April 30, 2007	Monday	Rabi-us-Sani 12, 1428

Corporate governance campaigner and activists after several years of experience have come to realise that boardroom is better option than courtroom. This approach, in their view, will attain the end objective. Furthermore, as many advocates believe, this has not disturbed their initial campaign focus.

Shareholder activists and governance experts have now seen the first results of their persistence. Their efforts seemed by many, as the campaign on corporate governance commenced, to fold up soon, has brought discernible results. This has spiked the mood and the activists have a new sense of dynamism.

Still a lot of questions loom large: whether and if the shareholder activists and governance experts got the needed support from the regulators and interest group and also on a bigger canvas from the stakeholders. There are no ready-made answers but the ground reality is not that disappointing. A lot of spadework and research including dialogue with various stakeholders dating back to early 1990s resulted in emergence of Code of Corporate Governance, Healthy Corporate Practices and International Best Practices, under various jurisdictions.

The second stage of these efforts of was to see the best practices applied in corporate governance. Both the developed and developing countries began this effort to make the working of corporate world more transparent. In this respect, developing countries opted for best healthy corporate practices to suit their specific circumstances and cultural background. Those countries which really meant business, graduated from the level whence they commenced the introduction of best practices. At this stage they are catching up with the most developed economies. Malaysia and Taiwan are in the forefront.

Will the corporate world rinse out of the dirt it accumulated in the days of Enron, Tyco and dot com episodes? Is it safe to say that corporate world has more of angles and less of devil? There are no definite answers but it is a clear, “yes, comparatively better”.

Financial statement frauds appearing in different ways and dimensions, have baffled even professional and the experts. Audit committees in such cases have been caught on the wrong foot. Proponents and experts on best practices mandated an audit committee for listed companies. Yet these committees failed to deliver despite the requisite resources at the disposal of the Audit Committee to draw on expertise from outside, should it deem appropriate.

Regulators have their ante up, should we conclude that all has not come to book is right in terms of best practices and have the shareholders been adequately protected. Many boards have played a pro-active role to ensure that transparency in their domain is not seen but felt. But still umpteen examples are discernible where practices are questionable. Is it board or senior management or both that need to be blamed. The minority shareholders protection is the prime concern of activists and there is a limit to what they can really do.

Examples of financial misdemeanour have surfaced recently, though the compliance of best practices is required yet the misfeasance is seen. Swissair for instance went into a landmark crime trial, SAirgroup (parent company) collapsed in 2001, with debts of $14 billion. Board manager, consultants and managers held for defrauding creditors, falsifying documents, breach of trust and making false statements

North-Western overstated its income from continuing operations by 176 per cent for the first quarter of 2002, 618 per cent for the second quarter, and 109 per cent for the third qurter due to improper accounting for accounts receivable, adjustments to customers' bills and allocation of losses to minority interests.

Cases of warranty accruals and overstated revenue have come to lime light whereby companies have used accounting jargons to their advantages. Nortel was carrying over $300 million in excess reserves; they did not release these excess reserves into income as required under, “generally accepted accounting principle”.

There is another phenomenon that has caught fancy. Apparently complying with regulations and rules, it is found that devil is in the detail: the buyback of shares. Companies have used deliberately deflating earnings to boost their share price. Thought by many as regular phenomena, a practice of buy-back of shares has lot to dissipate once such moves catches the eye of experts. There has been a discernible evidence that corporate executive have gained through such practices.

Are such examples prevalent in Pakistan? Many examples can be quoted by those who have seen them, observed them but yet there is no platform where these can be brought to notice, nor has there been serious effort, for whatever reason, to do this exercise seriously.

Those detected by regulators, auditors indicate such practices. One such example is regarding the booking of income, on which the auditors disagreed; once this surfaced the share price of the company went tail-spin. What is moral of this tale? We need to energise efforts in this part of the world to exert clout to check such practices.

Coming back to international scene, it is to been seen as to how have the activists and governance experts moved in their mission to cleanse such practices and protect those for whom they have taken up this battle. Over years, they have found that making the board responsible and making it sensitise to the need to protect the interest of stakeholders can be of immense help and bring substantial change in the corporate culture.

Under various jurisdictions and international best practices the spotlight is on the board. How does it plays its role, in terms of its legal obligation, moral responsibilities and expertise to discharge what is required. In major part, the board role is to permeate good practices down the line; the bottom-line is to set tone at the top.

Cases that have gone to the courtroom have resulted in long-drawn battles. Activists and even to some extent regulators and shareholder advocates believe that a strong board realising its obligations, and carrying out its moral obligations can and will in all likelihood be light at the end of tunnel. More rightly and prudently shifting to persuasion of the board; choosing boardroom instead of courtroom.