Terms & ConceptsTerms & ConceptsCORPORATE GOVERNANCECORPORATE GOVERNANCE

A lecture byA lecture by

Dr Safdar A ButtDr Safdar A Butt

DefinitionDefinition

• GovernanceGovernance

• Corporate BodyCorporate Body– CompaniesCompanies– Public SectorPublic Sector– Social SectorSocial Sector

Important IssuesImportant Issues

• AccountabilityAccountability

• StakeholdersStakeholders

• TransparencyTransparency

• Governance StructuresGovernance Structures

• Monitoring PerformanceMonitoring Performance

CG in Public SectorCG in Public Sector

Seven Principles of Public LifeSeven Principles of Public Life• SelflessnessSelflessness• IntegrityIntegrity• ObjectivityObjectivity• AccountabilityAccountability• OpennessOpenness• HonestyHonesty• LeadershipLeadership

Brief History of CG in UKBrief History of CG in UK

• Cadbury Report 1992Cadbury Report 1992– Code of Best PracticesCode of Best Practices

• Mayners Report 1995Mayners Report 1995– Role of Institutional InvestorsRole of Institutional Investors

• Greenbury Report 1995Greenbury Report 1995– Directors RemunerationDirectors Remuneration

• Hampel Committee 1998Hampel Committee 1998– Combined CodeCombined Code

Combined ReportCombined Report

• Main PrinciplesMain Principles• Supporting PrinciplesSupporting Principles• ProvisionsProvisions

– Specific acts to be takenSpecific acts to be taken– Compliance part of disclosure Compliance part of disclosure

statementsstatements– Latest revision June 2006Latest revision June 2006

Dominant Personality Dominant Personality AspectAspect• Principal cause of CG issuesPrincipal cause of CG issues• Characteristics of a dominant leaderCharacteristics of a dominant leader

– CharismaticCharismatic– PowerfulPowerful– IntolerantIntolerant– Often seemingly sincereOften seemingly sincere– Does not nurture subordinatesDoes not nurture subordinates

StakeholdersStakeholders

• Board of Directors elected by Board of Directors elected by shareholders shareholders – Controlling (Majority / Minority)Controlling (Majority / Minority)– Non-controlling (individual / institutional)Non-controlling (individual / institutional)

• Lenders (individual / institutional)Lenders (individual / institutional)

• Management / EmployeesManagement / Employees

• Clients / SuppliersClients / Suppliers

• Society (includes government)Society (includes government)

Key PersonsKey Persons

• Mr ShareholderMr Shareholder– Individual / Institutional InvestorIndividual / Institutional Investor

• ChairmanChairman• Board MembersBoard Members

– Executive / Non-executiveExecutive / Non-executive– Independent / NomineesIndependent / Nominees

• CEOCEO• Other Managers / EmployeesOther Managers / Employees

Agency ProblemAgency Problem

• Minority ControllerMinority Controller

• Majority ControllerMajority Controller

• Cost of agency monitoringCost of agency monitoring

Key Issues of CGKey Issues of CG

• Financial Reporting and AuditingFinancial Reporting and Auditing• Directors RemunerationDirectors Remuneration• Risk TakingRisk Taking• Effective Communication between:Effective Communication between:

– Board and shareholdersBoard and shareholders– Company and stakeholdersCompany and stakeholders

• Corporate Social ResponsibilityCorporate Social Responsibility

Financial ReportingFinancial Reporting

• Force of LawForce of Law

• Influence of professional bodiesInfluence of professional bodies

• Audit Report – how valid is it?Audit Report – how valid is it?

• Does it work?Does it work?

• Role of Institutional InvestorRole of Institutional Investor– Professional analystsProfessional analysts

• What is the real solution?What is the real solution?

Directors RemunerationDirectors Remuneration

• Big issue in West, not hereBig issue in West, not here

• Who sets it?Who sets it?

• Why do shareholders complain after Why do shareholders complain after approving?approving?

• Disunity in shareholders?Disunity in shareholders?

Company-Stakeholders Company-Stakeholders RelationsRelations

• Structure of the BoardStructure of the Board– Is it representative?Is it representative?– Does it have sufficient Independents?Does it have sufficient Independents?

• Articles of Association Contents?Articles of Association Contents?– Allocation of power to stakeholdersAllocation of power to stakeholders– Actual use of powersActual use of powers

Risk ManagementRisk Management

• WHO CARES:WHO CARES:– To take risk or not to take risk?To take risk or not to take risk?– How much risk to take?How much risk to take?– How to minimize / manage risks?How to minimize / manage risks?

• NATURE OF RISKSNATURE OF RISKS– OperationalOperational– TakeoversTakeovers

CommunicationCommunication

• What needs to be communicated?What needs to be communicated?

• FrequencyFrequency

• Set pattern, or need basisSet pattern, or need basis

• Why communicate?Why communicate?

Legislation for CGLegislation for CG

• Company LawCompany Law

• Regulations for listed companiesRegulations for listed companies

• Specific CG related laws?Specific CG related laws?

• Social pressure can often have the Social pressure can often have the same force as law.same force as law.

Questions asked Questions asked when companies failwhen companies fail

• Was it management incompetence?Was it management incompetence?– Why was it not noticed before disaster?Why was it not noticed before disaster?

• DishonestyDishonesty– Did the dishonest person get away with it?Did the dishonest person get away with it?– How?How?– Why?Why?

Eventually, this boils down to poor Eventually, this boils down to poor governace.governace.

Approaches to CGApproaches to CG

• Shareholder Value approachShareholder Value approach

• Enlightened Shareholder ApproachEnlightened Shareholder Approach

• Pluralist ApproachPluralist Approach

Shareholders ApproachShareholders Approach

• Board cares for only shareholdersBoard cares for only shareholders• Shareholder means:Shareholder means:

– All shareholders, orAll shareholders, or– Majority shareholders only, orMajority shareholders only, or– Vocal shareholders only?Vocal shareholders only?

• Balanced treatmentBalanced treatment– Between controlling shareholders and Between controlling shareholders and

others others

Enlightened ShareholdersEnlightened ShareholdersApproachApproach

• Balance between the interest of all Balance between the interest of all stakeholders, but basic attention to stakeholders, but basic attention to shareholders.shareholders.

• Issues:Issues:– Which shareholders?Which shareholders?– People who wear two or more caps like People who wear two or more caps like

shareholders, management and maybe shareholders, management and maybe lenders.lenders.

Integrated ApproachIntegrated Approach

• AccountabilityAccountability– To shareholders, but also to other stakeholdersTo shareholders, but also to other stakeholders

• ResponsibilityResponsibility– To all stakeholders.To all stakeholders.

• Means of enforcementMeans of enforcement– Company’s own policy and rulesCompany’s own policy and rules– Law and professional bodies like KSE, ICAP, Law and professional bodies like KSE, ICAP,

PCCIPCCI– Force of societyForce of society

What is the Best Approach?What is the Best Approach?

• WhichWhich

• WhyWhy

• WhereWhere

The Corporate SinsThe Corporate Sins

• Sloth (unwillingness to take Sloth (unwillingness to take risk/initiative)risk/initiative)

• GreedGreed

• FearFear

Thank youThank you