Corporate Governance

Safdar H.Tahir

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Topics
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Types of Boards Land Marks in Emergence of Corporate Governance.

Safdar H. Tahir

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Types of Boards

Composition:
Unitary  Two-tiered

Tenure
Common tenure  Staggered

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In theory. board of directors and managers. shareholders are powerful because they elect board of directors and cast vote at annual general meetings .Anglo-Saxon Model Theoretically this model is revolving around three main characters namely shareholders.

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• They have become merely a rubber stamp in the hand of management. .Anglo-Saxon Corporate Governance System •Theoretically (Practice) powerful shareholders have become powerless. • . relatively •Boards of director’s average 12 members in US. Boards of directors are potentially uniformed and unmotivated.

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. The firms were either managed by owners themselves or appointees by owners. the U.S. business became more prolific. argued the most of the units of businesses were owned by either individuals or small groups. Berle and Means.Berle and Means Model    1930s.

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Berle and Means model Is the Berle and Means model existing in the real world??? .

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THE JAPANSES MODEL     A high level of ownership association among banks and corporation named as “Keiretsu”. public policy and industrial policy networking structure planned to support and promote “keiretsu”. long-run industrial. trading commercial association among allied banks and corporations. “Keiretsu” is a well built and well defined. In Japanese model of corporate . A legal. participate largely in debt and equity financing of enterprise.

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Japan and German.THE GERMAN MODEL    The corporate governance model of German is significantly different from both the Anglo-Saxon model and The Japanese model of corporate governance. In both countries. In both German and Japan model. institutional investors play very important role in the formation of corporate governance structure. . bank representatives are elected to the board of directors but this representation is constant in Germany while in Japan the representation comes only at the time of financial distress. although some of its features resemble with the Japanese model.

German Corporate Governance System .

Balance on the Board     Balance of representation Balance of talents / abilities Balance of power Balance of attitudes or views 18 .

Consequences of Imbalance       Board can be misguided by the executives Interest of only one stakeholder is served Poor decision making Status quo mentality Lack of communication Things start getting fixed 19 .

Cadbury Code Guidelines     Regular meetings Monitoring executive performance Draw clear lines of authority Good board room practices 20 .

Board Room Practices       Every one should participate Formalized written procedures Induction program for directors Each director should get the same information at the same time No post-facto approvals Chairman decides the content of the agenda 21 .

chairing its meetings Ensuring all directors get timely and complete information Acting as bridge between the board and shareholders / stakeholders Evaluating the performance of individual directors Arbiter in event of internal disputes 22 .Role of Chairman      Running the board.

Responsibilities of CEO & Senior Management         Operating the company in an effective and ethical manner according to policies set by the Board Drawing the strategic plans Drawing annual plans and budgets Selection of managerial and other staff Identifying business risks Financial reporting Internal Controls Code of Conduct for all staff 23 .

Duality of Office: Chairman & CEO     Speeds up decision making Quick action Saves cost: often only one salary More effective due greater powers: Within the company  Dealing with outsiders  24 .

Thing to Ponder Duality desirable or not?? 25 .

Thank you Safdar H. Tahir 26 .

The Shareholders Safdar H.Tahir 27 .

Who is a shareholder     Owner Beneficiary Risk bearer Decision maker 28 .

Types of Shares    Ordinary shares Preference Shares Other types 29 .

Features of Ordinary Shares      Permanency No nominal cost to the company Residual claim on profits Residual claim on assets Voting rights  Cumulative voting rights  Right of purchasing new shares 30 .

Tahir 31 .Committees of a Board Safdar H.

Why Committees?     To get impartial and professional input Reduce work load for directors More detailed work Specialization principle 32 .

Common Committees      Audit Committee Nominations Committee Remunerations Committee Executive Committee Ad hoc Committees 33 .

Audit Committee      Membership All NEDs. preferably all INEDs Chairman must be INED Can take external help if needed US law says at least one member of AC must be a finance / accounting professional 34 .

Responsibilities of AC      Oversight of financial reporting and accounting policies/systems Liaison with external and internal auditor Ensuring regulatory compliance for disclosures Monitoring internal controls Oversight of risk management processes 35 .

Audit Committee Issues  Composition All NEDs  Majority INEDs  Chairman of the company not a member    Duration Frequency of meetings 36 .

It does not draw up accounting policy. It issues advice to management. 37 . its role is only to review and oversee.Nature of Audit Committee       It is not an executive body. It does not perform internal or external audit. not management. It reports to the Board. not directives.

quarterly programs  Formal meetings with executives  Formal meetings with external auditor    Frequency of interaction with management Regular self evaluation 38 .Best Practices for Audit Com   The prime tool of good corporate governance. Managing its agenda: annual.

past record Linkages. former employees of audit firm Audit firm’s performance. non-audit work Rotation.External Auditor & Audit Committee  Negotiations with external auditor   Verifies suitability of the external auditor Their resources. qualifications. ethics  Ensures independence     Discusses report / management letter with external auditor 39 . independence.

company chairman or CFO is made chairman of AC Since the whole board is subservient. no hope for truly independent members of audit committee. 40 .Situation in Pakistan on ACs     Law is being followed in words but often not in spirit. Often EDs are members of AC In some cases.

Nominations Committee      Responsibilities Formalization of process of finding good directors & senior managers Evaluation of directors’ individual performance Succession planning Board size and structure 41 .

Remunerations Committee     Drawing up Remuneration Policy for directors and senior managers Ensuring that directors are not paid any additional fee or given consultancy assignments etc. Oversight of bonus computation for directors Ensuring the proper disclosure is made in respect of directors’ remuneration 42 .

Basis of Remuneration    Fixed salary only Bonus only Combination Balance between the components  Too high fixed salary as bad as too high bonus  43 .

Fixed Salary    Promotes lethargy. status quo mentality Dampens entrepreneurial initiative Increases staff turnover 44 .

Performance Based Pay  Bonuses Cash  Free shares  Share options   Basis of computation Base figure: sales. market share. profit. etc  Short term view  Long term view: gradually increasing bonus 45  .

fudging   CCG recommends 1 : 2 ratio 46 . greed.Balance in Components    What is the right mix? Too high salary promotes lack of initiative Too high bonus promotes: short term view  Dishonesty.

Directors remuneration treated as employee salary issue. NEDs not paid any thing at all except attendance fee. controlling shareholder does. Remuneration committees do not exist in Pakistan 47 .Situation in Pakistan     Executive directors do not run the board.

Executive Committee     Some decisions can only be taken by board but board cannot meet too frequently. Often has EDs and some INEDs as members Meets frequently to dispose off routine executive matters Gives detailed report to board on more important matters 48 . hence executive committee with delegated powers.

49 .Executive Committee .2      Reduces work for the board Provides specialized input to the board Provides extra layer of checking Has more time to investigate and give more detailed report Serves as lower tier of a unitary board.

Negotiations Committee.Ad hoc Committees    Created for a situation. purpose or time and liquidated afterwards Project Committee. Terms of reference decided by the board on need basis. Investigation Committee. etc. 50 .

Thank you Safdar H.Tahir 51 .

Tahir 52 .BOD: A powerful instrument of Governance Safdar H.

BOD 53 .

that the key to good corporate governance lies in the hands of a company’s Board. social scientists and the regulators alike.Importance of the Board It is often believed. But: How does a Board become good? Is a good Board born or made? Is a Board free to be good? 54 . by stakeholders.

The Board’s Role       Provide entrepreneurial leadership Set strategic objectives of the company Arrange for resources needed to achieve the strategic objectives Review management performance Set the company’s values and standards Act as a bridge between stakeholders 55 .

Different Board Types: The Good, Bad, and Ugly
‘Yes-men’ Board ‘Rubber Stamp’ Board ‘Good Old Boys’ Board

‘The Real Thing’

‘Country Club’ Board ‘Trophy’ Board

‘Paper’ Board

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Functions of a Board
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Oversight Directional Advisory

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Oversight Function

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Approving and monitoring strategic plans. Approving and monitoring annual plans, operational and capital budgets Engaging external auditors Ensuring integrity of annual report Review of major operational activities
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executive. etc. etc. vision statement. 59 . Appointment of CEO and other senior executives Planning for succession of senior executives Appointing various committees like audit. value statement. remuneration.Directional Function     Setting company’s mission statement.

Advisory Function     Guidance What else is happening in the world Different perspective Specialized input on specific areas 60 .

Tools Available      Composition of the board Independence of the board Committees External help where necessary Governmental intervention 61 .

Board’s Responsibilities   Collective responsibilities of the board Individual responsibilities of each director 62 .

Collective Responsibilities    Acting in the best interest of the company. Accountability to owners Statutory duties: Directors have to comply with a number of obligations in terms of the Companies Act  Keeping minutes of all meetings  Filing periodic reports and financial statements  Stock exchange updates 63 .

Duties of Director      The common law Statutes The memorandum and articles of association of the company Service agreements specifically entered between the director and the company Resolutions passed at members’ or directors’ meetings 64 .

The common law     Director's fiduciary duty (Fiduciary’ meaning ‘of trust’) Conflict of interests Duty of care and skill 65 .

Statutory Duties  A director's duties in terms of the Companies Act 66 .

Test of Fiduciary Duties    Transactions are reasonably incidental to company’s business Good faith. Disclosure of conflict of interest 67 . believing the transactions to be correct.

Duties in terms of the memorandum and articles of association  The memorandum of association determines the scope of the company’s objects and powers. while the article of association is a contract between members themselves and between members and the company 68 .

Types of Boards  Composition: Unitary  Two-tiered   Tenure Common tenure  Staggered  69 .

Balance on the Board     Balance of representation Balance of talents / abilities Balance of power Balance of attitudes or views 70 .

Consequences of Imbalance       Board can be misguided by the executives Interest of only one stakeholder is served Poor decision making Status quo mentality Lack of communication Things start getting fixed 71 .

Cadbury Code Guidelines     Regular meetings Monitoring executive performance Draw clear lines of authority Good board room practices 72 .

Board Room Practices
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Every one should participate Formalized written procedures Induction program for directors Each director should get the same information at the same time No post-facto approvals Chairman decides the content of the agenda
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Role of Chairman

Running the board, chairing its meetings Ensuring all directors get timely and complete information Acting as bridge between the board and shareholders / stakeholders Evaluating the performance of individual directors Arbiter in event of internal disputes
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Responsibilities of CEO & Senior Management
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Operating the company in an effective and ethical manner according to policies set by the Board Drawing the strategic plans Drawing annual plans and budgets Selection of managerial and other staff Identifying business risks Financial reporting Internal Controls Code of Conduct for all staff
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Duality of Office: Chairman & CEO     Speeds up decision making Quick action Saves cost: often only one salary More effective due greater powers: Within the company  Dealing with outsiders  76 .

Thing to Ponder Duality desirable or not?? 77 .

Thank you Safdar H. Tahir 78 .

Corporate Governance Handout 6 .

In theory.   A corporate governance is a system/mechanism that is intended to solve the conflict of interests between shareholders and management. We have discussed whether various ‘corporate governance systems’ can be viewed as the system to alleviate the The effects of corporate governance on firm performance . these corporate governance systems can improve firm performance by increasing the incentive for management to shareholders’ values.

  For example. we have not much discussed if these corporate governance systems can indeed enhance firm performances. . and we have shown that these systems can be properly viewed as corporate governance systems. However. we discussed if the main bank system or the existence of large shareholders can be viewed as systems/mechanisms to solve the conflict of interests.

 Today. The existence of large foreign shareholders improves firm performance in Japan. Whether the main bank system has a positive effect on firm performance.We have already seen some results.  . The introduction of Chief-Officer system in Japan has not improved firm performance 2. 1. we investigate the following. We saw that 1.

dispatching a director to its client (by the main bank) has been viewed as a monitoring mechanism that substitutes the US style market-force based disciplinary mechanism. In particular. The effect of main bank system on firm performance .  As noted already in Handout 3. the main bank system in Japan has been considered as an ‘alternative’ corporate governance system.

This result indicates that the dispatch of a bank-director can be viewed as a monitoring system.  In handout 3. . its main bank is likely to dispatch a senior directors to the firm . However. when a firm experiences low performance in terms of ROA. we have not discussed whether the dispatch of a bankdirector by the main bank would actually enhance the firm’s performance. we showed that.

Saito and Odagiri examined if a new appointment of a senior director would improve the industry adjusted ROA. Consider the change in industry adjusted ROA Δ(ROA)it=(ROA)it+1-(ROA)it where (ROA)it is the industry adjusted ROA of firm i at year t. The basic idea is to examine if the dispatch of a bank .The effects of bank-dispatched directors on the firm performance    The discussion will be based on Saito and Odagiri (2008).

And there is a tendency that. The simplest method is to estimate the following equation. Then we cannot distinguish .  There are two problems with this method. when firm experience a bad performance. 1. the performance improves on the subsequence period (this is called meanreversion). The bank director is likely to be dispatched when the firm performance is bad. Δ(ROA)it=β0+β1(Bank director)it Where (Bank director) is a dummy variable that indicates if the main bank dispatched a director to the firm i in year t.

To mitigate these problems.  Second. . Saito and Odagiri estimates the following. the dispatch of a bank director may be more effective when the firm is performing poorly than when the firm is already performing well. For example. the effects of bankdispatched directors may be different at different firm performance levels.

Δ(ROA)it=β0+β1(ROA)it +β2(Bank director)it ROA +β3(Bank director)it×(ROAitROA ) Where is the sample average of ROA. that .  In this equation β captures the 1 mean-reversion effect.  The coefficients β and β captures 2 3 the effects of a dispatch of bank director on the change in ROA.

The effect of bank directors on Δ(ROA)it is given by ROA The effect = β2 + β3(ROAit- ) . The effect of a bank-dispatched director now depends on the ROA at the beginning of year t.

0404) -0.The results. or to go back to the mean.2757** ×(ROA) (0. 1.1123) ROA (β3) ROA is negative and significant.0516 (0. This indicates that the meanreversion is at work: When firm performance is bad in year t. .0117) (Bank Director) 0. there is a tendency for the performance to improve.0918) (Bank Director) -0.2827 (β2) (0.1502*** (0. The coefficient for Variable Constant (β0) (ROA) (β1) Coefficients 0.

2. (Bank Director) 0.0117) (Bank Director) is positive.The results. but not significant. the dispatch of bank director may not improve the firm performance.2827 (β2) (0.1502*** (0.0516 (0.2757** ×(ROA) (0. when the firm is performing on average.1123) ROA (β3) . The coefficient for Variable Constant (β0) (ROA) (β1) Coefficients 0.0918) (Bank Director) -0.0404) -0. This means that.

3.2827 (β2) (0.The results. To see this point.1502*** (0.0918) (Bank Director) -0.0117) (Bank Director)×(ROAROA ) is negative and significant. (Bank Director) 0.1123) ROA (β3) . when the firm is performing badly.2757** ×(ROA) (0. The coefficient for Variable Constant (β0) (ROA) (β1) Coefficients 0. a dispatch of a bank director positively affect the firm performance. see next slide.0516 (0. This means that.0404) -0.

  The previous slides show that. . Let’s see by how much a dispatch of bank directors can improve firm performance measured by industry adjusted ROA. when the firm is performing badly. a dispatch of a bank director improves firm performance. Firm performance does not necessary improve when a bank director is dispatched to a firm which is already performing well. The magnitude of the effect.

32% (this is the sample average of ROA for the firms who experienced negative ROA).74)  Consider a firm whose industry adjusted ROA is -3. then the ROA is expected to increase during the year ROA by β2 + β3(ROAit)  =0.2757*(-3.402 .2827-0. =0.74) =1.The sample average of ROA is 0.74 ROA (that is.32-0.  If the main bank dispatches a director to this firm.

Summary    When a firm is performing badly. a dispatch of a bank director will improve the firm performance. When a firm is already performing well. Saito and Odagiri’s study shows that the main bank system can enhance firm performances . a dispatch of a bank director does not necessarily improve firm performance. Thus.

The effect of board size on firm performance   It has been argued that a board with too many directors negatively affect corporate performance since efficient decision making is difficult in a large board. Jensen (1993) points out the ‘great emphasis on politeness and courtesy at the expense of truth and frankness in boardrooms’ and states that ‘when boards get beyond seven or eight people they are less likely to .

23. Yarmack (1996) shows that when a board size doubles. Today. For example. we will investigates if the size of the board has a negative effect on firm performance in Japan. the Tobin’s q (market to book asset ratio) would fall by as much as 0. The discussion is based on .    There has been many studies in the US that show that the size of the board has a negative impact on firm performance.

Does the size of the board matter in Japan?   Nakayama (1999) investigates the effect of board size on the efficiency of manufacturing firms in Japan. I will provide a short description of the methodology first. . The empirical methodology used in his paper is slightly different from what we have seen previously.

 To describe the above method. Second. Nakamura checks if the board size has a negative effect on the estimated ‘efficiency’ of each firm.K) Where Q is the output. To make things more simple. consider that the production technology of firms can be described by the following ‘production function’ Q=F(L. a production function that  .Nakayama first estimate ‘efficiency score’ for each firm by estimating a ‘stochastic production function’. L is the amount of labor. and K is the amount of capital. consider that for a moment.

Suppose that the production function, Q=F(L) has the following shape.
Q ●

L

If a firm is operating efficiently, then the firm should be operating on the production function, like this.

However, if the firm is not operating efficiently, the firm would be operating under the production function, like this.
Q

● The firm is not operating on the production function.

L

For this firm, we can define ‘efficiency score’ as OP/OA.
Q P Efficiency score = OP/OA

●A

If the firm is perfectly efficient (that is, operating on the production function), the ‘efficiency score’ will be one. If there is any inefficiency, the ‘efficiency score’ will be lower than 1. L O

We make a certain distributional assumption of μi and ui to . The term μi is the error term and ui is the efficiency score to be estimated.  Therefore. More specifically. then check if the size of the board has a negative effects on the efficiency. the basic idea of Nakamura’s study is to estimate the efficiency score for each firm. Li is the number of workers. Nakamura estimates the following production function Qi=β0+β1log(Li)+β2log(Ki)+μi-ui Where Qi is the value of output (sales). and Ki is the value of the fixed asset for ith firm.

. from Mitsubishi Research Institute’s ‘kigyo-no keiei bunseki’.Data  The data is 32 manufacturing firms for the period between 1992-1998.

The distribution of the board size Relative frequen cy The number of directors in a .

098) 0. [Details are omitted] . ofProductionCobbVariable Coefficient Douglas  Log(L) Log(K) Constant 0. as a by product. you can estimate the efficiency score for each firm. we can estimate the efficiency score for each observation.03) 1. As a by-product.The results There are two steps.093) function.150*** (0.906*** (0.909*** (0. First step is to estimate the production function. By estimating production function. The Production function estimation below is the estimatediscoefficients This the estimated results so-called for production function.

(Efficiency score*100)it =β0+β1(Number of directors)it+β3(Sales)it .  As a by-product of the production function estimation. Nakamura then estimates the following. we obtain the estimates for the ‘efficiency score’ for each firm for each period.

like in the US.634 (3. For each additional board will reduce the efficiency score by as much as 15.662) 20. the number of board has a negative and statistically significant effect on the efficiency of the firms.594** (7.846) As can be seen.6%. This results show that. a large .The results The effect of board size on the efficiency of manufacturing firms (Dependent variable is Efficiency Score*100) Variable The number of directors Sales Coefficient -15.

4: And at the same time. being able to work as a team Is this possible to find such a team of people?  . interested in protecting shareholders value.Several questions A good board: 1: Small 2: Independent 3: And at the same time.

how much does that matter? Should a director not pursue its own interest? .   Does the morality of individual directors matter? If so.

David (1996) ‘Higher market valuation of Companies with a small board of directors. 572-590 Nakayama. T and Odagiri H (2008) “Intra-Board Heterogeneity and the Role of Bank Dispatched Directors in Japanese Firms: An Empirical Study. 185-211 .’ Journal of Financial Economics 40.” Pacific-Basin Finance Journal. Yoshinori (1999) ‘ 日本企業の生産 性と役員数’日本経済研究、No38 Yermack.References Saito. 16.

 112 . groups of friends   External (invest only for a return) Individuals  Institutional investors.Classification of Equity shareholders  Internal (invest to own and run_ Corporate shareholders (holding companies)  Families.

Internal Shareholders     Controlling shareholders Majority not a necessity Scene in the West Situation in Pakistan 113 .

lack of influence 114 . Lack of unity Lack of interest Therefore.External Shareholders     Generally not on the board.

Small Private Shareholders        Individuals Only interest in share price change No long term interest Only a little interest in earnings Reactive buyers/sellers Biggest losers when things go bad No influence over Boards 115 .

private limited companies. etc.) Have long term interest in the company May have great influence on the company May provide bulk of executive directors In Pakistan. these people are the 116 .Large Private Shareholders      Individuals (but may be acting through trusts.

Corporate Shareholders     Holding companies Multinationals Groups Characteristics 117 .

on an overall basis. 118 . a majority of shares of all listed companies. it is believed that institutional shareholders hold.Institutional Investors       Mutual Funds Managed Funds Pension Funds Life Insurance companies Banks In UK.

Monitoring systems for danger 119 .Institutional Investors Perspective       Long term interest in share value growth. Ability to evaluate performance. Current returns are still important. Power and ability to influence Boards. But do they have the time to pay attention to every single company.

Dialogue with directors Regular evaluation of financial reports Flag off danger signals  Sharing info with other stakeholders    Judicious use of Vote Could / should seek representation on board 120 .Role of II’s in CG    Capability and Capacity to influence.

121 . 25% of their CEOs had met only half of their top 50 shareholders In Pakistan. most listed companies have majority held by a family or group and they do not seem to attach any importance to any other shareholder.Some interesting facts    10% of EDs in European companies do not know who their top 50 shareholders are.

Fair share of real profits.Expectations from a Company      Accountability of board members Transparency in all transactions Company interest over self interest Effective and efficient management leading to good returns and capital growth. 122 .

Shareholders’ Hold on Board Shareholders must approve:  Class 1 transactions  Large size relative to size of the company   Related party transactions Financial statements  Audit report is for shareholders Directors remuneration Shareholders elect and can remove  123 .

The AGM      Attendance should be encouraged Asking of questions to be encouraged Individual voting on issues (No grouping of issues) One vote. one share Proxy facility 124 .

Communication between Shareholders & Board

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Direction: One way reporting or Two way communication Nature: Formal or Informal communication Scope: All or some shareholders Frequency: Regular or irregular, need based.

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Communication Instruments
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Statutory reports Chairman’s report (OFR) Compliance reports Newsletters, circulars Meetings with major shareholders Correspondence

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Shareholders Activism
Refers to stand taken by shareholders against recommendations of the Board.  Do they have adequate rights or power?

Result less important than show of dissent.

Can work only if institutional investors participate. Do institutional investors have a duty

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Areas of Dissent        Re-election of directors Re-appointment of auditors Approval of directors’ remuneration Approval of annual accounts Dividend recommendations Changes in share capital Other approvals 128 .

129 . Monitoring of board performance Direct intervention Regular evaluation and sharing of analysis But remember.Shareholders’ Activism 2      If institutional investors join hands with smaller shareholders. institutional investor organizations are all run by managers so they have affinity for managers.

Thank you Safdar H.Tahir 130 .

What is it about?   Corporate Governance 131 .

Company    What is a company? Characteristics of a Company Types of Companies 132 .

Characteristics of a Company       Ownership in shares Freely transferable shares Separate entity apart from shareholders Liability of shareholders Indefinite life Board of directors 133 .

Types of Companies     Limited or Unlimited Limited by shares or by guarantee Private or Public Listed or Unlisted 134 .

do not run it.Hierarchy of a Company  Shareholders  Own the company. Elected by and reporting to shareholders  Board of Directors   Management Appointed by and reporting to directors  Includes executive directors  135 .

Top Players   Shareholders: Voting power Chairman:  May be executive or non-executive May be executive or non-executive May or may not be a director May or may not be directors 136  Directors   Chief Executive Officer   Senior Managers:  .

Classification of Stakeholders     Owners Lenders Employees Business Associates  Suppliers and Customers Includes government  Society  137 .

Lenders and Shareholders are most vulnerable. Society depends entirely on law 138 .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.

Classification of Stakeholders Classified on basis of Role in the Company Owners Classified on basis of opportunity to protect individual interests Those with Full Opportunity Controlling Shareholders Those with a Partial Opportunity Those with Virtually No opportunity Institutional Investors Minority and individual with Board shareholders with no representation board Representation Buyers of listed bonds Other lenders with trustee arrangements Lenders Financial institutions with elaborate lending Contracts Employees Executive Directors Senior Managers Other employees on regular or contract terms Business Associates Society Suppliers who sell Major Suppliers and Smaller suppliers only on cash terms clients with contracts and smaller clients Government Public at large 139 .

Need for Corporate Governance     To protect and serve individual interest of each stakeholder To protect and serve the collective interest of all stakeholders To ensure no one benefits at the expense of another To ensure no stakeholder has monopoly of decision-making. 140 .

Governance & Management How do these terms differ?  Does Governance include Management? Or  Does Management include Governance?  141 .

Governance & Management Governance Approval of Plans Providing overall leadership Arranging resources Controlling managers Function Planning Leading Management Preparation of plans Leading those who implement plans Tasks division & resource usage Controlling employees 142 Organizing Controlling .

Governance       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 143 .

Management     Current & Operational Affairs Taking directions from the Board Implementing the Plans Developing Suggestions and Alternatives 144 .

Approaches to Corporate Governance     Shareholders Approach Stakeholders Approach Enlightened Shareholders Approach Which approach is best? 145 .

Corporate Sins  Sloth  Unwillingness to take initiative or risk. prefer status quo. Putting self above company Not annoy or stand up to any stakeholder / investor / boss. be lazy. 146  Greed   Fear  .

Agency Theory     What is Agency Theory? Does it apply to companies? Two-party and three-party model Principal-Watchdog-Agent 147 .

Key Issues      Financial reporting Directors’ remuneration Risk management Effective communication Corporate Social Responsibility 148 .

Financial Reporting   Accuracy Reliability  Internal and external audit   Comprehensiveness Timeliness 149 .

Directors Related Issues    Remuneration Powers Balance between:  executive and non-executives   Election and re-election Representation 150 .

Risk Management   Risk profile What risks to take?  Avoidable and non-avoidable risks   What not to take? How to handle risks taken? 151 .

Communication     Transparency Regular communication With who? In what format? 152 .

Corporate Social Responsibility    Business Ethics Being a good citizen Doing business responsibly 153 .

Why is CG Important?      Good reputation is good business Protection of stakeholders’ interest Support to capital markets Support to society Every one wins 154 .

Thank you Safdar H.Tahir 155 .