Prof. Dr. Khawaja Amjad
Saeed, FCA, FCMA*
Sep 06, 1999
The decade of 1990s has been on interesting one. Several management
thoughts were the major contributions. From an emphasis on Strategic Planning to Strategic
Management and finally to Strategic Intent, all these aspects received great attention.
Corporate Sector kept debating operational aspects of the above aspects and many
operationalized these in reality to their great advantage. Innovation and creativity were
in full swing and healthy Corporate Sector practices were witnessed.
However, the World Bank provided a dynamic leadership in asking
recipient of financial assistance to ensure Good Governance. Economist, London, in June
1999, published an interesting feature in this respect. Led by these motivations, the
concept of Good Corporate Governance has been gaining popularity. Accordingly lot of home
work was undertaken in UK, France, Japan, Hong Kong, South Africa, USA, Malaysia and
Australia. Now every country is struggling to evolve an excellent Good Corporate
Governance model to ensure discipline in Corporate Sector.
Corporate Sector, in South Asia, is fairly large. Its size in all SAARC
Countries, is a big one. However, generally speaking, the following symptoms are
conspicuous by their presence:
1) Sick Units continue to dominate the corporate sector. Listed
Companies are also included in this sector.
2) Large number of companies continue to show losses. Their
contribution to Government exchequer in Income Tax is neglible. Shareholders yearn to
receive dividend but it represents no better than their dream. Based on the Report of the
State Bank of Pakistan, Central Bank of the Country, for 1997-98, only 145 Companies paid
dividend out of 770 listed companies on the Karachi Stock Exchange.
3) The statutory audit by an external auditor needs to be restructured
to identify tricks applied by clever management to show losses.
4) The quality of members of the Board of Directors needs to be
upgraded for dynamic and effective management.
5) Productivity consciousness, avoidance of wastage with focus on three
Ms namely Men, Material and Machine are the subjects to be carefully addressed by
6) The practice of Non-Executive Directors to be associated by legally
constituted Board of Directors needs to be operationalized in our region.
7) Management Audits need to be institutionalized and logistically well
cushioned for producing productive results.
Concept of corporate governance
Several definitions exist in the World for Corporate Governance.
However, OECD has defined the concept of Corporate Governance as under:
"Corporate Governance comprehends that structure of relationship
and corresponding responsibilities among a core group consisting of:
(Board members, and
designed to best foster the competitive performance required to achieve
the corporation's primary objective."
Lot of space and research is needed to comprehensively explain global
practices in the area of Good Corporate Governance. This piece explains excellent
Corporate Governance practices of some selected countries.
We have selected two countries from Asia to share good corporate
governance systems. These include Hong Kong and Malaysia.
Hong Kong remained under administrative control of UK for a long time.
Consequently, the events in UK have been having healthy impact on Hong Kong. Lead in Good
Corporate Governance was provided by the Hong Kong Society of Accountants. Two Working
Groups Reports are available. Their major initiatives to operationalize good corporate
governance are contained in these reports. The two reports of the two Working Groups are
named as under:
1) Report of the Working Group on Corporate Governance: Published in
December 1995 and reprinted in February, 1996.
2) Second Report of the Working Group on the Corporate Governance:
Published in January, 1997.
Salient features of the Code for effective Corporate Governance are
1) Compliance matters should be identified.
2) Same family must not have more than 50% members of Board of
3) There should be a Chief Financial Officer through a mandatory
4) Attendance record of Board at Annual General Meeting should be
5) Four board meetings must be held every year. However, six meetings
6) Other fees paid to auditors should be separately disclosed.
7) There should be separate disclosure regarding Corporate Governance
in the annual report of the company.
8) An Audit Committee, with defined functions, should be established.
9) Interim reports containing balance sheet, income statement and cash
flow should be released.
10) The above interim reports should be reviewed by auditors.
Magnificent work was undertaken to develop Code of Ethics for Directors
and Secretary of the Company. These codes have been published by Registry of Companies,
It is high time that the South Asian Countries should benefit from the
experiences of the above two countries.
One country has been selected from Europe namely, United Kingdom. The
framework developed need to be carefully studied and intelligently adapted to suit to the
needs of South Asian Countries. Some of the useful and highly instructive thoughts are
Two Committees were set up in U.K. The first one was titled Cadbury
Committee in 1991. The second one was set up in 1995 and was known as Hampel Committee.
This Committee submitted its report in January, 1998.
Cadbury committee report
The above report focussed on four major areas namely, Board of
Directors, Non-Executive Directors, Executive Directors and Reporting and Controls.
Salient features of recommendations included the following:
I. Board of Directors
(1) Meeting of Board of Directors should be regularly held.
(2) It must retain full and effective control over the company.
(3) It must monitor the executive development.
(4) No one individual be given unfettered power. A balance be
maintained between power and authority.
(5) Non-executive direction having sufficient caliber and number be
included in the board of directors.
(6) Direction and control of the company should be firmly in their
(7) Independent professional advice at company's expense be obtained
for furtherance of their duties.
(8) For getting benefits from the Secretary of the Board and enabling
him to stay independent, the following guidelines be followed:
(a) Access to advice and services.
(b) Procedures are followed and rules and regulations are complied
(c) Board as a whole should examine the question of removal of the
II. Non-Executive Directors:
(1) The role of non-executives directors may extend to the following:
(a) Contribute towards independent judgment.
(b) Areas of contributions may include:
i) Strategy performance
ii) Key appointments
iii) Standards of conduct
(2) For ensuring fairness and independence, the following guidelines be
(a) Be independent of management
(b) Fees should reflect the time which they commit to the company.
(c) They should be appointed for specified terms and re-appointment
should not be automatic.
(d) They should be selected through a formal process.
Board as a whole should make this decision.
III. Executive Directors
(1) The contract of service should not exceed three years without the
(2) There should be transparent disclosure of directors and chairman's
total emolument, separately together with the highest paid UK directors. Pension
contributions and stock operations be separately highlighted.
Salary and performance related elements be separately stated including
the basis on which performance is measured.
(3) A remuneration committee should be set up to recommend the pay of
executive director. This committee should be made up wholly or mainly of non-executive
IV. Reporting and controls
(1) Board must accept it a duty to present a balanced and
understandable assessment of the company's position.
(2) An objective and professional should be maintained between Board
and the internal and external auditors.
(3) The Board should set up an audit committee of at least three
non-executive directors. Terms of reference must be in writing and should clearly deal
with its authority and duties.
(4) The directors should report on the effectiveness of the company's
system of internal control. They should also report that the business is a going concern.
Supporting assumptions or necessary qualifications should also be included.
The Corporate Governance issue is now under review in UK. Sir Ronald
Hampel, ICI Chairman, has been appointed to submit a report by the end of 1997.
Hampel committee report on corporate governance
This report was released in January, 1998. The work was undertaken by
this Committee during two years (1995-97). Summary of conclusions and recommendations
cover the following aspects:
1) Principles of Corporate Governance
2) Application of the Principles
3) The Future
5) Directors' Remuneration
6) Shareholders and the AGM
Their recommendations are given on Annex "A".
South Africa has provided an excellent leadership in good corporate
governance. A magnificent treatise in the shape of King's Report is available for study,
comprehension and implementation. A chart tabulating the salient features of King's Report
is given as Annex "B".
Today is an appropriate time for all of us in South Asian Countries to
carefully examine the glorious work already undertaken in the world and learn from the
innovative literature already produced. In particular, the study of the literature cited
in selected Bibliography is highly recommended.
We, in South Asia, should set up a task force of most Eminent Scholars
to evolve a framework for Good Corporate Governance and help the Corporate Sector,
shareholders, auditors, regulatory bodies, Government, managements and all those whose
stakes are pegged to achieving great heights of good corporate governance. Let us commit
ourselves with dedication and zeal and achieve our goals. Indeed South Asia is poised for
a forward thrust in the 21st Century. Let Good Corporate Governance be the first step.
1) Proceedings, Silver Jubilee National Convention and Third
International Conference of Company Secretaries - Corporate Governance: Global
INDIA: Hyderabad, The Institute of Company Secretaries of India,
August, 1997, pp 226.
2) The Pakistan Accountant containing Proceedings of the 5th Pakistan
Chartered Accountants Conference with the theme of Corporate Governance - Myths and
PAKISTAN: Institute of Chartered Accountants of Pakistan, Karachi
Special Issue, November/December, 1998, pp 228.
3) Saeed, Khawaja Amjad, Corporate Governance : An Essential Element
PAKISTAN: "The News International" (of Lahore), May 05, 1997.
4) Saeed, Khawaja Amjad, Towards Corporate Governance in Pakistan
PAKISTAN: The Institute of Cost and Management Accountants of Pakistan
Official Journal "Management Accountant" May - June, 1997, P 1-2.
1) Dadiseth, K.B., Corporate Governance
INDIA: Mumbai, Forum of Free Enterprise, November, 1997, pp16.
2) Ghosh, Dr. T. P., Corporate Governance and Management Audit
INDIA: Calcutta, The Institute of Cost and Works Accountants of India,
July 1998, pp159.
3) Monks, Robert A.G., Minow, Nell, Corporate Governance
CAMBRIDGE (MASSACHUSETTS - USA), Blackwell Publisher, 1995, pp 550.
C: Code of Ethics
1) The Company Directors Code of Ethics
MALAYSIA: Pejabat Pendaftar Syarikat (Registry of Companies), n. d.
(Procured on visit to Kuala Lumpur in October, 1996)
2) Company Secretary's Code of Ethics
MALAYSIA: Pejabat Pendaftar Syarikat (Registry of Companies), n. d.
(Procured on visit to Kuala Lumpur in October, 1996)
D: Reports of Accredited Committees
1) Corporate Governance: A Review of Disclosure Practices in Canada
TORONTO (ONTARIO - CANADA): The Canadian Institute of Chartered
Accountants 1996 Annual Reports Award, pp 59.
2) The 21st Century Annual Report, Corporate Governance
LONDON: The Institute of Chartered Accountants in England & Wales,
n.d. pp 32.
3) Report of the Working Group on Corporate Governance
HONG KONG: Hong Kong Society of Accountants, December, 1995 (Reprinted
February 1996), pp 36.
4) Second Report of the Corporate Governance Working Group
HONG KONG: Hong Kong Society of Accountants, January, 1997, pp 1-20
5) The King's Report on Corporate Governance
JOHANNESBURG: The Institute of Directors in Southern Africa, November
29, 1994, pp 70.
6) Report of the Committee to make Recommendations on matters relating
to Financial Aspects of Corporate Governance
COLOMBO: The Institute of Chartered Accountants of Sri Lanka, pp 43.
7) Cadbury Report on The Financial Aspects of Corporate Governance
LONDON: Gee Publishing Ltd., December 01, 1992, pp 91.
8) Hampel Final Report: Committee on Corporate Governance
LONDON: Gee Publishing Ltd., January, 1998, pp 66.
SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS
Principles of Corporate Governance
1. We recommend that companies should include in their annual reports a
narrative account of how they apply the broad principles set out in Chapter 2 (2.1).
Application of the Principles
2. Companies should be ready to explain their governance policies,
including any circumstances justifying departure from best practice; and those concerned
with the evaluation of governance should apply the principles in Chapter 2 flexibly, with
common sense, and with due regard to companies' individual circumstances (1.11). 'Box
ticking' is neither fair to companies nor likely to be efficient in preventing abuse
3. We intend to produce a set of principles and code of good corporate
governance practice, which will embrace Cadbury and Greenbury and our own work. We shall
pass this to the London Stock Exchange. We suggest that the London Stock Exchange should
consult on this document, together with any proposed changes in the Listing Rules (1.23).
4. We envisage that the London Stock Exchange will in future make minor
changes to the principles and code; and we suggest that the Financial Reporting Council
should keep under review the possible need for further studies of corporate governance.
But we see no need for a permanent Committee on Corporate Governance (1.25-1.26).
5. Executive and non-executive directors should continue to have the
same duties under the law (3.3).
6. Management has an obligation to provide the board with appropriate
and timely information and the chairman has a particular responsibility to ensure that all
directors are properly briefed. This is essential if the board is to be effective (3.4).
7. An individual should receive appropriate training on the first
occasion that he or she is appointed to the board of a listed company, and subsequently as
8. Boards should appoint as executive directors only those executives
whom they judge able to take a broad view of the company's overall interests (3.6).
9. The majority of non-executive directors should be independent, and
boards should disclose in the annual report which of the non-executive directors are
considered to be independent (3.9). This applies for companies of all sizes (3.10).
10. There is overwhelming support in the UK for the unitary board, and
virtually none for the two tier board (3.12).
11. We suggest that boards should consider introducing procedures for
assessing their own collective performance and that of individual directors(3.13).
12. We consider that, to be effective, non-executive directors need to
make up at least one third of the membership of the board (3.14).
13. We believe that people from a wide range of backgrounds are able to
make a real contribution as non-executive directors (3.15).
14. Separation of the roles of chairman and chief executive officer is
to be referred, other things being equal, and companies should justify a decision to
combine the roles (3.17).
15. Whether or not the roles of chairman and chief executive officer
are combined, a senior non-executive director should be identified in the annual report,
to whom concerns can be conveyed (3.18).
16. Companies should set up a nomination committee to make
recommendations to the board on all new board appointments (3.19).
17. All directors should submit themselves for re-election at least
every three years, and companies should make any necessary changes in their Articles of
Association as soon as possible (3.21).
18. Names of directors submitted for re-election should be accompanied
by biographical details (3.21).
19. There should be no fixed rules for the length of service or age of
non-executive directors: but there is a risk of their becoming less efficient and
objective with length of service and advancing age, and boards should be vigilant against
20. It may be appropriate and helpful for a director who resigns before
the expiry of his term to give an explanation (3.23).
21. We urge caution in the use of inter-company comparisons and
remuneration surveys in setting levels of directors' remuneration (4.4).
22. We do not recommend further refinement in the Greenbury code
provisions relating to performance related pay. Instead we urge remuneration committees to
use their judgement in devising schemes appropriate for the specific circumstances of the
company. Total rewards from such schemes should not be excessive (4.7).
23. We see no objection to paying a non-executive director's
remuneration in the company's shares, but do not recommend this as universal practice
24. We consider that boards should set as their objective the reduction
of directors' contract periods to one year or less, but recognize that this cannot be
achieved immediately (4.9).
25. We see some advantage in dealing with a director's early departure
by agreeing in advance on the payments to which he or she would be entitled in such
26. Boards should establish a remuneration committee, made up of
independent non-executive directors, to develop policy on remuneration and devise
remuneration packages for individual executive directors (4.11).
27. Decisions on the remuneration packages of executive directors
should be delegated to the remuneration committee; the broad framework and cost of
executive remuneration should be a matter for the board on the advice of the remuneration
committee (4.12). The board should itself devise remuneration packages for non-executive
28. The requirement on directors to include in the annual report a
general statement on remuneration policy should be retained. We hope that these statements
will be made more informative (4.15).
29. Disclosure of individual remuneration packages should be retained;
but we consider that this has become too complicated. We welcome recent simplification of
the Companies Act rules; and we hope that the authorities concerned will explore the scope
for further simplification (4.16).
30. We consider that the requirement to disclose details of individual
remuneration should continue to apply to overseas based directors of UK companies (4.17).
31. We support the requirement to disclose the pension implications of
pay increases which has been included in the Stock Exchange Listing Rules. We suggest that
companies should make clear that transfer values cannot meaningfully be aggregated with
annual remuneration (4.19).
32. We agree that shareholder approval should be sought for new
long-term incentive plans (4.20); but we do not favour obliging companies to seek
shareholder approval for the remuneration report (4.21).
Shareholders and the AGM
33. We recommend pension fund trustees to encourage fund managers to
take a long view in managing their investments (5.6).
34. We believe that institutional investors have a responsibility to
their clients to make considered use of their votes; and we strongly recommend
institutional investors of all kinds, wherever practicable, to vote the shares under their
control. But we do not recommend that voting should be compulsory (5.7).
35. We suggest that the ABI and the NAPF should examine the problem
caused by the existence of different and incompatible shareholder voting guidelines (5.8).
36. We recommend that institutions should make available to clients, on
request, information on the proportion of resolutions on which votes were cast and
non-discretionary proxies lodged (5.9).
37. We encourage companies and institutional shareholders to adopt as
widely as possible the recommendations in the report Developing a Winning Partnership
38. Companies whose AGMs are well attended should consider providing a
business presentation at the AGM, with a question and answer session (5.14(a)).
39. We recommend that companies should count all proxy votes and
announce the proxy count on each resolution after it has been dealt with on a show of
40. We hope that the DTI will soon be able to implement their proposals
on the law relating to shareholder resolutions, proxies and corporate representatives
41. We consider that shareholders should be able to vote separately on
each substantially separate issue; and that the practice of 'bundling' unrelated proposals
in a single resolution should cease (5.17).
42. The chairman should, if appropriate, provide the questioner with a
written answer to a significant question which cannot be answered on the spot (5.18).
43. The decision on who should answer questions at the AGM is one for
the chairman; but we consider it good practice for the chairmen of the audit, remuneration
and nomination committees to be available (5.19).
44. Companies should propose a resolution at the AGM relating to the
report and accounts (5.20).
45. Notice of the AGM and related papers should be sent to shareholders
at least 20 working days before the meeting (5.21).
46. Companies may wish to prepare a resume of discussion at the AGM and
make this available to shareholders on request (5.22).
47. We commend the practice of some companies in establishing in-house
nominees, in order to restore rights to private investors who use nominees; and we note
that the DTI and the Treasury are considering changes in the law for the same purpose
48. Each company should establish an audit committee of at least three
non-executive directors, at least two of them independent (6.3). We do not favour a
general relaxation for smaller companies, but recommend shareholders to show flexibility
in considering cases of difficulty on their merits (6.4).
49. We do not recommend any additional requirements on auditors to
report on governance issues, nor the removal of any existing prescribed requirements
50. We suggest that the bodies concerned should consider reduction from
10% the limit on the proportion of total income which an audit firm may earn from one
audit client (6.8).
51. We suggest that the audit committee should keep under review the
overall financial relationship between the company and its auditors, to ensure a balance
between the maintenance of objectivity and value for money (6.9).
52. We recommend that the word "effectiveness" should be
dropped from point 4.5 in the Cadbury code, which would then read 'The directors should
report on the company's system of internal control'. We also recommend that the auditors
should report on internal control privately to the directors, which allows for an
effective dialogue to take place and for best practice to evolve (6.12).
53. Directors should maintain and review controls relating to all
relevant control objectives, and not merely financial controls (6.13).
54. Companies which do not already have a separate internal audit
function should from time to time review the need for one (6.14).
55. The requirement on directors to include a 'going concern' statement
in the annual report should be retained (6.18).
56. Auditors are inhibited from going beyond their present functions by
concerns about the law on liability. Accounts should be taken of these concerns by those
responsible for professional standards and in taking decisions on changes in the law
Source: Extracted from: Agenda for Change by Syed Masoud Ali Naqvi,
"The Pakistan Accountant", November 1998, Appendix, pp 105-108
SUMMARY OF COMMON RECOMMENDATIONS OF KING COMMITTEE
1. The code shall apply to all the affected corporations.
2. The recommendations should become a listing requirement for
companies on the main board of the Johannesburg Stock Exchange.
The affected corporations should include in their annual reports a
statement by the directors or officers as the case may be, that the company or entity
supports and has applied the principles of "The Code of Corporate Practices and
Conduct". Any departures from the Code should be disclosed and the reasons therefor
3. A non-executive director should be independent in the sense that
they are independent of management and do not have any benefits from the company other
than their fee. This is not intended to exclude persons being appointed as non-executive
directors who have a contractual nexus with the company for reward or to prevent as
non-executive directors from acquiring shares in the company by means independent from the
A non-executive director who is independent in the above sense, would
( A director or manager of the company's holding company, or major
investor, who has no executive responsibilities in the company,
( A former executive director who is no longer employed on a full time
basis but nevertheless is capable of giving valuable input to the board arising from his
( A senior executive director of major listed subsidiaries and
associates of the holding company, who has no executive responsibility in the holding
4. The term served by a non-executive director should be determined by
the board and it should be the duty of the chair to ensure that any non-executive director
who in not contributing to the decisions of the board, should not be re-elected and if
necessary, should be requested to resign and if he refuses, to remove him from the board.
5. To carry out its functions the board must meet regularly. How
regularly or at what intervals must be determined by each board, having regard to its
company's own special circumstances. A board should however, meet at least once a quarter.
6. Each appointment on board, should be a matter for the board as a
whole and as such nomination committees are not recommended.
7. Whilst recognizing the shortage of trained and experienced people to
be appointed directors in South Africa and even if the chair is an independent
non-executive director, no board should have less than two non-executive directors of
sufficient calibre that their views should carry significant weight in board decisions.
8. The board must retain full and effective control over the company.
The board should have a definition of materiality on matters.
A technical or executive sub-committee of the board may have to be
appointed to investigate the matters of technical nature.
9. The affected corporations should employ a competent and qualified
company secretary or contract with a professional organization to render company
secretarial services. The board should be entitled at the affected corporation's expense
to seek independent professional advice about the affairs of such corporation.
10. An executive director's service contract should not exceed five
years in duration and if a longer period is required it should be subject to the approval
of the shareholders.
11. There should be a separate full and clear disclosure of the total
of executive directors and non-executive directors earnings broken down into headings such
as, fees, salary, share options, benefits, bonuses, etc. Director's remuneration,
including that of the non-executive directors, should be the subject of recommendations to
the board by a Remuneration Committee with the majority of its members (including the
chair) being non-executive directors.
The affected corporation should have remuneration committees.
12. The directors should make a statement that the financial statements
are their responsibility; and the auditor is responsible for reporting on the financial
13. The directors should make a statement that the financial statements
fairly present the state of affairs of the company.
14. The directors should make a statement that an effective system of
internal control is being maintained.
15. The directors should state that there is no reason to believe that
the business will not be a going concern in the year ahead and if there is reason so to
believe, it must be disclosed and explained.
16. The board should establish an Audit Committee with the majority of
its members (including the chair) being non-executive directors with written terms of
reference confirmed by the board. The head of internal audit, the external auditors or
audit partner and the financial director should be invited to attend audit committee
17. The Companies Act should be amended to require that interim reports
should be subject to audit review.
Source: Summary of Conclusions and Recommendations, The Hampel
Committee Report on Corporate Governance, London: Gee and Co. January 1998.
* Former President,
Former Pro Vice-Chancellor and Founder Director, Institute of Business
Administration, University of the Punjab, Lahore. Pakistan.
President, Institute of Cost and Management Accountants of Pakistan
(Member - AMDISA).