Corporate Governance Hassan Tariq

Introduction to Corporate Governance

Objectives
After studying this lecture, you will be able to:
Define Corporate Governance
Difference between Governance and Management
Classification of Stakeholders
Key Players of Corporate Governance
Approaches to Corporate Governance
Company
A company is a legal person, quite separate from its members. In the eyes of the
law, a company and its owners (shareholders) are two separate entities, neither
responsible for the conduct or obligations of the other.

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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Introduction to Corporate Governance

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Introduction to Corporate Governance

Need a Mechanism
The individuals interest of each is stakeholder is served and protected
The collective interest of all stakeholders is served and protected
No stakeholder is allowed to expropriate the interest of other stakeholders
No single stakeholder enjoys a monopoly over the decision making process of a company

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Introduction to Corporate Governance

Benefits of Corporate Governance

Assist in improving performance
Help to attract investment
Enable to realize corporate objectives
Protect shareholder rights
Ensures efficient use of resources

Governance and Management

Governance: What a Board of Directors of a company does to ensure a proper conduct of its
affairs
Management: What is done by employees hired by Board to operate the companys affairs on a
day to day basis
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Governance
Strategic, i.e. long term, management of the company
Setting overall objectives of the company
Approving plans (including budgets) for achieving these objectives
Arranging resources for the conduct of the companys business
Defining rules and parameters within which the management of the company may operate
Protecting the interest of all stakeholders
Management
Conducting day to day affairs of running the companys business
Attending to all operational matters and coordinating the various activities of the business
Implementing the plans approved by the Board of Directors
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Developing proposals, suggestions and alternatives for consideration by the Board of Directors
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Corporate Governance Hassan Tariq
Introduction to Corporate Governance

Is Corporate Governance a Simple Extension of Agency Theory?

Scope of Corporate Governance

Preparation of companys financial statements
Internal controls and the independence of entitys auditors
Review of compensation arrangements for chief executive officer and other senior executives
The way in which individuals are nominated for the positions on the board
The resources made available to directors in carrying out their duties
Oversight and management of risk

Approaches to Corporate Governance

1. Shareholders Approach
2. Stakeholder Approach
3. Enlightened Shareholder Approach

Shareholders Approach
It states that BODs should govern the company in the best interest of its shareholders
All directors are elected by and are answerable to shareholders
It leads the BODs to make decisions which maximize shareholders value (profits and
improvement of share value) even at the expense of other stakeholders
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Example: A company can improve its profits by paying poor wages to its workers
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Proposed by Milton Friedman

Corporate Governance Hassan Tariq
Introduction to Corporate Governance
Stakeholder Approach
It is also known as Plurist Approach
Considered as an ideal approach by corporate governances proponents
It states that BODs should formulate policies that provide for equal (or almost equal) care of
interests of all stakeholders
This is not practical approach because directors are elected by and accountable only to
shareholders
Proposed by Edward Freeman
Enlightened Shareholders Approach
It states that BODs should work for the best interest of shareholder, but without damaging or
misappropriating the interest of others stakeholders
This most practical approach
It allows the directors to pursue the interest of shareholder in an enlightened and inclusive way

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Introduction to Corporate Governance

Importance of Corporate Governance

Attract more and cheaper capital both from shareholders and lenders
There is direct and positive link between the quality of governance of a company and its
financial performance
Good governance leads to better financial performance, encourages investment, fuels growth,
generate employment, improves the quality and range of products, enhances governmental
revenue and ultimately improves the quality of life for the general public

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