ROLE OF CREDITORS AND INSTITUTIONAL

SHAREHOLDERS ON CORPORATE
GOVERNANCE

Presented by: Rukmani Khadka

Roll no: B523
 WHO ARE CREDITORS
 A creditor is a bank, supplier or person that has
provided money, goods, or services to a company
and expects to be paid at a later date.
 The company owes money to its creditors and the
amounts should be reported on the
company's balance sheet as either a current
liability or a non-current (or long-term)
liability.
 It  has a claim on the services of a second party.
 Creditors are part of external stakeholders in corporate who
plays a pivotal role by making finance available that is used
for growth and expansion of the company.
 The stakeholders though external to an organization cannot be
ignored as insignificant due to the various roles they play as well
as their impact on the activities of the organization.
 In agreement with this assertion, John and Sebet (1998) opined
corporate governance as dealing with the mechanisms by which
stakeholders of a corporation exercise control over corporate
insiders and management to ensure that their interests are
protected.
 Creditors have an extremely important role to play in fostering
efficiency in medium and large private or state-owned firms and
in return for their survival on debt repayment by their borrowers.
 ROLE OF CREDITORS
 The facts regarding firm financing, bank
incentives, and the mechanisms for debt collection
may differ from one country or continent to
another.
 There are three crucial underpinnings to creditor
monitoring and control in market economies:
adequate information, market oriented creditor
incentives, and an appropriate legal framework for
debt collection.
 First, strong, market-oriented creditors are good for an economy.
They can afford to provide financing to a wide range of clients at
reasonable rates and play an important role in corporate governance,
particularly in the restructuring of firms in financial distress.
 Second, creditors must have strong legal rights under contract,
collateral, workout, and bankruptcy laws if they are to play this
governance role. Giving them those rights may require extensive
legal reform in some developing and transition economies
 Third, creditors must also have information on their borrowers if
they are to play this role. Credit information or credit-rating
services can be extremely valuable in facilitating firms’ access to
financing, and governments should encourage their formation
and growth.
 Like equity holders, creditors can monitor firms either actively or
passively. The active mode involves hands-on evaluation of a firm’s
operations, investment decisions, and capacity and willingness to
repay. The passive mode depends on collateral for security.
 To the extent analysis is carried out before a lending decision is
made, the value of the firm’s collateral is what is analyzed rather
than the operations of the firm.
 Effective debt monitoring and collection play a crucial role in
corporate governance in market economies and require adequate
information, creditor incentives, and an appropriate legal
framework.
WHO ARE INSTITUTIONAL SHAREHOLDERS
 An institutional shareholder is an entity which
pools money to purchase securities, real
property, and other investment assets or
originate loans. 
 It include banks, credit unions, insurance
companies, pensions, hedge funds, REITs,
investment advisors, endowments and mutual
funds.
ROLE OF INSTITUTIONAL SHAREHOLDERS
 In the United Kingdom the level of share ownership by individuals has
decreased over the last thirty years, whilst ownership by institutional
investors has increased.
 There are two representative bodies which act as a professional group
‘voice’ for the views of large institutional investors; these are the
Association of British Insurers (ABI) and the National Association of
Pension Funds (NAPF). Both the ABI and the NAPF have best practice
corporate governance guidelines which encompass the recommendations of
the Combined Code and also they monitor the corporate governance
activities of companies and will provide advice to members.
 The OECD Principles of Corporate Governance were first launched in
1999 and have since become an international benchmark for policy makers,
investors, corporations and other stakeholders worldwide.
 These principles have been developed attending the importance of
corporate governance is one key element in improving economic
efficiency and growth as well as enhancing investor confidence.
 Although these principles does not emphasized the importance of
institutional shareholders, aiming the principles for both individual
and institutional shareholders, the importance of the use of their
voting rights is remarked as an important principle of good
corporate governance.
 The Cadbury committee observed that the institutional
shareholders now own the majority of share of quoted companies.
 In 1995 the International Corporate Governance Network (ICGN) was
founded with the mission of developing and encouraging good
corporate governance worldwide, ICGN members include institutional
investors, business leaders, policy makers and professional advisors.
 The importance of the ICGN is that has been founded at the
instigation of major institutional investors, in doing so, the ICGN
represent clearly the thinking of institutional investors worldwide and,
among its objective are the development and the promotion of
corporate governance standards and guidelines, the promotion of
good corporate governance and the exchange of information and
education in all matters regarding corporate governance, as stated in
its articles of association.
 The Cadbury Committee drew attention to the three key
conclusions which are basic to the development of a
constructive relationship between companies and their owners:
1. Institutional investors should encourage regular, systematic
contact at senior executive level to exchange views and
information on strategy, performance, Board membership and
quality of management.
2. Institutional investors should make positive use of their
voting rights, unless they have good reason for doing
otherwise. They should register their votes, wherever possible
on a regular basis.
3. Institutional investors should take a positive
interest in the composition of Boards of directors,
with particular reference to concentration of
decision making power not formally constrained by
appropriate checks and balances, and to the
appointment of a core of non-executive directors of
the necessary caliber, experience and independence.
 Section 87(2) of Company Act, 2063 states that
Notwithstanding anything contained in Sub-section (1),
in the case of a company any shares in which a corporate
body has subscribed, the corporate body may appoint a
director in proportion of the total number of directors of
the company and the number of shares subscribed by
such body and also an alternate director to attend and
vote in a meeting of the board of instead of every such
director in cases where such director will not be in a
position to attend the meeting of the board for any reason.
Thank you!!!!