Chapter # 1

Corporate governance is concerned with governing the corporate entities.

Definition of company
The deliberate arrangement of people works together to achieving goals for earn profit that is
called company.
Characteristics of company
o Shares freely transferable
o The shareholder being a separate entity from the company.
o Company is considered a legal person and has an entity of its own.
o The ownership of the company are separate form management.
o The management of a company is entrusted to people called director who are elected
by shareholder.
Hierarchy of a company
The running of a limited company is entrusted to a board of directors whose members
are elected by shareholders. Some members of the management team may also be members
of the board of directors. All the other employees report to different managers. Management
reports to the board of directors while board of directors reports to the shareholders.
Persons Who they are ? What they do? Source of power
Owner of the Do not run the Hold the ultimate
Shareholder
company company voting power
Both executive and Formulate policies, Elected by and
Board of directors non-executive advises and supervise reports to
director management shareholder
Takes direction from
Executive directors Runs the company on
Managers and report to the
and other managers day to day basis
BOD
Carry out the tasks as
Non managerial staff per the instructions They report to the
Other employees
member given to them by the management
managerss.
Stakeholder of a company
Stakeholders are individuals, groups or any party that has an interest in the outcomes of
an organization. They can be internal or external and range from customers, shareholders to
communities and even governments.
Classification of shareholders
 Classification on basis of role in the On the basis of full opportunity
company
Owner Controlling shareholders
Lenders Financial institutions with lending contracts
Employees Executives directors
Business associates Suppliers (who sell only on cash term)
Society ---
Definition of corporate Governance
Corporate governance as “the mechanism used to control and direct the affair of a
corporate body in order to serve and protect the individual and collective interests of all its
stakeholders.
Difference between management and governance
There are four functions involved in running any organization namely planning, leading,
organizing and controlling. Both the director and management perform all these four
functions: however, their respective involvement is at different level.
Governance Function Management
Approval of plans Planning Preparation of plans
Providing overall leadership Leading Leading plan implementers
Arranging resources Organizing Task division / resource allocation
Controlling managers Controlling Controlling employee
Approaches of corporate governance
There are essentially three approaches to governing a company available to board of directors,
namely shareholders approach, stakeholder approach and enlightened shareholder approach.
Shareholder approach to corporate governance: This approach is lent credence and weight by
the fact that all the directors are elected by and are answerable to shareholder.
Stakeholder approach to corporate governance: This approach ordains that the board of
directors should aim at formulating policies that provide for equal care of the interests of all
stakeholder.
Enlightened shareholders approach: It requires the board of directors to work for the best
interest of shareholders but without damaging or misappropriating the interests at other
stakeholder.
Chapter # 3
Who is a Shareholder
He is a person who own shares in a company. He is considered a member of the company and
its co-owner with certain right and obligations.
Types of shares
There are two types of shares:
 Ordinary Shares
 Preference Shares
Ordinary Shares
These shares are common stock. Another term used for these shares is equity shares. Ordinary
shares represent the ‘real’ share capital of a company.
Preference Shares
Preference shares form a part of the share capital, but their holders do not possess the same
status as ordinary share.
Features of ordinary Shares
Features of ordinary shares are describe below:
i. Permanency: Amount received from sale of its ordinary shares cannot be refunded by the
company to the shareholders during its life time.
ii. No Nominal Cost: A company is not obliged is pay any dividends to ordinary shareholders. At
least theoretically, a company can go on forever without paying any dividends to its equity
holders.
iii. Residual claim on profit: Equity holders are entitled to only the residual profit of a company.
Dividend can be paid to equity holders only after all other classes of capital have been
adequate compensated.
iv. Residual claim on Assets: In the event of a company liquidation, ordinary shareholder have
claim on the company assets after the claims of creditors and other classes of shareholders
have been met in full.
v. Voting Right: The ordinary shareholders have a right to vote at the company’s meeting on such
matter as election of directors, declaration of dividends, major policy issues.

Classification of equity Shareholders

Equity shareholders can be classified into two broad groups internal and external
shareholders.
Types of Shareholders
 Internal Shareholders
These shareholders have a majority of directors on the board of a company and are therefore
able to control all the decisions of the board. In Pakistan, internal shareholders generally own
more than 50% of the issued shares of the company which enables them to ensure that all or
more of directors on the board are their nominees.
 External Shareholders
These are the shareholders who have no representation at the board, primarily because they
hold a minority of shares in the company.
Internal shareholder may be further classified into two groups:
 Corporate shareholder
 Individual (Family, friends)
External shareholder may be further classified into two groups:
 Individual (who have some capital on which they wish to earn a return without
participating in the management)
 Institutional investors (Business organizations that do a business of investing funds in
various companies)
Corporate Shareholders
Corporate shareholders are business entities that own shares in another company. They can
be various types of legal entities, such as limited companies, partnerships, non-profits, or
trusts.
Institutional investor
An institutional investor is an entity or organization that pools and invests money on behalf of
their members, clients, or customers in various types of securities, real property, and other
investment assets. They include banks, pension funds, insurance companies, hedge funds,
mutual funds, and others
Institutional shareholder’s perspective
Institutional shareholder’s perspective describes in following headings:
 Corporate Governance: Institutional shareholders are interested in ensuring that
companies have good governance practices in place.
 Corporate Social Responsibility: Institutional shareholders are increasingly interested in
companies’ social and environmental impact
 Long-Term Value Creation: Institutional shareholders are focused on long-term value
creation rather than short-term gains.
 Shareholder Rights: Institutional shareholders are interested in protecting shareholder
rights
Role of institutional investor in Corporate governance
Institutional investors play a proactive role in the corporate governance of companies. They
influence corporate governance through their voting rights.
Here are some heading that can help you understand the role of institutional investor in
Corporate governance.
 Capability and Capacity to influence.
 Dialogue with directors
 Regular evaluation of financial reports
o Flag off danger signals
o Sharing info with other stakeholders
 Judicious use of Vote
 Could / should seek representation on boar
Chapter # 2
Corporate wrong over the recent past
The investment world has seen a large number of scandals related to companies which are
attributed to failure of governance. These have been caused by a combination of number of
factures, principally the three corporate sins (sloth, greed, and fear), leading such things as:
 Company managers lost sense of business or corporate ethics.
 Earning became the prime measure of a company’s success or efficiency.
 Companies concentrated on short term gains and showing higher current profit.
 The disparity of remunerations between the higher and lower level of employees grew
to uncomfortable levels.
Corporate governance tragedies in USA.
WORDCOM
This phone and communication company used age-old technique of using improper
accounting policies to misallocate 3.8 billion in expenses, thereby inflating profits and
awarding huge bonuses to executive directors.
WASTE MANAGEMENT
The garbage management company misstated its earnings by 17 billion over a six years’
period 1992-97. Its director was ultimately sued for accounting.
Corporate governance tragedies in UK.
BARINGS BANK
The management of this bank failed completely in its internal controls, letting a single
employee cause a loss of 1.4 billion in stock trading. When Nick Leeson, its head of
settlements department, was made head of trading, he was not asked to relinquish the former
charge. This was a fatal internal control failure that allowed his activities go completely
unchecked.
Chapter # 1:
Corporate Sins
There are three attributes frequently found among directors and senior managers which are
considered as corporate sins: sloth, greed and fear.
Sloth: Sloth is unwillingness to take risks and initiative. It makes a manager lets things be
and not to make any effort to bring about a change. Its results in a loss of flair and enterprise
that converts the management into bureaucracy.
Greed: Greed the desire of managers to get the best for themselves. Even at the
expense of others. This leads to dishonesty taking short decisions to temporary boost profits in
order to increase one’s own bonuses.
Fear: Fear is a tendency to refrain from doing anything so as not to displease a boss, or
an investor. Fear is the principle reason why some companies do not progress as managers
refrain from taking any initiative or daring decision.
Agency Theory:
According to this theory when an agent is asked by a principal to look after something
on behalf of the principal and if a situation arises where the interests of the principal and
agent clash, the agent is likely to look after his own interest rather than that of the principal.
Corporate governance importance
The principal importance of this field of study lies in the fact that the interests of a large
number of stakeholders are attached to a company, but only a few have an opportunity to
protect their interest.
Good corporate governance supports capital markets.
Good governance leads to better financial performance by the companies, encourages
investment, fuels growth, generates employment, improves the quality and range of products,
enhances governmental revenue.
Key issues of Corporate Governance
Experts on the subject have identified the following as the key issues of corporate
governance.
 Financial reporting
 Directors remunerations
 Risk management
 Effective communication between the board and shareholders as well as other
stakeholders.
 Corporate governance responsibility
Types of companies
 Unlimited Companies
 Limited Companies
o Companies limited by guarantee
o Companies limited by Shares
 Private limited companies
 Public limited companies
o Listed Companies
o Non listed companies
-Unlimited Company: Unlimited company means a company not having any limit on the liability of its
members. It means that the personal assets of the shareholder can be used to pay the debts of the
company.
-Limited Company: A limited company is a legal business entity with limited liability for its members.
--Companies limited by Guarantee: A company limited by guarantee means a company having the
liability of its members limited by the memorandum to such amount as the members may
respectively thereby undertake to contribute to the assets of the company in the event of its being
wound up.
--Companies limited by Shares: In the companies limited by shares the liability of its members limited
up to the nominal value of shares held by them.
---Private Companies: A private company means a company which by its articles:
o Restricts the rights of transfer of shares.
o Limits the number of its members to 50, not including persons who are in the employment of
the company; and
o Prohibits any invitation to the public to subscribe for the shares, if any, or debentures or
redeemable capital of the company.
When two or more person hold one or more shares in a company jointly, they shall be treated as a
single member.
---Public Companies: A public company means a company which is not a private company. It means
that company may invite the general public to subscribe for its shares or debentures. At least 3
members are required to form a public company. There is no maximum limit of members in a public
company. A public company may be listed or non-listed.
----Listed Company: A listed company is listed with the stock exchange. It can offer its shares to the
public through the stock exchange.
----Non-Listed Company: A non-listed company is not listed with the stock exchange. It cannot offer
its shares to the public through the stock exchange.