Approaches to Corporate

Governance
Approaches to Corporate Governance

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

 Generally believed that the board of directors should govern the company
• In the best interest of its shareholders, i.e. the owners of the company.
• The fact that all the directors are elected by and answerable to shareholders.

 Make such policy that aim at maximization the shareholders value often at the
expense of other stake holders.

 In Pakistan this approach is most prevalent

Pros & Cons of the Shareholder Model

Pros
• Increased returns
• Singular, streamlined focus
• Avoids impulses and emotional decisions
Cons
• Lacking in social conscience
• Misses out on the big picture
• One dimensional approach
Stakeholders Approach

 Plurist Approach and the ideal approach by the proponents of CG.

 BOD provides equal care of the interests of all Stakeholders.
 It is not a practical approach
Reason is that directors are elected and accountable to the
shareholders.
Cont...
• Specifically, stakeholders are often divided into internal
and external categories.

• Internal stakeholders are the board’s directors and

employees involved in corporate governance. Whereas
external stakeholders might be creditors, auditors,
customers, suppliers, government agencies, and the
surrounding community.
Cont...
• Most vital to the stakeholder model is abiding by the idea
that all stakeholders engage with the corporation in some
way, shape, or form. Their expectation is for the
corporation to adhere to a distinct and desired set of
values.

• Dividends, salary, bonuses, additional orders, new jobs,

tax revenue, etc. are some of the benefits that come from
the stakeholder model.
Pros of the Stakeholder Model:
• Promotes fairness and ethics
• Gives directors and objective
• Creates an environment of social wealth
• Combines ethics and economy
Cons of the Stakeholder Model:
• Stakeholders aren’t necessarily altruistic and may
represent their own interests
• Due to being self-interested, internal and external
stakeholders can block progress
• Boards might get pulled into too many directions due to
the magnitude of stakeholders
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 other
stakeholders.
i.e. having a fair balance of interest.
Key Issues of Corporate Governance

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

 Accuracy
 Reliability
• Internal and external audit
 Comprehensiveness
 Timeliness
Directors Related Issues

 Remuneration
 Powers
 Balance between:
• Executive and non-executives
 Election and re-election
 Representation
Risk Management

This include deciding on what risk should be taken by

the company or how to manage those risk must be
taken.
 Risk profile
 What risks to take?
• Avoidable and non-avoidable risks
 What not to take?
 How to handle risks taken?
Effective Communication

Effective communication between board, shareholder and other

stakeholders.
 Transparency
 Regular communication
 With who?
 In what format?
Corporate Social Responsibility

 Business Ethics
 Being a good citizen
 Doing business responsibly
  Good reputation is good
business
Why is CG Important?
 Protection of stakeholders’
interest
 Support to capital markets
 Support to society
 Every one wins
 .

Thank you
 Quiz No 1
• Idetify the bulding blocks of cororate
governance? how these elements help the
organazation to achieve its strategic
objective?