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CorporateCorporate
GovernanceGovernance
Safdar H.TahirSafdar H.Tahir
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TopicsTopics
Types of BoardsTypes of Boards
Land Marks in Emergence ofLand Marks in Emergence of
Corporate Governance.Corporate Governance.
Safdar H. TahirSafdar H. Tahir
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Types of BoardsTypes of Boards
Composition:Composition: UnitaryUnitary
Two-tieredTwo-tiered
TenureTenure Common tenureCommon tenure
StaggeredStaggered
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Anglo-Saxon ModelAnglo-Saxon Model
Theoretically this model is revolvingTheoretically this model is revolving
around three main charactersaround three main characters
namely shareholders, board ofnamely shareholders, board of
directors and managers. In theory,directors and managers. In theory,shareholders are powerful becauseshareholders are powerful because
they elect board of directors and castthey elect board of directors and cast
vote at annual general meetingsvote at annual general meetings
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Anglo-Saxon Corporate GovernanceAnglo-Saxon Corporate Governance
SystemSystem (Practice)(Practice)Theoretically powerful shareholders have becomeTheoretically powerful shareholders have become
relativelyrelatively powerless.powerless.
Boards of directors average 12 members in US.Boards of directors average 12 members in US.
Boards of directors are potentially uniformed andBoards of directors are potentially uniformed and
unmotivated.unmotivated.
They have become merely a rubber stamp in theThey have become merely a rubber stamp in the
hand of management.hand of management.
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Berle and Means ModelBerle and Means Model
1930s, the U.S. business became more1930s, the U.S. business became more
prolificprolific..
Berle and Means, argued the most of theBerle and Means, argued the most of the
units of businesses were owned by eitherunits of businesses were owned by either
individuals or small groups.individuals or small groups.
The firms were either managed by ownersThe firms were either managed by owners
themselves or appointees by owners.themselves or appointees by owners.
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Berle and Means modelBerle and Means model
Is the Berle and MeansIs the Berle and Means
model existing in themodel existing in thereal world???real world???
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THE JAPANSES MODELTHE JAPANSES MODEL
A high level of ownership associationA high level of ownership associationamong banks and corporation named asamong banks and corporation named asKeiretsu.Keiretsu.
Keiretsu is a well built and wellKeiretsu is a well built and welldefined, long-run industrial, tradingdefined, long-run industrial, tradingcommercial association among alliedcommercial association among alliedbanks and corporations, participatebanks and corporations, participate
largely in debt and equity financing oflargely in debt and equity financing ofenterprise.enterprise. A legal, public policy and industrialA legal, public policy and industrial
policy networking structure planned topolicy networking structure planned tosupport and promote support and promote keiretsukeiretsu..
In Japanese model of corporateIn Japanese model of corporate
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THE GERMAN MODELTHE GERMAN MODEL
The corporate governance model of German isThe corporate governance model of German issignificantly different from both the Anglo-Saxonsignificantly different from both the Anglo-Saxonmodel and The Japanese model of corporatemodel and The Japanese model of corporategovernance, although some of its featuresgovernance, although some of its features
resemble with the Japanese model.resemble with the Japanese model. In both German and Japan model, institutionalIn both German and Japan model, institutional
investors play very important role in the formationinvestors play very important role in the formationof corporate governance structure.of corporate governance structure.
In both countries, Japan and German, bankIn both countries, Japan and German, bankrepresentatives are elected to the board ofrepresentatives are elected to the board ofdirectors but this representation is constant indirectors but this representation is constant inGermany while in Japan the representation comesGermany while in Japan the representation comesonly at the time of financial distress.only at the time of financial distress.
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German CorporateGerman Corporate
Governance SystemGovernance System
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Balance on the BoardBalance on the Board
Balance of representationBalance of representation
Balance of talents / abilitiesBalance of talents / abilities
Balance of powerBalance of power Balance of attitudes or viewsBalance of attitudes or views
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Consequences ofConsequences of
ImbalanceImbalance Board can be misguided by theBoard can be misguided by the
executivesexecutives
Interest of only one stakeholder isInterest of only one stakeholder is
servedserved
Poor decision makingPoor decision making
Status quo mentalityStatus quo mentality Lack of communicationLack of communication
Things start getting fixedThings start getting fixed
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Cadbury Code GuidelinesCadbury Code Guidelines
Regular meetingsRegular meetings
Monitoring executive performanceMonitoring executive performance
Draw clear lines of authorityDraw clear lines of authority Good board room practicesGood board room practices
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Board Room PracticesBoard Room Practices
Every one should participateEvery one should participate
Formalized written proceduresFormalized written procedures
Induction program for directorsInduction program for directors Each director should get the sameEach director should get the same
information at the same timeinformation at the same time
No post-facto approvalsNo post-facto approvals Chairman decides the content of theChairman decides the content of the
agendaagenda
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Role of ChairmanRole of Chairman
Running the board, chairing itsRunning the board, chairing its
meetingsmeetings
Ensuring all directors get timely andEnsuring all directors get timely and
complete informationcomplete information
Acting as bridge between the boardActing as bridge between the board
and shareholders / stakeholdersand shareholders / stakeholders
Evaluating the performance ofEvaluating the performance of
individual directorsindividual directors
Arbiter in event of internal disputesArbiter in event of internal disputes
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Responsibilities of CEO &Responsibilities of CEO &
Senior ManagementSenior Management Operating the company in an effective andOperating the company in an effective and
ethical manner according to policies set byethical manner according to policies set bythe Boardthe Board
Drawing the strategic plansDrawing the strategic plans Drawing annual plans and budgetsDrawing annual plans and budgets Selection of managerial and other staffSelection of managerial and other staff Identifying business risksIdentifying business risks Financial reportingFinancial reporting Internal ControlsInternal Controls Code of Conduct for all staffCode of Conduct for all staff
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Duality of Office:Duality of Office:
Chairman & CEOChairman & CEO
Speeds up decision makingSpeeds up decision making
Quick actionQuick action
Saves cost: often only one salarySaves cost: often only one salary More effective due greater powers:More effective due greater powers:
Within the companyWithin the company
Dealing with outsidersDealing with outsiders
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Thing to PonderThing to Ponder
Duality desirable orDuality desirable ornot??not??
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Thank youThank you
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The ShareholdersThe Shareholders
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Who is a shareholderWho is a shareholder
OwnerOwner
BeneficiaryBeneficiary
Risk bearerRisk bearer Decision makerDecision maker
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Types of SharesTypes of Shares
Ordinary sharesOrdinary shares
Preference SharesPreference Shares
Other typesOther types
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Features of OrdinaryFeatures of Ordinary
SharesShares PermanencyPermanency
No nominal cost to the companyNo nominal cost to the company
Residual claim on profitsResidual claim on profits Residual claim on assetsResidual claim on assets
Voting rightsVoting rights
Cumulative voting rightsCumulative voting rights Right of purchasing new sharesRight of purchasing new shares
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Committees of aCommittees of a
BoardBoardSafdar H. TahirSafdar H. Tahir
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Why Committees?Why Committees?
To get impartial and professionalTo get impartial and professional
inputinput
Reduce work load for directorsReduce work load for directors
More detailed workMore detailed work
Specialization principleSpecialization principle
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Common CommitteesCommon Committees
Audit CommitteeAudit Committee
Nominations CommitteeNominations Committee
Remunerations CommitteeRemunerations Committee Executive CommitteeExecutive Committee
Ad hoc CommitteesAd hoc Committees
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Audit CommitteeAudit Committee
MembershipMembership
All NEDs, preferably all INEDsAll NEDs, preferably all INEDs
Chairman must be INEDChairman must be INED Can take external help if neededCan take external help if needed
US law says at least one member ofUS law says at least one member of
AC must be a finance / accountingAC must be a finance / accountingprofessionalprofessional
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Responsibilities of ACResponsibilities of AC
Oversight of financial reporting andOversight of financial reporting and
accounting policies/systemsaccounting policies/systems
Liaison with external and internalLiaison with external and internal
auditorauditor
Ensuring regulatory compliance forEnsuring regulatory compliance for
disclosuresdisclosures
Monitoring internal controlsMonitoring internal controls
Oversight of risk managementOversight of risk management
processesprocesses
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Audit Committee IssuesAudit Committee Issues
CompositionComposition All NEDsAll NEDs
Majority INEDsMajority INEDs
Chairman of the company not a memberChairman of the company not a member
DurationDuration
Frequency of meetingsFrequency of meetings
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Nature of AuditNature of Audit
CommitteeCommittee It is not an executive body.It is not an executive body. It does not draw up accountingIt does not draw up accounting
policy; its role is only to review andpolicy; its role is only to review and
oversee.oversee. It does not perform internal orIt does not perform internal or
external audit.external audit.
It reports to the Board, notIt reports to the Board, notmanagement.management. It issues advice to management, notIt issues advice to management, not
directives.directives.
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Best Practices for AuditBest Practices for Audit
ComComThe prime tool of good corporateThe prime tool of good corporate
governance.governance.
Managing its agenda:Managing its agenda: annual, quarterly programsannual, quarterly programs
Formal meetings with executivesFormal meetings with executives
Formal meetings with external auditorFormal meetings with external auditor
Frequency of interaction withFrequency of interaction with
managementmanagement
Regular self evaluationRegular self evaluation38
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External Auditor &External Auditor &
Audit CommitteeAudit Committee Negotiations with external auditorNegotiations with external auditor
Verifies suitability of the external auditorVerifies suitability of the external auditor
Their resources, qualifications, independence,Their resources, qualifications, independence,
past recordpast record Ensures independenceEnsures independence
Linkages, non-audit workLinkages, non-audit work
Rotation, former employees of audit firmRotation, former employees of audit firm
Audit firms performance, ethicsAudit firms performance, ethics
Discusses report / management letter withDiscusses report / management letter with
external auditorexternal auditor
Si i i ki
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Situation in Pakistan onSituation in Pakistan on
ACsACs Law is being followed in words butLaw is being followed in words but
often not in spirit.often not in spirit.
Often EDs are members of ACOften EDs are members of AC
In some cases, company chairman orIn some cases, company chairman or
CFO is made chairman of ACCFO is made chairman of AC
Since the whole board is subservient,Since the whole board is subservient,
no hope for truly independentno hope for truly independent
members of audit committee.members of audit committee.
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Nominations CommitteeNominations Committee
ResponsibilitiesResponsibilities
Formalization of process of findingFormalization of process of finding
good directors & senior managersgood directors & senior managers
Evaluation of directors individualEvaluation of directors individual
performanceperformance
Succession planningSuccession planning
Board size and structureBoard size and structure
iR i
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RemunerationsRemunerations
CommitteeCommittee Drawing up Remuneration Policy forDrawing up Remuneration Policy for
directors and senior managersdirectors and senior managers
Ensuring that directors are not paidEnsuring that directors are not paid
any additional fee or givenany additional fee or given
consultancy assignments etc.consultancy assignments etc.
Oversight of bonus computation forOversight of bonus computation for
directorsdirectors Ensuring the proper disclosure isEnsuring the proper disclosure is
made in respect of directorsmade in respect of directors
remunerationremuneration
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Basis of RemunerationBasis of Remuneration
Fixed salary onlyFixed salary only
Bonus onlyBonus only
CombinationCombination Balance between the componentsBalance between the components
Too high fixed salary as bad as too highToo high fixed salary as bad as too highbonusbonus
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Fixed SalaryFixed Salary
Promotes lethargy; status quoPromotes lethargy; status quo
mentalitymentality
Dampens entrepreneurial initiativeDampens entrepreneurial initiative
Increases staff turnoverIncreases staff turnover
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Performance Based PayPerformance Based Pay
BonusesBonuses CashCash
Free sharesFree shares
Share optionsShare options
Basis of computationBasis of computation Base figure: sales, profit, market share,Base figure: sales, profit, market share,
etcetc Short term viewShort term view
Long term view: gradually increasingLong term view: gradually increasing
bonusbonus
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Balance in ComponentsBalance in Components
What is the right mix?What is the right mix?
Too high salary promotes lack ofToo high salary promotes lack of
initiativeinitiative
Too high bonus promotes:Too high bonus promotes: short term viewshort term view
Dishonesty; greed; fudgingDishonesty; greed; fudging
CCG recommends 1 : 2 ratioCCG recommends 1 : 2 ratio
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Situation in PakistanSituation in Pakistan
Executive directors do not run theExecutive directors do not run the
board, controlling shareholder does.board, controlling shareholder does.
Directors remuneration treated asDirectors remuneration treated as
employee salary issue.employee salary issue.
NEDs not paid any thing at all exceptNEDs not paid any thing at all except
attendance fee.attendance fee.
Remuneration committees do notRemuneration committees do not
exist in Pakistanexist in Pakistan
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Executive CommitteeExecutive Committee
Some decisions can only be taken bySome decisions can only be taken by
board but board cannot meet tooboard but board cannot meet too
frequently; hence executivefrequently; hence executive
committee with delegated powers.committee with delegated powers. Often has EDs and some INEDs asOften has EDs and some INEDs as
membersmembers
Meets frequently to dispose offMeets frequently to dispose offroutine executive mattersroutine executive matters
Gives detailed report to board onGives detailed report to board on
more important mattersmore important matters
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Executive Committee - 2Executive Committee - 2
Reduces work for the boardReduces work for the board
Provides specialized input to theProvides specialized input to the
boardboard
Provides extra layer of checkingProvides extra layer of checking
Has more time to investigate andHas more time to investigate and
give more detailed reportgive more detailed report
Serves as lower tier of a unitaryServes as lower tier of a unitary
board.board.
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Ad hoc CommitteesAd hoc Committees
Created for a situation, purpose orCreated for a situation, purpose or
time and liquidated afterwardstime and liquidated afterwards
Project Committee; InvestigationProject Committee; Investigation
Committee, Negotiations Committee,Committee, Negotiations Committee,etc.etc.
Terms of reference decided by theTerms of reference decided by the
board on need basis.board on need basis.
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Thank youThank you
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BOD: A powerfulBOD: A powerfulinstrument ofinstrument of
GovernanceGovernanceSafdar H. TahirSafdar H. Tahir
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BODBOD
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Importance of the BoardImportance of the Board
It is often believed, by stakeholders,It is often believed, by stakeholders,
social scientists and the regulatorssocial scientists and the regulators
alike, that the key to good corporatealike, that the key to good corporate
governance lies in the hands of agovernance lies in the hands of acompanys Board.companys Board.
But:But:
How does a Board become good?How does a Board become good?
Is a good Board born or made?Is a good Board born or made?
Is a Board free to be good?Is a Board free to be good?
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The Boards RoleThe Boards Role
Provide entrepreneurial leadershipProvide entrepreneurial leadership
Set strategic objectives of theSet strategic objectives of the
companycompany
Arrange for resources needed toArrange for resources needed to
achieve the strategic objectivesachieve the strategic objectives
Review management performanceReview management performance
Set the companys values andSet the companys values and
standardsstandards
Act as a bridge between stakeholdersAct as a bridge between stakeholders
Different Board Types:Different Board Types:
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Yes-men Board
ypypThe Good, Bad, and UglyThe Good, Bad, and Ugly
Rubber Stamp
Board
Country Club
Board
Good Old Boys
Board
The Real Thing
Paper
Board
?Trophy Board
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Functions of a BoardFunctions of a Board
OversightOversight
DirectionalDirectional
AdvisoryAdvisory
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Oversight FunctionOversight Function
Approving and monitoring strategicApproving and monitoring strategic
plans.plans.
Approving and monitoring annualApproving and monitoring annual
plans, operational and capitalplans, operational and capitalbudgetsbudgets
Engaging external auditorsEngaging external auditors
Ensuring integrity of annual reportEnsuring integrity of annual report
Review of major operational activitiesReview of major operational activities
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Directional FunctionDirectional Function
Setting companys missionSetting companys mission
statement, vision statement, valuestatement, vision statement, value
statement, etc.statement, etc.
Appointment of CEO and other seniorAppointment of CEO and other seniorexecutivesexecutives
Planning for succession of seniorPlanning for succession of senior
executivesexecutives Appointing various committees likeAppointing various committees like
audit, remuneration, executive, etc.audit, remuneration, executive, etc.
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Advisory FunctionAdvisory Function
GuidanceGuidance
What else is happening in the worldWhat else is happening in the world
Different perspectiveDifferent perspective
Specialized input on specific areasSpecialized input on specific areas
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Tools AvailableTools Available
Composition of the boardComposition of the board
Independence of the boardIndependence of the board
CommitteesCommittees
External help where necessaryExternal help where necessary
Governmental interventionGovernmental intervention
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Boards ResponsibilitiesBoards Responsibilities
Collective responsibilities of theCollective responsibilities of the
boardboard
Individual responsibilities of eachIndividual responsibilities of each
directordirector
CollectiveCollective
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CollectiveCollective
ResponsibilitiesResponsibilities Acting in the best interest of theActing in the best interest of the
company.company.
Accountability to ownersAccountability to owners Statutory duties:Statutory duties: Directors have toDirectors have to
comply with a number of obligations incomply with a number of obligations interms of theterms of the Companies ActCompanies Act
Keeping minutes of all meetingsKeeping minutes of all meetings Filing periodic reports and financialFiling periodic reports and financial
statementsstatements
Stock exchange updatesStock exchange updates
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Duties of DirectorDuties of Director
The common lawThe common law
StatutesStatutes
The memorandum and articles ofThe memorandum and articles ofassociation of the companyassociation of the company
Service agreements specificallyService agreements specifically
entered between the director and theentered between the director and the
companycompany
Resolutions passed at members orResolutions passed at members or
directors meetingsdirectors meetings
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The common lawThe common law
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The common lawThe common law
Director's fiduciary dutyDirector's fiduciary duty
(Fiduciary(Fiduciary meaning of trust) meaning of trust)
Conflict of interestsConflict of interests
Duty of care and skillDuty of care and skill
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Statutory DutiesStatutory Duties
A director's duties in terms ofA director's duties in terms of
the Companies Actthe Companies Act
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Test of Fiduciary DutiesTest of Fiduciary Duties
Transactions are reasonablyTransactions are reasonably
incidental to companys businessincidental to companys business
Good faith, believing the transactionsGood faith, believing the transactions
to be correct.to be correct. Disclosure of conflict of interestDisclosure of conflict of interest
Duties in terms of the memorandumDuties in terms of the memorandum
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Duties in terms of the memorandumDuties in terms of the memorandum
andand
articles of associationarticles of association
TheThe memorandum of associationmemorandum of association
determines the scope of thedetermines the scope of thecompanys objects and powers, whilecompanys objects and powers, whilethe article of association is a contractthe article of association is a contract
between members themselves andbetween members themselves and
between members and the companybetween members and the company
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Types of BoardsTypes of Boards
Composition:Composition: UnitaryUnitary
Two-tieredTwo-tiered
TenureTenure Common tenureCommon tenure
StaggeredStaggered
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Balance on the BoardBalance on the Board
Balance of representationBalance of representation
Balance of talents / abilitiesBalance of talents / abilities
Balance of powerBalance of power
Balance of attitudes or viewsBalance of attitudes or views
Consequences ofConsequences of
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Consequences ofConsequences of
ImbalanceImbalance Board can be misguided by theBoard can be misguided by the
executivesexecutives
Interest of only one stakeholder isInterest of only one stakeholder is
servedserved Poor decision makingPoor decision making
Status quo mentalityStatus quo mentality
Lack of communicationLack of communication
Things start getting fixedThings start getting fixed
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Cadbury Code GuidelinesCadbury Code Guidelines
Regular meetingsRegular meetings
Monitoring executive performanceMonitoring executive performance
Draw clear lines of authorityDraw clear lines of authority
Good board room practicesGood board room practices
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Board Room PracticesBoard Room Practices
Every one should participateEvery one should participate
Formalized written proceduresFormalized written procedures
Induction program for directorsInduction program for directors
Each director should get the sameEach director should get the sameinformation at the same timeinformation at the same time
No post-facto approvalsNo post-facto approvals Chairman decides the content of theChairman decides the content of the
agendaagenda
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Role of ChairmanRole of Chairman
Running the board, chairing itsRunning the board, chairing itsmeetingsmeetings
Ensuring all directors get timely andEnsuring all directors get timely and
complete informationcomplete information Acting as bridge between the boardActing as bridge between the board
and shareholders / stakeholdersand shareholders / stakeholders
Evaluating the performance ofEvaluating the performance of
individual directorsindividual directors
Arbiter in event of internal disputesArbiter in event of internal disputes
Responsibilities of CEO &Responsibilities of CEO &
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Responsibilities of CEO &Responsibilities of CEO &
Senior ManagementSenior Management Operating the company in an effective andOperating the company in an effective and
ethical manner according to policies set byethical manner according to policies set bythe Boardthe Board
Drawing the strategic plansDrawing the strategic plans Drawing annual plans and budgetsDrawing annual plans and budgets Selection of managerial and other staffSelection of managerial and other staff Identifying business risksIdentifying business risks
Financial reportingFinancial reporting Internal ControlsInternal Controls Code of Conduct for all staffCode of Conduct for all staff
Duality of Office:Duality of Office:
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Duality of Office:Duality of Office:
Chairman & CEOChairman & CEO
Speeds up decision makingSpeeds up decision making Quick actionQuick action
Saves cost: often only one salarySaves cost: often only one salary
More effective due greater powers:More effective due greater powers: Within the companyWithin the company
Dealing with outsidersDealing with outsiders
d
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Thing to PonderThing to Ponder
Duality desirable orDuality desirable ornot??not??
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Thank youThank you
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CorporateCorporate
GovernanceGovernanceHandout 6Handout 6
The effects of corporateThe effects of corporatefi
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governance on firmgovernance on firm
performanceperformance A corporate governance is aA corporate governance is asystem/mechanism that is intended tosystem/mechanism that is intended tosolve the conflict of interests betweensolve the conflict of interests between
shareholders and management.shareholders and management.
In theory, these corporate governanceIn theory, these corporate governance
systems can improve firm performance bysystems can improve firm performance byincreasing the incentive for managementincreasing the incentive for management
to shareholders values.to shareholders values. We have discussed whether variousWe have discussed whether various
corporate governance systems can becorporate governance systems can beviewed as the system to alleviate theviewed as the system to alleviate the
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For example, we discussed if theFor example, we discussed if the
main bank system or the existence ofmain bank system or the existence of
large shareholders can be viewed aslarge shareholders can be viewed assystems/mechanisms to solve thesystems/mechanisms to solve the
conflict of interests, and we haveconflict of interests, and we have
shown that these systems can beshown that these systems can beproperly viewed as corporateproperly viewed as corporate
governance systems.governance systems.
However, we have not muchHowever, we have not muchdiscussed if these corporatediscussed if these corporategovernance systems can indeedgovernance systems can indeed
enhance firm performances.enhance firm performances.
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We have already seen some results.We have already seen some results.
We saw thatWe saw that
1.1.The introduction of Chief-OfficerThe introduction of Chief-Officer
system in Japan has not improvedsystem in Japan has not improved
firm performancefirm performance
2.2.The existence of large foreignThe existence of large foreignshareholders improves firmshareholders improves firmperformance in Japan.performance in Japan.
Today, we investigate the following.Today, we investigate the following.
1.1. Whether the main bank system has aWhether the main bank system has a
positive effect on firm performance.positive effect on firm performance.
The effect of main bankThe effect of main bankfit fi
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system on firmsystem on firm
performanceperformance
As noted already in Handout 3, the mainAs noted already in Handout 3, the mainbank system in Japan has been consideredbank system in Japan has been consideredas an alternative corporate governanceas an alternative corporate governance
system.system.
In particular, dispatching a director to itsIn particular, dispatching a director to its
client (by the main bank) has been viewedclient (by the main bank) has been viewedas a monitoring mechanism thatas a monitoring mechanism that
substitutes the US style market-forcesubstitutes the US style market-forcebased disciplinary mechanism.based disciplinary mechanism.
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In handout 3, we showed that, whenIn handout 3, we showed that, when
a firm experiences low performancea firm experiences low performance
in terms of ROA, its main bank isin terms of ROA, its main bank islikely to dispatch a senior directors tolikely to dispatch a senior directors to
the firm . This result indicates thatthe firm . This result indicates that
the dispatch of a bank-director canthe dispatch of a bank-director canbe viewed as a monitoring system.be viewed as a monitoring system.
However, we have not discussedHowever, we have not discussed
whether the dispatch of a bank-whether the dispatch of a bank-director by the main bank woulddirector by the main bank wouldactually enhance the firmsactually enhance the firms
performance.performance.
The effects of bank-dispatchedThe effects of bank-dispatcheddi h fi f
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directors on the firm performancedirectors on the firm performance The discussion will be based on Saito and OdagiriThe discussion will be based on Saito and Odagiri
(2008).(2008). Saito and Odagiri examined if a new appointmentSaito and Odagiri examined if a new appointment
of a senior director would improve the industryof a senior director would improve the industryadjusted ROA.adjusted ROA.
Consider the change in industry adjusted ROAConsider the change in industry adjusted ROA
(ROA)(ROA) itit=(ROA)=(ROA)it+1it+1-(ROA)-(ROA)itit
where (ROA)where (ROA)itit is the industry adjusted ROA of firm i atis the industry adjusted ROA of firm i at
year t.year t.
The basic idea is to examine if the dispatch of a bankThe basic idea is to examine if the dispatch of a bank
The simplest method is to estimate theThe simplest method is to estimate the
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The simplest method is to estimate theThe simplest method is to estimate the
following equation.following equation.
(ROA)(ROA)
itit==
00++
11(Bank director)(Bank director)ititWhere (Bank director) is a dummy variableWhere (Bank director) is a dummy variable
that indicates if the main bank dispatchedthat indicates if the main bank dispatcheda director to the firma director to the firm ii in yearin year tt..
There are two problems with this method.There are two problems with this method.
1. The bank director is likely to be1. The bank director is likely to bedispatched when the firm performance isdispatched when the firm performance is
bad. And there is a tendency that, whenbad. And there is a tendency that, whenfirm experience a bad performance, thefirm experience a bad performance, theperformance improves on theperformance improves on the
subsequence period (this is called mean-subsequence period (this is called mean-
reversion). Then we cannot distinguishreversion). Then we cannot distinguish
Second the effects of bankSecond the effects of bank
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Second, the effects of bank-Second, the effects of bank-dispatched directors may be differentdispatched directors may be different
at different firm performance levels.at different firm performance levels.For example, the dispatch of a bankFor example, the dispatch of a bank
director may be more effective whendirector may be more effective when
the firm is performing poorly thanthe firm is performing poorly thanwhen the firm is already performingwhen the firm is already performing
well.well.
To mitigate these problems, SaitoTo mitigate these problems, Saito
and Odagiri estimates the following.and Odagiri estimates the following.
(ROA)(ROA) ++ (ROA)(ROA)
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(ROA)(ROA) itit==00++11(ROA)(ROA)itit
++22(Bank director)(Bank director)itit
++33(Bank director)(Bank director)itit(ROA(ROAitit- )- )
Where is the sample average ofWhere is the sample average ofROA.ROA.
In this equationIn this equation 11 captures thecaptures the
mean-reversion effect.mean-reversion effect.The coefficientsThe coefficients 22 andand 33 capturescaptures
the effects of a dispatch of bankthe effects of a dispatch of bank
director on the chan e in ROA, thatdirector on the change in ROA, that
ROA
ROA
The effect of a bank dispatchedThe effect of a bank dispatched
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The effect of a bank-dispatchedThe effect of a bank-dispatched
director now depends on the ROA atdirector now depends on the ROA at
the beginning of year t.the beginning of year t.
The effect of bank directors on (ROA)The effect of bank directors on (ROA) itit
is given byis given by
The effect =The effect = 22
++33
(ROA(ROAitit
- )- )
ROA
The results.The results.1 The coefficient for
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The results.The results.Variable Coefficients
Constant (0
) 0.0516(0.0404)
(ROA) (1) -0.1502***(0.0117)
(Bank Director)
(2)
0.2827
(0.0918)
(Bank Director)(ROA- )(3)
-0.2757**(0.1123)
ROA
1. The coefficient forROA is negative andsignificant. Thisindicates that the mean-reversion is at work:When firm performanceis bad in year t, there is
a tendency for theperformance to improve,or to go back to themean.
The results.The results.2 The coefficient for
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The results.The results.Variable Coefficients
Constant (0
) 0.0516(0.0404)
(ROA) (1) -0.1502***(0.0117)
(Bank Director)
(2)
0.2827
(0.0918)
(Bank Director)(ROA- )(3)
-0.2757**(0.1123)
ROA
2. The coefficient for(Bank Director) ispositive, but notsignificant.
This means that, whenthe firm is performing on
average, the dispatch ofbank director may notimprove the firmperformance.
The results.The results.3 The coefficient for
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The results.The results.Variable Coefficients
Constant (0
) 0.0516(0.0404)
(ROA) (1) -0.1502***(0.0117)
(Bank Director)
(2)
0.2827
(0.0918)
(Bank Director)(ROA- )(3)
-0.2757**(0.1123)
ROA
3. The coefficient for(Bank Director)(ROA-
) is negative andsignificant.
This means that, whenthe firm is performing
badly, a dispatch of abank director positivelyaffect the firmperformance. To see this
point, see next slide.
ROA
The magnitude of theThe magnitude of theff
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effect.effect.The previous slides show that, whenThe previous slides show that, when
the firm is performing badly, athe firm is performing badly, adispatch of a bank director improvesdispatch of a bank director improvesfirm performance. Firm performancefirm performance. Firm performance
does not necessary improve when adoes not necessary improve when abank director is dispatched to a firmbank director is dispatched to a firm
which is already performing well.which is already performing well.
Lets see by how much a dispatch ofLets see by how much a dispatch ofbank directors can improve firmbank directors can improve firm
performance measured by industryperformance measured by industry
adjusted ROA.adjusted ROA.
The sample average of ROA is 0.74The sample average of ROA is 0.74ROA
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p gp g
(that is, =0.74)(that is, =0.74)
Consider a firm whose industryConsider a firm whose industryadjusted ROA is -3.32% (this is theadjusted ROA is -3.32% (this is the
sample average of ROA for the firmssample average of ROA for the firmswho experienced negative ROA).who experienced negative ROA).
If the main bank dispatches aIf the main bank dispatches a
director to this firm, then the ROA isdirector to this firm, then the ROA is
expected to increase during the yearexpected to increase during the year
byby
22 ++33(ROA(ROAitit- )- )
=0.2827-0.2757*(-3.32-0.74) =1.402=0.2827-0.2757*(-3.32-0.74) =1.402
ROA
ROA
SummarySummary
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SummarySummary
When a firm is performing badly, aWhen a firm is performing badly, adispatch of a bank director willdispatch of a bank director will
improve the firm performance.improve the firm performance.
When a firm is already performingWhen a firm is already performingwell, a dispatch of a bank directorwell, a dispatch of a bank director
does not necessarily improve firmdoes not necessarily improve firm
performance.performance.Thus, Saito and Odagiris studyThus, Saito and Odagiris study
shows that the main bank systemshows that the main bank system
can enhance firm performancescan enhance firm performances
The effect of board size on firmThe effect of board size on firm
ff
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performanceperformance
It has been argued that a board withIt has been argued that a board withtoo many directors negatively affecttoo many directors negatively affectcorporate performance since efficientcorporate performance since efficient
decision making is difficult in a largedecision making is difficult in a large
board.board.
Jensen (1993) points out the greatJensen (1993) points out the great
emphasis on politeness and courtesyemphasis on politeness and courtesy
at the expense of truth andat the expense of truth and
frankness in boardrooms and statesfrankness in boardrooms and states
that when boards get beyond seventhat when boards get beyond seven
or ei ht eo le the are less likel toor ei ht eo le the are less likel to
There has been many studies in theThere has been many studies in the
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There has been many studies in theThere has been many studies in theUS that show that the size of theUS that show that the size of the
board has a negative impact on firmboard has a negative impact on firmperformance.performance.
For example, Yarmack (1996) showsFor example, Yarmack (1996) shows
that when a board size doubles, thethat when a board size doubles, theTobins q (market to book asset ratio)Tobins q (market to book asset ratio)
would fall by as much as 0.23.would fall by as much as 0.23.
Today, we will investigates if the sizeToday, we will investigates if the sizeof the board has a negative effect onof the board has a negative effect on
firm performance in Japan.firm performance in Japan.
The discussion is based onThe discussion is based on
Does the size of the boardDoes the size of the board
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matter in Japan?matter in Japan?
Nakayama (1999) investigates theNakayama (1999) investigates theeffect of board size on the efficiencyeffect of board size on the efficiency
of manufacturing firms in Japan.of manufacturing firms in Japan.
The empirical methodology used inThe empirical methodology used inhis paper is slightly different fromhis paper is slightly different from
what we have seen previously. I willwhat we have seen previously. I will
provide a short description of theprovide a short description of themethodology first.methodology first.
Nakayama first estimate efficiency scoreNakayama first estimate efficiency scoref h fi b ti ti t h tif h fi b ti ti t h ti
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for each firm by estimating a stochasticfor each firm by estimating a stochastic
production function. Second, Nakamuraproduction function. Second, Nakamura
checks if the board size has a negativechecks if the board size has a negativeeffect on the estimated efficiency of eacheffect on the estimated efficiency of each
firm.firm.
To describe the above method, considerTo describe the above method, consider
that the production technology of firmsthat the production technology of firms
can be described by the followingcan be described by the followingproduction functionproduction function
Q=F(L,K)Q=F(L,K)Where Q is the output, L is the amount ofWhere Q is the output, L is the amount of
labor, and K is the amount of capital. Tolabor, and K is the amount of capital. Tomake things more simple, consider thatmake things more simple, consider that
f r m m nt r ti n f n ti n th t
Suppose that the production functionSuppose that the production function,
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Suppose that the production function,Suppose that the production function,
Q=F(L) has the following shape.Q=F(L) has the following shape.
If a firm is operating efficiently, then the firm shouldIf a firm is operating efficiently, then the firm should
be operating on the production function, like this.be operating on the production function, like this.
L
Q
However, if the firm is not operatingHowever, if the firm is not operating
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, p g, p g
efficiently, the firm would be operatingefficiently, the firm would be operatingunder the production function, like this.under the production function, like this.
L
Q
The firm is
not operatingon theproductionfunction.
For this firm, we can define efficiency scoreFor this firm, we can define efficiency score
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, y, y
as OP/OA.as OP/OA.
L
Q
O
P
AEfficiency score= OP/OA
If the firm is perfectly efficient(that is, operating on theproduction function), theefficiency score will be one. If
there is any inefficiency, theefficiency score will be lowerthan 1.
Therefore, the basic idea of NakamurasTherefore, the basic idea of Nakamurasstudy is to estimate the efficiency scorestudy is to estimate the efficiency score
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study is to estimate the efficiency scorestudy is to estimate the efficiency score
for each firm, then check if the size of thefor each firm, then check if the size of the
board has a negative effects on theboard has a negative effects on theefficiency.efficiency.
More specifically, Nakamura estimates theMore specifically, Nakamura estimates the
following production functionfollowing production function
QQii==00++11log(Llog(Lii)+)+22log(Klog(Kii)+)+ii-u-uii
Where QWhere Qii is the value of output (sales), Lis the value of output (sales), Lii isis
the number of workers, and Kthe number of workers, and Kii is the valueis the value
of the fixed asset for iof the fixed asset for ithth firm. The termfirm. The term ii isis
the error term and uthe error term and uii is the efficiencyis the efficiency
score to be estimated. We make a certainscore to be estimated. We make a certain
distributional assumption ofdistributional assumption of ii and uand uii toto
DataData
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Data
The data is 32 manufacturing firmsThe data is 32 manufacturing firms
for the period between 1992-1998,for the period between 1992-1998,
from Mitsubishi Research Institutesfrom Mitsubishi Research Institutes
kigyo-no keiei bunseki.kigyo-no keiei bunseki.
The distribution of theThe distribution of the
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board sizeboard size
The number of
directors in a
Relativefrequency
The resultsThe results
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The resultsThe results
There are two steps. First step is toThere are two steps. First step is to
estimate the production function. Byestimate the production function. By
estimating production function, as aestimating production function, as a
by product, you can estimate theby product, you can estimate the
efficiency score for each firm. Theefficiency score for each firm. Thebelow is the estimated coefficientsbelow is the estimated coefficients
for production function.for production function.
Production function estimation
Variable Coefficient
Log(L) 0.909***(0.098)
Log(K) 0.150***(0.03)
Constant 1.906***
(0.093)
This is the estimatedresults of so-called Cobb-Douglas Production
function.
As a by-product, we canestimate the efficiencyscore for eachobservation. [Details are
omitted]
As a by product of the productionAs a by-product of the production
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As a by-product of the productionAs a by-product of the production
function estimation, we obtain thefunction estimation, we obtain the
estimates for the efficiency scoreestimates for the efficiency scorefor each firm for each period.for each firm for each period.
Nakamura then estimates theNakamura then estimates the
following.following.
(Efficiency score*100)(Efficiency score*100)itit
==00++11(Number of(Number of
directors)directors)itit++33(Sales)(Sales)itit
The resultsThe results
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The results
The effect of board size on the
efficiency of manufacturing firms(Dependent variable is EfficiencyScore*100)
Variable Coefficient
The number ofdirectors -15.594**(7.662)
Sales 20.634(3.846)
As can be seen, thenumber of board has anegative andstatistically significanteffect on the efficiency
of the firms.
For each additionalboard will reduce the
efficiency score by asmuch as 15.6%.
This results show that,like in the US, a large
Several questionsSeveral questions
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Se e a ques o sq
A good board:A good board:1: Small1: Small
2: Independent2: Independent
3: And at the same time, interested3: And at the same time, interestedin protecting shareholders value.in protecting shareholders value.
4: And at the same time, being able4: And at the same time, being able
to work as a teamto work as a teamIs this possible to find such a team ofIs this possible to find such a team of
people?people?
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Does the morality of individualDoes the morality of individualdirectors matter?directors matter?
If so, how much does that matter?If so, how much does that matter?
Should a director not pursue its ownShould a director not pursue its owninterest?interest?
ReferencesReferences
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ReferencesReferences
Saito, T and Odagiri H (2008) Intra-BoardSaito, T and Odagiri H (2008) Intra-BoardHeterogeneity and the Role of BankHeterogeneity and the Role of BankDispatched Directors in Japanese Firms: AnDispatched Directors in Japanese Firms: An
Empirical Study. Pacific-Basin FinanceEmpirical Study. Pacific-Basin FinanceJournal, 16, 572-590Journal, 16, 572-590
Nakayama, Yoshinori (1999) Nakayama, Yoshinori (1999)
Yermack, David (1996) Higher marketYermack, David (1996) Higher marketvaluation of Companies with a small boardvaluation of Companies with a small board
of directors. Journal of Financialof directors. Journal of FinancialEconomics 40, 185-211Economics 40, 185-211
Classification of EquityClassification of Equity
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112
shareholdersshareholders
Internal (invest to own and run_Internal (invest to own and run_ Corporate shareholders (holdingCorporate shareholders (holding
companies)companies)
Families, groups of friendsFamilies, groups of friends External (invest only for a return)External (invest only for a return)
IndividualsIndividuals
Institutional investors.Institutional investors.
Internal ShareholdersInternal Shareholders
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113
Internal ShareholdersInternal Shareholders
Controlling shareholdersControlling shareholders Majority not a necessityMajority not a necessity
Scene in the WestScene in the West
Situation in PakistanSituation in Pakistan
External ShareholdersExternal Shareholders
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114
External ShareholdersExternal Shareholders
Generally not on the board.Generally not on the board. Lack of unityLack of unity
Lack of interestLack of interest
Therefore, lack of influenceTherefore, lack of influence
Small PrivateSmall Private
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115
ShareholdersShareholders IndividualsIndividuals Only interest in share price changeOnly interest in share price change
No long term interestNo long term interest
Only a little interest in earningsOnly a little interest in earnings
Reactive buyers/sellersReactive buyers/sellers
Biggest losers when things go badBiggest losers when things go bad No influence over BoardsNo influence over Boards
Large PrivateLarge Privateh h ld
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116
ShareholdersShareholders Individuals (but may be actingIndividuals (but may be acting
through trusts, private limitedthrough trusts, private limited
companies, etc.)companies, etc.)
Have long term interest in theHave long term interest in thecompanycompany
May have great influence on theMay have great influence on the
companycompany May provide bulk of executiveMay provide bulk of executive
directorsdirectors
In Pakistan these eo le are the
Corporate ShareholdersCorporate Shareholders
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117
Corporate ShareholdersCorporate Shareholders
Holding companiesHolding companies MultinationalsMultinationals
GroupsGroups
CharacteristicsCharacteristics
Institutional InvestorsInstitutional Investors
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118
Institutional InvestorsInstitutional Investors
Mutual FundsMutual Funds Managed FundsManaged Funds
Pension FundsPension Funds
Life Insurance companiesLife Insurance companies
BanksBanks
In UK, it is believed that institutionalIn UK, it is believed that institutionalshareholders hold, on an overallshareholders hold, on an overall
basis, a majority of shares of allbasis, a majority of shares of all
listed companies.listed companies.
Institutional InvestorsInstitutional Investors
iP ti
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119
PerspectivePerspective
Long term interest in share valueLong term interest in share valuegrowth.growth.
Current returns are still important.Current returns are still important.
Ability to evaluate performance.Ability to evaluate performance. Power and ability to influencePower and ability to influence
Boards.Boards.
But do they have the time to payBut do they have the time to pay
attention to every single company.attention to every single company.
Monitoring systems for dangerMonitoring systems for danger
Role of IIs in CGRole of IIs in CG
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120
Role of II s in CGRole of II s in CG
Capability and Capacity to influence.Capability and Capacity to influence. Dialogue with directorsDialogue with directors
Regular evaluation of financialRegular evaluation of financial
reportsreports Flag off danger signalsFlag off danger signals
Sharing info with other stakeholdersSharing info with other stakeholders
Judicious use of VoteJudicious use of Vote Could / should seek representationCould / should seek representation
on boardon board
Some interesting factsSome interesting facts
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121
Some interesting factsSome interesting facts
10% of EDs in European companies10% of EDs in European companiesdo not know who their top 50do not know who their top 50shareholders are.shareholders are.
25% of their CEOs had met only half25% of their CEOs had met only halfof their top 50 shareholdersof their top 50 shareholders In Pakistan, most listed companiesIn Pakistan, most listed companies
have majority held by a family orhave majority held by a family or
group and they do not seem togroup and they do not seem toattach any importance to any otherattach any importance to any othershareholder.shareholder.
Expectations from aExpectations from a
CC
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122
CompanyCompany Accountability of board membersAccountability of board membersTransparency in all transactionsTransparency in all transactions
Company interest over self interestCompany interest over self interest
Effective and efficient managementEffective and efficient managementleading to good returns and capitalleading to good returns and capital
growth.growth.
Fair share of real profits.Fair share of real profits.
Shareholders Hold onShareholders Hold on
B dB d
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123
BoardBoard
Shareholders must approve:Shareholders must approve: Class 1 transactionsClass 1 transactions
Large size relative to size of theLarge size relative to size of the
companycompany Related party transactionsRelated party transactions
Financial statementsFinancial statements Audit report is for shareholdersAudit report is for shareholders
Directors remunerationDirectors remuneration
Shareholders elect and can removeShareholders elect and can remove
The AGMThe AGM
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124
The AGMThe AGM
Attendance should be encouragedAttendance should be encouraged Asking of questions to beAsking of questions to be
encouragedencouraged
Individual voting on issues (NoIndividual voting on issues (Nogrouping of issues)grouping of issues)
One vote, one shareOne vote, one share
Proxy facilityProxy facility
Communication betweenCommunication between
Sh h ld & B dSh h ld & B d
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125
Shareholders & BoardShareholders & Board
Direction: One way reporting or TwoDirection: One way reporting or Twoway communicationway communication
Nature: Formal or InformalNature: Formal or Informal
communicationcommunication Scope: All or some shareholdersScope: All or some shareholders
Frequency: Regular or irregular, needFrequency: Regular or irregular, need
based.based.
CommunicationCommunication
I t tI t t
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126
InstrumentsInstruments Statutory reportsStatutory reports Chairmans report (OFR)Chairmans report (OFR)
Compliance reportsCompliance reports
Newsletters, circularsNewsletters, circulars
Meetings with major shareholdersMeetings with major shareholders
CorrespondenceCorrespondence
Shareholders ActivismShareholders Activism
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127
Shareholders Activism
Refers to stand taken by shareholdersRefers to stand taken by shareholdersagainst recommendations of theagainst recommendations of the
Board.Board.
Do they have adequate rights orDo they have adequate rights orpower?power? Result less important than show ofResult less important than show of
dissent.dissent. Can work only if institutionalCan work only if institutional
investors participate.investors participate.
Do institutional investors have a dutyDo institutional investors have a duty
Areas of DissentAreas of Dissent
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128
Areas of Dissent
Re-election of directorsRe-election of directors Re-appointment of auditorsRe-appointment of auditors
Approval of directors remunerationApproval of directors remuneration
Approval of annual accountsApproval of annual accounts
Dividend recommendationsDividend recommendations
Changes in share capitalChanges in share capital Other approvalsOther approvals
Shareholders Activism -Shareholders Activism -
22
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129
22 If institutional investors join handsIf institutional investors join hands
with smaller shareholders.with smaller shareholders.
Monitoring of board performanceMonitoring of board performance
Direct interventionDirect intervention Regular evaluation and sharing ofRegular evaluation and sharing of
analysisanalysis
But remember, institutional investorBut remember, institutional investor
organizations are all run byorganizations are all run by
managers so they have affinity formanagers so they have affinity for
mana ers
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130
Thank youThank you
Safdar H.TahirSafdar H.Tahir
What is it about?What is it about?
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131
CorporateCorporate GovernanceGovernance
CompanyCompany
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132
p yp y
What is a company?What is a company? Characteristics of a CompanyCharacteristics of a Company
Types of CompaniesTypes of Companies
Characteristics of aCharacteristics of a
CompanyCompany
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133
CompanyCompany Ownership in sharesOwnership in shares Freely transferable sharesFreely transferable shares
Separate entity apart fromSeparate entity apart from
shareholdersshareholders Liability of shareholdersLiability of shareholders
Indefinite lifeIndefinite life
Board of directorsBoard of directors
Types of CompaniesTypes of Companies
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134
yp pyp p
Limited or UnlimitedLimited or Unlimited Limited by shares or by guaranteeLimited by shares or by guarantee
Private or PublicPrivate or Public
Listed or UnlistedListed or Unlisted
Hierarchy of a CompanyHierarchy of a Company
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135
y p yy p y
ShareholdersShareholders Own the company, do not run it.Own the company, do not run it.
Board of DirectorsBoard of Directors Elected by and reporting to shareholdersElected by and reporting to shareholders
ManagementManagement Appointed by and reporting to directorsAppointed by and reporting to directors
Includes executive directorsIncludes executive directors
Top PlayersTop Players
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136
p yp y
Shareholders: Voting powerShareholders: Voting power Chairman:Chairman:
May be executive or non-executiveMay be executive or non-executive
DirectorsDirectors May be executive or non-executiveMay be executive or non-executive
Chief Executive OfficerChief Executive Officer May or may not be a directorMay or may not be a director
Senior Managers:Senior Managers: May or may not be directorsMay or may not be directors
Classification ofClassification of
StakeholdersStakeholders
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StakeholdersStakeholders OwnersOwners LendersLenders
EmployeesEmployees
Business AssociatesBusiness Associates Suppliers and CustomersSuppliers and Customers
SocietySociety Includes governmentIncludes government
Opportunity to protectOpportunity to protect
individual interestsindividual interests
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individual interestsindividual interests
Managers and Employees have theManagers and Employees have thegreatest opportunity to protect theirgreatest opportunity to protect their
interest(s)interest(s)
Suppliers and Clients essentially goSuppliers and Clients essentially goby each transaction or contract.by each transaction or contract.
Lenders and Shareholders are mostLenders and Shareholders are most
vulnerable.vulnerable. Society depends entirely on lawSociety depends entirely on law
l ifi dCl ifi d l ifi d b i f i i di id l iCl ifi d b i f i i di id l i
Classification of StakeholdersClassification of Stakeholders
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Classified onClassified onbasis of Rolebasis of Rolein the Companyin the Company
Classified on basis of opportunity to protect individual interestsClassified on basis of opportunity to protect individual interests
Those withThose withFull OpportunityFull Opportunity
Those with aThose with aPartial OpportunityPartial Opportunity
Those withThose withVirtually NoVirtually No
opportunityopportunity
OwnersOwners ControllingControllingShareholdersShareholders
Institutional InvestorsInstitutional Investorswith Boardwith Board
representationrepresentation
Minority and individualMinority and individualshareholders with noshareholders with no
boardboardRepresentationRepresentation
LendersLenders FinancialFinancialinstitutionsinstitutions
with elaboratewith elaboratelendinglending
ContractsContracts
Buyers of listed bondsBuyers of listed bondswith trusteewith trustee
arrangementsarrangements
Other lendersOther lenders
EmployeesEmployees Executive DirectorsExecutive Directors Senior ManagersSenior Managers Other employeesOther employeeson regular oron regular or
contract termscontract termsBusinessBusiness
AssociatesAssociatesSuppliers who sellSuppliers who sellonly on cash termsonly on cash terms
Major Suppliers andMajor Suppliers andclients with contractsclients with contracts
Smaller suppliersSmaller suppliersand smaller clientsand smaller clients
SocietySociety GovernmentGovernment Public at largePublic at large
Need for CorporateNeed for Corporate
GovernanceGovernance
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GovernanceGovernanceTo protect and serve individualTo protect and serve individual
interest of each stakeholderinterest of each stakeholder
To protect and serve the collectiveTo protect and serve the collective
interest of all stakeholdersinterest of all stakeholdersTo ensure no one benefits at theTo ensure no one benefits at the
expense of anotherexpense of another
To ensure no stakeholder hasTo ensure no stakeholder hasmonopoly of decision-making.monopoly of decision-making.
Governance &Governance &
ManagementManagement
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ManagementManagement How do these terms differ?How do these terms differ? Does Governance includeDoes Governance include
Management?Management?
OrOr Does Management includeDoes Management include
Governance?Governance?
Governance &Governance &
ManagementManagement
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ManagementManagement
GovernanceGovernance FunctionFunction ManagementManagementApproval of PlansApproval of Plans PlanningPlanning Preparation ofPreparation of
plansplans
Providing overallProviding overall
leadershipleadership
LeadingLeading Leading thoseLeading those
who implementwho implementplansplans
ArrangingArranging
resourcesresources
OrganizingOrganizing Tasks division &Tasks division &resource usageresource usage
ControllingControllingmanagersmanagers
ControllingControlling ControllingControllingemployeesemployees
GovernanceGovernance
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StrategicStrategic Setting ObjectivesSetting Objectives
Devising plans to achieve theseDevising plans to achieve these
objectivesobjectives Setting rules or parametersSetting rules or parameters
Not directly concerned with routineNot directly concerned with routine
affairsaffairs Protection of Interests of allProtection of Interests of all
stakeholdersstakeholders
ManagementManagement
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Current & Operational AffairsCurrent & Operational AffairsTaking directions from the BoardTaking directions from the Board
Implementing the PlansImplementing the Plans
Developing Suggestions andDeveloping Suggestions andAlternativesAlternatives
Approaches toApproaches to
Corporate GovernanceCorporate Governance
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Corporate GovernanceCorporate Governance
Shareholders ApproachShareholders Approach Stakeholders ApproachStakeholders Approach
Enlightened Shareholders ApproachEnlightened Shareholders Approach
Which approach is best?Which approach is best?
Corporate SinsCorporate Sins
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SlothSloth Unwillingness to take initiative or risk,Unwillingness to take initiative or risk,
prefer status quo, be lazy.prefer status quo, be lazy.
GreedGreed Putting self above companyPutting self above company
FearFear
Not annoy or stand up to anyNot annoy or stand up to anystakeholder / investor / boss.stakeholder / investor / boss.
Agency TheoryAgency Theory
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What is Agency Theory?What is Agency Theory? Does it apply to companies?Does it apply to companies?
Two-party and three-party modelTwo-party and three-party model
Principal-Watchdog-AgentPrincipal-Watchdog-Agent
Key IssuesKey Issues
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Financial reportingFinancial reporting Directors remunerationDirectors remuneration
Risk managementRisk management
Effective communicationEffective communication
Corporate Social ResponsibilityCorporate Social Responsibility
Financial ReportingFinancial Reporting
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AccuracyAccuracy ReliabilityReliability
Internal and external auditInternal and external audit
ComprehensivenessComprehensivenessTimelinessTimeliness
Directors Related IssuesDirectors Related Issues
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RemunerationRemuneration PowersPowers
Balance between:Balance between: executive and non-executivesexecutive and non-executives
Election and re-electionElection and re-election
RepresentationRepresentation
Risk ManagementRisk Management
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Risk profileRisk profile What risks to take?What risks to take?
Avoidable and non-avoidable risksAvoidable and non-avoidable risks
What not to take?What not to take? How to handle risks taken?How to handle risks taken?
CommunicationCommunication
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TransparencyTransparency Regular communicationRegular communication
With who?With who?
In what format?In what format?
Corporate SocialCorporate Social
ResponsibilityResponsibility
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ResponsibilityResponsibility
Business EthicsBusiness Ethics Being a good citizenBeing a good citizen
Doing business responsiblyDoing business responsibly
Why is CG Important?Why is CG Important?
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Good reputation is good businessGood reputation is good business Protection of stakeholders interestProtection of stakeholders interest
Support to capital marketsSupport to capital markets
Support to societySupport to society Every one winsEvery one wins
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Thank youThank you
Safdar H.TahirSafdar H.Tahir