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Corporate Governance

Corporate Governance

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Corporate Governancein Pakistan
 Adopt or Adapt?
University of Cambridge Research
ByMahwesh Mumtaz
DECLARATION OF ORIGINALITY
“This dissertation is substantially my own work and conforms to the Judge Institute guidelines on plagiarism. Where reference has been made toother research this is acknowledged in the text and bibliography” 
Abstract
This study discusses the implications for Pakistan, as it adopts the Anglo-Saxon model of corporate governance. It explores the causes of impediments that policymakers face asthey try to implement the Code of Corporate Governance. The empirical question that thestudy poses is whether a Corporate Governance model that works for the US and the UK,also work for a country like Pakistan? We present data and review the literature to showthat Pakistan is a country much further down on the development ladder, with ownershipstructures markedly different from the diluted ownership structures of developedcountries; with its stock exchanges displaying shallowness; and its cultural underpinningsheavily influencing how the corporate sector operates. We conclude that the ultimateobjective of the Code of Corporate Governance should be to incorporate goodgovernance into the Pakistani corporate environment, in order to enhance productivityand efficiency, rather than trying to emulate the dynamics of those countries which pioneered the Anglo-Saxon model. We argue that the Code for Corporate Governanceadopted by Pakistan will need to be
adapted 
keeping the local business environment andmarket conditions in mind. The study proposes a broader paradigm that views thegovernance problem as more than mere conflict of interest between owners and managersor minority and majority shareholders, in order to be able to devise better policies that aretailored to the unique corporate context of Pakistan.
Corporate Governance in Pakistan -
 Adopt or Adapt?
1
1 Introduction
Corporations, their conduct, and impact on the social, political and economic sphereof their existence have been much in debate since the last century. In the recent timesthis debate has only intensified; especially in the wake of Asian crises, and a series of corporate scandals like Enron and WorldCom, much has been said and written about
 
good governance of corporations. In the last decade corporate governance has been adominant policy issue in developed and developing world alike. The issues that ensuetoday relate to how these corporations ought to be governed, who should govern themand how best to strike a balance between laissez faire and monitoring.There are countries that have pioneered in developing various legal frameworks, andare actively involved formulating an assortment of codes and statues that governthem. These countries are called the
origins
of such codes and laws. Then there arecountries and territories that receive the laws and codes, which originated in someother country, and adopt them. These are referred to as
transplants
in the literature. Itis imperative to consider that the origins have developed these laws and codes in their unique social, political, economic and cultural context. A number of studies (Pistor etal. 2001, 2003; La Porta et. al. 1999, 2000; Branson 2000; Roe 2003; Lincht etal.2004) suggest that a simple adoption cannot be beneficial to the transplantingcountry until and unless it is well understood and is meaningful to the users in thecountry of transplant. This is because unless the regulations are relevant to the peopleand their implementation holds benefits for the masses, there will be no motivation for the recipients of the legal system to accept it and implement it. Secondly, due to theuniqueness of each country, any law irrespective of which family it has been takenfrom would need to be adapted to the transplant country. This requires institutions andlegal intermediaries, which understand the law and can make changes, therebymaking the law more pertinent to their own country, as suggested by Pistor et al.(Pistor, 2001).To be able to make meaningful policy recommendations, the meaning of corporategovernance needs to be understood and defined in a country with regard to its prevailing institutions. The source of differences in countries may be entrenched inthe uniqueness of social culture, political aspects, history, structure of ownership of 
Corporate Governance in Pakistan -
 Adopt or Adapt?
2companies, level of socio-economic development, institutional and regulatorycapacity, and legality to name a few. It needs to be appreciated that the corporategovernance problems in a developing or transition economy country are likely to bedifferent than those of a developed market economy. This is why the solutions thathelp solve the governance problems in the developed economies may not do the samein developing countries. Developing countries need to study the unique issues theyhave at hand, and then implant the relevant solutions from other countries, rather thanexpecting economic turnarounds by adopting solutions of corporate governance lock,stock and barrel.
1.2 Purpose and Significance of the Study
As the global debate on corporate governance heats, the importance of this topic toany country—particularly any developing country—cannot be ignored. Being one of the important countries of South Asia, with immense trading potential and ideal geopoliticallocation, Pakistan has proactively pursued various policy reforms tostimulate its economic activity, in recent years. The Securities and ExchangeCommission of Pakistan (SECP) issued the Code of Corporate Governance (referredto hereinafter as the Code), in order to establish a framework for good governance of companies listed on Pakistan’s stock exchanges. This Code drew upon policies of good governance adhered to by the U.K. and U.S. models of corporate governance(the anglo-saxon model). It was assumed that since the origins of Pakistan’s corporate
 
law lie in the British legal framework, it was only rational that good governance practices in Pakistan follow those prevalent in the U.K.However it has been repeatedly emphasized in the vast literature that spans the topicof corporate governance, that good governance systems are not only limited to lawsand structures, even though they play an important part. What really determines thesuccess of a good corporate governance system is how it governs and influences theinteraction between all the stakeholders including firms, regulators, political agents,investors, shareholders, employees. This means that the historical, social, political,economic, and cultural influences that colour the attitudes of these stakeholders needto be reflected in a good corporate governance system.
Corporate Governance in Pakistan -
 Adopt or Adapt?
3This study discusses the implications for Pakistan, as it adopts the Anglo-Saxonmodel of corporate governance. It explores the causes of impediments that policymakers face as they try to implement the Code of Corporate Governance. Theempirical question that the study poses is whether a Corporate Governance model thatworks for the US and the UK, also work for a country like Pakistan?The objective of this study is to explore whether the anglo-saxon model of corporategovernance adopted by Pakistan, does indeed fulfil the requirement of beingrepresentative of the problems that are peculiar to Pakistan. This study draws on thedata and various theories put forth regarding the transplantation of law, and extendsthem to theorize the impact of transplanting such codes from the field of corporategovernance into a developing country like Pakistan. It postulates that even thoughaccording to the path dependency argument, following the Anglo-Saxon model of Corporate Governance may make perfect sense for Pakistan, since the roots of Pakistani law lie in the British Common Law family, but does this mean thattransplanting this particular code of corporate governance would be successful? Cansuch a model that works for the US and the UK, also work for a country like Pakistan,which is much far down on the development ladder? What of the differences inownership structures, the underdeveloped capital markets, and culturalunderpinnings?This thesis aims to observe the factors that may cause hurdles in a simple adoption of the Anglo-Saxon model of Corporate Governance. It points out that the Code for Corporate Governance adopted by Pakistan will need to be adapted keeping the local business environment and market conditions in mind. This study holds significance interms of contributing to the under-researched area of corporate governance in aPakistan-specific context. There are subtleties involved in convincing the Pakistanicorporate sector—which tends to resist change—that good governance is for their own benefit. This study aims to draw the attention of policymakers and implementerstowards recognizing these subtleties. It adds value to the limited research done inPakistan on this topic by outlining the potential sources of problems and hurdles thatwill need to be removed for an effective implementation of the Code of CorporateGovernance. This study has far reaching implications on the implementation policiesas well as on espousing further research. This study forms just the groundwork of 
Corporate Governance in Pakistan -
 Adopt or Adapt?
4much more research that is needed to understand the corporate dynamics of Pakistan,and address issues that impede the development of product and factor markets alike.

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