Corprate Governance

8/3/2019 Corprate Governance

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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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Composition:Composition: UnitaryUnitary

Two-tieredTwo-tiered

TenureTenure Common tenureCommon tenure

StaggeredStaggered


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http://en.wikipedia.org/wiki/File:Bob_Tricker_-_Corporate_Governance1.png


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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

l di


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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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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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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



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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



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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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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


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.



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Constant (0

) 0.0516(0.0404)

(ROA) (1) -0.1502***(0.0117)

(Bank Director)

(2)

0.2827

(0.0918)


-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.



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Constant (0

) 0.0516(0.0404)

(ROA) (1) -0.1502***(0.0117)

(Bank Director)

(2)

0.2827

(0.0918)


-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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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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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



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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


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.


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


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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137

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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138

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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139

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



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140

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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141

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 &



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142


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



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143

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



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144

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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145

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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146

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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147

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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148

Financial reportingFinancial reporting Directors remunerationDirectors remuneration

Risk managementRisk management

Effective communicationEffective communication

Corporate Social ResponsibilityCorporate Social Responsibility

Financial ReportingFinancial Reporting


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149

AccuracyAccuracy ReliabilityReliability

Internal and external auditInternal and external audit

ComprehensivenessComprehensivenessTimelinessTimeliness

Directors Related IssuesDirectors Related Issues


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150

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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151

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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152

TransparencyTransparency Regular communicationRegular communication

With who?With who?

In what format?In what format?

Corporate SocialCorporate Social

ResponsibilityResponsibility


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153

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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154

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


Documents

Corprate Governance