An Introduction

to Corporate
Governance
Dr. Safdar H. Tahir

What is it about?

Corporate
Governance

Company

What is a company/ Corporation?

Characteristics of a Company
Types of Companies

Characteristics of a
Company

Ownership in shares
Freely transferable shares
Separate entity apart from
shareholders
Liability of shareholders
Indefinite life
Board of directors
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Types of Companies

Limited or Unlimited
Limited by shares or by guarantee
Private or Public
Listed or Unlisted

Hierarchy of a Company

Shareholders

Board of Directors

Own the company, do not run it.

Elected by and reporting to
shareholders

Management
Appointed by and reporting to directors
Includes executive directors

Top Players

Shareholders: Voting power

Chairman:

Directors

May be executive or non-executive

Chief Executive Officer

May be executive or non-executive

May or may not be a director

Senior Managers:

May or may not be directors

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Classification of
Stakeholders

Owners
Lenders
Employees
Business Associates

Suppliers and Customers

Society

Includes government

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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Classification of Stakeholders
Classified on
basis of Role
in the Company

Classified on basis of opportunity to protect individual interests

Those with
Full Opportunity

Those with a
Partial Opportunity

Those with
Virtually No
opportunity
Minority and
individual
shareholders with no
board
Representation

Owners

Controlling
Shareholders

Institutional
Investors
with Board
representation

Lenders

Financial
institutions
with elaborate
lending
Contracts

Buyers of listed
bonds
with trustee
arrangements

Other lenders

Employees

Executive
Directors

Senior Managers

Other employees
on regular or
contract terms

Business
Associates

Suppliers who sell

only on cash
terms

Major Suppliers and

clients with
contracts

Smaller suppliers
and smaller clients

Government

Public at large

Society

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

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Governance &
Management
Governance

Function

Management

Approval of
Plans
Providing
overall
leadership

Planning

Preparation of
plans
Leading those
who implement
plans

Arranging
resources
Controlling
managers

Organizing

Tasks division &

resource usage

Controlling

Controlling
employees

Leading

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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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Approaches to
Corporate Governance

Shareholders Approach
Stakeholders Approach
Enlightened Shareholders Approach
Which approach is best?

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Corporate Sins

Sloth

Greed

Unwillingness to take initiative or risk,

prefer status quo, be lazy.
Putting self above company

Fear

Not annoy or stand up to any

stakeholder / investor / boss.
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Agency Theory

What is Agency Theory?

Does it apply to companies?
Two-party and three-party model
Principal-Watchdog-Agent

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Key Issues

Financial reporting
Directors remuneration
Risk management
Effective communication
Corporate Social Responsibility

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Financial Reporting

Accuracy
Reliability

Internal and external audit

Comprehensiveness
Timeliness

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Directors Related Issues

Remuneration
Powers
Balance between:

executive and non-executives

Election and re-election

Representation

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Risk Management

Risk profile
What risks to take?

Avoidable and non-avoidable risks

What not to take?

How to handle risks taken?

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Communication

Transparency
Regular communication
With who?
In what format?

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Corporate Social
Responsibility

Business Ethics
Being a good citizen
Doing business responsibly

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Why is CG Important?

Good reputation is good business

Protection of stakeholders interest
Support to capital markets
Support to society
Every one wins

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Thank you
Dr. Safdar H Tahir

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