What is Corporate Governance?

Faisal Rasheed

Corporate Governance
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed

Corporate Governance
There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance

Corporate Governance Parties

Shareholders Directors

those that own the company

Guardians of the Companys assets for the Shareholders who use the Companys assets

Managers

Corporate Governance
Primarily

concerned with public listed companies i.e. those listed on a Stock Exchange on preventing corporate collapses such as Enron, Polly Peck and the Maxwell companies

Focused

Four Pillars of Corporate Governance

Accountability Fairness Transparency Independence

Accountability
Ensure

that management is accountable to the Board that the Board is accountable to shareholders

Ensure

Fairness
Protect Treat

Shareholders rights

all shareholders including minorities, equitably effective redress for violations

Provide

Transparency
Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance

Independence
Procedures

and structures are in place so as to minimise, or avoid completely conflicts of interest Directors and Advisers i.e. free from the influence of others

Independent

Elements of Corporate Governance

Good

Board practices Environment disclosure shareholder rights

Control

Transparent Well-defined Board

commitment

Good Board Practices

Clearly Duties

defined roles and authorities

and responsibilities of Directors understood is well structured composition and mix of skills

Board

Appropriate

Good Board procedures

Appropriate Director Board

Board procedures

Remuneration in line with best practice

self-evaluation and training conducted

Control Environment
Internal Risk

control procedures

management framework present recovery systems in place

Disaster

Control Environment
Business

continuity procedures in place external auditor conducts audits audit committee established

Independent Independent

Control Environment
Internal

Audit Function Information systems established

Management Compliance

Function established

Transparent Disclosure
Financial

Information disclosed Information disclosed

Non-Financial Financials

prepared according to International Financial Reporting Standards (IFRS)

Transparent Disclosure
Companies

Registry filings up to date annual report published

High-Quality Web-based

disclosure

Well-Defined Shareholder Rights

Minority

shareholder rights formalised shareholder meetings conducted

Well-organised Policy

on related party transactions

Well-Defined Shareholder Rights

Policy

on extraordinary transactions defined and explicit dividend policy

Clearly

Board Commitment
Policies

and procedures have been formalised and distributed to relevant staff A corporate governance code has been developed A code of ethics has been developed The company is recognised as a corporate governance leader

Other Entities
Corporate

Governance applies to all types of organisations not just companies in the private sector but also in the not for profit and public sectors are NGOs, schools, hospitals, pension funds, state-owned enterprises

Examples

3. EXPERIENTIAL LEARNING
ASIA
3. Pakistan

First Code of Corporate Governance SECP With Assistance from; 1. ICAP 2. Stakeholders Sound Corporate Practices

3. EXPERIENTIAL LEARNING
ASIA
3. Pakistan

B: Applicable to: 1. Listed Companies 2. Banking Companies 3. NBFIs 4. Insurance Companies 5. Mutual Funds 6. Unit Trusts 7. Companies/Corporations held or controlled by the Government

3. EXPERIENTIAL LEARNING
ASIA
3. Pakistan

C: Constituents: 1. Directors BOD Qualifications and Eligibility Tenure Responsibilities, Powers and Functions of BOD Meetings Key Information

3. EXPERIENTIAL LEARNING
ASIA
3. Pakistan
C: Constituents: 2. CFO & Secretary Qualifications Attendance of Board Meetings 3. Corporate & Financial Reporting Framework Directors Report to Shareholders Frequency of Financial Reporting Responsibility for Financial Reporting & Corporate Compliance Disclosure of interest by a Director holding companys shares

3. EXPERIENTIAL LEARNING
ASIA
3. Pakistan

C: Constituents: 3. Corporate & Financial Reporting Framework Auditors not to hold shares Corporate ownership structure Divesture of shares by sponsors/controlling interest 4. Audit Committee Committee Frequency of meetings Attendance at meetings Terms of reference

3. EXPERIENTIAL LEARNING
ASIA
3. Pakistan

C: Constituents: 4. Audit Committee Reporting procedure Internal Audit 5. External Auditors