p1 by Sir Fawad Mujahid

P1 PROFESSIONAL ACCOUNTANT BY SIR FAWAD MUJAHID 2010
P1 “PROFESSIONAL
ACCOUNTANT”
By:
FAWAD MUJAHID, ACCA
Reference Note
www.fawadmujahid.com Page 1
CORPORATE GOVERNANCE
Definitions of Corporate Governance
 “Corporate Governance is the system by which companies are

directed and controlled…” Cadbury Report (UK), 1992
 “Corporate governance involves a set of relationships between a

company’s management, its board, its shareholders and other
stakeholders also the structure through which objectives of the
company are set, and the means of attaining those objectives
and monitoring performance are determined.” Preamble to the
OECD Principles of Corporate Governance, 2004
Issues - Corporate Governance
 Irregularity of power
 Irregularity of information
 Interests of shareholders as outstanding owners
 Role of owner management
 Assumption of separation of powers
 Division among stakeholders
Why Good Corporate Governance is

required?
Good governance leads to good

performance
 It creates an open and

transparent system
 It improves communication and

breaks down systematic barriers to
flow of information
 Good governance allows

decision making based on data. It
reduces risk
 Good governance helps in

creating a brand and creates comfort for all stakeholders and
society
Key Components of Corporate Governance
 Fairness Holds into account all Stakeholders
 Transparency Open to all public via disclosures, press release
 Independence Non-Executive Directors monitoring
 Probity Truth – Don’t mislead
 Responsibility M’gmt responsible for Organization
 Accountability Directors are accountable for their actions
 Reputation If poor Corporate Governance is Practiced
 Judgment Judging Decisions that contributes to Firm
 Integrity Fair dealing with others & architect of FS
Agency Relationship: Owners and Managers
Accountability Responsibilities
Agent is accountable & answerable for his actions to his

principal.
Issues
 How to implement the accountability system?

 What if the Agent is accountable to other parties than his
principal?
Fiduciary Responsibilities:
 Directors owe a Fiduciary Duty to the company to exercise their

powers bona fide where they are bound to first respect the
Interest of the company & then secondary to the General
Shareholders
 Performance – Contractual Obligation to perform
 Confidence – Information must be kept in confidence
 Skill – Maintain the standard of Skill
 Conflict of Interest – Avoid conflict of Interest
 Other Benefits – Retain with permission
Joint Stock Company
These are companies limited by

shares.
Issues:
 Principals (owners): Do not run

the Business’ they are the Investors.
 Agents (directors): They run

the Business on the behalf of the
Principals.
Agency Theory Problem & Solution
The agency problem occurs when:
 the desires or goals of the principal and agent

conflict and it is difficult or expensive for the
principal to verify that the agent has behaved
inappropriately
Solution:
 principals engage “in incentive-based performance

contracts”
 monitoring mechanisms “ such as the board of
directors”
Other Important Agency Relationships
 Shareholders – Auditors Relationship
 Shareholder = Principal , Auditors = Agent
 Audit Report = Key Communication
Stockholder & Corporate Governance
Stockholder Theory
 It focuses on the interests of Shareholders where it claims that

Shareholders have a legal right to influence the company.
 Shareholders purchase the Shares of the Company and in return

expect their interest to be protected.
Stakeholder Theory
 It focuses on the corporate accountability to a broad range of

Stakeholders.
 Stakeholder wants will vary and this will depend on your point
of view whether certain group should be considered as a
Stakeholder.
Two Motivations theory for Organizations responding stakeholder

concerns:
Instrumental View of Stakeholders
 The organization is using its Stakeholders as an Instrument to

achieve its Economic & Legal objectives.
 A business cannot survive alone it needs different Stakeholders

& therefore it is desirable to respond to stakeholders concerns.
Normative View of Stakeholders
 This View gives importance to the Ethical & generous

responsibilities towards the different Stakeholders.
 It is the moral duty of the Organization to take account of the

opinions & concerns of others.
STAKEHOLDERS:
 Internal Stakeholders: M’gmt, Employees.
 Connected Stakeholders : Shareholders, suppliers, customers,

lenders, competitors.
 External Stakeholders : The Government, Public, NGO’s,
 Legitimate Stakeholders: Those who have legal right upon the

Organization.
 Illegitimate Stakeholders : Those who don’t have a legal claim

upon the Organization.
 Direct Stakeholders: Those who can be affected or affect the

Organization.
 Indirect Stakeholders : Those who cannot directly affect the

Organization.
 Recognized Stakeholders : Those whose views are considered b/f

deciding strategies
 Unrecognized Stakeholders : Those whose views are not

considered
 Narrow Stakeholders : Those who are Most affected by the

Organizations Strategies
 Wide Stakeholders : Those who are least affected by the

Organizations Strategies
 Primary Stakeholders : Those who are the most important

Stakeholders
 Secondary Stakeholders : Those who are not very important to

the Organization
 Active Stakeholders : Those who take an interest in participating

in activities
 Passive Stakeholders : Those who do not seek to participate in

policy making
 Voluntary Stakeholders : Those who engage with activities

Voluntarily
 Involuntary Stakeholders : Those who engage with activities

Involuntarily
 Known Stakeholders : Those whose existence is known to the

Organization
 Unknown Stakeholders : Those whose existence is not known
Stakeholders in Corporate Governance
Directors
 Powers are defined in the Articles
Executive Director
 Who are involved in Full – Time managing the Company
Non – Executive Director
 Who are involved with the Monitoring of the Company
Company Secretary
 Assembling meetings of the Board of Directors
 Maintenance of Documents & Registers
 Administrative Duties
ICSA, UK Institute of Chartered

Secretaries& Administrators
Best Practice
 Is responsible to the Board
 If other Administrative or
Executive Duties exists then
should be reported to Chief
Executive
 Salary Package should be

settled by the Board or
Remuneration Committee on
the recommendation of
Chairman or Chief Executive

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P1 PROFESSIONAL ACCOUNTANT BY SIR FAWAD MUJAHID 2010

Definitions of Corporate Governance

 “Corporate Governance is the system by which companies are

 “Corporate governance involves a set of relationships between a

Issues - Corporate Governance

 Interests of shareholders as outstanding owners

 Role of owner management

 Assumption of separation of powers

 Division among stakeholders

Why Good Corporate Governance is

Good governance leads to good

 It creates an open and

 It improves communication and

 Good governance allows

 Good governance helps in

Key Components of Corporate Governance

 Fairness Holds into account all Stakeholders

 Transparency Open to all public via disclosures, press release

 Independence Non-Executive Directors monitoring

 Probity Truth – Don’t mislead

 Responsibility M’gmt responsible for Organization

 Accountability Directors are accountable for their actions

 Reputation If poor Corporate Governance is Practiced

 Judgment Judging Decisions that contributes to Firm

 Integrity Fair dealing with others & architect of FS

Agency Relationship: Owners and Managers

Agent is accountable & answerable for his actions to his

 How to implement the accountability system?

 Directors owe a Fiduciary Duty to the company to exercise their

 Performance – Contractual Obligation to perform

 Confidence – Information must be kept in confidence

 Skill – Maintain the standard of Skill

 Conflict of Interest – Avoid conflict of Interest

 Other Benefits – Retain with permission

Joint Stock Company

These are companies limited by

 Principals (owners): Do not run

 Agents (directors): They run

Agency Theory Problem & Solution

The agency problem occurs when:

 the desires or goals of the principal and agent

 principals engage “in incentive-based performance

Other Important Agency Relationships

 Shareholders – Auditors Relationship

 Shareholder = Principal , Auditors = Agent

 Audit Report = Key Communication

Stockholder & Corporate Governance

 It focuses on the interests of Shareholders where it claims that

 Shareholders purchase the Shares of the Company and in return

 It focuses on the corporate accountability to a broad range of

Two Motivations theory for Organizations responding stakeholder

Instrumental View of Stakeholders

 The organization is using its Stakeholders as an Instrument to

 A business cannot survive alone it needs different Stakeholders

Normative View of Stakeholders

 This View gives importance to the Ethical & generous

 It is the moral duty of the Organization to take account of the

 Internal Stakeholders: M’gmt, Employees.

 Connected Stakeholders : Shareholders, suppliers, customers,

 External Stakeholders : The Government, Public, NGO’s,

 Legitimate Stakeholders: Those who have legal right upon the

 Illegitimate Stakeholders : Those who don’t have a legal claim

 Direct Stakeholders: Those who can be affected or affect the