A Brief History of

Corporate Governance
 CG as field of study
 CG has existed for as long as companies have
existed.
 But as a field of study it is less than 70 years old.
 Last 40 years:
 A lot of activity in this field.
 Codes, reports and laws have come out.

 Number of research papers and theories have

evolved.
 Corporate Wrongs -1
 Loss of ethics
 Earnings became every thing.
 Ineffective boards, smart executives.
 Huge remunerations for executive directors.
 Greed leading to disparity among senior
managers and other employees.
 Corporate Wrongs - 2
 Short term goals and considerations.
 Collusion between directors and auditors.
 Pressure from institutional investors
 Loss of interest by small investors in big
companies.
 In Pakistan, family control of companies.
 Some Scandals in USA -1
 WorldCom
 Overstatement of profits by $3.8 billion
 Adelphia Communications
 Illegal loan to founder
 Enron
 Gross misuse of power by directors
 Waste Management Inc.
 Overstatement of earnings by $17 billion over 6 yrs
 Some Scandals in USA - 2
 Tyco
 Evasion of sales tax on personal purchases.
 Peregrine Systems
 Overstatement of earnings by $100 million.
 Imclone Systems
 Insider trading by CEO
 Rite Aid
 Accounting and securities fraud.
 Some Scandals in UK
 BCCI
 Improper accounting and policies
 Barings Bank
 Ineffective internal controls, $1.4 billion loss
 Mirror Group
 Gross misappropriation of funds including pensions
 Polly Peck
 Diversion of funds to personal use.
Some Scandals in Pakistan
 Crescent Bank
 Islamic Investment Bank
 Bankers Equity
 Pakistan Steel Mills
 Indus Bank
 Evolution of CG
 Cadbury Report 1992, UK
 Greenbury Report 1995, UK
 Hampel Report 1998, UK
 Combined Code 1998, UK
 Turnbull Report 1999, UK
 Organization for Economic Cooperation and
Development (OECD) Principles of CG, 1999
 OECD Principles
 Rights of shareholders must be protected.
 All shareholders to be treated equitably.
 All stakeholders to be allowed to play due
role.
 Timely and accurate disclosures.
 Accountability and responsibility of directors.
 More Reports
 Basle Committee Guidelines 1999 (banks)
 Myners Report 2001, UK
 Cromme Report 2002, Germany
 Higgs Review 2003, UK (INEDs)
 Smith Report 2003, UK (Audit committees)
 Revised Combined Code, 2003, UK
 Kings Reports 1994, 2000, 2009, South Africa
 Sarbanes Oxley Act 2002, USA
 CG Models
 Anglo American Model (AAM)
 Japanese Model
 German Model
 Anglo American Model
 Free economy based: Market sets the price of
capital and expectations of returns.
 Company runs for shareholders’ benefits, i.e.
to maximize their wealth.
 Triangular structure: SH/Board/Management
 Most companies run by people owning less
than a quarter of the company.
 Major agency and CG issues.
 Japanese CG Model
 Keiretsu system of ownership:
 Large groups own the companies.
 Inter-locking directorates and shareholding.
 All policies made by the group.
 Group funds, controls and helps where needed.
 Management kept alert all the term.
 Agency issues still persist.
 German CG Model
 Group ownership is common. Strong hold of
investors over the boards.
 Two tier boards by law.
 Lower tier-management board-executive directors.
 Upper tier-institutional investors and employees.
 Representation of workers and shareholders in
Supervisory Board.
 Size of Supervisory Board cannot be changed by
the company; regulated by law.
CG Related
International Bodies
 World Bank and IMF
 Global CG Forum
 International CG Network
 Commission on public trust and private
enterprise.
 The Two Perspectives
 CG problem in West
 CG problem in Pakistan
Thank you.