Corporate Governance.
Corporate Governance.
CORPORATE GOVERNANCE
Corporate Governance is for "to control upper level"
Types of Control
Three types of control are:
2. Unlisted Company: Any company which do not sale their shares to the
public or which is not registered in stock exchange.
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Preference shareholders: They are not the owner of the company.
Stakeholders: All those people who’s any action will affect the organization
or any action by the organization will affect them. Like employees, vendors,
owner, etc.
ACT: Any bills pass by the parliament means any one assembly (National or
Senate) will go to other assemble and they have to replay within 90 days
otherwise it is conceder as rejected if the bill is pass in both assemblies it will go
to president having age 45 or more have to replay within 10 days. If bill rejected
by president, then again it goes back to parliament if parliament approved again
then go back to president again but no matter if he approved or reject it within 10
days it will consider as approved, any bill that go through this process is called
ACT.
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Benefits of Corporate Governance:
1) Reduce risk
2) Improve leadership
3) Enhance performance
4) Improve access to capital market
5) Enhance stake holders support
6) Enhance the marketability of goods and services
1. Reduce Risk:
It helps to ensure that the personal objectives of the board and company's
strategic objectives are brought into line with those of stake holders. It can
help to reduce the risk of fraud.
2. Improve Leadership:
3. Enhance Performance:
It institute (focus) clear accountability and effective links between
performance and rewards which can encourage the organization to improve
its performance/ productivity.
4. Improve access to Capital Market:
It reduces the level of risk as perceived by outsiders including investors.
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An increasing number of high profile corporate scandals and collapses, including
Polly_ Peck international, BCCI and Maxwell communications Corporation
prompted the development of governance codes in the early 1990s. However,
scandals since then, such as Parmalat and Enron have raised questions about further
measures that may be necessary. These scandals have highlighted the need for
guidance to tackle the various risks and problems that can arise 111 organizations'
systems of governance.
1 . Dominating by single person
2. Lack of involvement of board
3. Lack of adequate control functions
4. Lack of supervision
5. Lack of independent scrutiny
6. Lack of contact with share holders
7. Emphasizing on short term profitability
8. Misleading accounts and information
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4. Lack of Supervision:
Employees who are not properly supervised can create large losses for the
organization through incompetence, negligence or fraudulent activity. The
behavior of Nick Lesson, the employee who caused the collapse of Barings
bank was not challenged because he appeared to be successful, whereas he was
using unauthorized accounts to cover up his large trading losses. Lesson was
able to do this because he was in charge of both dealing and settlement, a
systems weakness or lack of segregation of key roles that has also featured in
other financial frauds.
Board members may be out of touch with the interests and views of
shareholders. One possible symptom of this is the payment of remuneration
packages that do not appear to be warranted by results. Equally the directors
may choose to pursue their own interests and ignore the requirements of the
shareholders.
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Reports on Corporate Governance:
There were three significant corporate governance reports in the United Kingdom during the
1990s. The Cadbury and Hampel reports covered general corporate governance issues, whilst
the greenbury report concentrated on remuneration of directors.
Sarbanes-Oxley Act 2002 General guidelines for corporate governance
The recommendations of these three reports were merged into a Combined Code in 1998, with
which companies listed on the London Stock Exchange are required to comply. We look at the
combined code in this section.
Since the publication of the Combined Code a number of reports in the UK have been published
about specific aspects of corporate governance.
The Turnbell report focused on risk management and internal control
The Smith report discussed the role of audit committees
The Higgs report focused on the role of the non-executive director
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Driving Forces for Corporate Governance Development:
CG issues came to prominence in the USA during 1970s and in the UK and Europe in
1980s and in Pakistan 2.002. There are several reasons why this happen.
These issues were raised by many investors and were the focus of
much debates and litigations, to greater transparency and reduction
in risk faced by the investors.
A rule based approach provides a set of rules which must be followed in all
circumstances; rule based legislation includes punishment for noncompliance.
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Effective Control System (Qualities):
i. Acceptability
ii. Accessibility
iii. Adoptability
iv. Action Oriented
v. Appropriateness
vi. Affordability
1. Acce
ptability:
To the people who will operated (whom it will be operated) that fit with their
needs and expectations and the culture of the organization.
2. Accessibility:
That is in terms of its ease and understanding of an operation.
5. A p propriateness:
That is in term of the circumstances, skill knowledge and ability (SKL) of the people
of operating.
6. Affordability:
The cost of operating control must be less than the cost associated with
deviations/ failures (in other words prevention cost must be less than failure cost).
i. The provision of this ordinance shall have effect not which standing anything
contain in the Memorandum, Article of a company or any contract/ Agreement
executed by .it or any resolution passed by the company in general meeti.ng
before or after the commencement of this ord inance of the set provision and
ii. Any provision contained in the Memorandum / Article which is against to the
aforesaid provision shell be void.
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Section VI of the company ordinance provide that the right conferred by the
ordinance on a company, cannot be over ruled .by any provision ·in
a) Memo
b) A1ticle of Association
c) Contract/ Agreement
d) Resolution of General meeting
e) Director/ board meetings anything mentioned above in conflict with the
provision of company ordinance shall be void.
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1. Confidentiality:
2. Objectivity:
4. Professional Behavior:
5. Integrity:
Threats:
Compliance with the fundamental principles may potentially be threatened by a broad
range of circumstances such as:
1. Self-interest Threats:
2. Self-Review Threats:
This may occur when a previous judgment needs to be reevaluated by the
professionals responsible for that judgment.
3. Self-Advocacy Threats:
5. Intimidation Threats:
Safe Guards
Safe guards that may illuminate or reduce such threats to an acceptable level fall into
two broad categories;
Having considered these issues, they should determine the best course of action
consistent with the fundamental principles identified. We should also weigh the
consequences of each possible course of action. If the matter remains unresolved they
should approach other appropriate person with their firms or other employing
organization for help or obtaining resolution.
When a matter involves the conflict with or within the organization he should approach
to the audit committee or other body responsible for governance of that organization.
If a significant cannot be resolve, we should consult the relevant professional body they
may also consider seeking legal advice.
lf after conducting all relevant possibilities the matter remains unresolved than he
should refuse remain associated with the matter , or he may also withdraw
from the engagement term or specific assignment or resign altogether from the firm
or employing organization.
Directors:
Director wise Categories:
1. SMC (Single Member Company)
2. Private
1. SMC:
It has only one director. It is the only company where director is present at the start
of
the company. He (director) can appoint board of directors in the work load situation
and it is only company where he can remove board of director but BOD cannot
remove him. It has two sub types:
i. Nominal Director:
When the director will die in this situation nominal director will perform.
2. Private Compan y:
Minimum numbers of directors are two, minimum members are two and
maximum members are 50. If one director has left or dies than second
member can rule till maximum 6 months and after that he has to appoint
second director or convert _ its company into SMC.
3. Public Company:
1. Listed (at least 7 members)
3. A person has been director of company which become insolvent at any time while he
was a director. (Not applicable after 2 year)
7. Person has been declared a defaulter by exchange or his TRE has been canceled.
8. He has been interred into a plea bargaining arrangement with any of regulatory
authority.
9. They have conducted their business in a manner that effects the sovereignty of
Pakistan. Or friendly relationship with other state.
Types of Meeting:
1. Strategy Meeting
2. AGM (annual general meeting)
3. EOGM (Extra Ordinary General Meeting)
I. Strategy Meeting
Before 30th Jun 2017 it was mandatory once in a life otherwise company will have
to pay fine.
From 1ST JULY 2017 ACT if any company conducts AGM within 9 month of
incorporation or 6 Month of its Production then it will be considered as Strategic
meeting.
If any company converted from private to public within less than one year then
they must have to conduct this meeting.
Only Strategic reports will be discussed and approved in meeting.
Strategic reports will be signed by CE and one director if company is unlisted and
sing by CFO if company is listed.
Strategic report’s copy should be send to members 21 days before the meeting.
If any Meeting adjourn due to any reason, then meeting will be held on same day,
same time, and same place next week.
If chairman of meeting is change due to any reason, then new chairman will sign
the report.
Things which will be discussed in this meeting are
Number of shares
Number of members
Number of shares sold
Number of shares in hand
Expenditures of the company
If a director nominates any proxy person for AGM, then he has all the rights as the
original director have except speech right.
All meeting other than the Strategic meeting and AGM, are called EOGM.
They are called by directors himself.
If anyone having voting power more than 10 % will have the power to call this
meeting.
If meeting is called by any member, then Directors have to call\arrange the meeting
within 21 days.
If director will not call the meeting within 21 days, then member will call the meeting
within 90 days.
If Director Will not call the meeting, then all amount expended on meeting will be
deduct from the salary of Directors.
This meeting cannot be adjourning like Strategy meeting and AGM.
ii. First Chief Executive can be appointed for the period maximum of the first AGM.
He may earlier resign or be removed from his office.
iii. Subsequent Chief Executive shall be appoi nted within 14 days of themselves;
a. Directors election
b. Office of the Chief Executive falling vacant as the case may be.
iv. Subsequent Chief Executive shall be appointed for the maximum period of
three years however; he may be earlier removed from office or he may
otherwise seize to hold office.
v. Retiring Chief Execut ive shall continue to perform his services until
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his successor is appoi nted.
2. Persistence or continuous default in relation to provision of their Act requiring any return
amount or other documentation to be field with, deliver, send or notice of any matter to
be given to registrar or SECP.
3. A person has been director of company which become insolvent at any time while he was
a director. (not applicable after 2 year)
4. Business of the company on which he is or has been a director has conducted to defraud
its members or any other connecting person or in an appraises manner to its members.
8. He has been interred into a plea bargaining arrangement with any of regulatory authority.
9. They have conducted their business in a manner that effects the sovereignty of Pakistan.
Or friendly relationship with other state.
10. The person is convicted of insider trading or market manipulation practices.
Auditors (Internal):
III. If auditor leave the company or company fired him due to any reason.
IV. If company appoint any auditor and he is not interested in doing work, then
commission will appoint the auditor directly.
Responsibilities of
BOD:
BOD shall perform their duties with a sense of objective judgment and independence
in the best interest of a com pany, they shall ensure that: 1
POWER OF BOD:
The decisions which BOD can take without approval of members (SPETIAL RESOLUTION).
1. Issue Share.
2. Issue debentures or any other instrument in nature of redeemable capital (give
money to take back your instrument).
3. Barrow money otherwise then on debenture.
4. Invest the funds of company.
5. Approved financial statement.
6. Approved bonus to Employ.
7. Declared interim dividend.
8. Take over a company or acquire the controlling or substantial takeover of any
other company.
9. Right of bed dept. advances and receivable.
10. Right of inventory and other asset to the company.
1. Sell, lease or dispose of undertaking (20% of your earning) and sizeable parts
(25% of its total assets).
2. Sell or dispose of any subsidiary of company.
3. Remit (accepting less amount) or give extension of time for repayment of any
depth against any person. (Under section 182).
4. If anything approved its validity is of one year, if time goes more than one year
then it collapses then again need to take approval from members.
Social Responsibility/Levels of CSR:
The concept of social responsibility has been described in different ways e.g.
it has been called “profit making only", going beyond profit making, and any
discretionary corporate activi ty intending to further social welfare and
improving social or environmental conditions. This concept can be enhanced
by following level/ approach CSR, it incl udes;
1. Social Obligation
2. Social Responsibility
3. Social Responsiveness
1. Social Obligation:
Social obligation is a fim1s engaging in social action because of its
obligation to meet certain economics and legal responsibilities. The
organization does work it’s oblige to do and nothing more.
This idea reflects the classical view of social responsibilities, which says
that management's only responsibility is to maximize profit. (Providing
product, meeting legal standards and providing jobs).
2. Social Responsibilities:
3. Social Responsiveness:
Socially responsible companies tend to have more secure long run profit
than the companies which do not do this.
3. Ethical Obligations:
These businesses are socially responsible because responsible actions are the right
things to do.
4. Public Image:
Business can create a favorable public image by pursuing social goals on company do
a social activity has a better image in the society.
5. Better Environment:
Business involve in social activities help to solve difficult social problems (pollution.
water problem pollution etc.)
b) Dilution of Purpose:
Pursuing s o c i a l g o a l s d i l u t e s b u s i n e s s e s ’ primary p u r p o s e / o
bjectives
“ economical productivity" .
c) Cost:
Many social responsible actions do not cover their cost and someone m ust have
to pay these costs.
Business have a lot power already and it they pursue social goals
they may have social power ( dominance)
e) Lack of Accountability:
C. Prohibited agreement: -
No company or owner or undertaking will enter into agreement that are considered
prohibited.
a) It includes fixing the purchase or selling price or imposing any other
restricted trading condition with regard to the sale or distribution of any good
or the provision of servicers.
1. Utilitarian View
2. Rights View
3. Theory of Justice View and
4. Integrated Social Contract Theories
1. Utilitarian V i e w :
The utilitarian View says that ethical/social decisions are made solely on the
basis of their outcome or conseq uences. Utilitarian theory uses a quantitative
method for making ethical decisions by looking at how to provide to greatest
goods for the retest numbers. Utilitarian theory encourages efficiency and
productivity.
2. Rights View:
The rights views which is concern with the respecting and protecting
individual liberties and privilege such as the right to privacy, freedom
of conscious speech, life and safety religious practices etc.
This would incl ude protecting the free speech of employees who
reports legal violations by · their employees such as legal
strikes,whistle blowing.
3. Justice View:
U nder this theory/approach manager / owners are to impose and enforce
rules clearly and partially and do so by following legal rules and
regulations. A manager/ company would be using theory of justice by
deciding to provide the same· rate of pay to individual who a re similar to
the level of KSA as well as on performance not basing that decision are
betray differences such as gender, personality raise and personal favorites.
Justice View Not Applicable On: -
1. The general social contract that ·allows business to operate and define
the acceptable ground rules.
It purposes Includes:
1. To allow "objective grievance handling" , incl uding "pulling of ', per
iod and independent case investigation.
2. To protect employees from victimization, particularly where a
grievance involves their immediate supervisor.
3. To provide legal protection for both parties in the event of dispute
resulting in claims before an employment tribunal.
4. To encourage grievance airing which is an important s o u r c e
of feed b a c k to the management on employee’s problem
and d issatisfaction.
5. To require full and fair investigation of grievances, enabling the
employer - employee relation to be respected and preserved.
1) The individual should state the grievance in writing (three moths your
grievances can be arise).
2) The first interview will be held between the immediate supervisor/manager
, unless he is a subject of com plaint , in which case it will be next level up.
3) If the immediate manager cannot resolve the matter, all the employees
is otherwise dissatisfying with the first interview the case should be
refe rred upward to his superior (higher a u t h o r i t y /committee).
4) Allow his for the involvement of an individual or groups/trade union or staff
association representati ve .
5) State time limits for initiating certain grievances procedures and subsequent
stages of it (such as communication of decision and appeal).
6) Written record of all meetings I decisions concerned with the case to be made and
distributed to all participants .
6. The system of internal control is sound in design and has been effectively
implemented and monitored.
Chuim1an of the board of director shall preside the general meeting and in the
absence of the chairman a director shall preside the meeting. lf none of the
directors are present (within 15 minutes’ time of the meeting) or if directors
present are unwilling to chair the meeting, members shall choose any of t
he member as chairman.
Investigation:
Following persons ran apply to commission for investigation into the affairs of the
company:
A) Members having l0% or more share capital if company has a share capital
B) 1/10th of number of members if company has not share capital. (Provided that
member shall have to show sufficient evidence regarding the necessity of
investigation.
C) Commission may order investigation on the basis of report of registrar against
the company on the basis of his enquiry or inspection of books and records.
D) Company in a general meeting may resolve and makes an application to the
commission for an investigation.
E) The court may order an investigation on petition of any interested person or
shareholder.
1. Share or mudarba certificates has been issued and remain unpaid for 3 years
from the date it is payable.
2. Dividend /bonus shares have been declared by the company and remain
unclaimed for 3 years from the date it is due.
3. Any other instrument or amount which remain unclaimed or unpaid have
such nature for the same period (3 years).
4. Company shell give 90 days’ notice to share holder /certificates holder to
file a claim.
5. .After expiry of 90 days’ final notice shell be published in 2 daily newspapers
(one Urdu and one English) have been wide circulation.
6. If no claim is made, company shell after 90 days from the day of its publication
of second notice.
1. Deposit and unclaimed /unpaid amount to the credit FG (federal
government).
2. In case of shares or certificate or other instrument the company
deliver these to SECP and SECP shall after the selling of the share
and deposit the amount into the unclaimed account of FG.
7. Any claimant may apply to SECP and SECP after necessary verification
forward the claim to SBP or NBP for making payment (that should be paid
within 30 days).
8. While making payment expenses incurred for sell of those share shell be
deducted and if relevant shares /certificates has not been sold on the date of
claim. the person shell be intitule to receive those share/certificate or other
instruments.
9. No claim will be made after 10 years.
Appointment of administrator/management by
administrator
The creditor having interact of amount not less than 60% of paid of capital may
represent to SECP that.
1. company, s member’s directors or person connected with management of
guilty of preach of trade misfeasance (illegal activity) or miss conduct.
2. Affair are conduct in unlawful, fravalent oppressive and pre judiciary manners.
4. Industrial unit owned by company is not proper operation for 2 years and
equimilated losses exceed 60% of paid of capital.
Stake holders their types and interest and how to manage their
interest with reference to Medlow metrics.
Stake holder are person or groups that have a legitimate interest in the business conduct
and who’s concretes should be addressed as a matter of principle. May stake holder
groups have influence over the way in which organization are managed and operated.
they can be fundamental to corporate governance. They are categorizing into three types.
Low power
Minimal
Low Keep Informed
efforts
Layering: Is the act of concealing the source of that money by way of series of
complex transaction and book keeping gymnastic.
Integration: Integration refer to the act of accruing that money purporting legitimates
means.
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