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| August 21, 2006 | Monday | Rajab 25, 1427 |
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An unholy nexus
Fears of disease after rains
Fiduciary duties in privatisation
A threat to science study
THE widespread support for the Supreme Court decision on privatisation of the Pakistan Steel Mills (PSM) reflects the deep anxiety, even among supporters of privatisation, about the manner in which state-owned assets were being sold.
THE results of the alleged plot to bomb transatlantic airlines have varied from the serious to the ludicrous: while Britain and America have thanked Pakistan for unearthing the plot, flights have been delayed because a woman was carrying a screwdriver and Vaseline and a pregnant woman had the wrong ethnicity. The Vaseline woman’s nationality was not established: evidently, she was “normal”, but the media did not fail to mention the Pakistani origin of the woman in the other case. A couple of other flights too were delayed, even though the bomb scare turned out to be a hoax. Doubts on the authenticity of the plot have been cast by certain sections in Pakistan and Britain, and at least one British diplomat-turned-columnist thinks it is “rubbish”. His line of argument, which tends to strengthen the conspiracy theory, is that the hoax was intended “to get Bush and Blair out of political trouble”, and the media has “bought, wholesale, all the rubbish they have been shovelled”. At the diplomatic level, Kabul has denied Islamabad’s claim that the mastermind behind the plot is in Afghanistan, alleges that Pakistan is trying to shift the blame and claims that the intelligence coming from Pakistan is “diversionary” in nature.
Has the war on terror degenerated into such inanities as a woman having a screwdriver and Vaseline on board? But, invariably, it is the Muslims who suffer. To quote the ex-diplomat again, of the over 1,000 Muslims arrested in Britain on suspicion of involvement in terrorism, only 12 per cent are charged with any crime. This, he says, constitutes “harassment of Muslims on an appalling scale”. The western media has, of course, played a major part in trivialising the war on terror by sensationalising trivialities. One French journalist arranged a bogus interview with a fake Al Qaeda operative in Pakistan’s tribal area, while one British newspaper came out with an in-depth story — along with a map — showing how, after the ouster of the Taliban regime, Osama bin Laden moved from Afghanistan to Pakistan via Iran, then boarded a boat and was somewhere in Africa. Other newspapers seemed to know exactly where Osama is hiding, but would not disclose it!
What has caused the credibility of the plot to suffer was its timing, for it came at the height of the Israeli offensive in Lebanon. While sections of the European media did voice criticism of Israeli war crimes, the American and British governments merely pleaded with Israel not to use “excessive” or “disproportionate” force. Beyond that, there was no attempt by the US or Britain to condemn, much less restrain, the Zionist terror. In fact, Washington and London are co-sharers in the crimes against the Lebanese people because the two governments resorted to every diplomatic subterfuge to frustrate any French attempt to have the UN adopt a ceasefire resolution. The result was a prolongation of the war and the slaughter of Lebanese civilians. Clearly, the Bush and Blair governments either failed to gauge the intensity of the rage in the Muslim world or, if they did, chose to ignore it for the benefit of Israel. It is this aspect of the war on terror that needs to be taken care of instead of the US and Britain joining Afghanistan and India in asking Pakistan to “do more”. Support to Israeli terrorism only produces more extremists and terrorists in the Muslim world.
A RECENT report by the Network for Consumer Protection confirms the worst fears regarding the age-old and mutually beneficial relationship between physicians and multinational pharmaceutical companies. MNC largesse for doctors includes overseas trips, funding for family weddings and holidays, expensive gifts such as air conditioners and laptops, down payments on new cars and symposia sponsorship. These hefty investments clearly pay for themselves, and more, in the form of prescriptions for drugs manufactured by favoured companies regardless of their efficacy. For a car down payment, for instance, all that the “physician has to do” is to “write 200 prescriptions for the company’s expensive drug.” Local pharmaceutical companies also offer perks but usually on a smaller scale. This brazen unethical practice assumes added significance in the Pakistani context given the poor skill levels of many general practitioners and the easy availability of potentially hazardous drugs. Injudicious prescription of medicines can harm patients in many ways and cause health problems. To push the products of a particular manufacturer, many doctors prescribe drugs whether or not their use is called for. Similarly, expensive brand-name medicines are prescribed even when cheaper generic alternatives are available in the market. Particularly worrying is the prescribing of psychotropic drugs for mentally ill patients who require careful treatment, follow-up and monitoring. Moreover, the healing potential of counselling and therapy is often lost in this mode of treatment conditioned by factors other than medical.
This unethical relationship between greedy doctors and pharmaceutical firms will not be easy to curb, especially in the case of private practices. Hospitals can, of course, establish a code of conduct that prohibits doctors from accepting gifts or other benefits from pharmaceutical companies and their representatives. Depending on the violation, erring physicians must be disciplined or dismissed from service and reported to the Pakistan Medical and Dental Council, the authority empowered to register the country’s doctors. In the wider context of healthcare, it is imperative that the health authorities tackle the problem of quality control in locally produced medicines. This will be possible only if an independent drug administration authority is established on the lines of the US FDA. Such moves are already afoot in India and there is no reason why they cannot be adopted here.
DOCTORS in Karachi are warning of a possible outbreak of waterborne diseases after the recent rains in the city. In addition to the usual cases of vomiting and diarrhoea that consumption of contaminated water inevitably entails, they also fear that a large number of people will contract diseases such as cholera and typhoid if they are not careful. Their warnings should be taken seriously, especially in view of the poor handling of the post-rain situation by civic agencies whose efforts to clear the pools of water on the roads and elsewhere have clearly not been enough. With gutters overflowing, sewage content is entering cracked waterlines, resulting in the contamination of potable water. Moreover, standing water in many areas is proving to be an ideal breeding ground for mosquitoes, and if it is not drained out quickly, the city could witness a surge in malaria cases.
Obviously, the situation calls for better planning and improved drainage facilities so that seepage does not occur in waterlines and the contents of sewers do not mingle with water meant for drinking and other uses. It goes without saying that regular cleaning of the sewers, storm and main drains is essential to ward off a calamitous situation resulting from heavy rainfall. For the time being, the roads and open spaces strewn with filth must be cleared and the standing water drained. Large-scale fumigation in areas with stagnant water pools is also necessary to lessen the chances of vector-borne diseases.
Although Pakistan is a common law country like the US and the UK where corporate and securities issues are driven by case law, this is the first time in over 150 privatisations that the Supreme Court has judicially reviewed such a transaction.
It turns out from the Supreme Court judgment that our statute-driven privatisation has several flaws and its practice has been riddled with violations of laws, rules and fiduciary obligations. Pakistan’s corporations work under the fiduciary model of governance where the interests of shareholders (i.e. the people in state-owned enterprises) are represented on the board.
In such a model, judicial review, by courts — although ex post facto — provide an important remedy for corporate ailments. The absence of such a remedy had been a major cause of anxiety among people over certain privatisation cases and the court verdict, therefore, comes as a relief.
Because privatisation involves the sale of assets along with control over the corporation, it is an extraordinary event in the life of a corporation. It is the last chance for shareholders to realise control premium since henceforth they would have no ability to control the policies and working of the corporation which would now be managed according to the interests of the controlling shareholder.
That is why corporate law in developed countries like the US and the UK places the conduct of dealing parties under “enhanced scrutiny” from the moment the decision to sell corporate assets is taken so that negative practices like self-dealing, violation of laws and fiduciary obligations are not adopted and shareholders are deprived of full benefits from this last chance.
The Supreme Court has highlighted this concern while referring to a World Bank report that “The government... has a fiduciary responsibility to its citizens when it privatises an asset.” The Bank is actually advising that the same parameters for privatisation be followed in Pakistan in the sale of corporate assets as in other common law countries like the US and UK.
American corporate laws hold increasing sway over M&A (mergers and acquisitions) activities in European and Asian countries including Pakistan since the US is often the largest investor in these countries.
Within the US, the predominant corporate law that is also most friendly towards the management/ authorities is the Delaware general corporate law of the state of Delaware. That is why over 40 per cent of the companies listed on the NYSE and over 80 per cent of Fortune 500 corporations are all Delaware-registered corporations.
Yet, even Delaware corporate law imposes high standards of conduct upon the management and all parties dealing with the sale of corporate assets. In the US, while the black letter law of fiduciary duties of care and loyalty has long been established, enhanced scrutiny standards have been adopted in M&A transactions, through three landmark judgments by the Delaware supreme court in the Unocal, Van Gorkom and Revlon corporations cases.
Any doubts about conflict of interest situations were also dispelled in favour of securing the best price in sale transactions against any contractual obligations that reduced that price in another important judgment by the court of chancery of Delaware in Ace v. Capital Re Corporation (1999). The verdict held that “the public policy of ensuring directors’ care and loyalty in significant corporate events such as mergers outweighs the protection of the acquirer’s contractual rights.”
Therefore, in declaring the sale of PSM “void and of no legal effect” in view of acts of “omission and commission” that adversely affected shareholders (people) from receiving the best price, the Supreme Court judgment upheld the high standards of fiduciary duties towards the people that are also respected in other common law jurisdictions.
Leaving aside the important question of the Council of Common Interests’ approval, the privatisation of PSM was also vitiated by violations of mandatory provisions of law and rules and non-compliance with fiduciary duties, specially those relating to three principal areas of privatisation: (a) prequalification of bidders, (b) valuation of the assets and (c) a level playing field i.e. not changing the terms of the deal to benefit one party.
Its social policy merits apart, Privatisation Ordinance 2000 sets debt retirement as the essential objective of privatisation in Pakistan.
This imposes a legal obligation on the players to secure the highest price for the enterprise — similar to what American corporate law calls Revlon duty i.e. not to be affected by any factor other than securing the highest price in sale transaction. Yet, as the judgment notes, several billions worth of “the incentives/ concessions were not advertised but extended to successful bidders.”
We know that precision is not possible in valuation models and reliance on a single model is inadvisable. The valuation and marketing strategies adopted in privatisation have also been dented by the recent sale of 81 per cent of the shares of Union Bank (with 65 branches) for $431 million (equal to Rs25.8 billion) whereas 51 per cent shares of Habib Bank (with 1,425 branches in Pakistan and 48 abroad) were privatised in 2003 for Rs22.5 billion.
Normally the courts are not supposed to substitute their opinion in the conduct of business operations — the Business Judgment Rule (BJR) — or “in the policymaking domain of the executive”. But as the Supreme Court has noted “if the decision of the authority betrays total disregard of the rules and the relevant material, then the said decision fails the test of reasonableness laid down by the constitutional court for the exercise of the power of judicial review.”
The principal actors upon whom fiduciary duties devolve to meet these standards would include the board of directors of PSM, the Privatisation Commission, the Cabinet Committee on Privatisation (CCOP) as also valuers and their financial, legal, accounting and technical advisors whose discharge of fiduciary duties are reflected in the judgment. They were all under ‘Revlon duty’ to secure the highest price for the asset being privatised.
It is troubling that although privatisations have been going on for 15 years, these omissions and commissions were not noticed internally and it took the Supreme Court to do the needful.
It is also troubling that while approving previous and some additional privatisations, the CCI did not address the flaws pointed out in the judgment and plugged these out of the system before proceeding with further privatisation. It would be relevant here to refer to para 82 of the judgment which says, “Apart from the illegality noted above viz complete violation of Rule 4 this unexplained haste casts reasonable doubt on the transparency of the whole exercise.”
This decision will cause no obstacle to investment flows in Pakistan as some learned advocates argued before the court. The US is the largest investor abroad as well as the biggest destination of foreign investment flows and every serious investor is — or should be — familiar with the aforementioned and well-established practices of American corporate law. If anything, this judgment will help raise the quality of corporate law practice in Pakistan and set standards that are also respected and followed in other common law jurisdictions like the US and UK.
There is yet another reason why this decision is welcome. It has now set the standard of enhanced scrutiny for the sale of public assets and underlined the need for reviewing these judicially to see whether fiduciary duties have been duly fulfilled in privatisation transactions or if the disease that the court discovered in the PSM privatisation pervades the sale of other national assets as well.
E-mail: smshah@alum.mit.edu
THE idea that science promotes prosperity is far from cutting edge. Tony Blair makes the point in the context of a world he describes as changing beyond recognition, one of the themes that he shares with Harold Wilson, who first insisted on Britain equipping itself for the white heat of technology in the 1960s.
Yet even if it is obvious to state it, science does matter — and especially so when India and China are extending global competition from low-skill to high-tech sectors by churning out four million graduates each year. So the CBI’s claim that the education system is threatening the science base deserves close examination.
The charge sheet certainly looks serious. Physics and chemistry represent a dwindling share of degrees and the subjects suffer from teacher shortages. The upshot is that employers are forced to recruit abroad to get the scientists that they need. But the picture of failure is also a simplification.
Graduate numbers in biology and computer science, for example, have boomed in the last decade which, given the growth of the software and bio-tech industries, might suggest that students are choosing wisely.
—The Guardian, London