Fundamentals of Corporate

Governance
Session 3
by
Sahar Khan
 Associations in Pakistan
• PREGMA – Pakistan Readymade Garment Association
• PHMA – Pakistan Hosiery Manufacturing Association
• PCGA – Pakistan Cotton Ginners Association
• SECP – Security Exchange Commission of Pakistan
• APTMA –All Pakistan Textile Mills Association
• PAMA - Pakistan Automotive Manufacturers Association
• MFA - Mutual Funds Association
• Pakistan Chemicals & Dyes Merchants Association
• Karachi Chamber of Commerce
• PIFFA – Pakistan Institute of Freight Forwarders Association
• IATA - The International Air Transport Association
Principal actors in Corporate Governance
Shareholders
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 Lifecycle of Corporate Governance
Maturity Governance
challenges
Public Corporation
(Diffuse Shareholders)
• Maintain alertness
• Board assessment
•Advance value
commitments

Public Corporation
Development

(Majority Shareholders) Growth Governance challenges:

Corporate

•Risk management
•Develop board directors.
IPO • Engage stakeholders.
(Initial Public Offering)

Private
Company

Founding Launch Governance Challenges:

Entrepreneurs • Raise capital
• Recruit board of directors
• Establish accountability

Time
Pillars of Corporate Governance
 Pillars of Corporate Governance
• Accountability: Accountability embraces ownership of strategy and task
required to attain organizational goals.
• This also means owing reward and risk in clear context of predetermined
value proposition..
• When the idea of accountability is approached with this positive outlook,
people will be more open to it as a means to improve their performance.
• This applies from the staff all the way up to top leadership embracing Risk
management within defined formal appetite for risk.
• This also include fostering culture of compliance to create real and perceived
believe that the entity is operation within internal and external boundaries.
 Pillars of Corporate Governance
• Fairness: Fairness means “treating all stakeholders s including
minorities, reasonably, equitably and provide effective redress for
violations.
• Establishing effective communication mechanism is important in
ensure just and timely protection of resources and people asset as
well correcting of wrong approaches and acts.
 Pillars of Corporate Governance
• Transparency: Transparency “means having nothing to hide” that
allows its processes and transactions observable to outsiders.
• It also makes necessary disclosures, informs everyone affected about
its decisions.
• Transparency is a critical component of corporate governance
because it ensures that all of entity’s actions can be checked at any
given time by an outside observer.
• This makes its processes and transactions verifiable, so if a question
does come up about a step, the company can provide a clear answer
 Pillars of Corporate Governance
• Independent Assurance: In progressing transparency it is important for non-direct
actors to obtain confidence that executive actors are leading the entity towards pre-
defined intent and not using it for self and obtain expert advisory on how applied
approached can be improved.
• Assurance services provide independent and professional opinions that reduce the
information risk (risk that comes from incorrect information). 
• Independent assurance is the verification by a third party (not directly responsible for
QA and acceptance of the product/deliverable  and/or the reliability of test results
obtained from quality control and acceptance testing.
• This independent assurance insures that (1) the representation or acceptance test
results are accurate and provide a fair and equitable basis for construction acceptance
and (2) quality control testing is accurate and thus will properly indicate process quality.
 Two New Pillars of Corporate Governance
• Leadership; Direction “defining and offering leadership on organization's
agenda within the values and principles that frame the way business
should be done.
• Those charged with governance are responsible for these key strategic
issues and for proving leadership in establishing the right culture to drive
the performance of the business.
• Without clear direction, policy and procedures, the organization will
flounder and likely never to realize its long term goals and potential.
• This should include leadership and core expertise renewal to both retains
knowledge/experience, ensure appropriate representation and continuity.
 Two New Pillars of Corporate Governance
• Stakeholder engagement: Those charged with governance should
identify the key stakeholders and how they interact with the business
and how they are engaged with to ensure the best outcome for the
organization.
• Stakeholder engagement included in the annual agenda and strategic
plan.
 Few Basic Concepts / Entities Clarification
• Shareholder
• Stake Holder
• Corporate Body
• Governance
• Corporation
• Stock
• Share
 What is it about?
• Corporate
A legal entity that is separate and distinct from its owners. Enjoy most of the rights
and responsibilities that an individual possesses e.g enter into contracts, loan and
borrow money, sue and be sued, hire employees, own assets and pay taxes.

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 Governance

• refers to "all processes of governing, whether undertaken by a

government, market or network, whether over a family, tribe, formal or
informal organization or territory and whether through laws, norms,
power or language.
• It relates to "the processes of interaction and decision-making among
the actors involved in a collective problem that lead to the creation,
reinforcement, or reproduction of social norms and institutions

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 What is a Corporate Body?
• Any Company is a corporate body. However, in a broader sense only
public limited companies are taken to be the subject matter of CG.
• So far the thrust of CG is only on listed companies.
• Greatest emphasis is on those that are controlled by closed groups.
• In USA and Europe, companies are frequently run by minority
shareholders. Hence, they require even greater degree of CG.

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 Stakeholder and Shareholder
• A shareholder owns part of a company through stock ownership,
• while a stakeholder is interested in the performance of a company for
reasons other than just stock appreciation. 
• Stakeholders could be: employees who, without the company, would
not have jobs.
 Company

• Characteristics of a Company
• Types of Companies

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 Characteristics of a Company
• Ownership in shares
• Freely transferable shares
• Separate entity apart from shareholders
• Liability of shareholders
• Indefinite life
• Board of directors

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 Types of Companies

• Limited or Unlimited
• Limited by shares or by guarantee
• Private or Public
• Listed or Unlisted

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 Types of Companies

• In a limited company, the liability of members or subscribers of the company is

limited to what they have invested or guaranteed to the company.
• Limited companies may be limited by shares or by guarantee. 
• The former may be further divided in public companies and private companies.
• Who may become a member of a private limited company is restricted by law
and by the company's rules.
• In contrast, anyone may buy shares in a public limited company.
• Limited companies. ... A private limited company (ltd) is often a small business
such as an independent retailer in a market town. Shares do not trade on the
stock exchange. A public limited company (plc) is usually a large, well-known
business.
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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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 Classification of Stakeholders
• Owners
• Lenders
• Employees
• Business Associates
• Suppliers and Customers
• Society
• Includes government

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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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 Approaches to
Corporate Governance

• Shareholders Approach
• Stakeholders Approach
• Enlightened Shareholders Approach
• Which approach is best?

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 Shareholders Approach

• Generally believed that the board of directors of a

company should govern the company in the best
interest of its shareholders, i.e. the owners of the
company. This approach is lent credence and weight
by the fact that all the directors are elected by and
answerable to shareholders.
• Make such policy that aim at maximization the
shareholders value (Profit) often at the expense of
other stake holders.
• In Pakistan this approach is most prevalent (common)

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 Stakeholders Approach to CG

• Also known as Plurist Approach and considered as the ideal approach by

the proponents of CG.
• BOD formulates such policies the provides equal care of the interests of
all Stakeholders.
• It is not a practical approach for the simple reason that directors are
elected by and accountable only to the shareholders.

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 Enlightened Shareholders Approach

• This approach offers compromise between the afore-said two

approaches. It requires the BOD to work for the interest of shareholders,
but without damaging the interests of the other stakeholders. i.e. having
a fair balance of interest.

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 Enlightened Shareholders Approach

• Contemporary discussions of corporate governance tend to refer to

principles raised in three documents released since 1990
• Cadbury Report (UK, 1992)
• The Principles of Corporate Governance (OECD, 1999, 2004 and 2015)
• the Sarbanes–Oxley Act of 2002 (US, 2002)
• The First Two Reports (Cadbury & OECD) reports presents general principles
around which businesses are expected to operate to assure proper
governance.
• Sarbanes–Oxley Act is an attempt to get these principles actually applied in
Corporate Setting
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 Principles of Corporate Governance

• Rights and equitable treatment of shareholders: 

• Organizations should respect the rights of shareholders and help
shareholders to exercise those rights. They can help shareholders
exercise their rights by openly and effectively communicating information
and by encouraging shareholders to participate in general meetings.
• Interests of other stakeholders: 
• Organizations should recognize that they have legal, contractual, social,
and market driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities, customers,
and policy makers.
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 Principles of Corporate Governance
• Role and responsibilities of the board:
•  The board needs sufficient relevant skills and understanding to review
and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.
• Integrity and ethical behavior:
•  Integrity should be a fundamental requirement in choosing corporate
officers and board members. Organizations should develop a code of
conduct for their directors and executives that promotes ethical and
responsible decision making.

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 Principles of Corporate Governance

• Disclosure and transparency:

•  Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide stakeholders with a
level of accountability. They should also implement procedures to
independently verify and safeguard the integrity of the company's
financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors
have access to clear, factual information.
• 

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 Hanjin Shipping Case Study

• Amongst World Top Brand

• Trillion of Dollar Investment
• Korean Shipping Line.
• Got Bankrupt
• Stuck in Middle of Sea
• Crew Got Arrested
• Stakeholder and Shareholder problems
• Owners Exempted yet willing to serve and save
• Thousand’s of Conatiners
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