Corporate Governance
One of the better initiatives of the State Bank of Pakistan (SBP) is to encourage financial institutions to adhere to the “Code for Corporate Governance“ framed in 2002. While SBP is mostly concerned with monitoring financial institutions, the code is applicable for all corporate entities. The most tangible step has been the establishment of the “Pakistan Institute of Corporate Governance” (PICG). Appointing Zahid Zaheer, a respected senior corporate executive of proven great ability and experience as its Head showed positive intent and seriousness of purpose. Hopefully PICG will train independent directors structured corporate responsibility, and they in turn will translate this into ensuring viz (1) a fair return for the investors and (2) a merit-oriented professional environment for all the employees.
Zafar A Khan, formerly Chairman ENGRO and then Karachi Stock Exchange (KSE), and presently Chairman PIA, authored a very informative and useful booklet on “Corporate Governance” in which he states, “Good corporate governance is focused 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 behaviour. 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. Arguably among the finest executives in Pakistan’s corporate history, Zafar Khan is humble and self-effacing, not known to blow his own trumpet at the cost of the entity he manages, his performance speaks for him in contrast to others who go on a binge using advertising revenues and percs to raise their own image and benefit from other’s performance, One only hopes his basic decency as a human being will not deter Zafar Khan from carrying out due accountability of how PIA’s scarce resources were squandered, money that could have gone towards maintenance and spares, in promoting his predecessor’s “dynamic” image over the sorry image of the airline. The key responsibility of directors is to ensure company revenues are not squandered in making beautiful corporate offices or aberrations like “Banarsi Saris” out of the tail of the company aircraft.
A functioning Board focuses on high level policy decisions, and is not involved in the day-to-day management of the corporate entity. Being on the Boards in the corporate manufacturing sector one has as one’s colleagues salaried bureaucrats, as Directors representating Development Financial Institutions (DFIs) holding equity. With honourable exceptions, they may be fine human beings but as is their forte and training as bureaucrats they tend to get involved, in micro-management. This must be the responsibility of senior executive management. The function of non-executive directors is macro-management, to oversee senior management and hold them accountable, ensuring and certifying that internal control systems are effective, that they comply with the policies and procedures approved by and as required by law or regulation. Directors should be chosen for their skills and experience, and their potential for contributing to Board discussions, and not waste the time of private sector entrepreneurs on petty details, who unlike them are putting their money where their mouth is. A clear division and delegation of authority in the relationships between the management and the Board must be defined, as well as between the Board and the shareholders and other stakeholders. Independent directors must establish substantial weight of non-executive opinion on the Board. a strong voice beyond the ranks of management and insiders. This strong, challenging and independent element will allow exercising of objective judgment and maintaining of checks and balances to balance the influence of management and significant shareholders. Transparency and disclosure will enable stakeholders to assess financial performance and fairness in the treatment of all stakeholders. One form of blackmail of the minority bureaucrat directors is to write copious protests about micro-affairs, effectively freezing the working of the Board.
Although shareholders have the right to appoint directors, the obligations of each director are owed to the bank as a whole, and not to a particular shareholder alone as the bureaucrats appointed from DFIs seem to believe. Consider this, on the one hand govt is doing privatization because the public sector has no business being in business, on the other hand Pakistan is the only country in the world where public sector salaried executives with no entrepreneurial skills run riot over the majority in the Board. According to the guidelines given for good corporate governance independent directors should constitute at least one-third of the membership of the Board, with at least three independent, non-executive directors. Similar should be the ratio for all corporate entities. An Independent director is one whose directorship constitutes his only connection and whose judgment therefore is unlikely to be influenced by external considerations. An ‘independent’ director must not be the employee of any public sector corporate entity for the present or for the preceding three years, is not an immediate family member of an employee or director, is not receiving payment from the entity (other than as a director), is not a director or owner of company with which the entity does business, and is neither a significant shareholder (i.e. less than 5%) of the entity nor affiliated with one. One salaried executive from one DFI should be the maximum, the other DFI representatives must be professionals selected from the market. It is useful to bring senior members of Corporate management team into the meetings of the Board so that Board discussions can receive the benefit of their insight and experience in increasingly technical issues.
Directors must be limited to serving on the Board of not more than three public companies, some of our DFIs have their Chief Executives (CEs) and other senior management bureaucrats on dozens of Boards in the private sector. The claim to fame of most of them is not merit but being “Friends of Somebody” (FOS) in power. This is meant to avail percs from the Board of tens of companies. In one case it is reported that a Chairman of a DFI gets as much as Rs 20 million annually under the table, that is why everyone fights over the post. In any case CEs of DFIs have no business being on any Board of any corporate entity.
We have a lot of laws in Pakistan, mostly they are not adhered to by vested interest. One of the areas where the implementation has been excellent is the banking industry, while giving due credit to SBP for the results that are very visible economically, the public companies need to be brought into the ambit of corporate governance. There should be no lip-service about it! Pakistan is a land of tremendous economic opportunity, regulated through concerted corporate education, we can force-multiply our potential.
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