December 11, 2006	Monday	Ziqa'ad 19, 1427

WHY and how should good governance practices be promoted in non-listed companies? This was the topic of a seminar organised by the Pakistan Institute of Corporate Governance (PICG), the Centre for International Privative Enterprise (CIPE), and the Institute of Chartered Accountants of Pakistan (ICAP) in Karachi last month.

The participants included leading professionals and known businessmen, including those who have contributed to the development of Code of Corporate Governance for listed companies. A number of important points were highlighted by the participants, five of which are being explained here.

First, the non-listed sector has tremendous economic importance and promotion of good governance in this sector can bring strong economic gains. Compared to about 650 listed companies at Karachi Stock Exchange (KSE), there are about 50,000 non-listed companies. They are a diverse group including both for-profit and not-for profit entities of different legal form and business size. Some of them are very large in terms of their business size and how they are governed touches upon the lives of many citizens.

Second, there is a case for raising standards of governance in the non-listed sector because “good governance is good business” for any entity whether or not it is listed on a stock exchange. Internationally, research and experience are showing that good governance brings many advantages, such as business competitiveness, credibility with customers, suppliers, and creditors, access to low cost capital, ability to attract and retain professionals, business continuity in times of stress and so on.

In addition to commercial interest of the organisation or its controlling shareholder, the case for raising standards of governance can also be made on other grounds such as protection of interest of stakeholders other than controlling shareholders such as employees. In some entities, such as banks and utilities, protection of public interest also provides sufficient justification for demanding better governance.

Third, the initiative is supported by international precedents. Since formal efforts to promote good governance in listed companies, such as codes of corporate governance, have already become an international practice, it is only natural that we are seeing initiatives for non-listed companies.

The four core principles of good governance - fairness, transparency, accountability, and responsibility - are fairly universal in nature and their adoption does not depend upon the listing status. Some countries like Belgium have already introduced formal standards for the non-listed companies.

The Global Network for Corporate Governance of Non-Listed Companies has also been established in 2005 to bring together policy makers and practitioner for developing better understanding of challenges of governance in the non-listed companies.

Fourth, time is right to initiate a dialogue for raising the standards of governance in non-listed companies in Pakistan. With the increasing economic interaction in different parts of the world and indicators of good governance becoming part of the investment criteria used by large global investors, we can ill afford isolation from the international developments on good governance. Thanks to the implementation of the Code of Corporate Governance for listed companies in 2002, we already have more than four years of experience to guide us.

In fact, efforts to raise the standards in non-listed sector are already taking place as shown by the prescription of formal standards of governance - for non-listed banks and insurance companies, which are quite similar to those used for their listed counterparts. There is a need to broaden the good governance initiative because it does not make sense to allow one entity (say Wapda) to adhere to lower standards of governance compared to the other (say Hubco just because the former is not listed on a stock exchange while the latter is.

Fifth, given the diversity of the non-listed sector, it is critical that a target segment be identified and customised governance standards and practices developed for that segment after extensive consultation with stakeholders. These standards should be voluntary rather than mandatory and the initiative should be led by private sector so that it is not perceived by businessmen as a ploy by bureaucrats to extend their regulatory jurisdiction.

The initiative would necessarily be a slow process in winning hearts and minds through different means, such as highlighting the success stories of good governance from within the business community. In some case, a mandatory approach may also be required depending upon the degree of public interest involved in the target segment, particularly in the state-owned enterprises.

One can only support the initiative taken by private sector institutions to promote good governance in the non-listed sector. However, the obstacles facing it are daunting. Perhaps the largest obstacle in its path is the lack of an enabling environment as the country is still struggling with the most basic issues of governance at the very top.

If we analyse weaknesses in enforcement of the Code of Corporate Governance for listed companies or for that matter the general state of lawlessness in the country, it becomes obvious that a core underlying cause are the weaknesses in the government-entrusted institutions with the enforcement of relevant laws. These weaknesses in turn can be easily traced to lack of good governance practices in the higher ranks of the government.

The ground reality is that if good governance pays, downright unethical business practices can also pay, at times much more and in a shorter time with no fear of accountability even in the long run. Recent examples of this phenomenon include scandals in the sugar industry, cement industry, and the stock market. When mandatory laws are being flouted with impunity, the business case for voluntarily introducing checks and balances is greatly weakened.

The progress is further constrained by the limited ability of the market forces to reward good governance. In Pakistan, principal financiers of companies are banks who traditionally have not demanded good governance from the borrowers. Demand for good governance is made in the capital market from which very little capital is raised. Many companies listed on stock exchanges are in reality tightly held family businesses which did not list by choice but were forced to do so by regulation. The investor-base is extremely narrow as less than one per cent of the country’s adult population owns shares of the listed companies. With scandals frequently hitting stock market, the value listing can add to a company that has also become suspect. Venture capital is also a relatively new phenomenon and whether and to what extent it can demand good governance from the non-listed companies remains to be seen. Efforts to promote good corporate governance, therefore, need to be complemented by the broad-based reforms to make the market mechanism work.

It is unfortunate that while the private sector is raising voice to promote good governance beyond listed companies, the government is yet to introduce formal codes of governance in its ranks. Public interest alone is a sufficient justification to have a mandatory code of governance for various government institutions, particularly the regulatory bodies. Inculcation of good governance practices in these entities could make the task of promoting good governance across the economy much easier than what it is at present.

In sum, promotion of good governance in the non-listed companies is a positive initiative but it has been made very difficult due to lack of an enabling environment. However, given that some progress has been made in case of the listed companies, one can hope that the seeds being sown today for improving the governance in non-listed companies would bring some fruits in the years to come.