Business Law

Corporate Law and Corporate Governance

Presented by: Ahmad Waheed Haider Ali Khan Johar Abbas Presented to: Prof. Shaariq Mehmood BBA IV Section N Messum Husnain M. Zaayer Nasib Shayan Shaikh Zainab Javed

Corporate Law and Corporate Governance

Division of parts: (choose, fill and forward) Zaayer ± Yellow highlighted part«. I¶ve taken 5.5 pages«. Johar ± Green highlighted part Haider ± Messum ± Shayan ± Ahmed ± Zainab ±

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Corporate Law and Corporate Governance

Corporate Law

Corporate law (also "company" or "corporations" law) is the law of the most dominant kind of business enterprise in the modern world. Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another under the internal rules of the firm. Corporate law deals the formation and operations of corporations and is related to commercial and contract law. A corporation is a legal entity created through the laws of its state of incorporation, treating a corporation as a legal "person" that has standing to sue and be sued, distinct from its stockholders. Corporations are taxable entities that are taxed at a lower rate from individuals. Until formally dissolved, a corporation has perpetual life; deaths of officials or stockholders do not alter the corporation's structure. State laws regulate the creation, organization and dissolution of corporations. Many states follow the Model Business Corporation Act. States also have registration laws requiring corporations that incorporate in other states to request permission to do in-state business.

History of company law in Pakistan: 1 2 3 4 5 6 7 8 9 The concept of company was developed in the 2nd half of 19th century (1850 onwards). Different laws were developed during this era The first act was passed in the British India in 1850 for the registration of joint stock co¶s Another act for the registration of joint stock co\s in the UK in 1884 A complete and basic act of 1913 was developed. A company law commission was appointed by the Pakistani govt in 1959 The submitted their report to the govt in 1960. Its contents was made publically available in 1972 The title of the report was the company law commission of Pakistan ³company ordinance 1984´

10 At least in 1984 Pakistan has developed its own complete law for their co¶s in the form of

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arrangements and constitutions 10) Prevention of mismanagement 11) Winding up 12) Application of ordinance of co¶s formed and registered under any previous act. 1) Preliminary 2) Jurisdiction of the court 3) Corporate law authority 4) Incorporation of the company and their matters 5) Prospectus. Allotments.Corporate Law and Corporate Governance Constituents of the company ordinance 1984: It consist of 514 sections and 8 schedules The 514 sections have been divided into 16 parts and are as follows. Issue and transfer of shares and debentures 6) Share capital 7) Registration of mortgages etc 8) Management and administration 9) Arbitration. 13) Winding up of unregistered co¶s 14) Companies established outside Pakistan 15) Registration offices and fees etc 16) General Page | 3 .

And federal Govt 7. 4. rules and regulations 3. balance sheet and profit and lost account of listed co¶s 5. regulation of a Co¶s ltd by shares  memorandum of association  article of association 2. balance sheet and profit and lost account of non-listed companies 6. The detail of enactment (to give a practical shape) 8.Corporate Law and Corporate Governance Eight schedules: 1. Form and context of annual return report. Fees to be paid to the registrar. Amendments Procedure for Forming A Company 1 Promotion stage: y y y The idea of forming a company must be conceived by a person who is called promoter He is expert in forming a company work He is to prepare necessary documents in order to get incorporation certificate from the registrar of joint stock company There are two types of promoters: 1 Professional promoter When starting a company so they contact with professional promotee because they are experts in company creation and charges fees/commission 2 General promoter Minimum 7 members combine and want to start a business and submit there application to the registrar called general promoter Page | 4 . Matters to be specified by prospectus. Authority.

3. Idea for business b. Two types of underwriting facilities we have. i. govt etc and also to the small businesses. Here Risk is beared by company b. Demand ) c. Investigation (raw material.Corporate Law and Corporate Governance Promoters¶ duties or promoters characteristics: a. Best offer Here the underwriting firms take the commission they try their level best to flowed the company shares and also advertise.e. Mergers and acquisition The process in which one of the combining companies looses its separate identity and the assets and liabilities of the loosing company become a part of the surviving company. a. Selection of first directors (90% of promoters are BOD¶s) d.e. Investment advices It simply means to provide advices to banks. Selection of legal advisor (lawyer) auditors and banks like investment bank Three main function of investment bank is 1. Firm commitment Here the underwriter makes full payments and purchase all the shares«Risk is totally beared by underwriting i. Underwriting facility The facilities extended by the investment bankers to the issue of securities.mergers Page | 5 . investment bank 2. assuring them that they will get an expected amount to be paid by the purchaser of the securities.

to offer investors. notice of the address of the head office 4. statutory declaration of legal documents of incorporation * Here are two more steps involve in case of public ltd company i.Corporate Law and Corporate Governance Acquisition: can¶t loose its separate legal identity and take the liabilities and assets of the company in their sharing amount. memorandum) Submition of the documents To meet all the preliminary expenses To collect the share capital  Incorporation stage To get the certificate of incorporation from the registrar of joint stock company. 1 2 3 4 Promote all the necessary documents (prospectus. Certificate of commencement of business (public) Page | 6 . the director will file a copy of prospectus with the registrar. consents in writing of directors 6.e. Raising of share Capital (public) After the incorporation of a public company. articles of association 3. The promoters must submit the following necessary documents to the registrar. memorandum of association 2. 1. directors contract to purchase qualification shares(directors have to purchase) 7. that they shall submit their application along with the application money with the company bankers. list of directors 5.

Declaration by the company that the minimum subscription as per prospectus has been received in cash II. It is also called the constituents of the co.Corporate Law and Corporate Governance This certificate will be issued by registrar. if the following documents are submitted to him. it is primary document it the company formation. Declaration by the company that all legal requirements to the commencement of business have been fulfilled. Declaration by the company that all the directors have taken up their qualification shares and paid for them. III. It is for the external management of the company. The objects of the co and their extensions The liabilities of the members is limited Page | 7 . Private company Members 2-10 Cannot issue share to public Cannot trade in stock exchange Public company 7. 1 In case of public ltd co the names of the co with the word ³limited´ as the last word of the name while the private ltd with the name of the ³private ltd co´ as the last word of the name.’ Raising of share capital Easily trade in stock exchange Basic legal documents a) Memorandum of association (company¶s charter) It is the basic document on which the whole superstructure of the company is based. I. Contents of memorandum of association. 2 3 4 The province where the registered office of the co is to be situated.

Memorandum of association consist of 6 clauses 1. Situation clause 3. Name clause 2. Capital clause 6. Subscription clause (integral part of capital clause) Procedure for alteration of objects The following procedure must be followed otherwise alteration become void. Liability clause (limited up to their investment) 5. 1 2 3 4 5 A special resolution is passed by giving a notice to all persons who are interested in alteration. Object clause (objectives of company) 4. Form of memorandum of association 1 2 3 It must be printed Must be divided into paragraphs and consecutively numbered Signed by each subscriber (who must give his full address and occupation) in the presence of atleast one witness who must attest the signature. a certified copy of the order of the court along with the printed copy of memorandum must be submitted with the registrar of Page | 8 . The SECP must check the objections of creditors and be satisfied that their consent is obtained. With in 90 days from the date of order of SECP .Corporate Law and Corporate Governance 5 The amount of the shares capital and the no of shares with which the company is to be registered. After that the SECP will confirm the change if it deems fit. An application is filled with the SECP for confirmation of change.

power and liabilities of directors 10 Convening and conduct of meetings with respect to quorum . resolution etc 11 Rules regarding the forfeiture of shares 12 Rules regarding the winding up of shares Page | 9 . Articles of association must be signed by each subscriber. It is used for the internal matters/management of the company. which will be a proof of alteration in objects. Procedures as well as regulations on ³making calls´ on shares Manners of transfers of shares Rules regarding appointment of directors. it can be changed only with the sanction of the registrar. Procedure for change of name. managing agent. Contents of articles of association 3 4 5 6 7 8 9 Amount of share capital issued and transmission of shares Rights of shareholders regarding voting. qualification. proxy . dividend and return of capital Rules regarding issue of shares and debentures. Where the co has unintentionally registered a name similar to that of an existing name. poll. It is also known as supplementary or secondary document of the co. 1 2 3 4 A special resolution is passed Approval of registrar is obtained in witting with respect to change in name. The registrar enters the new name in register and shall issue a certificate of incorporation in the changed name. b) Article of association. secretary and treasurers etc Number .Corporate Law and Corporate Governance SECP 6 Registrar will then issue a certificate of registration. A company at many times during the course of its business may change its name by fulfilling the following conditions.

insolvency or lunacy (unsound mind). its 1/3 of directors. 14 Declaration of dividend. Note: forfeiter. Article lay down the manner in which the object is to be fulfilled.Transmission of shares: it is the process of transfer of shares to legal successor (next to kin) or representative of the deceased person (shareholder) by the operation of law in case of death. Memorandum of association Article of association Memorandum is a fundamental document. Quorum. out. Article is a supplementary document. The memorandum lay down the objects of the possessed someone else assets.Corporate Law and Corporate Governance 13 Matters relating the winding up of the Co.number of person for conducting meeting.(responsibility of Board of directors ) Difference b/w Transfer of shares and transmission of shares Transfer of share: when the person is mentally sound and sale out his shares (dispose off). Article indicates how the business is to be carried Page | 10 . Memorandum indicates the scope of affairs of company.

Corporate Law and Corporate Governance Memorandum is the dominant instrument. file with the registrar a copy of special resolution passed in the meeting. If memorandum is silent on a point. When the company is listed on the stock exchange the draft of alteration must be sent to the stock exchange for approval.a meeting of shareholders in case of sudden change or emergency. Then there is no need that the article supplements that memorandum. E. Article explains that point. Note. Draft-a legal written document must be prepared by company¶s legal adviser (lawyer) c) Prospectus (public ltd company only) Page | 11 . Notice of alteration must be sent together with alteration of articles atleast 21days before the meetings to the members. C. Procedure for alteration of article of association The following procedure must be followed while altering the articles. F. EOGM. call a members of directors for the approval of alterations and the fix a date for (EOGM) D. Send a copy of special resolution together with amended copy of articles of association for approval to stock exchange. With in 15days of EOGM. Instruct the company¶s legal advisor to draft the alterations together with a notice to the members of Extra Ordinary General Meeting (EOGM). Amend all unissued copies of the company¶s article. If memorandum is clear on a point. such part of article is to be deemed as void. G. B. A. If any part of article conflict with it. After the approval of stock exchange.

XI.The right of voting of meeting and dividend attached to shares.A summery in column from the earnings of the company for each 3 financial years. Description regarding remuneration of the directors or chief executive officer IV. The contents of memorandum with the name. XVI. XIII. The names. address. IX. Page | 12 . XV. The names and addresses of auditors and legal advisors. II.Corporate Law and Corporate Governance Prospectus is a document that includes notice or advertisement inviting public for subscription or purchasing and shares or debentures of a company or inviting deposits from the public. XII. XIV.The length of time during which the business of the company has been carried on. V. Where shares are offered to the public for subscription.Pending legal proceedings to which the Company is a party. The date and time of opening and closing subscription list VII. The estimated amount of preliminary expenses paid or payable by the company X. the nature and the extent of interests of the shareholders in the profit and property of the Company.A reasonable time and place for the inspection of balance sheet and income statement. Any amount paid to the promoters in previous two years.The names of the underwriters and directors opinion about them that their resources are sufficient to fulfill their obligation VIII. Description of business to be undertaken III. information regarding minimum subscription. Contents of prospectus I. preliminary expenses payable and underwriting commission payable etc.The names. description and occupation of the company vendors and the amount paid or payable to them. VI. occupation and description of the important office bearers of the company. address. addresses. occupation and description of the person who¶s names (their in memorandum) .

All matters coming before court under the company ordinance shall be disposed off (solved) and the judgment pronounced as soon as possible but not later then 90days form the date of Page | 13 . shall be liable to pay compensation to all those person who has subscribed to the shares and suffered from mis-statement. every person who signed or authorized the issue of prospectus shall be punishable with imprisonment which may extend to 2years or with a fine which may extend to RS 10000 or with both. Procedure of the company court i. each to be known as company bench . to be constituted by the chief justice of high court. to exercise the jurisdictions under the company ordinance 1984. he who has authorized the issue of prospectus.Corporate Law and Corporate Governance Liabilities arising from mis-statement in a prospectus Civil liability he who is the director at the time of issue of prospectus. so that has been delivered to the registrar for registration a statement in lieu of prospectus signed by every person who µs name their in as a director atleast 3days before the first allotment. Jurisdiction of the company courts It is provided that court having jurisdictions under the company ordinance 1984. the central govt may empower any district court to exercise all or any of the jurisdictions. Criminal liability Where a prospectus includes any untrue statement. he who is the promoters of the company . having jurisdiction at a place at which the registered office of the company is situated . A company having a share-capital which does not issue a prospectus. Company Benches There shall be benches in each high court . one or more benches . Statement in lieu (instead of) prospectus. shall be the high court.

ii. Grant license and allowing an association to enjoy all the rights of a limited company with out using the word ³limited´ Allow a public company to convert it self into a private Company. one of the member is to be appointed as chairman of the authority by the federal Govt. For special reasons allow a prospectus to be issued more then 30days before the subscription list is due to open. Corporate Law Authority (SECP) It is constituted under section 11 of the company ordinance 1984. Allow extending of time for holding annual general meeting and filing a document by the listed company up to 90days. Power and functions of Authority (company law authority) 1 2 3 4 5 6 7 8 9 Issues orders and instructions to all persons and officers in the execution of ordinance.Corporate Law and Corporate Governance the presentation of the petition to the court except in extra ordinary circumstances. The hearing of the matters shall not be adjourned except for sufficient cause or for more then 14days at one time or for 30days at all. Confirm alteration to memorandum Extend time for filing documents with the registrar. The authority must consist such number of members not being less then 3 to be appointed by the Govt. Page | 14 . Permit a company to with hold or delay payment of dividend in certain cases. Specify the form of application for r subscription to shares or debentures. The federal Govt is empowered to constitute the CLA. the court shall hear the case from day to day.

Receive copies of annual accounts. 3. Inspect auditors report at general meeting. their distinctive numbers. 11. father/husband¶s name. Appoint auditors at general meeting. 2. transfers of shares 6. paid up amount. Page | 15 . they will receive a statutory report. Inspect register of members and debenture holders. 12. Rights of members. 1. Appoint and fix remuneration of liquidators. 7. Receive minutes of the proceedings of general meeting. nationality and occupation b) Statement of shares held by each member.Corporate Law and Corporate Governance Share certificate It is a document issued under the common seal of the company and contains 1 2 3 4 Name and address of the holders Name of shares held by them Their distinctive numbers Paid of amount. have copies of memorandum and articles on payment of fee 4. 10. receive share certificate with in prescribed time 5. address. Resolve by special resolution that the company may be wound up voluntarily. Remove directors. d) The date at which any person was ceased to be a member and reasons of ceasing. In case of public ltd company. 8. Resolve by special resolution that the company ay be wound up by the court. 9. c) The date at which any person was entered as a member of the CO. Register of members It contains: a) The name. 13.

2. 1 2 3 In writing-off the preliminary expenses of a Co. The amount and rate must be disclosed in prospectus. the liability of shareholders is limited to amount. Where a prospectus is not issued. Approved dividend as recommended by the directors. To pay premium on redeemable preference shares or debentures. It shall be lawful for a company to pay commission to any person in consideration of his subscribing either absolutely or unconditionally for any shares in the company if: 1. In writing-off the expenses of commission and discount on issue of shares and debentures. the amount and rate must be disclosed in a statement in lien of a prospectus. if any unpaid on shares held by him. Page | 16 . This liability is continuous as long as anything remains unpaid on shares. This account may be applied by the company as under. Premium on issue of shares Where a company issues shares on premium. Have a share in the capital of a company. attend meetings and vote at meeting 15.Corporate Law and Corporate Governance 14. 5. if issued by the Co. the values of premiums shall be transferred to an account called ³the share premium account´. 3. Commission on issue of shares. The payment of the commission is authorized by article of association. Where a company is limited by shares. The number of shares for which the persons have agreed to subscribe absolutely for a commission is disclosed in a specified manner. 16. 4. Liabilities of share holders. The commission paid should not exceed the rate fixed by the authority.

If there are no profits in the year then there is no dividend for the simple preference shares 2. 3. The resolution must specify the maximum rate of discount not exceed than 10% or higher rate fixed by the authority. Kinds of preference share 1. Capital structure The combination of debt and equity financing in the capital of a company is called capital structure. Issue of shares at a discount It shall be lawful for a company to issue shares at discount if: a. b. cumulative preference share if in any year the profits are not enough. The shares are to be issued at a discount must be issued with in 60days after the date on which the issue is sanctioned by the authority. Not less then any year must at the date of issue have elapsed since that date on which the company was entitled to commence its business.Corporate Law and Corporate Governance 4 In paying up un-issued shares of the company as fully bonus shares. simple preference share They are usually entitled to receive fixed dividend before any dividend is pairs on the ordinary shares. While a particular amount of money with which the business is started is share capital. cumulative participating preference share these share holders is not only entitled to receive arrears of dividend but are entitled to Page | 17 . c. but carried so that when the company makes the profits in the subsequent year it must first pay off the arrears of dividend before paying dividend to other kind of shareholders. their right to dividend does not lapse. d. It must be authorized by a resolution passed at general meeting and sanctioned by the authority.

2. 5. Director as trusty Directors are trustee regarding the power conferred on them by the articles and the capital under their control. 1. 4. redeemable preference shares normally shares of company are not redeemable they can be redeemed only when the company goes into liquidation however. the position of a director by whatever name called every private company must not less then two directors and every public company not less then 7 directors . Directors as an agent The director may make contracts as agent of the company if the contract made by a director ultra-vires his power made with a member is only voidable but if made with an outsider who had no notice of the wants of his power. deferred/mgt share/founder shares These shares are normally issued to the company promoters or founders of the company or the underwriter of the share capital. First directors are appointed by promoters 3. They are trustee for the Page | 18 . these shares receive no dividend until the dividend on all other classes of shares has paid in full. the law in section 85 of the ordinance 1984 has provided for the redemption of redeemable preference shares during the lifetime of the company. They are not persons in the employment of the company. the balance of profit in some proportions after the right of ordinary share holders have been met. A company can¶t make loan to its directors.Corporate Law and Corporate Governance share with the ordinary shareholders . Directors having power to issue shares. it is binding on the company. Company Directors: Directors includes any person occupying a position of a director.

7. Eligibility of a person to become a director A person is appointed as a director if he: y y y y y y is a major share holder is of sound minded is a member of a company has not been convicted by court of law is a solvent person is a natural person Power of directors 1. semiannual. To make calls on share holders in respect of money unpaid on their shares.Corporate Law and Corporate Governance company and not for the individual share holders they are not trustee for third party who have made contract with the company they are also trustee for the company in respect of their power of approving transfer of shares. 2. 8. To make loans. issuing and allotment of shares as well as making calls and forfeiting of shares. To issue debentures. To issue shares. Page | 19 . 3. To approve annual. 4. 5. off a fixed asset of value exceeding rupees 1 lac. To borrow money otherwise then on debentures. 6. To invest the funds of the company. or periodical accounts as are required to be To incur capital expenditure exceeding Rupees 2 lac on any single item or dispose circulated to the members.

Page | 20 .). the Report of the Hampel Committee on Corporate Governance published in January 1998 (U. The Code of Best Practice of the Cadbury Committee on the Financial Aspects of Corporate Governance published in December 1992 (U. As a result.K. In exercise of its powers under Section 34(4) of the Securities and Exchange Ordinance. in other words to enhance the performance and ensure conformance of companies. the listing regulations were suitably modified by the stock exchanges.). the Securities and Exchange Commission of Pakistan issued the Code of Corporate Governance to establish a framework for good governance of companies listed on Pakistan's stock exchanges. in particular the experience of those countries with a common law tradition similar to Pakistan's. the Recommendations of the King's Report (South Africa).K. designed to provide a framework by which companies listed on Pakistan's stock exchanges are to be directed and controlled with the objective of safeguarding the interests of stakeholders and promoting market confidence. In doing this. to refine and consolidate the principles and to educate stakeholders of the advantages of strict compliance. 1969. The Code is a compilation of ³best practices´. Further measures will be required.Corporate Law and Corporate Governance CORPORATE GOVERNANCE IN PAKISTAN INTRODUCTION In March 2002. The Code is a first step in the systematic implementation of principles of The Code is a first step in the systematic implementation of principles of good corporate governance in Pakistan. and are contemplated by the SEC. the Code draws upon the experience of other countries in structuring corporate governance models. Lahore and Islamabad stock exchanges to incorporate the provisions of the Code in their respective listing regulations. the SEC issued directions to the Karachi. and the Principles of Corporate Governance published by the Organization for Economic Cooperation and Development in 1999 have been important documents in this regard.

policies. customers. The principal stakeholders are the shareholders.Corporate Law and Corporate Governance WHAT IS CORPORATE GOVERNANCE? THE BACKGROUND Corporate governance is a relatively new term used to describe a process. Page | 21 . including business dealings principles such as utmost good faith. crisis of confidence in effective compliance with. rules and practices which emerges from this synthesis is never static but constantly evolving to meet changing circumstances and requirements in which corporations operate. the environment and the community at large. administered or controlled. rules and practices which make up the corporate governance framework. regulators. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The body of laws. professionalism. which seeks to ensure that high standards of corporate governance continue to apply. rules and practices. or implementation of. transparency and accountability. customs. From time to time. which has been practiced for as long as there have been corporate entities. banks and other lenders. and the list can go on Corporate governance builds upon these basic assumptions and demands from human dealings and adopts and refines them to the complex web of relationships and interests which make up a corporation. The process of corporate governance does not exist in isolation but draws upon basic principles and values which are expected to permeate all human dealings. PROCESS OF CORPORATE GOVERNANCE Corporate governance is the set of processes. Other stakeholders include employees. laws and institutions affecting the way a corporation is directed. trust. prevailing corporate governance principles act as a catalyst for further refinement and enhancement of the laws. This process seeks to ensure that the business and management of corporate entities is carried on in accordance with the highest prevailing standards of ethics and efficacy upon assumption that it is the best way to safeguard and promote the interests of all corporate stakeholders. competency. management and the board of directors. The result is an evolving body of laws. suppliers.

1913. this Act was amended in certain respects. 1969. In 1949. There is empirical evidence to suggest that countries that have implemented good corporate governance measures have generally experienced robust growth of corporate sectors and higher ability to attract capital than those which have not. Pakistan inherited the Indian Companies Consolidation Act. THE PAKISTANI CORPORATION Upon independence. listed companies are also regulated by the stock exchange at which they are listed. where after it was referred to as the Companies Act. THE BENEFITS OF CORPORATE GOVERNANCE Good and proper corporate governance is considered imperative for the establishment of a Competitive market. IMPACT OF CORPORATE GOVERNANCE The positive effect of good corporate governance on different stakeholders ultimately is a strengthened economy. 1913. that for sustainable development. Economic health of a nation depends substantially on how sound and ethical businesses are. Pakistani companies were established and governed in accordance with the provisions of the Companies Act. following lengthy debate. and the various rules and regulations made there under. special companies may also be regulated under special laws and by other regulators. in addition to the SEC. 1984 (the Companies Ordinance) was promulgated. Corporate entities in Pakistan are primarily regulated by the SEC under the Corporate entities in Pakistan are primarily regulated by the SEC under the Companies Ordinance. and hence good corporate governance is a tool for socio-economic development. corporate governance has to be good. In addition. the World Bank's president warned those countries. 1913. the Securities and Exchange Commission of Pakistan Act. After East Asian economies collapsed in the late 20th century. including its name. banking companies are also regulated by the State Bank of Pakistan. companies engaged in the generation. In this way. Until 1984. transmission or distribution of electric power are also regulated by the National Electric Power Page | 22 . the Securities and Exchange Ordinance. More recent examples are the Taj Company Scandal in Pakistan. 1997.Corporate Law and Corporate Governance Some examples of corporate governance issues arising are the circumstances surrounding the collapse of the South Sea Company (frequently referred to as the ³South Sea Bubble´) in England in 1720. when the Companies Ordinance.

It is their responsibility to endorse the organization¶s strategy. appoint. All parties to corporate governance have an interest. whether direct or indirect.g.Corporate Law and Corporate Governance Regulatory Authority. a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. the board of directors. the SEC has focused. workers and management receive salaries. companies engaged in providing telecommunication services are also regulated by the Pakistan Telecommunication Authority. develop directional policy. management and shareholders). benefits Page | 23 . PARTIES TO CORPORATE GOVERNANCE Parties involved in corporate governance include the regulatory body (e. With the significant increase in equity holdings of investors. This is expected to provide transparency and accountability in the corporate sector and to safeguard the interests of stakeholders. since it took over the responsibilities and powers of the Corporate Law Authority in 1999. the Chief Executive Officer. and oil and gas companies are also regulated by the Oil and Gas Regulatory Authority. in the effective performance of the organization. Directors. A board of directors often plays a key role in corporate governance. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities. has been acutely alive to the changes taking place in the international business environment. As part of its multidimensional strategy to enable Pakistan's corporate sector meet the challenges raised by the changing global business scenario and to build capacity. there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse. In corporations. Partly as a result of this separation between the two parties. customers and the community at large. on encouraging businesses to adopt good corporate governance practices. creditors. in part. including protection of minority shareholders' rights and strict audit compliance. which directly: and indirectly impact local businesses. Other stakeholders who take part include suppliers. employees. the shareholder delegates decision rights to the manager to act in the principal's best interests. THE ORIGINS OF CORPORATE GOVERNANCE IN PAKISTAN The SEC.

If some parties are receiving more than their fair return then participants may choose to not continue participating leading to organizational collapse. suppliers receive compensation for their goods or services. Page | 24 . Moreover. Corporate governance serves two indispensable purposes. It enhances the performance of corporations by establishing and maintaining a corporate culture that motivates directors. transparency as to corporate performance. A number of surveys of investors in Europe and the US support the same findings and show that investors eventually reduce their investments in a company that practices poor governance. while shareholders receive capital return. rules and practices. It is also the realization and acknowledgement that weak corporate governance systems ultimately hinder investment and economic development.Corporate Law and Corporate Governance and reputation. 1. human. it ensures the conformance of corporations to laws. managers and entrepreneurs to maximize the company's operational efficiency thereby ensuring returns on investment and long term productivity growth. 2. and participation in certain fundamental decisions by shareholders. A key factor in an individual's decision to participate in an organization e.g. THE NEED FOR CORPORATE GOVERNANCE The popularity and development of corporate governance frameworks in both the developed and developing worlds is primarily a response and an institutional means to meet the increasing demand of investment capital. In a McKinsey survey issued in June 2000. In return these individuals provide value in the form of natural. It is fundamental that managers exercise their discretion with due diligence and in the best interest of the company and the shareholders. through providing financial capital and trust that they will receive a fair share of the organizational returns. investors from all over the world indicated that they would pay large premiums for companies with effective corporate governance. which provide mechanisms to monitor directors' and managers' behavior through corporate accountability that in turn safeguards the investor interest. ownership and control. social and other forms of capital. Customers receive goods and services. This can be better achieved through independent monitoring of management.

Simply put. including Pakistani corporations. There has been a move away from traditional forms of financing and a collapse of many of the barriers to globalization. The Board of directors will also ensure legal compliance and their decisions will not be based on political or public relations considerations. Poor Page | 25 . the governance profile of a corporation is now an essential factor that investors and lenders take into consideration when deciding how to allocate their capital. As a result. though it may not eradicate them immediately. Effective corporate governance allows for the mobilization of capital annexed with the promotion of efficient use of resources both within the company and the larger economy. It is understood that efficient corporate governance will make it difficult for corrupt practices to develop and take root. It assists in attracting lower cost investment capital by improving domestic as well as international investor confidence that the capital will be invested in the most efficient manner for the production of goods and services most in demand and with the highest rate of return. In addition. the less likely that investors and lenders would be attracted and persuaded to invest or lend. The more obscure the information. Good corporate governance ensures the accountability of the management and the Board in use of such capital. crisis and the inevitable periods of decline. Boards and management are voluntarily and proactively taking steps to improve their own accountability. which are able to exercise greater influence as the predominant source of future capital. it will also assist companies in responding to changes in the business environment. The lack of transparency. have begun to recognize the need for change for positive gain. institutions are awakening to the opportunities presented by governance activism. Along with traditional financial criteria. Added to this is the changing role of institutional investors. In many countries corporate ownership is becoming increasingly concentrated in institutions. Corporate governance is the market mechanism designed to protect investors' rights and enhance confidence. Companies all over the world are now competing against each other for new capital. unreliable disclosure.Corporate Law and Corporate Governance Dramatic changes have occurred in the capital markets throughout the past decade. unaccountable management and the lack of supervision of financial institutions (all of which are the consequences of inadequate corporate governance) combine to infringe investors' rights. Corporate governance has become the means by which companies seek to improve competitiveness and access to capital and borrowing in a local and global market. the corporations. Throughout the world.

unlike the interest of most stakeholders and investors which can generally and adequately be protected through contractual rights and obligations with the company. compliance with internationally recognized accounting standards is necessary to ensure that investors can effectively analyze and compare company data. As the ownership of corporations is widely dispersed. Openness 2. Also. In addition to the applicable general law. Accounting standards 3. but also on the stock market as it blocks crucial Page | 26 from this springs the ³equity contract´.Corporate Law and Corporate Governance corporate governance has a tendency to inflate uncertainty and hamper the application of appropriate remedies. With incorporation of the Code in the listing regulations of the Pakistan's stock exchanges. The inability or unwillingness to make credible disclosure constitutes a bad equity contract which potentially makes it difficult for the market to distinguish good risk from bad resulting in an inability to attract investors. the equity contract is created . (the shareholders). The corporate governance system specifies the rights of the shareholder and the steps available if management breaches its responsibilities established on equitable principles under Section 31 of the Companies Ordinance. principles of corporate governance were more specifically framed to facilitate the so called ³agency problems´ that were a consequence of the separation of ownership and management in publicly owned corporations. that corporate governance is primarily directed at the effective protection of shareholder interests. listed companies are now under an obligation to act transparently. Efficient markets depend upon investor confidence in the accuracy and openness of information provided to the public. Compliance reporting. management of the corporation is vested in directors who act as agents for the owners. Transparency can be achieved through three key market elements: 1. Initially. The long term consequences of such inabilities prove to have a crippling effect. It is. not only on corporations. for this reason. From this stems the theory that the interest of the shareholder is not determined or protected by any formal instrument.

at this stage. with the resultant weakening of the entire financial system. employees. the Board of directors is further assisted by managers. Hence. perhaps. however. the formation of a public listed company is such that its success is dependant upon the performance of a contribution of factors encompassing a number of stakeholders. can only be made possible through the exercise of good corporate governance. etc. In order to achieve maximum success.Corporate Law and Corporate Governance liquidity of the stock market. is the pyramidal ownership structure and corporations with concentrated ownership enabling large shareholders to directly control managers and corporate assets. contractors. the increased cost of capital reallocates financing and the capital market towards debt. whether for publicly traded companies or privately held and state owned companies. Therefore it is imperative to recognize the importance of stakeholders and their rights. A distinctive characteristic of the Pakistani corporate culture. Consequently. however. THE STAKEHOLDERS General A corporation enjoys the status of a separate legal entity. Furthermore. Page | 27 . A ³stakeholder´ is a person (including an entity or group) that has an interest or concern in a business or enterprise though not necessarily as an owner. It is for this reason that the role of the various stakeholders cannot go ignored and their rights and the corporations' obligations must be determined. creditors. arise under the prevailing structure as the conflict of interest that emerges gives rise to the ³expropriation problem´ as opposed to the ³agency problem´. management and control is delegated by the shareholders to agents called the Board of directors. however. to acknowledge the rapid developments that are taking place within the Pakistan corporate culture and the fading out of the traditional and more conventional corporate formation. a good governance system is required for such institutions as the success of any institution is a combined effort comprising of contributions from a range of resource providers including employees and creditors. Thus the need for corporate governance should not. Financing of any kind. It is imperative. The ownership of listed companies is comprised of a large number of shareholders drawn from institutional investors to members of public and thus it is impossible for it to be managed and controlled by such a large number of diversified minds.

They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. PRINCIPLES OF CORPORATE GOVERNANCE Commonly accepted principles of corporate governance include:  Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. jobs and sustain ability of financially sound enterprises. The aim is for the directors to discuss and interpret the financial statements to give a meaningful overview of the enterprise's activities to stakeholders and to give users a better foundation on which to base decisions. The annual report is a vital link and. Apart from the above.  Uncertainties in its environment.  Its financial structure and the factors relevant to an assessment of future prospects  Other significant items which may be relevant to a full appreciation of the business. the only link between the company and its stakeholders. The Companies Ordinance requires directors to attach in the annual report a directors' report on certain specific matters. Both positive and negative aspects of the activities of the company should be presented to give an open and transparent account thereof. Page | 28 . stakeholder communication should consist of a discussion and interpretation of the business including:  Its main features. in most instances. It is the Board's duty to present a balanced assessment of the company's position when reporting to stakeholders. The Code expands the content of the directors' report and requires greater disclosure on a number of matters that traditionally were not reported on.Corporate Law and Corporate Governance Communication with stakeholders is considered to be an important feature of corporate governance as cooperation between stakeholders and corporations allows for the creation of wealth. Specific emphasis has been placed upon the fiduciary obligations of directors and hence the need to understand the implications of such obligations also arises.

 Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. The key roles of chairperson and CEO should not be held by the same person. There are issues about the appropriate mix of executive and non-executive directors. employees. but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. consumers and the public at large are framed and sought to be resolved. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear. many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries. factual information. that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. though. management. creditors.  Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. It is important to understand.  Integrity and ethical behaviour: Ethical and responsible decision making is not only important for public relations. including the shareholders. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Page | 29 . CONCLUSION Corporate governance is the mechanism by which the agency problems of corporation stakeholders. Because of this.Corporate Law and Corporate Governance  Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties.

secp. 3rd Page | 30 . Module of Best Practices.wikipedia. 2010 On December 3.Corporate Law and Corporate Governance References Corporate 6-13 by The Institute of Company Secretaries of India ³Codes of Corporate Governance´ Retrieved from http://www. http://en.

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