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 – those that own the company

Directors – Guardians of the Company’s assets for the Shareholders

Managers who use the Company’s assets

Corporate Governance

Primarily concerned with public listed companies i.e. those listed on a Stock Exchange

Focused on preventing corporate collapses such as Enron, Polly Peck and the Maxwell companies

Four Pillars of Corporate Governance

Accountability

Fairness

Transparency

Independence

Accountability

Ensure that management is accountable to the Board

Ensure that the Board is accountable to shareholders

Fairness

Protect Shareholders rights

Treat all shareholders including minorities, equitably

Provide effective redress for violations

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

Independent Directors and Advisers i.e. free from the influence of others

Elements of Corporate Governance

Good Board practices

Control Environment

Transparent disclosure

Well-defined shareholder rights

Board commitment

Good Board Practices

Clearly defined roles and authorities

Duties and responsibilities of Directors understood

Board is well structured

Appropriate composition and mix of skills

Good Board procedures

Appropriate Board procedures

Director Remuneration in line with best practice

Board self-evaluation and training conducted

Control Environment

Internal control procedures

Risk management framework present

Disaster recovery systems in place

Control Environment

Business continuity procedures in place

Independent external auditor conducts audits

Independent audit committee established

Control Environment

Internal Audit Function

Management Information systems established

Compliance Function established

Transparent Disclosure

Financial Information disclosed

Non-Financial Information disclosed

Financials prepared according to International Financial Reporting Standards (IFRS)

Transparent Disclosure

Companies Registry filings up to date

High-Quality annual report published

Web-based disclosure

Well-Defined Shareholder Rights

Minority shareholder rights formalised

Well-organised shareholder meetings conducted

Policy on related party transactions

Well-Defined Shareholder Rights

Policy on extraordinary transactions

Clearly defined and explicit dividend policy

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

Examples are NGOs, schools, hospitals, pension funds, state-owned enterprises

3. EXPERIENTIAL LEARNING ASIA

3. Pakistan

First Code of Corporate Governance SECP With Assistance from;

1. ICAP2. Stakeholders

Sound Corporate Practices

3. EXPERIENTIAL LEARNING ASIA

3. Pakistan

B: Applicable to:1. Listed Companies 2. Banking Companies3. NBFIs4. Insurance Companies 5. Mutual Funds6. 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

company’s 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

interest4. 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 Audit5. External Auditors