Corporate Governance Practices In Pakistan

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Corporate Governance is commonly referred to as a system by which organizations are directed and controlled. It is also a process through which company s objectives are established, achieved, and monitored. It is concerned with the relationships and responsibilities between the board, management, and other relevant stakeholders within a legal and regulatory framework. The standard definition of corporate governance by economists and legal scholars refers to the defense of shareholders interests (Jean Tirole, 2001). There is a growing interest in the concept of corporate governance in Pakistan mainly because corporate governance is a key to develop market economy and civil society in transitioning economics. Corporate governance is becoming increasingly important to investors, because well-governed companies having lower risks and fewer unexpected events can protect shareholders rights and provide better assurance that management will act in the best interest of the company and of all its shareholders. Since its inception in 1999, the SECP has focused its regulatory measures on fostering investor s confidence to encourage good corporate governance to ensure transparency and accountability in the corporate sector and safeguard the interests of all stakeholders, especially those of minority shareholders. In March 2002, the first code of corporate governance for Pakistan was finalized and issued by Security and Exchange Commission of Pakistan (SECP). It was subsequently incorporated in the listing regulations of the three stock exchanges and is now applicable to all public listed companies. The main objectives of code of corporate governance are to:
(a) Stimulate the performance of companies;

(b) Limit insider s abuse of power;

(c) Monitor manager behavior to ensure corporate accountability and protection of interest of investors and society;

(d) Propose restructuring of the board of directors to introduce board based representation by minority shareholders and by executive and non-executive directors;

(e) emphasize openness and transparency in corporate affairs and the decision making process;

(f) Require directors to discharge their fiduciary responsibilities in the larger interest of all stakeholders in a transparent, informed, diligent, and timely manner.

To achieve the goal of effective institutional framework, that would help corporate management, increase shareholder value while protecting the interests of other stakeholders, SECP in partnership with the United Nations Development Program (UNDP), and economic affairs division of the Government of Pakistan launched the SEC-UNDP project on corporate governance in August, 2002. UNDP has provided technical and financial assistance to the SEC for developing and implementing good corporate governance practices and establishing a sound regulatory framework for the corporate sector in the country. The work involves implementation of the code of corporate governance issued by the SEC in March 2002, creating stakeholder awareness, capacity building and networking with other emerging markets and a corporate governance cell has also been established at the SEC which acts as a resource centre and carries out research and awareness campaigns on various issues related to corporate governance. In 2004, the SECP took the initiative to establish the Pakistan Institute of Corporate Governance in Public Private Partnership. The establishment of the institute fulfils the need for an institutional arrangement where all major stakeholders jointly study governance practices in their respective roles, where necessary. Moreover, in 2006 International Finance Corporation (the private sector arm of the World Bank Group) launched the Pakistan corporate governance project (PCGP) to improve corporate governance practices in Pakistan and ACCA Pakistan (A part of Association of Chartered Certified Accountants) strongly supported the adoption of code of corporate governance in Pakistan and has been actively involved in arranging seminars and workshops to create awareness of best practices of corporate governance in Pakistan.

A survey of corporate governance practices in Pakistan 2007 was compiled and drafted by ACCA Pakistan with the association of International Finance Corporation (IFC), SECP, and PICG from listed and large (paid-up capital 500 million and above) listed companies and financial sector institutions of Pakistan. The survey aimed at to make stakeholders understand the extent to which financial institutions and companies in Pakistan follow good corporate governance practices. Being a front line regulator, SECP initiated an action against companies, which do not comply with the requirements of Listing Regulations, particularly Regulation No. 32, which includes a) failure to declare dividend or bonus for the last five years; b) failure to hold its annual general meeting for a continuous period of three years; c) has gone into liquidation either voluntarily or under court order; d) failed to pay the annual listing fees for 2 years; and e) failed to join CDS after its securities have been declared eligible security by the CDC. The Exchange after adopting the due process has placed a number of companies on the Defaulters Counter , whose names are quoted separately through the Daily Quotation of the Exchange along with nature of default(s) mentioned against each company. The purpose of placing the companies on separate counter Defaulters Counter is to create awareness amongst the shareholders / investors that the company is in default(s) of the Listing Regulations. In order to encourage good corporate governance and appreciate outstanding performance of the companies, the Exchange has a practice to give away the awards to top companies each year. The criteria for selection of top companies are regularly reviewed to ensure that only such companies are rewarded that not only pay good returns to their shareholders but also comply with the Listing Regulations, particularly the code of corporate governance.

The Securities & Exchange Commission of Pakistan Act 1997 (SECP Act) established the SECP as the regulator of the capital markets and the controller of corporate entities. The code of corporate governance was issued in December 2002. The central bank of Pakistan is the regulator and was formed by the State Bank of Pakistan Act 1956. Compliance of the code of corporate governance has been made mandatory for Non-Banking Financial Institutions (NBFI) and Development Financial Institutions (DFI s). PICG was formed by 19 stakeholders in December 2004 as a Public Unlisted Company Limited by Guarantee to promote Corporate Governance in Pakistan. Institute of Chartered Accountant of Pakistan (ICAP) was founded in 1961 under the Chartered Accountants Ordinance 1961 to regulate the Auditing Profession. KSE has 75% of the trading volume of Pakistan. Stock exchanges are responsible to oversee the listing requirements including the compliance of the code of corporate governance since 2003. IFC S CORPORATE GOVERNANCE PROJECT IN PAKISTAN (PCGP) IFC s Private Enterprise Partnership for Middle East and North Africa (PEP-MENA) support the PCGP and aim to promote and support the corporate governance reforms in Pakistan. The World Bank in corporate governance assessment for Pakistan 2005 concluded that despite initial resistance to the code from issuers and market participants, compliance was improving. Multinational companies, leading banks, and notable family controlled corporations were creating more transparent and modern corporate governance structures. Companies are arranging orientation seminars for their boards.There is also a need that regulatory bodies should keep check on the companies. SECP should ensure effective implementation of corporate governance practices and stock exchanges must implement listing rules relating to corporate governance.
Courtesy: Pakistan & Gulf Economist

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