Corporate

Governance
MBA EXECUTIVE-II

Submitted To:
Dr. Ashfaq Sb
 Corporate
Governance
Submitted By:
Muhammad Asif 08-
01

DEPARTMENT OF BUSINESS ADMINISTRATION

UNIVERSITY OF SARGODHA
Definition

Corporate Governance is a combination of
processes , policies and laws by which
corporations are managed and controlled. It
encompasses the relationship amongst the
stakeholders
Main Stakeholders
 Shareholders
 Employees
 Management
 Board of Directors
 Customers
 Creditors (i.e. Banks)
 Suppliers
 Local Communities
 Regulators
Why Need for
Corporate Governance
?
The concept of Corporate
Governance started almost 20 years
ago, and especially in early 2000's ,
due to corporate failures such as
Enron, Worldcom Governements
and Shareholders started thinking
about Corporate Governance
Agency Problem
Agency Problems
 Conflicts which arise due to separation of
Ownership and Control between Owners
(Shareholders) and Managers (Management)
 The aim of Owners is to maximize their profits
while Manager's have their own interests like
remunerations, compensations.
Two models of
➢

Corporate Governance
Outsider (shareholders) model

Insider (stakeholders) model

 The outsider (Share
Holder) model value and
Maximise shareholder look after
shareholder interests
 Seek profitability and efficiency
 Ownership concentrated in a few hands with strong
power over management sometimes through an
executive chairman
 The absence of close relationships between
shareholders and management
 The existence of an active `market for corporate
control´ - takeovers, particularly hostile ones
 The primacy of shareholder rights over those of other
organisational groups
 Minority shareholders poorly protected and need
independent director support
The insider (Stakeholder)
model
 Look after all stakeholder interests, especially public
 Look for survival, long term growth, and stability
 Less concerned with profit than value for money
 Ownership scattered with managers given a great of
freedom but subject to market forces such as
takeovers and proxy fights
 The relationships between management and
shareholders are close and stable
 There is little by way of a market for corporate
control
 the existence of formal rights for employees to
influence key managerial decisions
Principles for Corporate
Governance
 Organizations should admit the rights of Shareholders
and help the shareholders to exercise those right
 Organizations should admit that they have legal and
other obligations to the shareholder
 Board should be of suitable size having both
Executive and Non-executive members to fulfil the
commitments.
 Organizations should behave in manner that they
promote ethical and responsible decision making.
 Organizations should clearly disclose their hierarchy
so that shareholders should know who is accountable
for what.
 Honesty, Trust and integrity, openness, mutual
respect, and commitment to the organization
Internal Corporate
Governance Controls
 Monitoring by the Board of Directors
Board of directors are responsible for
hiring, firing and compensation for
Management. BOD should have such
knowledge to make decision and evaluate
performance of Top Management
 Internal Audit and Policies
BOD set up and plan strategies so as to
set up Audit Committees to ensure that
organization is working in the right direction to
achieve its objectives
Internal Corporate
Governance Controls
 Balance of Power An important Internal control is
Balance of Power. Each one in the management
should have powers distinctive from others and
on the basis of which he should be held
accountable
 Remuneration Remuneration and
compensations are given to employees on the
basis of their performance, these can be either in
cash form like Bonus or Non-cash form like
share options, vehicles, mobile phones etc.
External Corporate
Governance Controls
 Competition
 Demand for and assessment of Performance
information (Financial statements)
 Government Regulations
 Media Pressure
 Takeovers
Corporate Governance
Models
 Most known 3 Models of Corporate
Governance
 Anglo US Corporate Governance System
 Liberal Model
• Japanese Corporate Governance System
• German Corporate Governance System

Non Anglo American Model
•
Indian Model
Anglo US Corporate
Governance System
 A System of Check and balance
 Also called Shareholder wealth
maximization model
 Suppliers of Equity capital bear the entire
risk of enterprise.
 Share holders elect Board of Directors
 Each of the stakeholder has the following
characteristics
Anglo US Corporate
Governance System
(Continued)
 Board of Directors Corporation is governed by
Board of Directors which has the power to hire
CEO,BOD itself are chosen by Shareholders.
 Managers Responsible for Company's daily
operations and daily affairs.
 Provides and updates conditions and incentives for for
the company's performance.
 A small, powerful group with access to information and
control of daily affairs of the company. But – they must
report to board and shareholders.
Anglo US Corporate
Governance System

Share Holders

Powerful (in theory) because they elect board
and vote at AGMs. In order to exert influence,
they should be committed ,knowledgeable ,long-
term.

A diverse and relatively powerless group with
one common goal – they want to see good
financial performance. But - they control capital
and can exercise oversight by selecting
accountable board
Liberal Corporate
Governance Model
 Liberal Model of Corporate Governance is
characterized by
 Radical Innovation and Cost Competition, and also
has the
 feature that it looks after the interests of
Stakeholders.
 There are 2 examples of Liberal Governance Model

Japanese Model of Corporate Governance

German Model of Corporate Governance
JAPANESE CORPORATE
GOVERNANCE SYSTEM
 Board of Directors:
A large Board of Directors (as many as 50
members) usually contains only insiders.
 50% are the shareholders and 50% are elected
by Central Bank
 When a company's financial performance is
poor, majority shareholders send
representatives to the company's Board of
Directors
JAPANESE CORPORATE
GOVERNANCE SYSTEM
 Firms are run in such a way that society’s
resources are used efficiently by taking into
account a range of stakeholders such as
employees, suppliers, and customers, in
addition to shareholders.
 Rather than being concerned only with
shareholders a wider set of stakeholders
including employees and customers as well as
shareholders are considered.
German Corporate
Governance Model

The system of corporate governance in Germany
has following core characteristics which
distinguish it from the Anglo-Saxon model:

Concentrated ownership

BOD include 50% share holders and 50% are
appointed by Labour Union representatives

A dual board structure (two-tier board structure)

Extensive worker representation on the supervisory
board ("board co-determination").

The and extensive labor representation are
defining features of Germany’s internal control
mechanisms.
Non-Anglo American Model

 This model is mostly followed in East
Asian countries and Middle East,
where there are more family-owned
organizations. It includes following Models

Indian Model of Corporate Governance
Indian Model of Corporate
Governance
 The Indian Model can be characterized
as:

Board of Directors is not really
Central/Main entity in Indian Model.

There is more involvement of Govt. in
Indian Model, regulatory institutions.