THE TUSSLE between the Securities and Exchange Commission of Pakistan (SECP) and the Karachi Stock Exchange (KSE), which started after the issuance of an order by the SECP on August 13, 2002 as a first step towards the separation of the ownership and management of the KSE with a view to guarding the interest of shareholders and investors, finally ended in the first week of September.

After this reform measure, would the shareholders and investors, whose interest is an avowed goal for the SECP to guard, be at all represented directly or adequately on the KSE’s Board of Directors(BoD)? And, would one stakeholder’s interest of stock brokers continue to be over-represented on the board despite the above well-intentioned effort?

The strength of the BoD has been reduced from 18 to 9 with five broker members and four outside directors. The 5th member would be the managing director who would not vote in the election of the chairman. The chairman would no longer be elected by the general body of the broker-members but by the BoD as a whole including the outside directors. The chairman is thus set free from a previous accountability only to his electorate of brokers. He will now be accountable to the BoD and the other stakeholders as well. This is a long over-due step in the direction of a balanced representation of various interests and towards professionalization of the management of stock exchanges in the country.

When the question of performance improvement arises, the issue of balance of power invariably needs to be dealt with as it is this imbalance that is, inter alia, responsible for a lop-sided distribution of performance gains or losses and/or direction of the organization. Performance is, therefore, a function of power which correction is imperative for good governance, irrespective of the level of operation—macro or micro.

However, if performance is a function of distribution of power, it is important to ascertain the sources of power of the categories of directors on the KSE’s BoD. Net balance of power would then be important to determine as it may not necessarily just be a function of numerical strength currently divided equally between the voting member and nonmember directors. While the broker directors will be backed by immense wealth and social status this society confers on the wealthy, the outside professional directors will mostly be having expert power mainly that is usually discounted heavily in our wealthy elite circles. For job aspirants are viewed as “servants’, not supposed to be putting in their two bit when important crucial decisions are taken mainly by the wealthy who, according to our societal norms, are supposed to be taking major decisions by birth right or even worse a divine right as heavy shades of feudal behaviour keep appearing in various forms in the country and micro institutions alike—professional or otherwise.

Therefore, before viewing equation of voting right as a fine balance of power, it is important to realize that mere equation of numbers may not necessarily lead to an equation of power at the KSE’s BoD. Further, mere equation of voting rights alone for electing the chairman may not lead to a balance either as outside directors remain outnumbered.

Because of the outside directors’ lower numerical strength and a “weaker” source of power as discussed above, the question of balance of power remains which could be further addressed through a direct representation of the shareholders and the investors on the BoD of the KSE. Further, all the key stakeholders ought to be adequately represented on the board which is important for guarding their interest which, in this case, are also the shareholders and investors. Unless these interests are guarded, promoted, and adequately represented directly, the bourse cannot develop further and thrive. And, the syndrome “of the brokers, for the brokers, by the brokers” will be difficult to get rid of. Dilution of brokers’ interest may not necessarily rectify their over-representation on the board which is an important issue to address if power is to be balanced to secure all interests.

Direct representation of key stakeholders is important as we have yet to know whether the seven outside professional directors on KSE’s BoD for several years now have adequately promoted or attempted to promote the interests of the key stakeholders—shareholders and investors. If they have tried, the attempts are not visible publicly either in the above direction or towards the development of the capital market in general. For, board membership alone becomes a factor that may look very good on the CV which is about all the wealth that the professionals have. So, securing a seat on KSE’s BoD may become an end in itself rather than as a means towards the end that the SECP is seeking. Personal rapport with the powerful and influential broker directors may be more important to develop than achieving the goals and the mission of the BoD which should be clearly delineated and sold to the directors as well together with their responsibilities and obligations.

First, outside directors should be carefully chosen after determining whether or not they would be able to make time to fulfil the above requirements. That is, whether or not their own professional commitments and their other board memberships would allow them time and space to function as involved directors of the KSE’s BoD. In this case, other board memberships should not be viewed as additional qualifications but as a limitation on their time and attention required essentially for a fuller engagement with the KSE’s BoD. Otherwise, this constraint alone would lead to an over-representation of the broker directors that the SECP has been trying to guard against.

Second, it is the inclination to reform that would need to be checked out too. For, professionals in a wealthy elite dominated society tend to be more interested in building personal relationships with the society’s influential members in their bid to make further progress in terms of the next position they should be moving to.

So, while personal progress may occur, collective or institutional progress may not result when it is for the purpose of institutional development that they are placed in positions as coveted as KSE’s directorship. However, efforts towards the latter goal might entail more personal costs than gains in a body where a major stakeholder remains dominant. It would be important to seek out professionals whose inner drive and thereby personal life goals are harmonious with the overall institutional development goals. Only such professionals would be able to balance the brokers’ power somewhat. Otherwise, not only will the outside directors remain outnumbered but power imbalance will persist.

From the vantage point of the more powerful in the society, professionals are very easy to “work” with by determining the latter’s goals in life and helping them achieve the same in consideration of which we see in the country that acquiescence, compromises, “consensus,” amenability, and “understandings” abound. The upshot is ‘no change’ despite ‘changes’ in form. Either the benefits of the above indicators of implicit or explicit ‘consent’ are raised so much that they significantly outweigh the costs of dissent and the professionals stand tempted. Or, the costs of dissent are raised so much that these cross the threshold of tolerance of even the most ardent reformers. Based on secondary sources of information, it is the type of M/s Irtiza Husain, Shamim A. Khan, and Khalid Mirza (of SECP) that will need to be searched and sent into the KSE’s board room from outside. Each one of these reformists has led to what we now have in the form of an organized, determined and resolute corporate regulator. The BoD of KSE should be no less so.

It is substantive and tangible reform measures that are required to turnaround extremely unfavourable situations. Effort should, therefore’ continue in the desired direction with attempts to rectify situations that could not be rectified in a previous attempt.

For, the goal should not be maximum control or major power of any one stakeholder over decision-making. If this be the case, then it is a power game to promote vested interests of a stakeholder group or two.

On the contrary, if the goal remains as lofty as stipulated by the SECP, then one may even end up conceding some power in the interest of the overall goal as the SECP did when a final agreement was reached. The SECP allowed the chairman to be from amongst the broker members contrary to their earlier position on this issue when they wanted the Chairman to be from amongst the non-member directors. The SECP further allowed a 9th member on the BoD who would be the KSE’s MD although without a right to vote in chairman’s election.

The SECP conceded so that the thrust towards the development of capital markets is maintained as it is an efficient and an effective capital market that all would like to see eventually. It is against this backdrop that the above effort and the so-called “tussle” should be viewed. And, so should the need for more and more substantive balancing acts be seen.