December 18, 2006	Monday	Ziqa'ad 26, 1427

THE integrity of a business is central to the stability of our economies and so is the good corporate governance. Good corporate governance includes the rules and practices that govern the relationship between the management and shareholders of a company as well as stakeholders like the employees creditors, contribute to growth and financial stability by underpinning market confidence, financial market integrity and economic efficiency.

Recent corporate scandals have focused the minds of the governments, regulators, companies, investors and general public on weaknesses in corporate governance systems and the need to address this issue.

For all this, fundamental amendments are needed in the Companies Ordinance 1984. An effective corporate governance framework needs to be backed by effective board structure. The board as a whole and their individual members must have business-related expertise, education and experience in managing a company.

A company carries very important status in an economy. It mobilises the resources and contributes to growth and financial stability and economic efficiency of the company and our economy as a whole. Each member of the board must have clearly-defined responsibilities that include establishing a code of corporate ethics, ensuring compliance with the laws and standards and oversight of internal control systems for financial reporting.

Looking at the structure of the board of the companies in our country, which mostly comprises family members, including household females, are not expected that they focus on long-term issues such as assessing corporate strategy and activities that might involve a change in the nature and direction of the company. The result is before us.

Since the board and its members have a fiduciary duty to the company and shareholders, it should be independent and objective. In case a company is part of a group, the board’s duty is to the company, not to the group.

The good corporate governance system aims at establishing an effective system of checks and balances between the board and the management. The professional managers have a key role to play in the modern listed or widely-held company whose performance should be monitored by the board to ensure strategic guidance of the company and the oversight of internal control.

The board in turn is accountable to shareholders who, should be able to exercise their fundamental ownership rights, including appointing and removing board members, and should be treated equitably by the company. The corporate governance systems of the companies in Pakistan mostly lack this fundamental principle. The appointment of board members is manipulated in a manner that the minority shareholders do not have an opportunity in real sense to play a constructive role in appointing or removing them. The family members of sponsors, as an ownership right, have life tenure on the board because of such provisions of the Companies Ordinance in this regard.

The effective use of right to monitor and influence the board by minority shareholders requires basic standards of disclosure and transparency, the area considered more complex with companies and their management which are controlled by dominant sponsor shareholders.

Thus the minority shareholders appear to have been either passive or ineffective at sanctioning the board. This situation has resulted that in number of cases controlling shareholders have pursued their interest at the expense of minority shareholders. The regulators are to address these issues in our corporate sector to safeguard from corporate failure as has been in number of recent high-profile cases.

Under the present scenario, the minority shareholders will never be able to play a participatory role in their companies. However, recent trend of growth of shareholdings of institutional investors under Mutual Funds is often thought to have led to the formation of a large and powerful constituency in favour of monitoring the board of the companies.

The regulators should encourage the institutional investors to cooperate and coordinate their action with the minority shareholders in respect of election of board members, placing proposals on the agenda and holding discussions directly with the a company. These are all welcome as valid methods for improving corporate governance. The boards will never adopt a structure for effective accountability to shareholders. However, desirable features such as cooperation between investors and protection of minority shareholders may depend to a great extent on regulator’s action and to issue regulatory directives and to enforce their rights.

The board should act objectively and independently and be accountable to shareholders. They should draw a code of ethics and introduce an effective compliance programme to ensure that this code is followed.

Although, boards constitute committees for tasks such as audit. But the audit committee does not play its due role because it comprises of board members themselves and also the household females as its member who do not attend assignment. Thus, underlying concepts are not always well understood and committee often serves different roles in different companies.

Many countries now regard as best practice the creation of a remuneration committee with independent directors for formulating and disclosing a remuneration policy that highlights the link between remuneration and performance for key executives and board members. The composition, mandate and remit of committees be clearly defined and fully disclosed in the annual report of the company.

Good corporate governance, therefore, is essential for companies that want to stimulate private sector investment. If companies are well run, they will prosper. This, in turn, will enable them to attract investors whose support can help to finance faster growth.

Poor corporate governance, on the other hand, weakens a company’s potential and at worst can pave the way for financial difficulties and even fraud. Recent corporate scandals in a number of countries have highlighted a need for improvements in standards of corporate governance.

The performance of stock markets can be endangered by adverse impact of bad corporate governance. Ensuring the stability of stock markets requires trust in the integrity of these markets and in the management of the companies whose shares are listed on them.

The regulators and policy makers should develop governance framework with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and promotion of transparent and efficient markets.