Fundamentals of Management

 Corporate Governance
(Part1)

Mubashir Wasim (MSc.

Economics-Banking &
Finance, MBA
Marketing, MS
Business Management,
MS-IT)

Lecture#44
Corporate Governance Part-1

Separation of Ownership & Governance

Corporate Governance in Brief
Benefits of Corporate Governance
Principles-based versus rules-based
approaches to corporate governance
Executive & Nonexecutive Directors
 Separation of Ownership & Governance

Owner Controllers

One set of individual own the Another set of individual run the
Note: CG are the Principles of
business business
best Practice not Rules or Laws
 Put their own money into the  Make all decisions for the
business business.
 Own all assets of the business.  Manage operations of the
business.
Q1: Where there are a large number of external shareholders who play no role in the
day-today running of a company, there is a situation that is described as:
A. Detached corporate ownership
B. Uninvolved external ownership
C. Dividend based shareholding
D. Separation of ownership and control

Q1: D
 Corporate Governance

The main purpose of corporate governance is to align the interest of managers, executive and the board
of directors with those of the shareholders and made
Strategic Decisions Represents the set of polices and procedures that determine how a organization is
directed, administered and controlled.

System by which Contents

Extend to
corporations Accountability: towards shareholders
organization’s
directed and Compliance: with all laws and regulations
shareholders and
controlled Transparency: in financial information
stakeholders
Integrity: ethical actions and decision.
Risk Management,
Internal Controls
Corporate Governance Theoretically Speaking
Corporate governance can be described as ‘the system by which companies are directed
and controlled in the interests of shareholders and other stakeholders'.

Governance is an issue for all organisations, however the corporate governance rules
covered in this chapter would principally be applied to large quoted companies. In large
quoted companies the owners of the company (the shareholders) are often distinct from
the people running the company (the directors).

There has been an increased emphasis on governance regulations over the last 20 years as
a result of a number of high profile scandals and corporate failures over that period.
Benefits of Corporate Governance

Good corporate governance should:

Reduce risk. It helps to ensure that the personal objectives of the board and the
company’s strategic objectives are brought into line with those of stakeholders. It can help
to reduce the risk of fraud.
Improve leadership. It allows increased expertise to be brought to bear on strategic
decision-making, through the influence of nonexecutive directors (NEDs), and because all
board members are encouraged to examine board decisions critically.
Enhance performance. It institutes clear accountability and effective links between
performance and rewards which can encourage the organization to improve its
performance.
Improve access to capital markets. It reduces the level of risk as perceived by outsiders,
including investors.
 Benefits of Corporate Governance

• Enhance stakeholder support by showing transparency, accountability and social responsibility.

• Enhance the marketability of goods and services. It creates confidence among other
stakeholders, including employees, customers, suppliers and partners in joint ventures.
Principles-based versus rules-based approaches to corporate governance

There are two different approaches to corporate governance; principles-based and rules-
based. In the UK there is a principles-based approach (The UK Corporate Governance
Code), while in the USA there is a rulesbased approach (Sarbanes-Oxley). A rules-based
approach will provide a set of rules which must be followed in all circumstances. A rules-
based legislation will also include punishment for non-compliance.
 Principles-based versus rules-based approaches to corporate governance

A principles-based approach is not a rigid set of rules, but consists of principles, which
should be followed unless there is a justifiable explanation as to why not. The UK code
adopts a ‘comply or explain’ approach – the main principles of the code should be adhered
to, however some of the provisions to the code may not be followed exactly providing the
departure can be justified and if it can be shown that good governance can still be
achieved.
Q: The following question is taken from the December 2008 exam paper.
1- In most countries , what is the usual purpose of codes of practice on corporate governance?
A- To establish legally binding requirements to which all companies must adhere
B- To set down detailed rules to regulate the ways in which companies must operate
C- To provide guidance on the standards of the best practice that companies should adopt
D- To provide a comprehensive framework for management and administration

Q:- C
 Shareholders

Appoint the Board of Directors

Chairman
CEO & Executive Directors Non-Executive Directors
Joint

1- Set long term objectives of business for the 1- Bring extra-knowledge

organization 2- Care of highly risky and ethical issues
2- Hire the executive and managers 3- Hiring and liaison with auditors
3- Are responsible for an overall performance of 4-Renumeration of directors.
the organization. (must not own large number of company shares

Annual Performance of the Organization

Review of Annual Performance

Q3: Which of the following would render a non-executive director of a company
unsuitable for this post?
A. The person has enough time to carrying out the duties
B. The person is financially independent of the remuneration received for this post
C. He/she also runs his/her own company at the same time
D. The person owns a large number of the company's shares

Q3: D
Five principles of corporate governance
The OECD (Organisation of Economic Cooperation and Development) identifies five
principles of corporate governance:
• the rights of shareholders.
• the equitable treatment of shareholders.
• the role of stakeholders.
• disclosure and transparency.
• the responsibility of the board.