An Introduction

to Corporate
Governance

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 Course Objectives
The course aims to enable students to:
1.Explain the concept of corporate governance, why governance is
important for corporations as well as for society at large.
2.Describe how corporate governance structures evolved and how
academic interest and political/social concerns developed.
3.Analyze the main actors and structures of corporate governance and
show how their interaction and functioning differs across national
economies, industries and with the development stage of firms.
4.Analyze how managers are controlled by markets and what roles
institutional investors can play.
5.Study why corporations pay increasing importance to issues of “social
responsibility”.
6.Discuss open issues concerning the future evolution of corporate
governance in the context of globalization.
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What is it about?
 Corporate entities mean companies.
 Governance means the way a company is
controlled.
 Corporate governance is concerned with
governing the corporate entities.

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What is a Company?
 A company is a form of business ownership.

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Characteristics of a Company
 Ownership in shares
 Freely transferable shares
 A legal person
 Separate entity apart from shareholders
 Limited liability of shareholders
 Indefinite life i.e. perpetual existance
 Board of directors

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Types of Companies
 There are two types of companies:
 Limited companies and Unlimited companies.

1. In unlimited company, shareholders have

unlimited liability.
2. These companies resemble partnerships.

3. These are uncommon.

 In limited liability company, shareholders have
limited liability towards company debts.
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Types of Companies
 Limited companies are of two types:
1. Limited by Guarantee: It has no share capital.
Its members guarantees to settle company’s
debts. e.g., ICAP and NGOs
2. Limited by Shares: It has share capital. Its
shareholders’ liability towards company’s
debts is limited to the par value of shares held
by them.

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Types of Companies
 Limited by share companies are of two types:
1. Private Limited Companies.

2. Public Limited Companies.

 Public Limited Companies are of two types:

1. Listed Public Limited Companies.

2. Unlisted Public Limited Companies.

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Hierarchy of a Company
 Shareholders
 Own the company, do not run it.
 Board of Directors
 Elected by and reporting to shareholders
 Management
 Appointed by and reporting to directors
 Includes executive directors

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Top Players
 Shareholders: Voting power
 Chairman:
 May be executive or non-executive
 Directors
 May be executive or non-executive
 Chief Executive Officer
 May or may not be a director
 Senior Managers:
 May or may not be directors

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Classification of Stakeholders
 Stakeholder is a person who has an interest in a
company. Following are stakeholders:
 Owners (shareholders)
 Lenders
 Employees
 Business Associates
 Suppliers and Customers
 Society
 Includes government
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Opportunity to protect
individual interests
 Managers and Employees have the greatest
opportunity to protect their interest(s)
 Suppliers and Clients essentially go by each
transaction or contract.
 Lenders and Shareholders are most vulnerable.
 Society depends entirely on law

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 Classification of Stakeholders
Classified on Classified on basis of opportunity to protect individual interests
basis of Role
in the Company Those with Those with a Those with
Full Opportunity Partial Opportunity Virtually No opportunity

Minority and individual

Controlling Institutional Investors
Owners shareholders with no board
Shareholders with Board representation
Representation

Financial institutions
Buyers of listed bonds
Lenders with elaborate lending Other lenders
with trustee arrangements
Contracts

Other employees
Employees Executive Directors Senior Managers on regular or
contract terms

Suppliers who sell Major Suppliers and Smaller suppliers

Business Associates
only on cash terms clients with contracts and smaller clients

Society Government Public at large

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 Need for a System
There is therefore a need for a system that would
ensure that:
 Individual interest of each stakeholder is
protected and served.
 Collective interest of all stakeholders is
protected and served.
 No one usurps any one else’s rights.

Corporate Governance is that system.

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Definition
Corporate governance refers to the mechanism
used to control and direct the affairs of a
corporate body
in order to serve and protect
the individual and collective interests
of all stakeholders.

(Dr Safdar A Butt)

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Governance & Management
 How do these terms differ?
 Does Governance include Management?

Or
 Does Management include Governance?

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 Governance & Management
Governance Function Management

Approval of Plans Planning Preparation of plans

Providing overall Leading Leading those who

leadership implement plans
Arranging Organizing Tasks division &
resources resource usage
Controlling Controlling Controlling
managers employees

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Governance
 BOD look after the following matters:
 Strategic (long term) management of the
company.
 Setting Objectives of the company.
 Devising plans to achieve these objectives
 Setting rules or parameters
 Not directly concerned with routine affairs
 Protection of Interests of all stakeholders
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Management
 Management looks after the following matters:
 Current & Operational Affairs
 Taking directions from the BOD
 Implementing the Plans
 Developing Suggestions and Alternatives

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Corporate Sins
 Sloth
 Unwillingness to take initiative or risk, prefer
status quo, be lazy.
 Greed
 Putting self above company
 Fear
 Not annoy or stand up to any stakeholder / investor
/ boss.

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Agency Theory
 What is Agency Theory?
 Does it apply to companies?
 Two-party and three-party model
 Principal-Watchdog-Agent

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Key Issues
 Financial reporting
 Directors’ remuneration
 Risk management
 Effective communication
 Corporate Social Responsibility

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Financial Reporting
 Accuracy
 Reliability
 Internal and external audit
 Comprehensiveness
 Timeliness

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Directors Related Issues
 Remuneration
 Powers
 Balance between:
 executive and non-executives
 Election and re-election
 Representation

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Risk Management
 Risk profile
 What risks to take?
 Avoidable and non-avoidable risks
 What not to take?
 How to handle risks taken?

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Communication
 Transparency
 Regular communication
 With who?
 In what format?

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Corporate Social
Responsibility
 Business Ethics
 Being a good citizen
 Doing business responsibly

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Approaches to
Corporate Governance
 Shareholders Approach
 Stakeholders Approach
 Enlightened Shareholders Approach
 Which approach is best?

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 Why is CG Important?
 Good reputation is good business
 Protection of stakeholders’ interest
 Support to capital markets
 Support to society
 Every one wins

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Thank you

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