Unformatted text preview: Corporate Governance
01 June 09 Introduction Awais Alam Khan
Access: [email protected] Office: Faculty Room No: B07, Basement, Academic Block
Web access: https://sites.google.com/site/imspeshawargrou 2 Consider the following
Consider NICL Scam
Satyam Computers 3 Corporate Governance What is a corporation?
Different definitions from different perspectives.
“The business corporation is an instrument through which capital is assembled for the activities of producing and distributing goods and services and making investments” (Eisenberg 2004)
• Emphasis on corporation’s profit and gain for the shareholders. 4 What is a Corporation? “A corporation is an artificial being, invisible, intangible, and existing only in the contemplation of law. Being the mere creature of the law, it posses only those properties which the charter of its creation confers on it, either expressly or as incidental to its very existence”. (John Marshall)
“A body of persons granted a charter legally recognising them as a separate entity having its own rights, privileges, and liabilities distinct from those of its members”. American Heritage Dictionary 5 What is a Corporation? In summary, corporation is a mechanism established to allow different parties to contribute capital, expertise, and labour, for the maximum benefit of all of them. • Investors invest without responsibility
• Management manages without personal funding Similarly this entity must have to be relate with a wide variety of constituents e.g., directors, employees, managers, shareholders, customers, creditors, suppliers, community and government.
6 What is a Corporation? Each of these relationships affects the direction and focus of the corporation And the study of corporate governance (CG) is the study of the connection of those relationships to the corporation and to one another. 7 Evolution of the Corporate
Structure In their earliest AngloSaxon form, municipal and educational corporations were granted control over their functions.
Seventeenth century, corporations were created by the state for specific purposes like the settlement of India and American Colonies e.g., East India Company
Is considered as success of Europe during that era.
Coming to the present state of the corporations
As there was need for more capital, technology was advancing, therefore modern corporations evolved. 8 Four Characteristics of
Corporations The four characteristics essential to the vitality and appeal of the corporate forms are (Robert Clark):
• Limited liability for investors
• Free transferability of investor interests
• Legal personality (entityattributable powers, life span, and purpose)
• Centralized management
9 The Purpose of a Corporation Different purposes for the entity of a corporation such as:
• Human satisfaction (fulfilment, success, security for creative expression and for competitive spirit)
• Social structure (offers lasting and resilient social structures)
• Efficiency and efficacy (ideas transformed into products and services)
• Ubiquity and flexibility (more permanent and more versatile).
• Identity (have identities, personalities, powers, rights) 10
10 The Corporation as a Moral Person It is expected of the corporation, that it will follow the laws of a country in which it is operating.
Will use sense of judgement and morality in decision making.
E.g. Body Shop, Patagonia
Union Carbide Bhopal Incident 11
11 The Corporation in Society What a society wants from a corporation?
Jobs, creativity, rewards, environment, etc etc.
Two common sets of laws govern the relationships b/w society and corporations • Government laws
• Private law (agreements) b/w corporation and its constituents such as employees, suppliers, investors and community
• Both needs to be balanced to keep the interests of maximum stakeholders intact. 12
12 Corporate Power and Performance “Power corrupts and absolute power corrupts absolutely” How a government’s power is rationalised? The same applies here in the corporations in form of corporate governance e.g. (Accountability, BOD,)
Corporate penalties in case it violates the law e.g. SECP penalized different companies or Competition Commission penalized different Banks for monopoly in the market. 13
13 Measuring Performance &
Corporate First and foremost Generally Accepted Accounting Principles (GAAP)
Market Value and Rankings such as Fortune 100, or 500
Earnings Per Share (EPS)
Economic Value Added (EVA)
Are these sufficient to evaluate performance and corporate value?
14 Measuring Performance &
Corporate Human Capital?
Or combined known as Intellectual Capital (IC)
Prof. Brauch Lev (NYU)
Reference Monks, R. A. G. and Minow, N. (2004). Corporate Governance. Oxford: Blackwell Publishing Limited (pp 01 to 70) 16
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- Spring '12