CORPORATE FINANCE

TOPIC:
CORPORATE GOVERNANCE IN PAKISTAN

TO:
MR. SHAHAB & WHOLE CLASS

BY:
M. MOBASHAR ALI 08117032

GIFT UNIVERSITY MBA (BANKING & FINANCE)

SECTION C
 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



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”.
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
 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.
 PROVISIONS TO SECURE
HOSTILE TAKEOVER

Ban targeted share repurchase known as
Greenmail

No shareholders rights provisions known as
Poison Pill

Restricted voting rights
 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.

PARTIES TO CORPORATE
GOVERNANCE

CHIEF EXECUTIVES SHAREHOLDERS

BOARD OF DIRECTORS

SUPPLIERS
EMPLOYEES
MANAGERS CREDITORS
CUSTOMERS
COMMUNITY

OTHER STAKEHOLDERS
 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
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

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
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

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)
THANKS FOR YOUR
TIME