University of Karachi

Karachi University of Business School

Topic: Basic weaknesses found in the companies’ ordinance

1984

Submitted to: Sir Jawaid Akram

Submitted By: Tasbeeha Salehjee
Dated: 29th January, 2021

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Abstract
The corporate sector in Pakistan was governed by the Companies Ordinance 1984 which was
promulgated on 8 October 1984 and repealed the Companies Act, 1913.The Companies
Ordinance 1984 is a broad piece of Pakistani legislation that, according to its own preamble, is
"An Ordinance to consolidate and amend the law relating to companies and certain other
associations". It encompasses all legal rules and regulations for businesses registered with
Security and Exchange Commission of Pakistan (SECP) and is enforced by that agency.

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Introduction
A company is a corporation. In the eye of law, it is a person which is different from its members.
As company is person in the eye of law, it can own property. It can have rights and it can also be
subject to the liabilities. A company is not agent of its members. The company cannot sue the
members in case of liabilities and members of the company cannot sue it to enforce rights.

WEAKNESSES OF CORPORATE GOVERNANCE

 It is true that the ‘corporate governance’ has no unique structure or design and is largely
considered ambiguous. There is still lack of awareness about its various issues, like,
quality and frequency of financial and managerial disclosure, compliance with the code
of best practice, roles and responsibilities of Board of Directories, shareholders rights,
etc. There have been many instances of failure and scams in the corporate sector, like
collusion between companies and their accounting firms, presence of weak or
ineffective internal audits, lack of required skills by managers, lack of proper disclosures,
non-compliance with standards, etc. As a result, both management and auditors have
come under greater scrutiny.
 Strong  governance  standards  focusing  on  fairness,  transparency, accountability and
responsibility are vital not only for the healthy and vibrant corporate sector growth,  as 
well  as  inclusive  growth  of  the economy. Recent corporate scandals have led to
public pressure to reform business practices and increase regulation. The public is
demanding accountability and responsibility in corporate behavior. It is widely believed
that it will take more than just leadership by the corporate sector to restore public
confidence in our capital markets and ensure their ongoing vitality. It will also take
effective government action, in the form of reformed regulatory systems, improved
auditing, and stepped up law enforcement. These responses make clear that the
governance of corporations has become a central item on the public policy agenda. The
recent scandals themselves demonstrate that lax regulatory institutions, standards, and
enforcement can have huge implications for the economy and for the public. Of course,
government responses to scandals should be well considered and effective.

 Family-owned business- Family-owned companies are characterized as organizations in

which the shareholders belong to the same family and participate substantially in the
management, direction, and operation of the company. A family business refers to a
company where the voting majority is in the hands of the controlling family; including
the founder(s) who intend to pass the business on to their descendants. Many Pakistani
businesses are old family establishments and while controlling shareholders may
welcome cash infusions by outside investors, but they may hesitate to relinquish
control. It becomes difficult for outsiders to track the business realities of individual
companies. As the family and its business grow larger, this situation can lead to many
inefficiencies and internal conflicts that could threaten the continuity of the business.
Family control also brings governance problems – not least of which are a lack of checks

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 and balances over executive decision making and behavior, and a lack of transparent
reporting to the outside world.

 After families, the state is the second largest stakeholder in both listed and non-listed
companies. The state-owned companies are usually politically governed. Therefore, the
governance of these companies depends on the enchantment of state, as every
government changes the key positions of administration and the conditions for the
selections on these positions is political affiliation leaving aside the appropriate
experience and qualification. The authors submit that family-owned and state-owned
companies are crucial for the growth of corporate market in Pakistan though; the
control maximization is a great interruption in this development. These large
shareholders (family and state) generally oppose modifications and growth of best
principles of corporate governance as these principles creates the system of check and
balance and frightens to delist their companies. In fact, there was a substantial delisting
after the declaration of the first code of corporate governance in 2002.

 While the Companies Act provides clear instructions for maintaining and updating share
registers, in reality minority shareholders have often suffered from irregularities in share
transfers and registrations – deliberate or unintentional.

 Minority shareholders have sometimes been defrauded by the management

undertaking clandestine side deals with the acquirers in the relatively scarce events of
corporate takeovers and mergers.

 One of the big problems with corporate governance is that too many listed companies
and directors follow the letter of the law, rather than the spirit. For example, a listed
company must have a non-executive and one-third of its board should be non-executive
directors. The nonexecutives should be on the board to challenge management, but in
reality they tend not to.

 ‘Good people are very few’ partly because there is a legal limit on the amount
companies can pay non-executives. They are not allowed to receive a salary and can
only be paid for attendance at board meetings that gives the non-executives little
incentive to fulfill their obligations properly.

 Directors’ remuneration needs a rethink, as does the process of appointing directors.

Currently, non-executives are generally selected by the board, with little input from
shareholders – they should become more active. An independent agency should also
rate the standards of corporate governance at listed companies.

Comparing Pakistan companies act and ordinance with developed countries

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 I have made a comparison of UK and Pakistan Corporate governance which highlighted that
Pakistan governance system has many problems. So, I suggest some points which is given
below.

 Pakistan should improve the practices of internal control system especially as it is seen
in developed country they control their system quite effectively.
 Pakistan Board of directors should not misuse of powers as we can see clearly other
country directors use their power in accordance to need only not to support any other reason.
 Pakistan should be strict check and balance.
 In Pakistan there is just one senior non-executive director exists whereas number of
non-executive should be increase so, that Individual decision does not influence. While on the
other hand in UK half of the director is non-executive director.
 Notice of Meeting is necessary before the time so, that directors attend meeting timely.
 Fine should be increase from 10,000.
 Board of directors should avoid developing fiduciary relationship.

Comparative weaknesses as far as Islamic business clauses are concerned.

Islam advise us to be trustworthy, Transparent and it guide us to be accountable for the thing we are
doing because it is our believe that whatever we are doing either right or wrong it will eventually come
to us at end. Therefore each act should be according to the Islamic teachings. There should not be any
existence of deception and substantial misstatement in the dealings and conduct.

The companies are answerable to stakeholders. Therefore, their aims should not be just to get
financial benefits instead they also have the social responsibility towards Ummah. Companies
should disclose and unveil information regarding their policy making, taking decisions and
activities undertaken such as their Corporate Social Responsibility, as the Islamic system desires
truthfulness, veracity, honesty and integrity in the governance mechanisms.

Justice Delayed Is Justice Denied

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The problem of delayed justice is nothing new and has been growing since the independence of
Pakistan. Many attempts have been made by law commissions and committees constituted by
successive governments to counter the problem without yielding any positive results.

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@ limitations of the court system according to certain sections along with the
discreetly powers used by the honourable courts.

@ Challenges and opportunities of business and its by laws which creating the
impact on the human rights.

@ Does companies ordinance and companies act has any direct jurisdiction
applicable on the the small industries and a unitary businessman in Pakistan.

@ If I believe security exchange commission has failed in its duties to produce

a uniform system by placing a quality businesses in Pakistan.

Conclusion:
But, with the integration of Pakistani economy with global markets, industrialists and corporate
in the country are being increasingly asked to adopt better and transparent corporate practices.
The degree to which corporations observe basic principles of good corporate governance is an
increasingly important factor for taking key investment decisions. If companies are to reap the
full benefits of the global capital market, capture efficiency gains, benefit by economies of scale
and attract long term capital, adoption of corporate governance standards must be credible,
consistent, coherent and inspiring.

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References
www.google.com

www.Nestle.com

www.education.com

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