LECTURE 1 - CG Best Practices

Corporate Governance
Lecture 1: Corporate Governance

Best Practices
Dr. Shakir Ullah

About Me
• EDUCATION
• MBA (Finance)- Korea Development Institute School of Public
Policy and Management, South Korea
• PhD (Finance)- University of Southampton, UK
• TEACHING EXPERIENCE
• IMSciences- Assistant Professor
• 10 years
• University of Maryland Global Campus, USA- Assistant
Professor
• Assistant Professor- 3 Years
• Georgetown University, Washington D.C.- Thesis Chair
• 3 Years
• California Intercontinental University- Thesis Chair
• 1 year
• Guidance College, Texas, USA- Assistant Professor
• Stratford University, USA, Faculty of Finance- 5 years
• University of Southampton, UK, Lecturer of Finance- 2 years
01/26/2021 2
About Me
• CONSULTING PROJECTS
• Microsoft, Honda, Walt Disney, Jaguar, MasterCard, just to name
a few
• STARTUPS
• Darewro, Pakistan
• Chairman of the Board of Directors
01/26/2021 3
Students’ Introductions
• Please introduce yourselves one by one
• Tell us about your background, especially
in Islamic finance
• Your current job
• Your plans, especially related to Islamic
finance
01/26/2021 4
What is Corporate Governance?
• Corporate governance is the system of rules,
practices and processes by which a company is
directed and controlled.
• It involves balancing the interests of a
company's many stakeholders, such as
shareholders, management, customers,
suppliers, financiers, government and the
community.
5
Why do we Need CG?
• We need to understand types of Companies
– Unlimited Liability
– Limited Liability
– Private Limited
– Public Limited
» Separation of Ownership and Control
» Agency Theory
C4
Forms of Business and Relevance of
Here are some of the major attributes of proprietorships, partnerships,
and corporations:
The Hierarchy of a Company
• Shareholders
– Board of Directors
– Management
– Other Employees
Relationship Between Management
Book: Corporate Governance for Pakistan, By

Safdar A Butt
Functional Relationship Between Governance
and Management
Governance Function Management

Approval of Plans Planning Preparation of Plans
Providing Overall
Leadership Leading Leading Plan- Implementors
Arranging Resources Organizing Resource Allocation
Controlling Managers Controlling Controlling Employees

What is the Function of
Shari’a Board?
Book: Corporate Governance for Pakistan, By Safdar A Butt
Background: Organizational Structure of an IFI
Central Shari’a
Shareholders Board
Chairman of BOD Shari’a Board
Chairman of SB
BOD
Shari’a Advisor
CEO
Shari’a
Compliance Dept
Head of Treasury Shari’a
Review/Audit
Head of Unit
Investments
Formal Line of Authority
Head of Operations Reporting
• Core concern: How do we make sure that
corporate managers are doing what they’re
supposed to be doing?
12
The Agency Perspective
• Separation of ownership & control
– Principals & agents
• Shareholders are Principals and Managers are Agents
• SGS Challenge:
– Are Shari’a Scholars the agents of stockholders or someone else?
– Misalignment of interests
• What’s good for the managers may not be what is good
for the owners
• SGS Challenge:
– What’s good for owners may not be compliant with Shari’a
13
The Agency Perspective
• The Agency Problem:
– The misalignment of agents & principals’ interests
leads to agents (managers) pursuing strategies
that are not in the best interests of the principals
(stockholders).
• Focus is on Shareholders interests
14
The Stakeholder Perspective
• The board has broader responsibilities
– Focus is on protecting key stakeholder rights
• Shareholders
• Employees
• Vendors
• Customers
• Society as a whole
15
Best Practices
• The board of directors
• Executive compensation
• Anti-takeover measures
16
The Board of Directors
• Role is to monitor & evaluate top
management
17
Best Practices: Board of Directors
• Separate CEO & Chairman of the Board
– Role duality gives CEO too much power
• Paper read?
18
• Appointment of lead outside director
19
• Appointment of lead outside director
• Former CEO does not continue to sit on the
board
20
• Active board members
– Not a rubber-stamp board
21
• Evidence that the directors are in contact with
employees, vendors, & customers
22
• Evidence that the directors are in contact with
employees, vendors, & customers
• Board composition
– Size
– Age
– Diversity
– Expertise
23
– Insiders versus outsiders
24
– “Having a board monitor itself is like having the
fox watch the henhouse.”
25
– The majority should be independent
26
– The majority should be independent
27
– What is meant by “independent”?
• No material relationship with the company, either
directly or as a partner, shareholder or officer of a firm
that has a relationship with the company
28
– What is meant by “independent”?
• Five year “cooling off” period before one can be
considered independent:
– Former employees of the firm
– If formerly part of an interlocking directorate in which an
executive of the firm sat on the compensation committee of
the firm employing the director
– Same applies to directors with immediate family members in
the above categories
29
• Board members (insiders & outsiders)
– Limits on number of other board memberships
• Average director spends 176 hours a year for each
board position
• One SB member services on 85 board positions
30
– CEOs should not serve on each other’s boards
(interlocking directorates)
33
board position
– Directors & their firms barred from doing
consulting, legal, or other work for the firm
34
board position
– Directors & their firms barred from doing
consulting, legal, or other work for the firm
35
• Board committees
– Key committees at least chaired by outsiders
• Audit, compensation, corporate governance
(nominating) committees
36
– Key committees at least chaired by outsiders
• Audit, compensation, corporate governance
(nominating) committees
– Preferred: Key committees composed entirely of
independent directors
37
– Compensation committee
• Conduct formal evaluation of all company officers
(including CEO) and set compensation
38
– Corporate governance (nominating) committee
• Create charter for board
39
• Conduct formal governance review using an external
consultant
40
consultant
• Nominate board members
41
consultant
• Board term limits
42
consultant
• Board term limits
43
– Audit committee
• Select independent auditor
– Not also employed for consulting work
44
– Audit committee
45
– Audit committee
– Do not seek SEC exemption to do so
• Rotate auditors – at least rotate the lead auditor, if not
the entire firm, every 5 years
46
– Audit committee
– Do not seek SEC exemption to do so
• Rotate auditors – at least rotate the lead auditor, if not
the entire firm, every 5 years
• CEO & CFO should not be former employees of the
auditing firm
47
• Board meetings
– Frequency of overall board & committee meetings
48
• Board meetings
– Attendance
49
• Board meetings
– Attendance
50
• Board meetings
– Attendance
– Risk assessment function
• Reports identifying risks & methods of addressing
51
• Board meetings
– Attendance
– Risk assessment function
• Reports identifying risks & methods of addressing
– Access to internal information
52
Best Practices: Executive
Compensation
• CEO has substantial stock ownership
53
Compensation
• Salary, bonuses, & stock options reward
superior performance
– not size of the company
54
Compensation
• AND penalize poor performance
55
Compensation
56
Compensation
57
Best Practices: Anti-takeover
measures
• Lack of provisions designed to thwart a hostile
takeover
– Golden parachutes
58
Best Practices: Anti-takeover
measures
• Lack of provisions designed to thwart a hostile
takeover
– Poison Pills
• Golden parachutes is an example of Poison Pills
• Tony Hayward of British Petroleum
– “$12M Payoff for Captain Clueless.”
• Enron Executives- Kenneth Lay
• Lehman Brothers
– Paying hefty amounts to fired executives while seeking bailouts from the
government
– Greenmail
• Carl Icahn- Motorolla case
59

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Corporate Governance

Lecture 1: Corporate Governance

Dr. Shakir Ullah

Book: Corporate Governance for Pakistan, By

Governance Function Management

Arranging Resources Organizing Resource Allocation

Controlling Managers Controlling Controlling Employees

Chairman of BOD Shari’a Board

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