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QLCian 2009

Corporate governance has emerged as a key issue in the 'volatile and competitive' local business markets. Taking a retrospective peek, the code of corporate governance was promulgated in the year 2002 by the Securities and Exchange Commission of Pakistan (SECP) after the initial drafting by the Institute of the Chartered Accountants of Pakistan in 1998. Presently, corporate governance primarily falls within the ambit of two entities: the SECP and the State Bank of Pakistan (SBP). The SECP is largely an independent body that regulates the corporate sector and financial markets, on the other hand the SBP is Pakistan's central bank and is responsible for regulating the country's banking and finance sector. In spite of these two regulatory entities the implementation of the corporate governance code has not been an enormous success. The Reason for this being presence of varying obstacles, which have derailed the execution of this code to its optimum level. The most fundamental factor in this regard is the predominance of family controlled corporations. Pakistan's leading business corporations including textile, automotive, tobacco and agriculture sectors have been historically family controlled through generations by means of pyramid structures and cross shareholdings. However a healthy trend of altering family dominance in corporations has emerged, triggered by the awareness on the part of giant corporations to implement good governance and secondly the entrance of fresh graduates from top international universities who understand the gross mistake of ignoring the implementation of corporate governance. However this task of revolutionising corporate structures is daunting and uphill because of the ''old school" of family control and a rubber stamp board. A fundamental misgiving among the majority of family controlled companies is the idea that ceding control and diversifying the board is inimical to their interests. Further education on the advantages of a diversified board structure is necessary to change this misconception. Another contributing factor in the unsuccessful implementation of corporate governance in Pakistan is the lack of focus on the equity culture. In the early 80's high return on government bonds and easy access to bank loans in the 90's all discouraged the development and progress of equity culture in the country. Debt financing is still prevalent which is an enormous obstacle in the flourishing equity culture and as a result equity market is oriented towards handful of major companies. Ironically the giant family corporations are often satisfied with their position in the market and prefer not to risk weakening family control by selling shares to market investors and dilute their own share holding and control. To combat against this current reforms in the government's agenda are the demutualization of the stock exchanges and the creation of over the counter markets, both of which will help increase the depth and volume of equity market. However these efforts will be dented by the fact that equity financing is still not a priority because of lack of competition in various markets. Third and a very important aspect in this regard is the scratchy fact that there are no penal provisions in the Code and hence deterrence is limited. A number of academics believe that the addition of penal provisions would make the Code more effective in

Prof. Haris Zayad Ahmad
The author is graduate of University of London (Ext). Currently visiting faculty member of QLC. Area of expertise includes Corporate law and International Humanitarian Law. He is a regular contributor in daily english national newspapers.


however. balanced between too much interference and no monitoring. The Pakistani business community feels that the Pakistani financial press is still developing and is not as active as it could be. A major complaint the Case Team heard was that the stock exchanges themselves do not completely follow the Code. The "comply or explain" regime in place in Pakistan does not give the SECP an active monitoring role . More over the Pakistani financial press does not provide active deterrence. Moreover. Despite the voluntary nature of the requirement for independent directors. would help ensure greater compliance with the Code. Several financial news channels have appeared in Pakistan in the past few years. Although major domestic and international corporate developments are widely reported. an active financial press that keeps shareholders abreast of company developments is vital to minority shareholder protection. penal provisions are an ex post mechanism that do not protect the interests of Minority shareholders until it is too late. However. Thus. which itself indicates what areas of the Code it has followed. These networks provide pertinent and up-to-date information on the markets. people willing to serve as independent directors are difficult to find because remuneration is not commensurate with the duties or liabilities of directors. not any serious compliance. there is little incentive for them to subject themselves to the liability inherent in such a position without being compensated accordingly. Compliance with the Code is construed loosely because all that is necessary is an annual statement of compliance verified by an auditor. many companies think of the Code as simply requiring a rubber stamp. since they have a stake in that company. A market based remuneration scheme will attract qualified directors who will be willing to take on the responsibilities and 55 . the SECP appeared to be moving towards more vigorous enforcement of the Code. The most recent entrant is CNBC Pakistan. an auditor simply verifies a statement provided by the company.listed companies just need their statement of compliance signed by a verified accountant. In the Code's "comply or explain" regime. without necessarily verifying the accuracy of the information. which transmits business news from across the country 24/7 in both Urdu and English.QLCian 2009 establishing good corporate governance. The financial press often plays an important role in promoting good corporate governance. penalizing a company will often translate into penalties for the minority shareholders. but rather focus on major stories and scandals. many companies. and as such fails to provide the additional level of enforcement necessary for good corporate governance. have appointed independent directors. especially where traditional enforcement mechanisms are lacking or are ineffective. A more active monitoring system. Accordingly. At least two English financial newspapers are widely circulated among the business community. Recently. The papers do not actively provide routine yet important information to shareholders. a common complaint is the effectiveness of the Pakistani financial press in actively pursuing corporate matters. The competition to get the latest story is fierce and even foreign financial channels have established local channels to stake out a share of this growing sector. Even though there are qualified candidates. However. including those that are not required to comply with the Code. The television media is better at active deterrence than the financial press.

we need more character. Although the Code was recently promulgated in 2002. the minority shareholders. it may be easier to have the Code cross-reference the Companies Ordinance for certain provisions. We do not need more law... For example. we need more of the things that are unseen. quotes about law: “We do not need more intellectual power. And this is important not only for the economic and social growth of Pakistan but more so because the future is all about corporations and good governance.. many corporations initially resisted the Code because there were already several Laws in effect pertaining to corporate governance. We do not need more of the things that are seen. we need more religion.QLCian 2009 liabilities of such a position. the superstructure will stand. we need more culture.” 56 . To facilitate the implementation of sound corporate governance." As a result. We do not need more knowledge. In short time is running in favour of the implementation of corporate governance and the next couple of years will witness a 'metamorphosis' in terms of the corporate structures in Pakistan. Often these laws are more stringent than the Code itself. We do not need more government.. certain corporate governance provisions remain only in the Companies Ordinance.29 The Companies Ordinance deals directly with the protection of minority shareholders. a company can be wound up by the court if it "conduct[s] its business in a manner oppressive to. Calvin Coolidge. Compliance to the code of good governance will lead us to competitive and uncompromising edge over the other competitors around the globe. If the foundation is firm. we need more moral power.