ISLAMABAD, Jan 17: The Securities and Exchange Commission of Pakistan (SECP) has decided to effectively check unethical business practices, mismanagement and corporate frauds with a view to promoting good corporate governance in the country.

Informed sources told Dawn here on Monday that unethical business practices were root cause of widespread disappointments among shareholders, which forced the SECP to take serious notice of the issue.

A number of measures have been planned by the SECP including creation of awareness and understanding of a company's customer base, its employees, its supply chain, its shareholders, its processes and the state of society at large.

"Trust is the foundation of governance in any corporation. Unless that is built, problems continue to arise and good governance is the real way to build trust between businesses, society and government," a source said.

One of the lessons learnt out of the South East Asian crisis, he said, was weak or ineffective corporate governance procedures that could create huge potential liabilities for both individual firms and collectively, for society.

In this sense, corporate governance failures can potentially be as devastating as any other large economic shock. These concerns, the sources said, were not just limited to developing countries any more and that even in the advanced industrial societies, there was a global trend toward strengthening corporate governance.

The Asian financial crisis showed that even strong economies lack transparent control, responsible corporate boards, and shareholder rights can collapse quite quickly as investor's confidence erodes.

The sources said that foreign investors have valid excuses for not investing in Pakistan and they were seeking improvement in corporate practices. "We have to realize that good corporate practices enhance credibility and will definitely attract investors to increase their share.

Even if we do not look at the foreign investors as a primary source of capital, the practice of good corporate governance will improve the confidence of domestic investors too," another source said.

Good corporate governance, he pointed out, was the decision-making and implementation process, which guides all company activities in the promotion of human rights, labour and environmental standards and compliance with legal requirements within its operations and in its relations to the societies and communities where it operates.

Realizing the responsibility of the corporate sector and aiming at promotion of good corporate governance, the Securities and Exchange Commission of Pakistan along with others has established the Pakistan Institute of Corporate Governance.

The main objective, the sources said, was to engender sound corporate governance practices and provide an enabling environment for implementation of the Code of Corporate Governance issued by the SECP.

Corporate governance is basically a system by which companies are directed and managed. It influences how the objectives of a company are set and achieved, how risk is monitored and assessed and how performance is optimized. However, the good corporate governance structures encourage companies to create value and provide accountability and control systems.

The sources said that good corporate governance has become a topic of world wide importance and corporate entities have a crucial role to play in promoting economic growth as they are the engines of economic and social growth. Good governance is increasingly being seen as the hallmark of a well-run company.

The sources said that the Asian financial crisis, that started in July 1997 in Thailand and affected currencies, stock markets and other asset prices of several Asian countries, actually drove the process world wide.

For example, in recent years, the Cadbury Commission in the United Kingdom, the Vienot Commission in France, and the Organization of Economic Cooperation and Development (OECD) have all issued new guidelines.

In the United States, there is a mounting concern over ways to accomplish the core values of corporate governance including transparency, accountability, and building values.

The SECP, the sources said, has been directed by the higher authorities to ensure corporate governance practices which must contribute to social and environmental aspects.

They should cover environmental, social and human rights-based impacts and initiatives of companies. It is a good sign that many countries in both the industrialized and third world are taking the concept and practice quite seriously.