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Promoting best practices

January 14, 2008

Corporate governance issues continued to take centre stage in the corporate world during 2007. Ever since the Code of Corporate Governance was issued by the Securities and Exchange Commission of Pakistan (SEC) in 2002, companies have been striving to introduce best governance practices.

In the year 2007 significant moves have been made in improving corporate practices. This included understanding of the “business case” for good governance. This motivates companies and financial institutions to opt for good governance practice not because it is mandated by the regulators but because it makes business sense to do so.

The year 2007 also saw several companies (listed, unlisted, family-owned and SOEs) strengthening their corporate governance structures through improving board practices, documenting policies and procedures, improving transparency and disclosure and holding training sessions for board members and senior executives on corporate governance.

Another important achievement has been the strengthening of the Pakistan Institute of Corporate Governance (PICG) and the introduction by it of the

Board Development Series programme- an internationally accredited training programme for board directors. To date approximately 50 individuals have completed this training, which consists of 24 modules spread over a period of 12 to 18 months. These individuals are now designated as Certified Directors and recognised worldwide. It is hoped that over time a sufficiently large data base of certified directors will be created, which would address the most common dilemma faced by companies when nominating directors – the lack of qualified individuals.

Some of the other developments during 2007 were as follows:

Media plays a very significant role in creating an awareness of issues and advocating benefits. Similarly, in the area of corporate governance media has a very crucial role in forcing companies to adhere to best practices and insisting that regulators take action against those who do not comply. In order to do so, the media itself needs to be aware of the issues and have knowledge on how to report on corporate governance and unearth scandals related to this. For this purpose the IFC’s Pakistan Corporate Governance Project held several workshops for the media. To date, approximately 55 media persons have been trained on corporate governance reporting.

Curriculum: The PCGP is also working with leading Pakistani educational institutions to assist in developing a curriculum on corporate governance to be taught to final year students of business, economics and law. The idea is that when these students enter the corporate world as managers, government servants, judiciary, media personalities, etc, they would be aware of the issues and able to address them in a positive manner.

Assessments: Owing to the increased awareness of the benefits of good governance to companies, a number of them are now embarking upon improving current practices and bringing them in line with international norms. This has also been accelerated by the fact that, increasingly, international institutional investors are looking at corporate governance practices of companies before making investment decisions. Companies are, therefore, now having corporate governance assessments carried out to identify current practices and highlight and improve upon the gaps. To date one state owned financial institution and one private sector company has completed such an assessment and several are in the pipe-line.

Judiciary: It is very important for the judiciary to understand the principles of corporate governance, especially, when they have to take decisions in commercial cases/disputes. With the increase in privatisation activities and the improved flow of foreign direct investment, such cases are bound to increase (as we have already witnessed in the Steel Mills and PSO privatisation cases). With this in mind, two training workshops were conducted for the judiciary with the cooperation of the Pakistan Judicial Academy. To date approximately 70 judges have been trained on corporate governance and the issues that companies could face because of the lack of it.

Commercial banks: In April 2007, the SBP made amendments in the prudential regulations for commercial banks, essentially to strengthen corporate governance. One of the amendments made was the requirement for these banks to have a minimum of 25 per cent of their board of directors to be independent. The SBP, with the assistance of the IFC, is also drafting guidelines on corporate governance for commercial banks. All this is in recognition of the fact that corporate governance plays an even more important role within financial institutions and any failures here can have grave consequences for the national economy.

Code: In view of the increased awareness of best corporate governance practices and the fact that the current code of corporate governance has been in effect for five years now, the SECP has initiated an exercise for reviewing the current code and strengthening it further. This exercise is being carried out under the leadership of the PICG who have constituted a task force for this purpose. One hopes that the revised code will embody international best practices, which will further align our corporate sector with international norms.

The leadership for good corporate governance has to come from the board of directors. It is they who have to be totally committed and set the tone at the top, as the board remains at the centre of all governance issues. The tone at the top shapes corporate culture and permeates through the entire company and its relationships with investors, customers, suppliers, employees and other stakeholders. This is essential to ensure that the board functions effectively and is able to meet all its responsibilities.

A key challenge facing today’s boards of directors is promoting long-term shareholder value in the face of opportunities to realise short-term stock-market gains. Directors have to navigate through an ever-increasing plethora of disclosure requirements and ever-evolving best practices. It is important the boards of directors find the right balance between monitoring compliance and advising as to strategy.

The boards of directors will, amongst other things, increasingly have to focus on the following issues: monitoring performance of management; monitoring compliance with legal and regulatory requirements; and reviewing internal controls and risk management systems.

Building an effective board cannot be legislated but can be accomplished over time given the necessary will and commitment.

The writer is the IFC Manager for the Pakistan Corporate Governance Project