WHAT IS GOOD CORPORATE GOVERNANCE?

Best Practice Recommendations

TAUQIR HAIDER
Apr 23 - 29, 2007

Corporate governance is a set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.

Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized. Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development and exploration) as well as providing accountability and control systems commensurate with the risks involved.

How good corporate governance is achieved?

What constitutes good corporate governance will evolve with the changing circumstances of a company and must be tailored to meet those circumstances. Best practice must also evolve with developments both in Pakistan and overseas. There is a need of a comprehensive model of good corporate governance. Each principle is explained in detail, with implementation guidance in the form of best practice recommendations.

THE FUNDAMENTALS

1. Fundamental to any corporate governance structure is establishing the roles of management and the board.

2. A balance of skills, experience and independence on the board appropriate to the nature and extent of company operations.

3. There is a basic need for integrity among those who can influence a company's strategy and financial performance, together with responsible and ethical decision-making.

4. Meeting the information needs of a modern investment community is also paramount in terms of accountability and attracting capital. Presenting a company's financial and non-financial position requires processes that safeguard, both internally and externally, the integrity of company reporting.

5. Providing a timely and balanced picture of all material matters.

6. The rights of company owners, that is shareholders, need to be clearly recognized and upheld.

7. Every business decision has an element of uncertainty and carries a risk that can be managed through effective oversight and internal control.

8. Keeping pace with the modern risks of business and other aspects of governance requires formal mechanisms that encourage enhanced board and management effectiveness.

9. Corporate governance rewards are also needed to attract the skills required to achieve the performance expected by shareholders.

10. The impact of company actions and decisions is increasingly diverse and good governance recognizes the legitimate interests of all stakeholders.

Why is it important to Pakistan?

Demonstrably good corporate governance practices are increasingly important in determining the cost of capital in a global capital market. Pakistani companies must be equipped to compete globally and to maintain and promote investor confidence both in Pakistan and overseas. In an examination of our corporate governance practices, Pakistan starts from a position of scratch. However, it is important that we continue to review new practices to ensure they continue to reflect local and international developments and position of Pakistan at the forefront of best practice.

Disclosure of corporate governance practices (applying the "if not, why not?" approach)

DISCLOSURE REQUIREMENTS

Companies are required to provide a statement in their annual report disclosing the extent to which they have followed these best practice recommendations in the reporting period. Where companies have not followed all the recommendations, they must identify the recommendations that have not been followed and give reasons for not following them. Annual reporting does not diminish the company's obligation to provide disclosure. The Listing Rules should mandate the establishment of audit committees by those companies and require that the composition, operation and responsibility of the audit committee comply with the best practice recommendations.

WHERE DISCLOSURE SHOULD BE MADE?

Specific guidance should be given with supporting principle as to what disclosure the company is required or encouraged to make and where. In some cases the company is required to set out the relevant disclosure in a separate corporate governance section of the annual report. Where the SECP requires particular information to be included in the directors' report, the company has the discretion to include a cross-reference to the relevant information in the corporate governance section of the annual report rather than replicating that information.

For more general information, there are requirements to make information publicly available, ideally by provision on the company's website. This information should be clearly presented in a dedicated corporate governance information section within the website. The corporate governance section of the annual report should contain appropriate website references, links or instructions to enable shareholders to readily access this information. Where a company does not have a website, this information must be made publicly available by other means. For example, a company may provide the information on request by email, facsimile or post.

WHAT ENTITIES ARE AFFECTED?

The best practice recommendations can be applied to companies and other types of listed entities. Where appropriate, the term 'company' is used in the best practice recommendations to encompass any listed entity, including listed managed investment schemes (trusts), listed stapled entities, and listed foreign entities. Also where appropriate, references to 'shareholders' and 'investors' will include references to unit holders of unit trusts.

MONITORING IMPLEMENTATION AND CHANGE

Corporate governance practices must be evolutionary and responsive to the information needs of local and international investors. SECP should be committed to a continuing review of principles and best practice recommendations of corporate governance to ensure that they remain relevant, take account of local and international developments and continue to reflect international best practice. Companies and investors are encouraged to provide feedback about the implementation and impact of these recommendations to their corporate governance representative. SECP should also establish a separate 'implementation review group' to report back to the council on the experience of companies and investors. The corporate governance will formally review the impact of principles and best practice recommendations following collation and examination of disclosures made in annual reports and consideration of feedback received, including the reports from the implementation review group.

The essential corporate governance principles & recommendations

1. Lay solid foundations for management and oversight

Recognize and publish the respective roles and responsibilities of board and management.

2. Structure the board to add value

Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.

3. Promote ethical and responsible decision-making

Actively promote ethical and responsible decision-making.

4. Safeguard integrity in financial reporting

Have a structure to independently verify and safeguard the integrity of the company's financial reporting.

5. Make timely and balanced disclosure

Promote timely and balanced disclosure of all material matters concerning the company.

6. Respect the rights of shareholders

Respect the rights of shareholders and facilitate the effective exercise of those rights.

7. Recognize and manage risk

Establish a sound system of risk oversight and management and internal control.

8. Encourage enhanced performance

Fairly review and actively encourage enhanced board and management effectiveness.

9. Remunerate fairly and responsibly

Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined.

10. Recognize the legitimate interests of stakeholders

Recognize legal and other obligations to all legitimate stakeholders.

- The contributor is a senior financial consultant