Corporate Governance
“Corporate Governance” came into universal lexicon only in the 1970s, high profile corporate failures in the developed economies in the early 1990s making the use more common. Framing of the code in Pakistan in March 2002 had decided impact on the way companies are presently being governed. The State Bank of Pakistan (SBP), in partnership with International Finance Corporation (IFC) and Pakistan Institute of Corporate Governance (PICG), hosted a one-day conference on “Corporate Governance in Banks” for Board Members, Presidents and senior executives of Banks and DFIs, to apprise them of the rationale and approach of Board of Directors in implementing “Good Corporate Governance”. Presided over by the Governor SBP Ms Shamshad Akhtar, this welcome initiative brought home to the participants the parameters of their corporate job descriptions and the modus operandi for executing their responsibilities. Suggestions and reservations proliferated in the inter-active Session. Dr Ishrat Hussain, the previous Governor SBP, may be a difficult act to follow, it was refreshing to see the new lady on the block not only confidently handling things in an adroit and knowledgeable manner, but holding her own in her own right. The SBP baton has been passed onto safe hands!
Excellent Presentations were made on Corporate Governance by IFC’s representative Sebastian A Molineus on “Basel Guidelines for Banks”, OECD’s Motoyuki Yufu on “OECD on Principles and International Trades” and Chris Pierce, CEO Global Governance Services, UK on “Rules and Responsibilities of the Bank’s Board Internationally”. We had a very good Report on “Observance of Standards and codes (ROSC) in Banks” by IFC’s Kaiser H Naseem. Citibank’s Zubyr Soomro gave a case study of Citibank in studying the practical aspects of implementation of the US Sarban-Oxley Act, UAE’s Dr Nasser H Saadi spoke about how to implement it in banks and Sebastian Molineus gave the benefits thereof. Naveed A Khan, Chairman Pakistan Banks Association, and Mr Taufiq Hussain, Deputy Governor SBP, spoke about implementing theory of international best practices into practice. One of our outstanding corporate executives, Zahid Zaheer, has come out of retirement to become the Head of PICG, one expects that this formal training for executives will translate into institutionalised good corporate practices in Pakistan.
Senior executives of multi-national companies (MNCs) mostly tend to serve their foreign masters as loyally as their predecessors in South Asia served “The East India Company”. In Pakistan, however, MNC executives can be said to be exceptions rather than the rule. Arguably Zaffar A Khan, present Chairman Karachi Stock Exchange (KSE) is one of the finest Pakistani executives ever produced by an MNC in Pakistan. Rising in the ENGRO hierarchy (together with the outstandingly brilliant Shaukat Mirza, a man of amazing ability and integrity, who was assassinated in Karachi while he was Managing Director PSO), Zaffar stepped into Shaukat’s rather large shoes when Shaukat retired as Chairman ENGRO. One may remember that Zaffar was part of Shaukat’s team that did successful ESOP (Employee Stock Open Plan) takeover of ENGRO. After retiring from ENGRO, Zaffar took PTCL into privatization as Chairman. For the most part, MNC executives have done well for Pakistan, however a dozen or so are highly over-rated, arrogant leeches who must be sent out to pasture.
Mahmood Mandiwala tackled the legal ramifications of corporate governance extremely impressively viz (1) the purpose of the code (2) duties and responsibilities of Directors (3) role of non-executive directors (4) setting the strategy (5) role of the CEO and (6) duties of various functionaries, etc. Blessed with incisive comprehension and clear thinking, Mahmood is one of the outstanding legal eagles of Pakistan. I may have hit a discordant note though by asking that there should be some code also for the legal practitioners as to their responsibilities and liabilities as they are honour bound to uphold the law irrespective of attorney client privilege.
Zaffar A Khan asked (and answered) 26 questions in his booklet on Corporate Governance, some more important than others, viz (1) Is the CEO and those reporting to him formally appraised each year? (2) Does the Board engage in succession planning? (3) Are they involved in setting Vision/Mission/Values? (4) involved with debating and approving key business strategies? (5) Are investment decisions freely debated & then decided? (6) Are non-executive Directors given opportunities to interact with employees? (7) Does the Board have any “Retreat” meetings? (8) formally assess the Human Resource Stock and employee morale? (9) have a formal Corporate Social Responsibility (CSR)? (10) Are Directors on the Board sufficiently oriented to perform effectively as a Director? (11) Are Board Committees playing a useful role? and (12) Is SECP pro-active enough in encouraging good governance?
A principle by principle assessment of Pakistan’s compliance within OECD Principles of Corporate Governance shows that in Pakistan, viz (1) Basic shareholder rights are protected (2) shareholder participation in Annual General Meeting (AGM) being cumbersome needs improved compliance (3) concentrated control limits influence of minority shareholders (4) quality and timing of financial disclosure has improved, partly due to SECP monitoring and the requirements of the new code (5) mandatory requirement to disclose indirect or intimate beneficiary ownership (6) controversies over related party transaction disclosure and transfer pricing (7) no system of independent oversight and control, the Boards are often bypassed (9) insufficient guidance on duties of care and loyalty (10) boards dominated by controlling shareholder/s (11) independent directors are the exception rather than the norm, remuneration is often inadequate in attracting independent directors (12) enforcement is centered on SECP and SBP, the Stock Exchanges being responsible for monitoring and enforcing compliance of the code.
Some recommendations in establishing enforcement priorities are, viz SECP (1) should focus on enforcing the rules on the disclosure of ownership and related party transactions (2) continue to build its enforcement capacity (3) develop a system of independent audit oversight . To mobilize the private sector to improve corporate governance the KSE should (1) consider a market differentiation strategy (2) institutional investors should play a more effective role (3) build a core of effective independent directors (4) CDC can play a major role in protection of shareholders rights and transparency by encouraging dematerialize and move to Central Registry. Legislation should focus on some areas of concern, viz (1) strengthen rules of independent directors, improve quality of Directors and clarify role of Chairman of the Board (2) review the ownership disclosure framework and adjust as appropriate (3) shareholder rights should be strengthened by improving access to the AGM, lowering thresholds for shareholder redress, and updating rules on cheques in control and (4) increase accountability of direction. Focus should be on future technical assistance on high priority implementation by viz (1) development of national action plan (2) training and awareness progress working to develop a culture of corporate governance extending beyond SECP and (2) improve governance of State-owned enterprises.
The Zaffar Khan booklet states, “good corporate governance is focussed on how companies should be directed and controlled so as to prevent pilferage, misrepresentation, insufficient disclosure, selective siphoning favoritism etc. One should also address efficiency, value addition, transparency, social responsibility etc., based on high ethical behavior. The essential prerequisite is to have an “Effective board”. The best positioned stakeholder to make that happen is the controlling shareholder. An enlightened controlling shareholder who values efficiency, fair play and long-term sustainability will encourage the formation of an effective board. This is particularly important in emerging countries where the controlling shareholder invariably has a dominant majority and often the influence to play above the rules. The controlling shareholder could be the government, a multinational or a family”, unquote. The differences in the approach to good corporate governance in different countries notwithstanding, Zaffar A Khan’s description sums it up best, viz, “good corporate governance is about maximizing the wealth of a company in a legitimate way and distributing it in an equitable way”.
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