Corporate Governance

A Brief Overview
by

Dr Safdar A Butt

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

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Corporate Governance - Dr S A Butt

Stakeholders in a Company

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

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Corporate Governance - Dr S A Butt

The Important Questions

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

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Corporate Governance - Dr S A Butt

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

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Corporate Governance - Dr S A Butt

Individual Vs Collective Interest

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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Corporate Governance - Dr S A Butt

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 elses 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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Corporate Governance - Dr S A Butt

Governance & Management

How do these terms differ? Does Governance include Management? Or Does Management include Governance?

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Corporate Governance - Dr S A Butt

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

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

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

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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