CLASS NOTES + ASSIGNMENT

Corporate Governance:
The system of rules, practices and processes by which a firm is directed and
controlled.
Corporate governance refers to having the appropriate people, processes and
structures to direct and manage the business and affairs of the company to
enhance long-term shareholder value, whilst taking into account the interests of
other stakeholders. Companies that embrace the tenets of good governance,
including accountability, transparency and sustainability, are more likely to
engender investor confidence and achieve long-term sustainable business
performance.
Organizational Structure: (Example)

BoD
 Stakeholders Involved:
 Shareholders
 Directors/CEO
 Employees
 Customers and Suppliers
 Regulatory Bodies
 Auditors
 Government
 Society at Large
 Investors Stock Exchange
Code of Corporate Governance:
Ensures effective and good governance. All practices are governed by this code
pertaining to how you manage and run the whole organization at large.
Effective Governance Covers

CSR + Responsibiltiies of
CFO/CEO

Internal Audit Department.

Complete System of Internal
Controls.
Financial Reporting Structure. Effectiveness of external audit.
Compliance Statements. Internal + Code of corporate
BoD Committee/Audit governance.
External Auditors Committee/ HR Committee.
Laid out Qualifications RIsk & Compliance.
pertaining to
CFO/Directors/Internal
Auditors
CASE OF ENRON:
Date: Jan 2001.
Loss of Shareholder Value: 63 Billion Dollars.
Employees Lost: 20000.
Enron Ranking at that time: 7 th Largest in USA
Outside Partners of Enron: 3000 +
Total Undeclared Debts: 13.12 Billion Dollars.
Major Culprits:
Keneth Ley: COO
Jeffrey Skillings(Hired from Mckinsey)(Gas Bank Idea)
Fastow (MBA) Promoted to CFO in 5-6 Years.

SPE SPECIAL
PURPOSE
ENTITIES MARK TO MARKET
ACCOUNTING
DIRECTORS:
CEO- Has to be an executive director,
Chairman BoD: One from the non-exec directorate.

Director

Executive Non Executive

Director Director

Non-
Independant Independant
Director Director

Non-Executive Director:
1. Should not be from the executive management of a company.
2. Can lend an outside viewpoint.
3. Does not devote full time to the company/not involved in managing the
affairs of the company.
4. He is not a beneficial owner of the company or its associated
undertakings.
5. Does not draw any remuneration from the company except the meeting
fee.
Will not be considered Independent Director if:
1. He has been an employee of the company in the last 3 years.
2. Has been the CEO of the subsidy/associated company/holding company in
the last 3 years.
3. He has been in any material business relationship with the company in
last 3 years.
 4. Received remuneration from the company in 3 years preceding his
appointment.
5. He is a close relative of spouse, descendant / Sibling.

Powers of board. — (1) The business of a company shall be managed by the

board,
who may exercise all such powers of the company as are not by this Act, or by
the articles, or by
a special resolution, required to be exercised by the company in general
meeting.
(2) The board shall exercise the following powers on behalf of the company, and
shall do
so by means of a resolution passed at their meeting, namely-
(a) to issue shares;
(b) to issue debentures or any instrument in the nature of redeemable capital;
(c) to borrow moneys otherwise than on debentures;
(d) to invest the funds of the company;
(e) to make loans;
(f) to authorize a director or the firm of which he is a partner or any partner of
such
firm or a private company of which he is a member or director to enter into any
contract with the company for making sale, purchase or supply of goods or
rendering services with the company;
(g) to approve financial statements;
(h) to approve bonus to employees;
(i) to incur capital expenditure on any single item or dispose of a fixed asset in
accordance with the limits as may be specified:

DISQUALIFICATION OF DIRECTORS BY THE COMMISSION

172. Disqualification orders. -(1) In any of the circumstances stated hereunder,
the
Commission may pass a disqualification order against a person to hold the office
of a director of
a company for a period up to five years beginning from the date of order-
(a) conviction of an offence in connection with the promotion, formation,
management or liquidation of a company, or with the receivership or
management of a company's property;
89
(b) persistent default in relation to provisions of this Act requiring any return,
account or other document to be filed with, delivered or sent, or notice of any
matter to be given, to the Commission or the registrar;
(c) a person has been a director of a company which became insolvent at any
time
(while he was a director or subsequently):
Provided that order against any such person shall not be made after the
end of the period of two years beginning with the day on which the company
of which that person is or has been a director became insolvent;
(d) the business of the company in which he is or has been a director, has
conducted to defraud its creditors, members or any other persons or for a
fraudulent or unlawful purpose, or in a manner oppressive of any of its
members or that the company was formed for any fraudulent or unlawful
purpose; or
(e) the person concerned in the formation of the company or the management
of
its affairs have in connection therewith been guilty of fraud, misfeasance,
breach of trust or other misconduct towards the company or towards any of its
member; or
(f) the affairs of the company of which he is a director have been conducted in a
manner which has deprived the shareholders thereof of a reasonable return; or
(g) the person has been convicted of allotment of shares of a company for
inadequate consideration; or
(h) the person is involved in illegal deposit taking; or
(i) the person has been convicted of financial irregularities or malpractices in a
company or
(j) the company of which he is a director has acted against the interests of the
sovereignty and integrity of Pakistan, the security of the State, friendly
relations with foreign States; or
(k) the company of which he is a director refuses to act according to the
requirements of the memorandum or articles or the provisions of this Act or
fail to carry out the directions of the Commission given in the exercise of
powers under this Act; or
(l) the person is convicted of insider trading or market manipulation practices;
or
(m) the person has entered into a plea bargain arrangement with the National
Accountability Bureau or any other regulatory body;
(n) the person has been declared a defaulter by the securities exchange;
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(o) that it is expedient in the public interest so to do.
(2) Where a disqualification order is made against a person who is already
subject to such
an order, the periods specified in those orders shall run concurrently.
(3) An order under this section may be made by the Commission on its own
motion or
upon a complaint made in this regard.
(4) Before making an order the Commission shall afford the person concerned
an
opportunity of representation and of being heard.
(5) Any order made by the Commission under this section shall be without
prejudice to
the powers of the Commission to take such further action as it deems fit with
regard to the person concerned
Assignment Question:
Statement of Financial Position as at December 31st, 2018
Assets
Non Current Assets
PPE 10,000,000
Investment 15,000,000
Total NCA 25,000,000
Current Assets
Inventory 2,500,000
Receivables 1,500,000
Cash at bank 2,500,000
Total CA 6,500,000
Liabilities and Equity
Equity
Share Capital 10,000,000
Accumulated Profit 15,000,000
Total Equity 25,000,000
Liabilities
Non Current Liabilities 6,000,000
Current Liabilities 500,000
Total Liabilities 6,500,000

The Question has been solved by all relevant stated laws in code of corporate
governance as well as companies act 2017:
Below are all relevant extracts and proposed ways of doing certain transaction In
accordance with the above stated regulations.
 1. Company issued additional share capital of 300,000 shares at a market price
of Rs. 75/share on 30.06.2019.

Why? Meeting the financing needs of the company.

Concerned Departments: Finance, Investment.

As per Section 183 the board shall exercise power to:

a) Issue Share b) Issue debentures/instruments
C) To borrow money other then debentures.

Extract:
 2. Company borrowed funds for expansion by issuing 15% redeemable
preference shares of Rs. 5 million.

Financing Activity: Meeting/Sourcing funds. Reasons can be:

Funding Project/Capital Requirement/Shortfall etc.

Concerned Departments: Finance,Investment,Any Specific

Committee if may be.

As per Section 183 Sub Section 1) Clause a) the power rests with
board to issue shares.
* The valuation and projection how ever will be made by the
concerned departments and final approval will rest with the
board.

Extract:
 3. Company has also arranged the purchase of PPE for its production facilities
from Germany for Rs. 250,000 Euro against the bank facility arranged from
MCB Pakistan.

MCB: The provider of services to the company.Foreign import of PPE is

involved.

Concerned Departments:
Legal,Finance,Investment, External: State Bank.

As per Section 183 Sub-Section 1 Clause:

the power rests with the board to i) incur capital expenditure on any single
time.

The concerned departent will put up the quotations and feasibility which
will finally be approved in the Board Meeting held.

Extract:
 4. Company signed a contract to sell goods with the company of marketing
director’s spouse worth Rs.10 million.

Is not Illegal. Is withing the legal framework under the

following considerations.

Section 208. Related Party Transactions. * Policy has to be

approved by the board. Clause a) sale,purchase of any good
or materials.

Arms Length transaction is emphasized whereby no undue

or personal interest be guaged out from the event or
transaction for personal gain.(Section 208 Subsection b)

Extract:
 5. Company has introduced a policy of giving loans upto Rs.1 million to its
employees who have completed 5 years of services with the company.

HR Policy/Ammendment

Departments Concerned: HR. FInance.

As per Section 183-2e such an ammendment pertaining to giving

loan in an HR Policy of the company must go through the approval
of the board for this subject matter.
 6. The company is considering to give 1 salary as a bonus to its employees if
the profit is below Rs.25 million and if above Rs.25 million, it will give 2
salaries.

Proposal and Appraisals Final approval and power

Department Involved:
will be prepared by rests with the board to
HR,Finance,Sales.
repective departments. approve the agenda.

Extract:
 7. Co is disposing off its old plant and machinery for Rs. 500,000

Bidding/Auction The final power to

procedure can be carried approve the agenda is
Departments Involved:
out. The report and the board and further
Finance,Procurement,Any Specific
valuation would then be with the consent of
Committee if maybe.
sent for approval to Shareholders which as
board. per law is abiding.

Extract:
 8. Company has written off bad debts of Rs. 300,000

The valuation is done by the The final power to approve

Departments Involved:
finance department by the bad debt under
Finance,Sale,Policy& Regulations(If
methods including debt consideration rests with the
present)
aging and analysis. board as per companies act.

Extract:
 9. Company is impairing its fixed assets and recording a provision of Rs.
750,000 against it.
The valuations pertaining to As per the section 182-
Deparmtnets Invovled: any revulations after being 2(1(ii) The matter will be
Investment/Valuation Fianance assessed by the respective approved by the board and
Division department will be sent to the final authority thus rests
board for approval with the directors.

Extract:
 10.HR Director has submitted a note to management that an employee has filed
a suit of 5 million against the company on account of negligence.

Such matters of law/legal The Board can in the case be

nature are not a regulatory informed thus about the
Department Involved: Legal Finance requiremnt how ever critical nature or any
Compliance Department depending upon nature are implication which may result
disclosed and informed by out of the contigency that
the legal dept. needs to created.

Extract:
 11.Company is taking over XYZ Ltd by acquiring 70% stake against cash
consideration of 45 million.

The acquisiton and the valuation As per section 182-2(m) the final
deal is dealt by the management resolution rests with the board if
Departments Invlovled: Finance Investment how ever this all needs to be put passed with the majority and vote
up as an agenda to the board for of the board members in the
final approval meeting.

Extract:
 12.Company has identified a fraud in inventory management of company
valuing 2.5 million while doing the stock take at the end of the year. Goods
worth 2.5 million were not located in the warehouse.

The departments as well The code of corporate

This heavily indicates that the as the board is governance and the
company has a weak channel of reponsible as there lies a companies act places
internal controls due to which such an responsibility on the heavy compliance of
event has occured board to establish effective internal
internal controls controls in organisation.

Extract Code of Corporate Governance:

 13.Purchased raw material worth 5 million from supplier who was not the
lowest bidder

Such an activity shows the The code of corporate

This heavily indicates that the company general principles and governance and the
has a weak channel of internal controls practices are by passing companies act places
in particualr the procuremnt code of corporate heavy compliance of
department is held responsible govenrnance and show effective internal controls
weak control in organisation.
 14.Company has decided to sell a piece vacant land for 25 million to the son of
corporate affair director.

The concerned departments As per section 205 and 208

Departments Concerned: Finance, will draw upo the proposal such type of desicion under
Investment, Any Special Committee if which will be sent for the the law requires the consent of
present. approval of board as well as both the board and the share
share holders. holders by power.

Extract:
 15.Company is disposing off its loss making subsidiary ABC Ltd by selling
40% of the stake of the company out of 80%

The proposal and complete draft As per the section 183 it

This desicion involves the feasibility and of the preposition of the deal will obligates that such a nature of a
investment valuaiton of Finance Investment be sent for final approval to the desicion must be approved with
and other legal departments Board and for the approval by both the board and the share
the share holders holders (AGM)

Extract:
 16.Finance director had taken a loan from company of 20 million for
construction of his house which was due to be repaid in 2019. He has put up
request for extending the loan repayment for another 2 years.

This is part of the HR policy As per the Section 183 the

made by the company as per request will be put forward by
Departments Concerned: Finace Human the rules and regulations there the concerned department for
Resource of any ammendemnt must be finall approval by the board
taken through both AGM and and shareholders which have
Board. the power there in to approve.

Extract: