Corporate Governance

A Brief Overview
by

Dr Safdar A Butt

What is a Corporate Body?

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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 even run by minority shareholders. Hence, they require even greater degree of CG.

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Stakeholders in a Company


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Management and Employees Lenders Suppliers and Clients Shareholders Society at large (this includes government)

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The Important Questions


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Who is in a position to protect his interest? Who needs protection? Who needs to be monitored? Who should monitor?

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Opportunity to protect individual interests

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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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Individual Vs Collective Interest


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Interests of various stakeholders differ How to create a balance Shareholders: Share Value & Profit Management: Survival & Job Security Lenders: Debt security, low risk Society: Environmental/Economic Issues

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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 manner in which the affairs of a corporate body should be conducted in order to serve and protect the individual and collective interests of all stakeholders.

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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
Approval of Plans Providing overall leadership Arranging resources Controlling managers
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Function
Planning Leading Organizing Controlling

Management
Preparation of plans Leading those who implement plans Tasks division & resource usage Controlling employees
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Corporate Governance - Dr S A Butt

Governance


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Strategic Setting Objectives 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


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Current & Operational Affairs Taking directions from the Board Implementing the Plans Developing Suggestions and Alternatives

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Tools of CG

The principal tool of enforcing good governance in a corporate entity is Board of Directors. The composition and functioning of the Board determines how well a company serves and protects the interest of all its stakeholders. Law, regulators and professional associations have a role too. Another potent influence is institutional investors.
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Corporate Hierarchy

Shareholders (voting power) Management
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Board of Directors (represents interests) CEO (delegated executive powers) Senior Managers (delegated powers)

Employees (follow orders)

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Approaches to Corporate Governance


Shareholders’ Value Approach Enlightened Shareholders Approach Pluralist Approach

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