“A STUDY ON THE CORPORATE GOVERNANCE FRAMEWORK IN PAKISTAN”

Abstract

“A recent World Bank study on South Asia “Access to Finance” ranked Pakistan corporate governance standards highest among South Asia. This is further supplemented by the 2005 ROSC assessment of corporate governance standards which have given higher points, relative to the world average, to Pakistan on majority of its principles. Among other efforts, this is an outcome of effectiveness of an elaborate Corporate Governance Framework laying down specific corporate governance guidelines for the corporate sector”1. This eloquent statement made by the head of the Country’s Central Bank at an international forum is a sure acknowledgment of the efforts done so far towards the development of corporate governance framework in Pakistan. Given the recent corporate failures -- such as Enron and WorldCom in the United States, Harris Scarfe, One-Tel, HIH and Ansett in Australia, Parmalat in Italy and Ahold in the Netherlands -- as well as the Asian crisis, there has been a conscious effort to strengthen corporate governance practices not only in the developed world, but also in the developing world. In a similar vein, actors on the Pakistani capital market have also started to understand the significance of well-functioning corporate governance mechanisms. Recent corporate scams such as those involving financial cooperatives and forex companies have alarmed the corporate community and public policymakers alike to take corporate governance seriously. The public and private sectors are now aware that the availability of outside funding can no longer be guaranteed unless certain corporate governance standards are adopted and enforced. The increasing globalization further underscores the importance of corporate governance reforms. Weak investor protection in Pakistan has negatively affected overseas financing and domestic savings. Further, research studies done all over the world have shown that foreign direct investment (FDI) into a country’s corporate sector is bolstered in 1 Excerpt from Dr. Shamshad Akhtar, Governor State Bank of Pakistan’s key note address at Institute of International Bankers Annual Washington Conference, Washington DC, USA on 5 March 2007 (Business Recorder, March 19 2007) the presence of a sound and effective corporate governance framework, leading to national economic growth2. This thesis study brings forth the conclusion that with the adoption of the Corporate Governance Code, there has been improvement in the overall corporate structure and business environment by making the companies more responsible, and by ensuring transparency and accountability in the corporate and financial reporting framework. Several research studies have also shown that most of the listed companies have started implementing the provisions of the Corporate Governance Code. The inclusion of nonexecutive directors on the board is a big step forward as it will discourage the tendency of protecting personnel interests and motives at the expense of the minority shareholders. Moreover, the addition of the non-executive members has improved decision-making process, which was not only slow previously, but also opaque due to the lack of interest of the board of directors to meet as and when required. The publication of the quarterly results and better disclosure of material information has also resulted in best price discovery of shares, which is a vital requirement for the investors operating in the modern corporate environment. However, all of these positive developments must be viewed with caution, as another major observation out of this thesis study is that the introduction of the Code and all other corporate governance initiatives though has made the corporate managements quite conscious of their corporate and fiduciary responsibilities, but they have been accepted only in form and not in substance. It has been observed that some of the companies are still violating the laws for disclosing the material information and are manipulating the announcements of the results for the benefits of the insiders. Similarly family oriented businesses/groups still view corporate governance requirements as obstacles and are trying to resist them though subtly. Here there can be no denying of the fact that regulation matters for good corporate governance. The impediments identified and discussed in this thesis study, call upon the regulators to improve the enforcement mechanisms across the board in an efficient and effective manner. A lot depends upon the regulators as at this critical 2nd stage, the capacity of corporate entities to fully comply with the corporate governance is somewhat limited. The policy makers should look into their problems and 2 UNDP (United National Development Program) (2003), “Impact Assessment of the Corporate Governance Code 2002, United Nations Development Program, Islamabad. provide them with the means to enhance their capacity and understanding about best practices on corporate governance. The experience of several developed and developing countries clearly reflect that the required action at this stage in development of corporate governance framework should be the establishment of transparent and accountable systems of public policy and governance and enhanced capacity of regulators for Regulatory Impact Assessment of CG standards in the country3. It is the task of the men at the helm to introduce relevant changes in our regulatory structures to make them more compatible with international norms and standards. There has already been a sea change in the regulatory apparatus of the country. However we need more such positive actions in letter and spirit, to further strengthen & ensure the effectiveness of corporate governance framework in Pakistan for a long time to come.