Corporate Governance

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Muhammad Azeem Rafi.. NUML Lahore
CHAPTER 1 – AN OVERVIEW
What is Corporate Governance? Corporate Governance is concerned with governing the corporate entities.
What is corporate entity (Company)? A company is a form of business ownership with the following
characteristics:-
• Its capital consists of several units, called shares.
• The shares are generally transferable.
• The shareholders have no liability towards the debts of company.
• A company is considered a legal person and has an entity of its own, quite separate from its shareholders.
• Perpetual existence (Infinite life).
• Management of company is entrusted to people called directors.
Types of Companies
• Unlimited Companies. These are the companies where shareholders have an unlimited liability
towards the liabilities of the company. They may or may not have share capital. They resemble
partnership.
• Limited Companies. These are the companies where shareholder’s liability towards the company’s
sum is restricted to a limited sum. Limited Liability Company is of two types:-
• Company limited by guarantee
• Company limited by shares
• Private Limited Companies. Its shares are generally not freely transferable. It has to be approved
by the company. It can have not less than two and not more than fifty members excluding employees. Its
shares are not offered for subscription to general public. The word “Private” forms part of the name of the
company.
• Public Limited Companies. Its shares are freely transferable. It can have any number of
shareholders in excess to seven which is the minimum requirement. The shares can be offered for public
subscription. They are of two types:-
• Listed companies
• Unlisted companies
Hierarchy of a Company. The hierarchy of a company comprises of the following three stages:-
• First Stage: Management is appointed by, takes its directions from and reports to the Board of
Directors. It runs the company on a day to day basis
• Second Stage: Board of directors is elected by and reports to the shareholders. It provides the overall
guidance for running the company, draws up its policies and appoints the management
• Third Stage: Shareholders who are the owners of a company hold the ultimate power to make
decisions about the affairs of the company. They elect the directors usually from among themselves, to
provide the overall guidance for running the company.
Key Players in a Company
• Shareholders who elect the board of directors.
• Chairman of the board may or may not be the executive of the company.
• Directors who may be employees (Executive) and those who only serve the board (Non-Executive).
• Chief executive officer who may or may not be the director of the company.
• Senior Managers who actually run the company on day to day basis.
Corporate Governance
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Stakeholders in a Company. A stakeholder is a person who has an interest (or stake) in a company.
Shareholders are the main group who has a stake in the well being of the company, but they are not the only
ones. A number of other people are also affected by the financial position and performance of a company and
therefore need to be kept happy by those who run the company. Such people include creditors, lenders,
customers, suppliers, employees, general public, society at large, government, etc.
Classification of Stakeholders
• Owners. Individuals as well as institutional investors. They have the greatest interest in the company.
• Lenders. They extend financial advances to the company.
• Employees. Executive directors, senior managers and all others who are on the payroll.
• Business Associates. Company suppliers and clients
• Society. Public at large.
• Government. Tax authorities
What is governance? The mechanism used to control and direct the affairs of a corporate body in order to
serve and protect the individual and collective interests of all its stakeholders.
Corporate governance focuses on some structures and mechanisms that would ensure the proper internal
structure and rules of the board of directors, creation of independent committees, and rules for disclosure of
information to shareholders and creditors, transparency of operations and impeccable process of decision
making and control of management.
• Corporate governance is the system by which companies are directed and controlled.
(Cadbury Report 1992)
• If management is about running businesses, governance is about seeing that it is being run properly.
(Prof. Bob Ticker)
• Corporate governance as a set of mechanisms through which outside investors protect themselves against
expropriation by the insiders. He defines insiders as both managers and controlling shareholders.
(La Porta 2000)
Why Corporate Governance?
• Ownership is separate from Management.
• Conventional focus is on shareholders wealth maximization.
• Many of large organizations are multinationals and global companies.
• Bad governance impact would be colossal.
• Adversely affects economic activity.
• Stakeholders’ interest is significant.
• Corporate need to be socially responsible as well.
Corporate Sins. There are three attributes frequently found among directors and senior managers
which are considered as corporate sins:-
• Sloth. This is the unwillingness to take risks and initiatives.
• Greed. Is the desire of managers to get the best for themselves, even at the expense of others
• Fear. It is a tendency to refrain from doing anything so as not to displease a boss, or an investor.
These sins are responsible for majority of cases of poor governance.
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Approaches to Corporate Governance. There are three approaches available to the board of directors, to
govern a company:
 Shareholders approach to Corporate Governance. It is generally believed that the board of directors of a
company should govern the company in the best interest of its shareholders, i.e., the owners of the
company. Because directors are elected by and answerable to shareholders. This approach leads the board
to formulate policies that aim at maximizing the shareholders’ value often at the expense of other
stakeholders.
 Stakeholders approach to Corporate Governance. Under this approach, the board of directors should
aim at formulating policies that provide for equal (or almost equal) care of the interests of all stakeholders
(not just the shareholders). This is ideal but not a practical approach for the simple reason that directors
are elected by and accountable only to shareholders.
 Enlightened shareholders approach. This approach offers a compromise between the two
approaches. It requires the board of directors to work for the best interest of shareholders, but without
damaging or misappropriating the interests of other stakeholders, i.e. having a fair balance of interests.
Issues in Corporate Governance
• Distinguishing the roles of Board and Management
• Composition of Board and related Issues
• Separation of role of CEO and chairperson
• Should the board have committees
• Appointment to the board and directors’ re-election
• Directors and executives’ remuneration
• Disclosure and audit
• Protection of shareholders rights and their expectations
• Dialogue with Institutional shareholders
• Should Investors have a say in making corporate as socially responsible corporate citizen
Distinguishing the Roles of Board & Management
• Business is to be managed by or under the direction of board
• Board delegates powers to CEO
• CEO delegates it to management
• Board is the link between shareholders and management.
• Board selects, decides the remuneration, evaluates and change the CEO where necessary
• Oversee the conduct of business
• Review and approves financial plans, corporate plans and objectives
• Render advice and counsel to top management
• Identify and recommend candidates to shareholders for electing them to BOD
• Review the adequacy of system to comply with all applicable laws and regulations
Key Parameters of Corporate Governance
• Right of shareholders
• Equitable treatment of shareholders
• Role of Stakeholders
• Disclosure and Transparency
• Responsibilities of Board of Directors
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Corporate Governance-Benefits to Society

• Transparency
• Minority Interest & Liquid capital markets
• Competition for product and capital
• Check on corruption
• Improvement in Management System
Corporate Governance-Benefits to Corporate
• Creation and enhancement of competitive advantage
• Prevention of frauds and malpractices
• Protection to shareholders interests
• Enhancing valuation of an enterprise
• Ensuring compliance of laws and regulations.
CHAPTER 2 – A BRIEF HISTORY OF CORPORATE GOVERNANCE
What is Corporate. A corporate is an association of persons recognized by law with a contribution towards
common stock to undertake trade and business and to share the profits arising there from. It has following
characteristics:
• Artificial legal persons
• Perpetual Existence
• Common Seal
• Extensive membership
• Separation of management from ownership
• Limited Liability
• Transferability of shares
What is Governance
• The process of decision-making and the process by which decisions are implemented.
• Governance Structure can be formal and informal.
• Governance could be national governance, international governance, local governance, corporate
governance.
• Governance is as old as human civilization.
Theoretical Basis of Corporate Governance-Agency Theory
• Shareholders are owners
• They are Principals
• Management, selected directly & indirectly by shareholders, are agents.
• Agent to perform for the benefit of Principal
• Reduction of agency costs or loss:
• Fair & accurate financial disclosures
• Efficient & Independent Board of Directors
Stewardship Theory
• Governance approach is sociological and psychological.
• Managers are stewards
• Managers motives are aligned with Principal’s objectives
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• Managers are trustworthy and attach significant value to their reputation

• Steward behavior will not depart from interest of his organization
• Control can be counter-productive.
• Time frame is long term
• Risk orientation is done through trust.
A Comparison of Agency and Stewardship Theory
Agency Theory Stewardship Theory
Behavioral Differences
• Managers act as agents • Managers act as stewards
• Governance approach is materialistic • Governance approach is sociological and
psychological
• Behavior Patter is Individualistic, Opportunistic • Behavior pattern is collectivistic, pro-
and self-serving organizational and trustworthy
• Managers are motivated by their own objectives • Managers are motivated by principals objectives
• Interest of managers and principals differ • Interest of principal and agents converge
• Role of management is to monitor and control • The role of management is to facilitate and
empower
• Owners attitude is to avoid • Owner attitude is to take risk
• Principal relationship is based on control • Principal-agent relationship is based on trust.
Situational Mechanism
• Management philosophy is control oriented • Management philosophy is involvement oriented
• Greater control and supervision for dealing with • Training, empowerment, motivating and making
uncertainty and risk jobs challenging is the way to deal with risk and
uncertainty
• Time frame is short • Time frame is long
• The objective is cost control • The objective is improving performance
Psychological Mechanism
• Motivation around lower order needs • Motivation around higher order needs
• Little attachment to company • Greater attachment to company
• Power rests with institution • Power rests with personnel.
Stakeholders Theory
• Managers accomplish their tasks as efficiently as possible by building up a contract with stakeholders that
is equitable for both the parties to benefit.
• Theory is based on ethics of care, ethics of fiduciary relationships, social contract theory etc.
• Theory dates back to 1930
• Theory is hardly found in practice
Sociological Theory
• Board composition, implication for power and wealth distribution in society
• Bigger Challenge: Concentration of directorship in hands of privileged class
• Board composition, financial reporting, disclosures and auditing mechanism promote equity and fairness.
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Corporate Governance Models

• Anglo-American Model
• All directors participate in a single board comprising both executive and non executive directors in
varying proportions.
• Shareholding is almost equally divided between institutional and individual shareholders.
• Fairly clear separation of management from ownership.
• Institutional investors are reluctant activists.
• Protect small investors
• Disclosure norms are comprehensive.
• America, Britain Canada, Australia
• German Model
• Corporate Governance is exercised through two boards, in which the upper board supervises the
executive board on behalf of stakeholders.
• Supervisory board is equally elected by shareholders and labor unions and employees.
• Shareholders elect 50 per cent of members of supervisory board and the other half is appointed by
labour unions.
• This ensures that employees and labourers also enjoy a share in the governance.
• The supervisory board appoints and monitors the management board.
• Management board independently conducts the day to day operations.
• The Japanese Model
• Shareholders and main bank together appoint the supervisory board including president.
• President who consults both the supervisory board and the executive management (primarily board of
directors)
• Banks and financial institutional have large stakes in equity.
• Lending banks have important role.
• Institutional investors consider themselves as long term investors.
• Indian Model
• Shareholding is vested with directors, relatives, other corporates, Public and institutions
• Board composition is executive and non-executive
• Board independence is little
• Control of corporate is linked with ownership
• Pakistan Model
• Shareholding is vested with directors, relatives, other corporates, Public and institutions
• Board composition is executive and non-executive
• Board independence is little
• Control of corporate is linked with ownership
What is Good Corporate Governance
Bad governance is being recognized now as one of the root causes of corrupt practices in our societies.
Institutional investors and international financial institutions provide their aid and loans on the condition that
ensure “good governance” is put in place by the recipient nations. As with nations, corporations too are
expected to provide good governance to benefit all their stakeholders. At the same time, good corporate are
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not born, but are made by the combined efforts of all stakeholders, which include shareholders, board of
directors, employees, customers, dealers, government and the society at large.
Law and regulation alone cannot bring about changes in corporates to behave better to benefit all concerned.
• Obligation to Society at large
• National interest • Political non-alignment
• Legal compliances • Rule of law
• Honest and ethical conduct • Corporate citizenship
• Ethical behaviour • Social concerns
• Corporate social responsibility • Environment friendliness
• Healthy and safe working environment • Competition
• Trusteeship • Accountability
• Effectiveness and efficiency • Timely responsiveness
• Uphold fair name of the country
• Obligation to Investors
• Towards shareholders • Financial reporting and records
• Promote transparency and informed shareholders participation
• Obligation to Employees
• Fair employment practices • Equal opportunities employer
• Encourage whistle blowing • Human treatment
• Participation • Empowerment
• Equity and inclusiveness • Participative and collaborative environment
• Obligation to Customers
• Quality of products and services • Products at affordable prices
• Unwavering commitment to customer satisfaction
• Managerial Obligations
• Protecting company’s assets • Behavior towards government agencies
• Control • Consensus-oriented
• Gifts and donations • Role & responsibilities of boards and directors
• Direction and management must be separate • Devotion
CHAPTER 3 – THE SHAREHOLDERS
Who is a shareholder? He is a person who owns shares in a company. He is considered a member of the
company and its co-owner with certain rights and obligations. Now a company may issue different types of
shares, each with its own peculiar attributes. The rights, powers and obligations of the shareholder will depend
on the type of shares held by him.
Types of Shares
• Ordinary • Preferred
Features of Ordinary Shares
• Permanency • Dividend
• Residual claim on profits • Residual claim on assets
• Voting rights • Right to purchase new shares
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Features of Preference shares

• No voting power • Claim on company’s profits
• Claim on company’s assets
The Real Owners of a Company. Ordinary shareholders are entitled to the residual of profits and
residual of company’s assets. This makes them the real risk-bearers in the company, whose rights on the
company’s profits and assets come after the claims of everyone else, have been satisfied in full. At the same
time, they are the ones who benefit if the profits or the assets of the company increase.
Classification of Equity shareholders. Equity shareholders can be classified into two broad groups:-
• Those who invest in a company with an intention to own, control and run the company, this group of
shareholders is considered as internal shareholders.
• Those who invest in a company with a view to earn a return on their investment but have no intention of
participating in the management of the company, or putting their nominees on the board. This group of
shareholders is considered as external shareholders.
Types of Shareholders
Internal Shareholders External Shareholders
Companies that own Large Private Small Private Investing

other companies Investors Investors Organizations
Mutual funds,
MNCs holding
Families and close Pension funds,
companies, Individuals
friends Investment &
conglomerates
Commercial Banks
Corporate investors Individual Investors Institutional Investors

Internal Shareholders
• Controlling shareholders
• Majority of directors on the board
• In Pakistan, internal shareholders generally own more than 50% of the shares, which enables them to
ensure that all or most of directors on the board are their nominees.
• In USA & Europe, several companies are controlled by shareholders, holding much less than half of the
company’s total shares. Nominees are elected with the help of external shareholders who may have trust
in the management ability.
External Shareholders
• No or less representation in the board
• Seldom able to unite and vote collectively
• Management scientists studying the performance of company boards believe that the prime cause of
corporate governance problems is lack of unity between external shareholders
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Capabilities of Institutional Shareholders

• Large sums of money on behalf of their depositors
• Wants to earn a reasonable return to keep their clients happy
• Professional and competent staff
• Institutional investors are knowledgeable and organized investors
• They divide their portfolios into various categories like duration of investment or volume.
• In practice, institutional investors refrain from having direct representation on the board. Instead, they
use their influence by having a relationship with the company’s board or management. In this way, they
can communicate their preferences to the company and be sure of being listened do.
• In Britain and USA, Institutional investors are the ones who raised voice against huge remuneration of
directors.
Institutional Shareholders’ Perspective
• Generally institutional shareholders allocate a good percentage of its investment portfolio to long term
shareholding.
• They are interested in the sustainable growth of share price, also dividends
• Due to the size of their shareholding, they can influence the policy making processes of the investee
companies.
Role of Institutional Investors in Corporate Governance
• Institutional investors have two main qualities i.e. Professional competence and size of investment.
• They are therefore in a position to influence the decision making process at the board.
Principal forms of Intervention by Institutional Investors. Three principal ‘forms of intervention’ by
institutional investors are:-
• Having a dialogue with the board of directors of investee company, making them aware of their concerns
and preferences
• Carrying our regular evaluation of financial and other reports issued by the company
• Making a judicious use of their vote. Even if they are not interested in running the affairs of the company.
What do shareholders expect from the company? The shareholders, particularly the external ones,
expect the following from the company:-
• The board of the company should be accountable to them
• There should be transparency in all decision making processes in honest manner. It should be recorded in
minutes.
• Directors should not allow self interest to prevail over the interest of the company, or other stakeholders.
• Directors should manage their companies effectively and efficiently, showing good profits and good
growth in the market value of their shares.
• Executive directors should not award themselves unreasonably high remuneration at the expense of
dividends to the shareholders.
Tools Available to Shareholders
• Larger transactions made by the company, must be disclosed to and approved by the shareholders. The
defining size of such transactions may differ from company to company, but generally any transaction that
is in excess of say 25% of company’s equity is classified as class 1 transaction.
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• All transactions made by the company with related parties must be disclosed to the shareholders. Related
parties in this context include directors, major shareholders and other companies in the group, or other
companies in which directors, majority shareholders or managers of the reporting company may have an
interest.
• Law requires listed companies to issue periodic financial statements to shareholders. These statements
must be audited. The appointment of auditors is approved by the shareholders and the audit report is
addressed to the shareholders.
• Directors’ remuneration must be approved by the shareholders.
AGM of Shareholders. The code of corporate governance makes the following recommendations in respect of
AGM:-
• The company must encourage attendance by members at AGM. This means that meeting should be held
after a suitable notice and at a convenient place and time. The company must ensure that all members get
the notice of the meeting and attachments in good time to enable them participate effectively at the
meeting.
• Members should be encouraged to ask questions. Their queries should not be suppressed, rather dealt
with respect and dignity.
• Matters should be put to vote individually.
• Vote count at AGM is based on one vote per share, not one vote per shareholder.
• Shareholders do not have to be physically present at the meeting. They can authorize someone else to
attend the meeting on their behalf.
Shareholders’ Activism. It is relatively new trend in the corporate world. It involves shareholders taking
a stand against the recommendations made by the board of directors at the AGM. It is not necessary that such
a stand would lead to withdrawal of the recommendation; but it does send signals to the board about how
shareholders feel on any particular issue. If institutional shareholders support shareholders’ activism, then the
board may find it difficult to get its recommendations, on directors’ remuneration or dividend declaration,
approved by the members.
CHAPTER 4 – THE BOARD OF DIRECTORS

Director. Section 2(13) defines a “director” as including any person occupying the position of director,
by whatever name called;
• A director may therefore be defined as a person having control over the direction, conduct, management
or superintendence of the affairs of company
• Further any person in accordance with whose direction or instructions, the board of directors of a
company is accustomed to act is deemed to be a director of company.
• Agent. Directors act as agents of company and company acts as principal
• Trustee. Directors are trustees of assets of a company but they are not trustees of individual
shareholders.
Minimum Number of Director
• Listed Public Company 7
• Unlisted Public Company 3
• Private Company 2
• Single Member Company 1
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Directors’ Appointment
• First Board of Directors is usually appointed by virtue of provisions of articles of association.
• In the absence thereof, the number and names of directors shall be determined in writing by the
subscribers of the Memorandum of Association or by majority of them.
• If not, the subscribers of MOA become the directors.
• First directors hold their office up till the holding of first AGM and taking over by next BOD.
Kinds of Directors
• Executive Directors
• Full time working director covered by a service contract.
• EDs are in charge of day to day conduct of the affairs of the company
• Together with other team members collectively known as “Management”.
• Non-Executive Directors
• Nothing to do with day to day management of company.
• They may attend meetings of BOD and meetings of committees to which they are members.
• Nominee Directors. A nominee director is generally appointed in a company by the creditors and
or by other special interest to ensure that affairs of the company are conducted in the manner dictated by
law governing companies and to ensure good corporate governance.
• Independent Director. The board of directors of each listed company shall have at least one and
preferably one third of the total members of the board as independent directors. The board shall state in
the annual report the names of the non-executive, executive and independent director(s).
Explanation: For the purpose of this clause, the expression "independent director" means a director
who is not connected or does not have any other relationship, whether pecuniary or otherwise, with the
listed company, its associated companies, subsidiaries, holding company or directors. The test of
independence principally emanates from the fact whether such person can be reasonably perceived as
being able to exercise independent business judgment without being subservient to any form of conflict of
interest.
Provided that without prejudice to the generality of this explanation no director shall be considered
independent if one or more of the following circumstances exist:-
• He/she has been an employee of the company, any of its subsidiaries or holding company within the
last three years;
• He/she is or has been the CEO of subsidiaries, associated company, associated undertaking or holding
company in the last three years;
• He/she has, or has had within the last three years, a material business relationship with the company
either directly, or indirectly as a partner, major shareholder or director of a body that has such a
relationship with the company:
Explanation: The major shareholder means a person who, individually or in concert with his family or
as part of a group, holds 10% or more shares having voting rights in the paid-up capital of the
company;
• He/she has received remuneration in the three years preceding his/her appointment as a director or
receives additional remuneration, excluding retirement benefits from the company apart from a
director’s fee or has participated in the company’s share option or a performance-related pay scheme;
• He/she is a close relative of the company’s promoters, directors or major shareholders:
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Explanation: close relative means spouse(s), lineal ascendants and descendants and siblings;
• He/she holds cross-directorships or has significant links with other directors through involvement in
other companies or bodies;
• He/she has served on the board for more than three consecutive terms from the date of his first
appointment provided that such person shall be deemed “independent director” after a lapse of one
term.
Any person nominated as a director under Sections 182 and 183 of the Ordinance shall not be taken to be
an "independent director" for the above-mentioned purposes.
The director representing an institutional investor shall be selected by such investor through a resolution
of its board of directors, either specifically or generally, and the policy with regard to selection of such
person for election on the board of directors of the investee company shall be annexed to the Directors'
Report of the investor company.
Board of Directors
• If BOD is responsible and effective, the quality of its governance will be good and its stakeholders will
generally be happier. The overall performance of the company will improve due to access to larger and
cheaper capital, better reputation in the market, availability of better workers, etc.
• A board can translate the wishers of stakeholders into workable policies, communicate them to the
management and ensure that these are actually followed. All the codes of corporate governance
issued in various countries of the world are essentially directed at the board of a company for bringing
about necessary reforms for the protection of all stakeholders’ interest.
Role of the Board
• It should be Strategic Board
• Small size of Board-Cohesiveness and decision making.
• Independence of Board – lesser insider and more outsiders.
• Diversity of the Board – experience and professional diversity plus ethnic and cultural diversity.
• A well informed Board – Intelligent, timely and accurate information.
• Longer Vision and Broader responsibility.
• It must arrange for resources needed to implement the strategic plans.
• It should review the performance of the management to ensure that board’s plan is being effectively and
efficiently implemented.
• It should set the company’s values and standards; this involves company’s vision and mission statement,
code of conduct of managers and employees.
Types of Ineffective Boards
• Rubber Stamp Board or Yes Men Board. Simply approves whatever proposal or resolution is put
forward by the executive directors
• Good Old Boys Board or Country Club Board. Comprising of old friends of old friends of the
chairman (or principal shareholder of the company) who simply meet for board meetings but actually talk
only about good old days rather than company’s business.
• Paper Board. That exists only on paper and plays no role in the company, e.g. wives and daughters
of principal shareholder of the company.
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• Trophy Board. Comprises of people who have a big name in the society like major sports stars, film
actors, politicians, etc.) but have no interest in the conduct of the business.
Powers of Board. The board of directors of a company normally has absolute powers to conduct the
affairs of the company. Whatever a company is authorized to do by its memorandum of association, the board
can do it on behalf of the company. However, these are the collective powers of the board.
Sources of Power
• The company’s constitution
• The Law
• Resolutions passed by shareholders
• Sometimes practices prevailing in particular industry
Functions of Board
• The Oversight Function
• Approving and monitoring strategic plans
• Approving annual budgets and plan
• Ensuring the integrity and reliability of company’s annual reports
• The Directional Function
• Setting the vision mission statement
• Appointment of CEO
• Planning for succession of Senior Executives
• Appointment of committees
• The Advisory Function. General guidance to the management
Tools Available to a Board
• Composition of the board
• Independence of the board
• Committees
• External Help
• Consultation with the govt.
Responsibilities of a Board. It can be discussed in two broad groups, collective responsibilities and
individual responsibilities. It is important to note that a board is responsible for its acts and accountable only to
the company, and not to any other party. Anyone else having a grievance must seek redress from the
company, and not from its directors, except where a director acts illegally or fraudulently, he cannot be held
responsible personally for steps taken on behalf of the company. The collective responsibilities:-
• Acting in the best interest of the company
• Accountability to the owners
• Statutory duties
• Proper minutes of the meetings
• Periodic reports
• Stock exchange regulations
• Statutory duties
• Fiduciary or trusteeship duties
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Borrowing Powers of the Board.

• The companies Ordinance does not place any limitation on the amount of borrowings that a company can
make. The prudential regulations issued by the state bank of Pakistan do place some restrictions on the
amount of loan a bank or other financial institutions governed by the SBP can lend to a company.
• The SBP has come up with a requirement that all the directors of a company must extend a personal
guarantee to the lending financial institution for any loans being given to the company.
Types of Boards
Types of Boards
Composition Tenure of Members
Unitary Two tiered Common Staggered

Boards Boards Tenure Boards Board
Types of Boards
• Unitary Board. A unitary board does not have tiers or divisions. All members of the board are equal
status and participate in the decisions of the board simultaneously.
• Two-Tier Board. A two-tier board has two distinct tiers: the upper tier is often called supervisory board
and the lower tier is called management board.
• Common Tenure Board. All the directors in such a board have the same tenure. They are elected at the
same time for the same duration of tenure and retire at the same time at the end of their tenure.
• Staggered Board. Under this arrangement, only a part of the board retires at the end of a stated tenure
while the duration of each director remains fixed.
Advantages of Staggered Board
• The board enjoys a degree of stability as the entire board does not go out at any one time. This ensures
that there is continuation of policies and no radical changes ensue after each election.
• Frequent re-elections infuse new members into the board, thereby enabling it to get new blood, fresh
ideas and better exposure to the outside world.
Balance on the Board. The key to success of a board is to have a balanced board. A board is said to be
balanced if it has the right blend and proportion of the different attributes needed in its members. Board of
directors should be balanced in four respects:-
• Balance of Representation. All the stakeholders should have adequate representation on the board.
• Balance of Talents and Abilities. Having a blend of all the necessary talents and technical expertise
needed to lead the company.
• Balance of Power. Having an adequate number of truly independent non-executive directors on a board.
Non Executive Directors (NED), Representative Non Executive Directors (RNED), Independent Non
Executive Directors (INED).
• Balance of Attitudes. Having diversity of views at the board that ensures presence of a wide range
of social, moral and managerial attitudes of directors.
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Role of Chairman of the Board. The chairman of the board is also considered the chairman of the company.
His functions include:-
• Running the board, chairing all its meetings, setting its agenda, conducting its proceeding, and leading all
discussions at board and shareholders’ meetings.
• Ensuring that directors get adequate and timely information.
• Acting as a bridge between the board and shareholders.
• Evaluating the performance of the board as a whole and of each of its individual members.
• Act as an arbiter for any issues between different members of the board or management.
Role of the Chief Executive Officer
• Also known as CEO, Managing Director or President.
• Head of the management.
• Responsible for the management.
• He is answerable to the board in respect of all operational and managerial matters-every one else in the
company’s management is answerable to him.
• Most CEOs are also member of the company’s board. In many companies the offices of chairman and CEO
are held by the same person.
Duality of Office: Chairman and CEO. The company law and articles of association of most companies permit
one person to hold both the offices of chairman and CEO. Advantages are:-
• Speeds up the decision making process.
• Saves the cost to the company as often chairman and CEO draws salary for one office.
• Has greater influence on the company and is able to conduct its affairs more effectively.
Revision of Code of Corporate Governance 2012. Code has made it mandatory that these two offices
should be held by different persons in listed companies. Non listed and private limited companies are so far
exempt from the provision of the code.
• It provides an extra layer of answerability, making the CEO more careful.
• The chairman should be non-executive director. This adds independence.
• A non-executive chairman is more likely to listen attentively to the grievances of stakeholders.
CFO & Company Secretary
• Appointment Terms. The appointment, remuneration and terms and conditions of employment of
the CFO, the company secretary and the head of internal audit shall be determined by the CEO with the
approval of the board of directors.
• Qualifications. CFO should be a member of recognized body of professional accountants; or he should
be a recognized university graduate having five years’ experience in dealing corporate and financial affairs
at listed company or a financial institution.
• The company secretary should fulfill the same condition.
• Requirement of Attending the Board Meetings. The CFO and Company Secretary of listed company
should attend the meeting of Board of Directors. However, they will vote at the meeting only if they are
elected directors.
CHAPTER 5 – COMMITTEES OF THE BOARD

Introduction. Board of directors is a body that meets not more than four or five times a year to perform its
oversight, directional and advisory functions. It is therefore necessary that the board should get some
16
assistance from certain quarters, other than the management. Forming committees of the board is one way to
get such assistance. Some of the committees are required by law, while others may be formed purely as a
convenience and a tool for better governance.
Advantages of Committee
• Professional directors get the information from many sources other than management.
• The workload of directors is reduced. The detailed work is done by the committee members while the
board receives a summarized report and / or recommendations.
• With the induction of outside consultants or specialists in such committees, the board can get more
detailed and specialized information for a more dependable decision making.
Issues & Problems
• Committees are often accused of slowing down the process of decision making.
• Once a committee is formed about a particular matter, many board members stop caring or even thinking
about it.
• If the committee is not performing its work properly, the whole board and hence the company suffers.
• Board committees are often used by the real management of the company to get legitimacy for their
decisions without taking responsibility for them.
Common Committees
• Audit Committee
• Human Resource and Remuneration Committee
• Executive Committee
• Compliance Committee
THE AUDIT COMMITTEE. The code requires listed companies to form an audit committee comprising of
three or four board members. It is charged with the responsibility to oversee certain functions on behalf of the
board and to brief the board there-on.
Membership of Audit Committee. Code:- The board of directors of every listed company shall establish
an Audit Committee, at least of three members comprising of non-executive directors. The chairman of the
committee shall be an independent director, who shall not be the chairman of the board. The board shall
satisfy itself such that at least one member of the audit committee has relevant financial skills/expertise and
experience.
Responsibility of Audit Committee
• Oversight of financial reporting and accounting systems/policies
• Liaison with external auditors of the company
• Ensuring regulatory compliance in respect of disclosure and other requirements of law relating to financial
statements
• Monitoring the internal control process of the company
• Oversight of the risk management processes of the company
Terms of Reference. The Audit Committee of a listed company shall meet at least once every quarter of the
financial year. These meetings shall be held prior to the approval of interim results of the listed company by its
Board of Directors and before and after completion of external audit. A meeting of the Audit Committee shall
also be held, if requested by the external auditors or the Head of Internal Audit.
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The Board of Directors of every listed company shall determine the terms of reference of the Audit Committee.
The Board shall provide adequate resources and authority to enable the Audit Committee carry out its
responsibilities effectively. The Audit Committee shall, inter alia, recommend to the Board of Directors the
appointment of external auditors, their removal, audit fees, the provision by the external auditors of any
service to the listed company in addition to audit of its financial statements. The Board of Directors shall give
due consideration to the recommendations of the Audit Committee in all these matters and where it acts
otherwise; it shall record the reasons thereof. The terms of reference of the Audit Committee shall also include
the following:
• Determination of appropriate measures to safeguard the listed company’s assets;
• Review of quarterly, half-yearly and annual financial statements of the listed company, prior to their
approval by the Board of Directors, focusing on:
• Major judgmental areas;
• Significant adjustments resulting from the audit;
• The going concern assumption;
• Any changes in accounting policies and practices;
• Compliance with applicable accounting standards;
• Compliance with listing regulations and other statutory and regulatory requirements; and
• Significant related party transactions.
• Review of preliminary announcements of results prior to publication;
• Facilitating the external audit and discussion with external auditors of major observations arising from
interim and final audits and any matter that the auditors may wish to highlight (in the absence of
management, where necessary);
• Review of management letter issued by external auditors and management’s response thereto;
• ensuring coordination between the internal and external auditors of the listed company;
• Review of the scope and extent of internal audit and ensuring that the internal audit function has
adequate resources and is appropriately placed within the listed company;
• Consideration of major findings of internal investigations of activities characterized by fraud, corruption
and abuse of power and management's response thereto;
• Ascertaining that the internal control systems including financial and operational controls, accounting
systems for timely and appropriate recording of purchases and sales, receipts and payments, assets and
liabilities and the reporting structure are adequate and effective;
• Review of the listed company’s statement on internal control systems prior to endorsement by the Board
of Directors and internal audit reports;
• Instituting special projects, value for money studies or other investigations on any matter specified by the
Board of Directors, in consultation with the CEO and to consider remittance of any matter to the external
auditors or to any other external body;
• Determination of compliance with relevant statutory requirements;
• Monitoring compliance with the best practices of corporate governance and identification of significant
violations thereof; and
• Consideration of any other issue or matter as may be assigned by the Board of Directors.
18
Nature of Audit Committee. Despite its apparent importance and influence on the governance of a
company, it is wise to remember that an Audit Committee is not an executive body. It does not carry out any
executive function at all. It does not draw up the accounting policy, neither does it approve. The management
draws accounting policies and procedures while the board of directors approve them. Committee is to advise
the board on the efficacy of the policy and its implementation.
• Audit committee does not perform internal or external audit. It does not issue any instructions to the
either auditor. It simply oversees their work and reviews their reports.
• Audit committee reports to the board of directors and gives findings, advice and recommendations to the
board.
• In certain situations, it lies within the prerogative of the audit committee to give a report direct to the
shareholders, or to communicate with them through some other formal or informal means to convey its
views.
Best Practices. The following advice is available to audit committees for conducting its business effectively:
• Managing its Agenda
• Frequency of interaction with management (with CEO, CFO, Internal Audit Manager, External auditor, tax
advisor etc.)
• Regular Executive sessions (formal scheduled meetings b/w the audit committee and key managerial staff
or external auditors)
• Regular evaluation (each member performance)
Audit Committee and the External Auditor
• AC should maintain constant liaison with the external auditor.
• AC has to check the details of the qualifications, experience, past record etc. of any firm of auditors whose
name is proposed at AGM.
• AC should ensure the independence of the external auditor by verifying that there are no linkages b/w
auditor and the management.
• AC should ensure rotation of external auditors after suitable periods.
• AC should monitor the performance of external auditors and report its finding to the board.
Situation of Audit Committees in Pakistan
Sadly most audit committees are far from independence. Some companies nominate their executives, even
the director finance, on such committee. Others assign the chairmanship of audit committee to the chairman
of the company.
In many companies, since most directors are family members, it is common that one brother is chairman of the
company, another is the CFO while the third is chairman of the audit committee.
THE HUMAN RESOURCE AND REMUNERATION COMMITTEE. There shall also be a Human Resource and
Remuneration (HR&R) Committee at least of three members comprising a majority of non-executive directors,
including preferably an independent director. The CEO may be included as a member of the committee but not
as the chairman of committee. The CEO if member of HR&R Committee shall not participate in the proceedings
of the committee on matters that directly relate to his performance and compensation.
Responsibilities of Committee
• Formalization of the process of finding suitable directors, including both the executive and non executive
directors.
19
• It does not appoint the directors, but makes recommendations to the board.
• Formulation of policy regarding remuneration of executive, non executive as well as senior managers of
the company.
• Periodic performance evaluation of executive directors, non executive director and senior management.
• Succession planning of directors and senior officials including the chairman.
• Making recommendation on the board size and structure.
• Ensuring that directors are not being paid any additional fees, or given assignments or such other contracts
that may undermine their independence.
• If the company operates any bonus scheme for directors or senior officials, the committee should be
involved in devising such a scheme.
• Ensuring that disclosures relating to directors remuneration are correctly made in periodic financial
statements.
Directors’ Remuneration. Over the recent past, these executive directors have been paying themselves
huge salaries and bonuses, causing a lot of concern to not only the shareholders who were directly affected by
these enormous payments but also other stakeholders whose interests were also adversely affected, e.g.
Enron had 970 million dollar profit and 750 million dollar bonuses to executive directors.
Basis of Remunerating Directors. Directors pay is generally divided into two segments:
1. Fixed Salary
2. Performance Based Pay
Fixed Salary Only Approach. If a company pays only a fixed salary to its directors, it does not motivate them
to work harder for company’s profitability or growth. Restricting directors’ remuneration to only salary also
takes away the entrepreneurial instincts and initiative from their working.
Performance Based Pay
• A performance based pay or incentive pay, promotes motivation.
• It gives the directors a reason for better performance as they stand to gain personally from company’s
profitability or growth.
• Cash bonus, free shares, share options
Executive Committee. Since board members are busy people they cannot get together very frequently. An
executive committee is formed with powers to make decisions on many of the matters (up to a specific limit)
thereby eliminating the need of bringing every matter to the board. It has following advantages:-
• It reduces work load on the board of directors.
It has an opportunity to consult internal and external resources before putting up any matter to the board.
Ad hoc Committees of the Board. Companies also form additional committees from time to time to
attend to issues that during the course of operations of the company. They may include:-
• Investigations Committee. To investigate any breach of company’s operational code.
• Negotiations Committee. To negotiate with unions, government or any other external party.
• Projects Committee. To supervise any project or acquisition.
• Communications Committee. For better communications with stakeholders, investors and media.
20
CHAPTER 7 – FINANCIAL REPORTING

Annual report. For legal and necessity reasons, Companies publish a formal report at the end of each financial
year. This annual document has three broad sections:
• Directors’ Report
• Financial Statements
• Audit Report
Directors’ Report. Often in the form of a letter from the company’s chairman to its shareholders giving
three important pieces of information:
1. Comment on the financial performance of the company during the year to which the report relates. This
part is often referred to as OFR, i.e., Operational and Financial Review.
2. Assessment of what lies in the immediate future
3. A statement about the company’s policies, principles and strategies developed to meet the challenges of
future.
Financial Statements
1. Income statement
2. Balance sheet
3. Cash flow statement
4. Statement of changes in equity
Each statement is accompanied with a large number of notes providing explanation of the items contained
therein. Notes to the accounts are considered to be as important as the accounts themselves.
Audit Report. The third section of the annual report contains a report from the external auditors which
essentially gives his opinion on the financial statements.
The Need for Publishing Financial Statements
• The Informational Function. Shareholders, lenders, suppliers, customers, managers, employees,
investors, govt. etc.
• The Control Function. How much dividend to declare, what portion of profit to reinvest, comparison
with similar companies, and also comparison within the deptt.
• The Planning Function. Plan or budget for the next few years, set targets and make attainable plans
Balance Sheet
• Capital Employed. = Equity + Long Term Liabilities
= (Fixed Assets + Intangible Assets + Investments) + Working Capital
= Noncurrent Assets + Working Capital
• Equity. It is shown on the liabilities side of the balance sheet. It comprises of company’s paid up share
capital, reserves and un appropriated profits.
• Long Term Liabilities. The obligations company has to pay after at least a year.
• Fixed Assets. The assets that a company uses to do the business with.
• Non-Tangible Assets. These assets do not have a physical shape but are used to do business like
patent etc.
21
• Investments. These are financial assets and may be in form of shares of other companies or bonds
etc.
• Working Capital. This is the excess of current assets over current liabilities at any moment of time.
• Current Assets. The assets that are reasonably expected to be sold, consumed or converted into cash
during a normal operating cycle of the company.
• Current Liabilities. The obligations that must be discharged by the company within its operating cycle.
• Capital Employed. Total of each side of the balance sheet represents the capital employed.
Income Statement
• The first part is called the trading account. It shows the sales revenue earned by the company, the total
direct costs incurred to earn and the resultant gross profit.
• The second part is the profit & loss account. All incidental incomes are added to gross profit to get gross
operating profit. All expenses (overheads) are deducted to get year’s net profit.
• The third part is the profit and loss appropriation account. This shows how the profit earned is being used.
After deduction of taxes profit after tax is deduced.
Cash Flow Statement
• Cash flow from operating activities
• Cash flow from financing activities
• Cash flow from investing activities
Statement of Changes in Equity. Equity of a company comprises of essentially three parts.
Share Capital Share Premium General Reserves Retained Earning Total Equity
Bal as on 31 Dec 09 5,500 80 1,740 2,459 9,779
Shares issued in 2012 4,000 1,000 5,000
Net profit for the year 3,050 3,050
Tfr from P&LC A/C 2,500 (2,500)
Dividend final (1,500) (1,500)
Bal as on 31 Dec 10 9,500 1,080 4,240 1,509 16,329
Notes to the Financial Statements. Notes provide the additional information:-
• An explanation of accounting methods or policies used.
• Greater details regarding certain figures in the financial statements.
• Statutory Disclosures.
• Changes in accounting policies, methods or nature of business during the year.
• Details of off-balance sheet items.
Limitation of Financial Statements. Financial Statements are very useful source of information to all those
people who have an interest, or stake, in the company. Companies take great care in preparation of these
statements. Law also prescribes certain disclosure requirements as well. However, financial statements suffer
from some inherent defects. These are briefly discussed:-
• Most balance sheets show values of assets, in particular the fixed assets, at cost less accumulated
depreciation. These values may be vastly different from the prevailing market value of these items.
• Accounting policies of companies differ even within an industry.
• Financial statements contain absolute figures.
22
• Certain assets or liabilities may not be shown in the financial statements e.g., contingent liabilities,
disputed receivable.
Stakeholders Interest in Financial Statements. Financial Statements are perhaps the most important
communication from the board/management of the company with its stakeholders.
• Shareholders use them to decide how they should vote at various issues.
• Investors use them for making investment decisions, like to hold or sell the shares.
• Investment analysts use them for rating the company or its shares and bonds.
• Major investors use them for making acquisitions, mergers and demerger decisions.
• Creditors use them for accessing the credit worthiness or risk weight of the company.
• Management uses them to plan for the future.
• Employees use them to negotiate better terms of employment.
• Government uses them to calculate taxes.
Qualities of Financial Statements. A good set of financial statements should have the following qualities:-
• Clear and understandable
• Reliable
• Honest
• Compliance with applicable standards
Responsibility for the Health of Financial Statements
• The Management. Who keeps the books, chooses the accounting policies, maintain the books of
accounts, prepares the Financial Statements and facilitates the external auditor.
• The Board. Who oversee the preparation of accounts, ensure that all due legal disclosures are made
• Audit Committee. who liaises with internal and external auditors and recommends the Financial
Statements to the board
• External Auditor. Who examines the accounting and related records as well as the Financial Statements
and gives a formal opinion on them
(The company law says that the ultimate responsibility for the health and integrity of the company’s Financial
Statements lies with its board of directors.)
Audit Committee Role
• It reviews the internal control processes of the company.
• It reviews the reports of the internal auditor.
• It plays a pivotal role in selection of external auditor.
• It maintains liaison with external auditor.
• It can directly go to chairman if feels that that executive directors are impeding work.
Misleading Financial Statements. Statements are said to be misleading if:-
• They are not consistent with the accounting records.
• They are not based on correct accounting policies.
• They do not comply with applicable accounting standards.
• They do not disclose the true profit or loss.
• They do not value the assets and liabilities of the company correctly.
• They do not provide adequate information or disclosure.
23
Consequences of Unreliable Financial Statements. A lot of people related with the company make
number of their decisions on the basis of its financial statements. For example, investors decide about buying
more shares, or selling off their present holding in light of the information contained in the financial
statement. Creditors make decisions about extending more terms or calling back their existing loans on the
strength of these statements. Management draws future plans and employees make their long term decisions.
Why does company make unreliable Financial Statements? There are several reasons:-
• Over-Statement of Profits
• To meant the expectations of general public.
• To maintain share price.
• To meet with contractual obligations with creditors.
• To maintain image of rising profits.
• To prepare the company for higher price if merger or sale of the company is in the offing.
• Under-Statement of Profits
• To save corporation tax.
• To avoid having to pay dividends.
• To smoothen the earning trend.
• Misstatement of Financial Position
• Stating the assets and liabilities at incorrect value.
• To show a healthy position of the company.
• Creative Accounting. A systematic and intentional misrepresentation of the true income and
financial position of an entity to achieve certain objectives. This involves using such accounting policies and
techniques that assist in misstating the financial statements. For example, companies are generally free to
choose the basis of valuing their stock in trade. A company could therefore deliberately select or change
the basis of stock valuation with the intention of overstating its stocks at a particular time.
Role of the External Auditor. The law requires all public limited companies to get their financial statements
audited by duly licensed external auditors who should be appointed by the shareholders. The reason for this
requirement is quite obvious – it is one the strongest tools in the hands of shareholders to ensure that what
they are being told by the company’s management is essentially correct.
Purpose of Audit. The purpose of audit is to provide the shareholders and other stakeholders an
independent opinion about the state of financial statements.
Stakeholders attach a lot of importance to external auditor’s report because:-
• External auditor is appointed by shareholders, not the management.
• He is independent, not a part of the company’s management.
• He is competent to examine the accounts and financial statements and give an opinion thereon. Only
professionally qualified persons can get a license to act as external auditors to a company.
• He is believed to have a high degree of integrity as he belongs to a profession that is strictly regulated by a
professional body.
Audit Report. This report is given by the external auditor after they have examined the accounting records,
supporting evidence and financial statements prepared on the basis of such records at the end of the year. It
essentially gives the auditor’s opinion on the financial statements, generally covering the following areas:-
• Steps taken by the external auditor to form his opinion on the financial statements.
24
• Auditor’s opinion on whether or not:-

• The books of accounts have been properly kept and are complete in all necessary aspects.
• The financial statements are in accordance with the accounting records.
• The financial statement give a true and fair view of company’s profit for the year ended and its
financial position at the end of the year.
• The financial statements provide all the disclosures required by relevant laws.
An external auditor’s task is only to give an opinion; not to ensure the accuracy of financial statements. He is
not expected to advise management on how to get the accounts in order. His responsibility is to say in his
report whatever is revealed by his examination of accounting records and financial statements. If anything is in
order or not in order, he simply indicates so. He is however responsible for the correctness of his report. A lot
of people depend on his report and if he gives an inaccurate report, he can in certain circumstances be held
liable for damages. (e.g. Enron Scandal)
Types of Audit Reports
• Unqualified Report
• Qualified Report
• Adverse Report
• Disclaimer
Independence of External Auditor. It is often said that financial statements are of little or no value if they
are not accompanied by a substantially unqualified audit report. With that much importance being attached to
the audit report, it is essential that the external auditor must be independent and allowed to do his work
independently. The following are some of the means used to ensure the independence of external auditors:-
• The firm performing the external audit should not be given any other professional work. If an audit firm
earns a large percentage of its total revenue from a particular company through fees for audit, accounting,
tax, consultancy, financial advisory services, etc. It is likely that its independence may be impaired.
• Auditors should be rotated frequently so that familiarity does not lead to loss of independence.
• There should be no relationship between the partners of an audit firm and company’s directors
• All the external auditors are members of Institute of Chartered Accountants of Pakistan (ICAP). This body
strictly regulates the conduct of its members providing them with comprehensive code of conduct and
monitoring their work. In addition, SECP also monitors the conduct of audit firms in Pakistan. There are
also several international professional bodies which issue standards / guidelines for accounting and
auditing practices. ICAP is a member of most of these international professional bodies and makes it
compulsory for its own members to follow the internationally recognized standards and guidelines.
CHAPTER 7 - RISK MANAGEMENT

Risk. Risk is:-
• Uncertainty
• Chance of loss
• Variability of returns
• The actual result may be different from those that were expected.
Why take a risk?
• Inevitability
• Reward
25
Risk Aversion. Risk aversion refers to an individual person or company’s attitude towards risk. Some people
are willing to take risk and others are not. Risk averse people are willing to pay to reduce their exposure to risk.
Risk Exposure. The risk faced by an individual or firm, for example, if you are a temporary office worker, your
exposure to the risk of a layoff is relatively high. And if you are a permanent employee, your exposure to the
risk of a layoff is relatively low.
Risk Faced by Firms. The financial system can be used to transfer some of the risks faced by a company to
other parties. Specialized financial firms, such as insurance companies, perform the service of pooling and
transferring risks.
• Production and operations risk
• Price risk of outputs or market risk
• Price risk of inputs
• Economic conditions risk
• Political risk
• Environmental risks
• Project risk
• Reputational risk
Who Bears These Risks? The shareholders are not the only people who bear the risks of the business.
• The company’s managers
• Employees
• Creditors
• Customers
• Tax authorities
Risk Management. The process of formulating the benefit-cost trade-offs of risk reduction and deciding
on the course of action to take, to reduce or eliminate risks is called risk management.
Responsibility for Managing Risks. The company’s board of directors is ultimately responsible for
managing the risks faced by a company because of its basic duty to protect the company’s assets. Hence, risk
management is very much a governance issue. While the actual process of risk management will be carried out
by the management, it must be overseen by the board.
Risk Management Process. A systematic attempt to analyze and deal with risk.
• Risk Identification
• Risk Assessment
• Selection of risk-management techniques
• Implementation
• Review
Risk Identification. Before a company can make any plan or policy about how to handle the risks it faces,
it must be fully aware of all the risks it is exposed to.
Risk Assessment. Risk assessment will involve finding answers to the following questions:-
• How likely is it for any of these risks to happen?
• What is the maximum possible financial loss that you will suffer in each of the listed situations?
• What would be the cost of eliminating or transferring this risk to some on else?
26
Selection of Risk Management Techniques. The next step is to decide what steps to take to eliminate or
reduce the impact of risk. There are four basic techniques available for reducing risk, namely:-
• Risk Avoidance. If the risk is inevitable, we cannot avoid it. But some of the risks can be
avoided. For example, a person who does not buy shares at a stock exchange eliminates the risk of loss in
value of his investments.
• Loss Prevention and Control. This refers to actions taken to reduce the likelihood or the severity of
losses. For example, you can reduce your exposure to the risk of illness by eating well, getting plenty of
sleep, abstain from smoking etc. Similarly, companies can reduce the risk of fire at factories by taking
necessary precautions, by having fire extinguishing equipment.
• Risk Retention. This refers to absorbing the risk and covering losses out of one’s own resources. For
example, some people do not buy comprehensive car insurance. They prefer to save insurance premium
by agreeing to meet any repair costs that may ensue from an accident.
• Risk Transfer. One way to cover you against risks is to transfer the risk to others. For example, when
you insure your car, you transfer the risk to the insurance company.
Implementation of Risk Management Plan. Following a decision about how to handle the risks identified,
one must implement the technique selected.
Regular review of the Risk Situation. It is a dynamic process in which the decisions are periodically reviewed
and revised.
Risk Transfer Techniques
• Hedging. Action taken to reduce one’s exposure to a loss also causes one to give up the possibility of a
gain. For example, farmers who sell their future crops before the harvest at a fixed price to eliminate the
risk of a low price and also give up the possibility of profiting from high price.
• Options. An option gives the buyer a right to buy (or sell) an item at pre-determined price on a pre-
determined date.
• Insurance. Insurance means paying a premium to avoid losses.
• Diversification. Diversifying means holding many risky assets instead of concentrating all of your
investment in only one.
Institutions for Risk Management.
• Insurance companies
• Stock exchanges
• Specialized traders in forward contracts and options
• Mutual funds
• Financial institutions offering guarantees, LC’s, underwriting of shares and bond issues etc.
Disaster Recovery
The role of Government in Risk Management
Report by Board on Risk Management

Corporate Governance

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Muhammad Azeem Rafi.. NUML Lahore

Corporate Governance-Benefits to Society

• Managers are trustworthy and attach significant value to their reputation

Corporate Governance Models

Features of Preference shares

Internal Shareholders External Shareholders

Companies that own Large Private Small Private Investing

Corporate investors Individual Investors Institutional Investors

Capabilities of Institutional Shareholders

CHAPTER 4 – THE BOARD OF DIRECTORS

Borrowing Powers of the Board.

Composition Tenure of Members

Unitary Two tiered Common Staggered

CHAPTER 5 – COMMITTEES OF THE BOARD

CHAPTER 7 – FINANCIAL REPORTING

• Auditor’s opinion on whether or not:-

CHAPTER 7 - RISK MANAGEMENT

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