2. CORPORATE FINANCE TOPIC: CORPORATE GOVERNANCE IN PAKISTAN TO: MR. SHAHAB & WHOLE CLASS BY: M. MOBASHAR ALI 08117032 GIFT UNIVERSITY MBA (BANKING & FINANCE) SECTION C
3. NEED OF CORPORATE GOVERNANCE Shareholders require managers with technical competence to maximize their wealth Managers are people, and people have both personal and corporate goals. If their self-interests are not aligned with the interest of the shareholders then corporate value will not be maximized. Managers may spend too much time on lunching, surfing net, and so forth rather than focusing on tasks. They may use resources to benefit themselves rather to benefit shareholders Enhances the performance of corporations by establishing and maintaining a corporate culture that motivates directors, managers and entrepreneurs For this purpose Corporate Governance is needed.
4. WHAT IS CORPORATE GOVERNANCE The set of rules and procedures that ensure that managers do indeed employ the principles of value based management. Where VBM is, “a managerial approach where the whole aim, strategies and actions are linked to shareholder value creation” Essence of Corporate Governance, “to make sure that the key shareholder objective wealth maximization is implemented”.
5. ORIGINS OF CORPORATE GOVERNANCE Since 1948, when Pakistan came into being, Indian Companies Act, 1913 is used by corporations until the promulgation of Companies Ordinance, 1984. Corporate entities in Pakistan primarily regulated under Securities and Exchange Ordinance, 1969 and SECP Act, 1997. With the changes in the International Business Environment SEC took responsibilities and powers of the Corporate Law Authority in, 1999. The SEC has focused on encouraging businesses to adopt good corporate governance practices to manage business challenges internationally. Purpose is to provide transparency and responsibilities to corporate sector and to safeguard the interests of stakeholders, including protection of minority shareholders' rights and strict audit compliance.
6. MANAGERIAL ENTRENCHMENT Management Entrenchment ability of management to insulate themselves from actions taken by shareholders and other stakeholders to take reactionary measures in response to their actions This idea emerged in the 80s when several actions to hostile takeover a company were occurring and several companies started planning actions on how to protect themselves from being bought by a hostile takeover. Where a takeover is considered "hostile" if the target company's board rejects the offer, but the bidder continues to pursue it, or the bidder makes the offer without informing the target company's board beforehand.
7. Provisions to secure hostile takeover Bantargeted share repurchase known as Greenmail No shareholders rights provisions known as Poison Pill Restricted voting rights
8. Use of compensation to align managerial & shareholders interests Executives bonuses are based on performance in short term and long term periods One the most effective and better way is Employee Stock Ownership Plans (ESOPs) Reasons to establish ESOP Legislation is passed to improve employee productivity ESOP represent additional compensation if it is not created then other compensations required that may not enhance employee productivity When an employee’s rights in ESOP are vested , the ESOP help to retain employees Stock issued to ESOP excluded from taxable income that improves after tax profit Takeover can be avoided by ESOP because participants are employees.
9. PARTIES TO CORPORATE GOVERNANCE CHIEF EXECUTIVES SHAREHOLDERS BOARD OF DIRECTORS SUPPLIERS EMPLOYEES CREDITORS CUSTOMERS COMMUNITY MANAGERS OTHER STAKEHOLDERS
10. STAKEHOLDERS A “stakeholder” is a person (including an entity or group) that has an interest or concern in a business or enterprise though not necessarily as an owner. Communication with stakeholders is important feature of corporate governance as cooperation between stakeholders and corporations allows for the creation of wealth, jobs and sustain ability of financially sound enterprises. Communication includes: Its main features; Uncertainties in its environment; Its financial structure and the factors relevant to an assessment of future prospects Other significant items which may be relevant to a full appreciation of the business.
11. PRINCIPLES OF CORPORATE GOVERNANCE Rights and equitable treatment of shareholders Interests of other stakeholders Role and responsibilities of the board Integrity and ethical behavior Disclosure of material matters and responsibilities of the board and management
12. BENEFITS OF CORPORATE GOVERNANCE Good corporate governance is necessary for the corporations in the competing markets An empirical evidence to suggest: Countries that have implemented good and proper Corporate Governance have experienced: Healthy growth Higher ability to attract capital
13. CONCLUSION Corporate governance is the mechanism by which the agency problems of corporation stakeholders, including the shareholders, creditors, management, employees, consumers and the public at large are framed and sought to be resolved. To react managers and directors in the objective of shareholders two corporate governance provisions are used: Sticks Carrots
14. CONCLUSION (Cont.) Where “Sticks” is threat for removal “Carrot” is compensation i.e. must be according to the performance of the employees Another measure to remove agency problem is ESOP. (Employee Stock Ownership Plan)
