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The corporate governance regulations, it is said, have hurt the capital market and might reduce the already thin size to razor-thin size. Few companies have already opted for de-listing; others might follow over the period.
In this paper, I have discussed why the above does not stand to reason. I have also discussed that code of corporate conduct is a social need and national imperative.
The corporate practices in Pakistan were out of sync with modern time for a very long period. Such rules were long overdue
Market-size: The size of a market is not and should not be the determining criteria. Sri Lanka is an example. Its market size is less than Pakistan but it has good governance rules. Corporate sector's unease is indeed a facade to avoid accountability and continue indulging unfettered in self-serving and enjoying the liberty to stand on others' toes.
Corporate governance: The Institute of Internal Auditors has defined governance processes as procedures used by shareholders and other organisational stakeholders to oversee management's risk and control activities.
The code of corporate governance (hereinafter 'Regulations), do not add any thing new to directors' responsibilities. They only clarify their fiduciary responsibilities and set rules of the game for corporate behaviour that prevent, as far as feasible, directors to play football by the rules of rugby.
Corporate scams are a consequence of fallacious assumption in law etc. about directors and auditors' behaviour; If we wish to learn lesson from history, the issue is not how did the scams happen- the crucial issue is why did they happen? Knowing 'why' alone would ready us to forestall further scams.
The source of scams is attributing altruism to directors and auditors-the directors perform their roles in good faith in the interest of the general body of shareholders, or, as the 'regulations' put it, the directors exercise their powers and carry out their fiduciary duties with a sense of objective judgement and independence in the best interests of the company and that the auditors stand on an ethical pedestal higher than the rest of the civil society.
The scams point out that the above assumptions are indefensible. They were evolved in the 19th century Victorian age and do not fit in the 21st century behaviour which is driven, by and large, by material wealth-seeking motives.
It is not the place to discuss how an individual acquires ethical values and mind-set. Suffice it here to mention that, as we all know, they are both the effect of and cause for a society's ethical norms. It is a fatal fiction to think that, one could exorcise himself from being materialistic when he functions as director of a company while as part of society be materialistic in other respects.
It is simply irrational: "If you would be Pope, you must think of nothing else," says a Spanish proverb. In a recent study in Canada hundred per cent of the three-dozen Canadian chief executive officers observed that self-interest was the dominant factor in directors' behaviour. Also, a recent survey in the US showed 79 per cent of the corporate financial officers to be of the view that the scandals were due to directors' personal self-interests..
(With regard to Pakistan, consider the circumstances surrounding the petition of 28 companies to the Sindh High Court for winding up. Elsewhere, the directors would have been arrested, says Sultan Ahmad in his article in Dawn)
External supervision: The whole issue then is: where members of society could indulge in behaviour that is not conducive to the collective good of the society, do or should the societies leave the individuals free or impose laws with threats for punishment to ensure compliance with desirable norm?
We know that the society in such events puts in place code of conduct. The 'regulations' are a right step in the right direction.
'Regulations' expose users to greater risks than before. Like elsewhere in the world, the 'Regulations' have established the institutions of non-executive directors (NEDs) and audit committees to curb directors' self-serving and ensure that company performance is reported without grooming.
The 'regulations' link their independence solely to one aspect- they should not be connected with the company, its directors and promoters, which does not guarantee independence in fact. This is only one criterion out of the many to assure independence, for instance, who appoints them and their working modalities within the entity etc are equally important determinants to their independence. Thus, by creating expectations without appropriate mechanism to assure their realization the 'Regulations' expose users to greater risks than before. The regulators need to look into it.
To elaborate, I wish to mention the collapse of HIH, second largest general insurer in Australia. The commentators are almost unanimous that it happened due to lack of independent directors. Further, talking in hindsight about (US) corporate failures, the neds and the audit committee accept they were widely misled. They admit they approved seriously incomplete financial statements and accepted the word of the CEO that no harm would result even when corporation's conflict-of-interest position was crying, e.g., independent off balance sheet entities under the CFO to which the corporation sold assets and debts. And this, because they were not independent in fact.
Improvement: Investor's want to have more effectively control over the management and to see the future of the company from management eye. In this behalf, the 'regulations' have greatly improved the company law mandated directors' report. There is, however, yet great room for improvement in many aspects. e.g., the regulations require that the directors shall formulate and keep record of risk management policies but doesn't oblige them to disclose it in their report.
The balance sheet has serious structural defect- it can show only past history. Many countries have therefore taken steps to meet investors' needs by mandating directors to disclose appropriate strategic information in their report, e.g., Hong Kong requires directors to make about 60 disclosures of key areas; the UK is about to make it mandatory for directors of all quoted companies to include non-financial information and include both historic and forward-looking events and trends, including future plans, facts and events, probabilities, as well as risks and opportunities in annual report.
Of course, such disclosure might increase the vulnerability of management to criticism, but "in corporate governance terms this may be no bad thing: companies are a great deal more than the sum of their executive directors or even the whole board, observes Mathew Caved (closing the communication gap, The Institute of Chartered Accountants in England and Wales (ICAEW))
Regulations' are an instrument for attracting foreign capital. The wider access to global capital is conditional to good governance. We know for sure that international investors shall not lower the standards of good governance they are used to. Companies with no good governance mechanism will face greater investor pressure to either conform to or reconcile their practices with Western standards or be ready for high costs on capital.
Delisting: The delisting phenomenon is no big problem. At the age of four with paper hats and wooden swords we are all Generals. Only some of us do not grow out of it. What is needed is firmness.
This had happened in the US as well where consequent to Sarbanes-Oxley Act, 95 US public companies opted to go private. But, since the US Act extends to all non-listed companies that offer public debt or issue public equity as well, the delisted companies quickly realized that when it comes to 'Regulation', they can run, but they can't hide.
The phenomenon in Pakistan can be tackled effectively if the disclosures etc. are linked to the size of a company's balance sheet total, turnover and number of employees rather than to its legal category, private, and 'public.' Most of the countries have adopted this practice, for instance, the UK, Australia and New Zealand.
