Lahore University of Management Sciences MGMT 362 Capital Markets & Corporate Governance

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1 MGMT 362 Capital Markets & Corporate Governance Fall 2013 Instructor Khalid Aziz Mirza Room No. SDSB Building Room 2-11 Office Hours TBA Telephone Secretary/TA Saleem Ahmad Khan, Administrative Assistant TA Office Hours TBA Course URL (if any) N/A Course Basics Credit Hours 3 Lecture(s) Nbr of Lec(s) Per Week Twice weekly Duration 75 minutes Recitation/Lab (per week) Nbr of Lec(s) Per Week --- Duration --- Tutorial (per week) Nbr of Lec(s) Per Week --- Duration --- Course Distribution Core Elective Open for Student Category Close for Student Category Yes Seniors and Juniors Freshman and Sophomore COURSE DESCRIPTION The course covers the theoretical underpinnings of corporate governance viewed in the historical and contemporary context. It is recognized that perhaps the most significant stakeholder in corporate governance is the shareholder --- in particular, the minority shareholder --- and that adherence to corporate governance norms has a profound impact on engendering investor confidence (thus creating an environment that is attractive for capital). The course thus begins by delving in some detail in the manner in which equity markets function. The course then moves on to deal with the principal aspects/foundations of corporate governance on which it is based; and then, importantly, the diverse as well as widely acknowledged views regarding corporate governance. Ranging from classical theories to current controversies, the course seeks to enlighten the student with an erudite perspective of corporate governance and contemporary analysis with respect to this subject. It is hoped that students taking this course will develop insights into the conceptual basics of this fast emerging field, the practical manifestation of which differs substantially even between jurisdictions with closely aligned legal systems, circumstances, and corporate legacies. The spate of corporate governance scandals --- notably Enron --- that engulfed some of the most spectacularly successful corporate groups in the early part of the last decade and that continue to recur across the globe with unacceptable frequency have heightened interest in corporate governance. At the same time, it is felt that the widely differing response these developments have evoked at both regulatory and corporate levels point to the need for a clearer understanding of the fundamentals and principles that constitute the essence of sound corporate governance. In order not to be oblivious of the local context, the course also addresses Pakistan s approach to corporate governance largely embodied in the two Codes of Corporate Governance issued by the capital markets regulator ( i.e. SECP) in 2002 and 2012 COURSE PREREQUISITE(S) Principles of Finance: micro and macro economics.

2 COURSE OBJECTIVES Lahore University of Management Sciences To provide a perspective on : (a) how equity markets operate; and (b) the essence of corporate governance and the theories/controversies regarding this subject (as indicated in the Course Description above) LEARNING OUTCOMES Students should be able to demonstrate a clear understanding of: (a) the functioning of equity markets: and (b) the principles/conceptual foundations of corporate governance Grading Breakup and Policy (i) As an assignment, students will be required to write an essay ( words) on a topic provided to them which is to be submitted by the 21 st lecture. (ii) Not less than three surprise quizzes may be given in class on the assigned last reading; and the best two results will count towards the final grade. No make up quizzes shall be allowed. (iii) Students are expected to participate sensibly in class discussions --- only intelligent and contributory participations will be rewarded. (iv) Primarily lecture method based on assigned topics. Lecture notes/takeaways to be distributed, as necessary. Specialist guest speakers to be arranged as well (as indicated in the Course Overview ) Final grade break-down: Source % of Total Class Participation 10 Assignment 10 Quiz (s) 10 Mid-Term Exam 30 Final Examination 40 Total 100 Examination Detail Midterm Exam Yes: Duration: 60 minutes Preferred Date: 16 th lecture Exam Specifications: TBD Final Exam Yes: Duration: 120 minutes Exam Specifications: TBD COURSE OVERVIEW/SCHEDULE Lecture/ Topics Module Module 1: The Capital (Equity) Market Lecture 1 Introduction to: (a) the course; and (b) the equity market. Recommended Readings Fabozzi - Capital Markets (Chapter 1) Objectives/ Application Set the stage for the course. Give a perspective of financial markets and financial assets, including inter alia the differences between debt and equity claims. Create an awareness regarding the economic goal of the equity market and its linkage with corporate governance.

3 Lecture 2 The Players in th e Equity Market Lahore University of Management Sciences (Chapters2,4 and 5) To provide an overview of market participants, financial innovation, and the operations of non-bank financial institutions, particularly investment banks. Lecture 3 The Organization and Structure of Markets (Chapters 6 and 7) To understand the essentials of how corporate securities, in particular equity instruments, are issued, traded, and regulated. Lecture 4 The Common Stock Market ( the market for Ordinary Shares ) Fabozzi -- Capital Markets (Chapter 13) To achieve clarity regarding the functional aspects of equity markets, pricing efficiencies, and vulnerabilities. Lecture 5 The Market for Stock Derivatives (Chapters 14 and 15) To understand the basics of stock derivatives (Options, Index Futures/Options, Warrants, equity swaps) including trading modalities and pricing. Lecture 6 Accessing Global Equity Markets by growth-oriented enterprises. Global Equity Markets for Emerging Growth Firms: Partners, Drivers, Implications for the Globalizing Entrepreneur by R. Amit and C. Zott To become conscious of the growing trend in entrepreneurial finance to raise funds in external equity markets. Lecture 7 Guest Speaker --- The Equity Market in Pakistan -- Pakistan Economic Survey, ( Chapter 6) -- Speech delivered by K. Mirza in the Toronto Centre (Securities Market Leadership Program ) on July 14, To become perceptive regarding the state of the equity market in Pakistan and the related regulatory imperative. Module 2: Overview of Corporate Governance, Foundations, and the Agency Theory Lecture 8 An Overview of Corporate Governance and its conceptual contours. (Introductory Chapter: pp 1-30.) To broadly understand the essence of corporate governance and the contemporary theories that underpin it. Lecture 9 The Economic Foundations of Corporate Governance. (Part 1: pp 33-53). To drive home the ascendency of management, the significance of the corporation, and managerial capitalism. Lecture 10 Agency Theory (1): The theoretical basics of the firm and the separation of ownership and control. (Part 2: pp 58-77). To draw attention to the manifest tensions inherent in the firm, mainly between the shareholders (residual risk takers) and managers (self-interested utility maximizers). Lecture 11 Agency Theory (2): An assessment and review. (Part 2: 78-92) To appraise the Agency Theory and assess the extent to which this theory provides too simplistic a view of firm dynamics) Module 3: Managerial Hegemony, Stewardship Theory, and External Pressures Lecture 12 Managerial Hegemony: the role of Directors vis-i-vis CEO/management. (Part 3: pp ) To provide an assessment regarding the reality of the power of a corporate board and recent developments in this respect. Lecture 13 The Stewardship Theory of Management. (Part 4: pp ). To understand the basis for the opposite view i.e. instead of the much-touted conflict of interest, managers actually have a stewardship role aligned with the interest of the owners.

4 Lecture 14 External Pressures (1): exogenous influences on governance. Lecture 15 External Pressures (2): network governance. (Part 5: pp ). (Part 5: pp ) To appreciate that governance structures and processes (including Board composition, role, and the making of strategic choices) cannot be isolated from, and are affected by, the external environment. To get familiar with the pros and cons of governance processes resting on informal social systems rather than structured, contractual arrangements. Lecture 16 MID-TERM EXAMINATION Module 4: Stakeholder Theory and Convergence Lecture 17 Stakeholder Theory (1): Ownership and Control. Clark -- Corporate Governance (Part 6: pp ) To clarify how a corporate organization can be duly perceived as comprising institutional arrangements governing relationships between all parties that contribute to firm-specific assets, tangible and intangible. Lecture 18 Stakeholder Theory (2): The philosophy of adapting an inclusive approach in a Stakeholder Corporation. Clarke --- Corporate Governance (Part 6 : pp ). To examine the imperative to satisfy more complex constituencies than the Agency Theory or a shareholder value based approach might suggest. Lecture 19 Theories of Convergence (1): Corporate leadership in a Globalizing Equity Market. Lecture 20 Theories of Convergence (2): Corporate Governance and Globalization. Lecture 21 Theories of Convergence (3): Convergence uncertainties --- the European experience and global prospects. Module 5: Shareholder Value and Post-Enron Shareholder Value (1): Lecture 22 Maximizing the value of the ownership stake. (Part 7 : pp ) Part 7 : pp (Part 7: pp ). (Part 8: pp ). To provide the back drop for the thesis that global integration of capital markets will induce convergence of corporate systems and structures. To consider the reality of convergence in corporate governance across borders (which cannot be isolated from the rest of the institutional underpinnings in the local economy). To appreciate why Europe is likely to have continued diversity in corporate governance; and also, why the dominance of family ownership/other forms of embedded capitalism would mean convergence advocacy being viewed as culturally and politically insensitive. To understand the implications when enhancing shareholder value is the primary aim of governance. Lecture 23 Shareholder Value (2): A conceptual critique of shareholder ideology. (Part 8: pp ). To appreciate that merely adopting the shareholder value approach to corporate governance may be too constricting since this approach does not recognize other relations and inter-dependencies on which the company relies for its success. Lecture 24 Post-Enron Analysis (1): Some initial reflections. (Part 9: pp ). To recognize how some of the basic pillars of corporate governance were shaken (and their validity questioned) as a consequence of the Enron collapse.

5 Lecture 25 Post-Enron Analysis (2): What caused the Enron collapse? (Part 9: pp ). To recognize not only the immediate causes for the Enron debacle but also that it was the natural consequence of trends and forces developing for some time and were by-products of the then prevailing governance structures. Module 6: Corporate Governance in Pakistan Lecture 26 Guest speaker --- Corporate Governance in the developing world. Enhancing Corporate Governance. Speech by K. Mirza at a meeting organized by the Pak- Brunie Investment Company in Karachi (2011). To become perceptive regarding the state of corporate governance in the developing world, including Pakistan. Lecture 27 Instituting Corporate Governance in Pakistan (1). (i) The Code of Corporate Governance (SECP Publication, 2012). (ii) The Code of Corporate Governance, the previous code (SECP Publication). To understand the fundamentals of corporate governance in Pakistan. Lecture 28 Instituting Corporate Governance in Pakistan (2). Harmonizing the Code of Corporate Governance with other laws/regulations (SECP Publication -- UNDP Project, April, 2003). Pp 1-34 and are important. To appreciate the Code of Corporate Governance in Pakistan in the context of other corporate laws and regulations subsisting in Pakistan and governance practices in relevant developed jurisdictions. Textbook(s)/Supplementary Readings Required Texts: (i) Frank Fabozzi & Franco Modigliani --- Capital Markets: Institutions and Instruments, 4 th Edition, Prentice Hall PTR ( essentially Chapters 1, 2, 4 to 7, and 13 to 15) (ii) Thomas Clarke (Editor) --- Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance, Routledge, (iii) Amir,R. and Zott,C. --- Global Equity Markets for Emerging Growth Firms: Pattern, Drivers, Implications for the Globalizing Entrepreneur, Working Paper Series (INSEAD-Wharton Alliance Centre fpr Global Research 2003/85/ENT/ACGRD 1), Fountain-bleau: INSEAD. (iv) The two Codes of Corporate Governance issued by SECP in 2002 and 2012 and the SECP publication in 2003 Harmonizing the Code of Corporate Governance with other laws/regulations. Supplementary Readings: (i) As indicated under Course Overview above. (ii) Students may find it helpful to keep in touch with the financial press, namely, the daily Business Recorder, the daily DAWN (the weekly Economic and Business Review ), the Financial Times, and the Wall Street Journal. (iii) Other reading material may be provided as the course proceeds.