THEORY & PRACTICE OF

CORPORATE
GOVERNANCE
Corporate Governance
 What is Corporate
 What is Governance?
 Theories of Corporate Governance
 Agency Theory
 Stewardship Theory
 Stakeholders Theory
 Sociological Theory
 Good Corporate Governance
 Obligation to Society
 Obligation to Investors
 Obligation to Employees
 Obligation to Customers
 Managerial Obligations
What is Corporate
 A corporate is an association of persons recognized by
law with a contribution towards common stock to
undertake trade and business and to share the profits
arising therefrom. It has following characteristics:
 Artificial legal persons
 Perpetual Existence
 Common Seal
 Extensive membership
 Separation of management from ownership
 Limited Liability
 Transferability of shares
What is Governance
 The process of decision-making and the process by
which decisions are implemented.
 Governance Structure can be formal and informal.
 Governance could be national governance,
international governance, local governance,
corporate governance.
 Governance is as old as human civilization.
Theoretical Basis of Corporate
Governance-Agency Theory

 Shareholders are owners

 They are Principals
 Management, selected directly & indirectly by
shareholders, are agents.
 Agent to perform for the benefit of Principal

 Agency loss caused by agents to principal

 Reduction of agency costs or loss:
▪ Fair & accurate financial disclosures
▪ Efficient & Independent Board of Directors
Stewardship Theory

 Governance approach is sociological and psychological.

 Managers are stewards
 Managers motives are aligned with Principal’s objectives
 Managers are trustworthy and attach significant value to
their reputation
 Management dominates important mechanism of financial
disclosures, reporting and auditing.
 Steward behavior will not depart from interest of his
organization
 Control can be counter-productive.
 Time frame is long term
 Risk orientation is done through trust.
 A comparison of Agency and
Stewardship Theory
Behavioral Differences
Agency Theory Stewardship Theory

Managers act as agents Managers act as stewards

Governance approach is materialistic Governance approach is sociological and

psychological .
Behavior Patter is Individualistic, Opportunistic and Behavior pattern is collectivistic, pro-organizational
self-serving and trustworthy

Managers are motivated by their own objectives Managers are motivated by principals objectives

Interest of managers and principals differ Interest of principal and agents converge

Role of management is to monitor and control The role of management is to facilitate and empower

Owners attitude is to avoid Owner attitude is to take risk

Principal relationship is based on control Principal-agent relationship is based on trust.
A comparison of Agency and
Stewardship Theory
Situational mechanism
Agency Theory
Management philosophy is control
oriented
Greater control and supervision for
dealing with uncertainty and risk
Time frame is short
The objective is cost control
Cultural differences revolve around:
Individualism
Large power distance
Stewardship Theory
Management philosophy is involvement
oriented
Training, empowerment, motivating and
making jobs challenging is the way to
deal with risk and uncertainty
Time frame is long
The objective is improving performance
Cultural differences revolve around:
Collectivism
Small power distance
A comparison of Agency and
Stewardship Theory
Psychological Mechanism

Agency Theory Stewardship Theory

Stakeholders theory

 Managers accomplish their tasks as efficiently as

possible by building up a contract with stakeholders
that is equitable for both the parties to benefit.
 Theory is based on ethics of care, ethics of fiduciary
relationships, social contract theory etc.
 Theory dates back to 1930
 Theory is hardly found in practice being ,superfluous,
Sociological Theory
 Board composition, implication for power and
wealth distribution in society
 Interlocking directorships
 Concentration of directorship in hands of
privileged class
 Board composition, financial reporting, disclosures
and auditing mechanism promote equity and
fairness.
Corporate Governance Models
 Anglo-American Model
 German Model
 Japanese Model
 Indian Model
 Pakistani Model
Anglo-American Model
 Shareholding is almost equally divided between
institutional and individual shareholders.
 Directors are rarely independent of management.
 Fairly clear separation of management from
ownership.
 Institutional investors are reluctant activists.
 Protect small investors
 Disclosure norms are comprehensive.
 Promote general market liquidity.
German Model
 Supervisory board is equally elected by shareholders
and labor unions and employees.
 The supervisory board appoints and monitors the
management board.
 Management board independently conducts the day to
day operations.
 Board independence over management is high.
 Banks and financial institutional have substantial
stakes in equity.
 Institutional investor consider themselves as long term
investors.
The Japanese Model
 Shareholders and main bank together appoint the
board.
 Board tend to be large predominantly executive.
 Banks and financial institutional have large stakes
in equity.
 Lending banks have important role.
 Institutional investors consider themselves as long
term investors.
 Board independence is little.
Indian Model
 Shareholding is vested with directors, relatives,
other corporates, Public and institutions
 Board composition is executive and non-executive
 Board independence is little
 Control of corporate is linked with ownership
Pakistan Model
 Shareholding is vested with directors, relatives,
other corporates, Public and institutions
 Board composition is executive and non-executive
 Board independence is little
 Control of corporate is linked with ownership
What is good corporate governance

 Obligation to Society
 Obligation to investors
 Obligation to Employees
 Obligation to customers
 Managerial Obligations
Obligation to Society at large
1. National Interest
2. Political non-alignment
3. Legal Compliances
4. Rule of Law
5. Honest and ethical conduct
6. Corporate Citizenship
7. Ethical Behaviour
8. Social Concerns
9. Corporate social responsibility
10. Environment friendliness
Obligation to society at large
11. Healthy and safe working environment
12. Competition
13. Trusteeship
14. Accountability
15. Effectiveness and efficiency
16. Timely responsiveness
17. Uphold fair name of the country
Obligation to Investors
1. Towards shareholders
2. Promote transparency and informed shareholders
participation
3. Financial reporting and records
Obligation to Employees
1. Fair employment practices
2. Equal opportunities employer
3. Encourage Whistle blowing
4. Human Treatment
5. Participation
6. Empowerment
7. Equity and Inclusiveness
8. Participative and Collaborative environment
Obligation to Customers
1. Quality of Products and services
2. Products at affordable prices
3. Unwavering commitment to customer
satisfaction
Managerial Obligations
1. Protecting Company’s assets
2. Behavior towards government agencies
3. Control
4. Consensus-oriented
5. Gifts and donations
6. Role and responsibilities of boards and directors
7. Direction and management must be separated.
8. Devotion
The End