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1- NATIONAL BANK POISED FOR CONSOLIDATION & GROWTH
2- FOREIGN INVESTMENT IN PAKISTAN
3-
CORPORATE GOVERNANCE
4- PSF INCLUDED IN DTRE SCHEME
5- FOOTWEAR: LOCAL VS IMPORTED
6- CHINESE PRODUCTS: CHALLENGES FOR LOCAL BUSINESSES

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CORPORATE GOVERNANCE


Global and Pakistani experience

 

By Prof. Dr. Khawaja Amjad Saeed*
Email: kamjadsaeed@yahoo.com
icmalhr@brain.net.pk

June 16 - 22, 2003
.

 

 

Corporate Sector in the shape of joint stock companies started with the commercial and industrial revolution in Europe during 16th and 17th Century. With the arrival of East India Company in Bengal and after 100 years, the first Companies Act, 1857 was enforced. Later it was replaced in 1882 and finally Companies Act 1913 was enforced with effect from April 01, 1914. Pakistan adapted it after her establishment on August 14, 1947. India followed suit on August 15, 1947. Later Companies Act 1956 was enacted and with amendments continues to govern corporate sector in India. In Pakistan, Corporate laws govern corporate sector in Sri Lanka, Bangladesh and other SAARC Countries where corporate sector growth in an agenda of tomorrow.

Globally there has been a growing interest in sound corporate governance. Box No. 1 presents a snapshot position of six reports prepared in North America.

Box No. 1
SIX REPORTS PREPARED IN NORTH AMERICA

Year

Report

1987

The Tradeway Report

1988

The McDonald Report

1991

The Federal Deposit Insurance Corporation Improvement Act

1992

Internal Control and Integrated Framework

1993

In the Public Interest a special Report by Public Overslight Board

1995

Directors Management and Auditors Allies in Protecting Shareholders Interest by Public Overseight Board.

 

 

Concurrently, in UK. trade, business, investors, regulatory bodies, accounting profession, stock exchanges were not satisfied with the Corporate Management System. During 1980s several companies collapsed. This led to establishment of Cadbury Committee in 1991. The above Committee published the Code of Best Practice in December, 1992 to be complied within UK by companies listed on London Stock Exchange. In 1995, Hampel Committee was set up and was given two years to complete the job. Their report was released in January, 1998.

In the background of above, this piece has been developed with the following constituents:

CONCEPT: CORPORATE GOVERNANCE

OECD has defined "Corporate Governance" as under:

"Corporate Governance comprehends that structure of relationships and corresponding responsibilities among a core group consisting of shareholders, board members, corporate managers designed to best foster the competitive performance required to achieve the corporation's primary objective".

CENTRAL CONCERNS: CORPORATE GOVERNANCE

It is generally believed that there are seven central corporate governance concerns. These are identified below:

1. Role of board of directors.
2. Structure of board of directors.
3. Pattern of remuneration of directors.
4. Issues relating to directors ownership.
5. Degree of freedom and enterprise available to the board.
6. Role of Institutional directors.
7. Accountability of board for its action.

GLOBAL SCENE

UK SCENE

CADBURY COMMITTEE:

Box No. 2 captures four major areas addressed by the Cadbury Committee:

Box No. 2
CADNIRU REPORT: MAJOR AREAS

MAJOR AREAS

Board of Directors

Non-Executive Directors

Executive Directors

Reporting Control

 

 

Salient features of each of the items included in the above Box are summed up below:

BOARD OF DIRECTORS:

Secretary of BOD is required to stay independent. He should have an access to advice and service. Procedures, Rules and Regulations of the Company must be comptied with. Board as a whole should examine the subject of removal of secretary.

NON-EXECUTIVE DIRECTORS:

Non-Executive Directors should be appointed. Contribution areas will include giving independent judgment focus on strategy performance, key appointments and standard of conduct, use fairness and independence through exercise of independent management, fee to be based on committed time. Their reappointment will not be automatic.

EXECUTIVE DIRECTORS:

Contract for executive directors should be for three years. Formal approval in this respect must be obtained through the BOD as a whole. Emoluments should have transparent disclosure e.g. for directors, chairman, pension contributions and stock options and salary and performance related elements with basis of measurement. There should be a Remuneration Committee which should recommend pay of executive director. Its composition should consist of wholly or mainly of non-executive directors.

REPORTING & CONTROLS:

The Company's position should be balanced and understandable. An objective and professional relationships must exist between BOD and internal and external auditors.

The Audit Committee must consist of at teast three non-executive directors. TORs must be in writing. Deal must be studded with ctarity with transparent position of authority and duties. Internal Controls must be effective. Business ought to be on going concern. Supporting assumptions and qualifications should be include.

HAMPEL COMMITTEE 1995:

Box No. 3 captures seven major areas addressed by Hampel Committee:

Box No. 3
HAMPEL COMMITTEE: MAJOR AREAS

MAJOR AREAS

Principles of Corporate Governance

Application of Principles

The Future

Directors

Directors Remuneration

Shareholders and the AGM

Recommendations

 

 

ASIAN SCENE

HONG KONG:

Accounting Profession in Hong Kong is a strong one. It has statutory body namely, Hong Kong Society of Accountants (HKSA). Professionally qualified accountants are playing productive role. This profession has a great impact of UK. Encouraged by the excellent lead provided in UK regarding corporate governance the following assignments undertaken merit study:

a) Working group report on Corporate Governance released in 1995 and with its growing use, this was reprinted in January 1996.
b) The Second Report on Corporate Governance was released in 1997.
c) Hong Kong Society of Accountants released special issue of their official organ on the theme of "Corporate Governance" in October 1996.

Emphasis on implementing ten point code of corporate governance is being operationalized. Box No. 4 captures the above points.

Box No. 4
HONG KONG: TEN - POINT CODE

 

FOCUS

OPERATIONAL FOCUS

1.

Compliance

Matters to be identified.

2.

Board

Same family members not to have more than 50%.

3.

CFO

Mandatory.

4.

AGM

Attendance record mandatory.

5.

Board Meeting

Four compulsory every year. However six are preferred.

6.

Auditors other Fees

Separate disclosure regarding corporate governance.

7.

Annual Report

Separate disclosure in respect of corporate governance.

8.

Audit Committee

This must be established with defined functions.

9.

Interim Report

This be released. The constituents should include balance sheet, income statement and cash flow.

10.

Auditors

To review Interim Report.

 

 

MALAYSIA:

Under the inspiring and dynamic leadership of Dr. Mohammed Mahathir, Malaysia has developed into a strong country with prosperity being shared on a wider scale. Socio-economic front has strengthened. Corporate Governance attracted specially the following two aspects:

a) Five points Code of Ethics for Directors.
b) Four parts of Code of Ethics for Company Secretaries.

The five points Code of Ethics of Director includes comprehensive coverage of relationship of directors with shareholders, employees, creditors and customers. Besides, five points covering social responsibilities and the environments have also been included in it. Accordingly the Code of Ethics for Directors has been serving as a strong logistic to sound corporate governance.

The role of company secretaries in corporate sector need to be positive, productive and result-oriented. A company secretary ought to play an interesting role in the conduct of company meetings, implementation of board decision, guiding corporate world to beef up bottom line and enable company to serve the stakeholders in particular and the society in general. Four parts of the Code of Ethics for Company Secretaries include introduction, principles, objectives and five points code of conduct.

There would be no need to reinvent the wheel but it would be fruitful to benefit from the above excellent work, released by the Registry of Companies, Ministry of Domestic Trade and Consumers of the Government of Malaysia, Kuala Lumpur in 1996.

AFRICAN SCENE

SOUTH AFRICA:

Accountancy and Company Secretarial profession is fairly strong in South Africa. They are providing leadership in Africa. The Institute of Directors in South Africa released. The King's Report on Corporate Governance on November 19, 1994. Mr. King did visit Pakistan in 1997 and the author had the pleasure of meeting him and shared thoughts on Corporate Governance.

PAKISTAN

The Securities and Exchange Commission of Pakistan (SECP) released the First Code of Corporate Governance on March 18, 2002. SECP from the assistance from the Institute of Chartered Accountants of Pakistan (ICAP) and other stakeholders. Benefiting from the above report and from ideas generated from various Seminars & Conferences conducted throughout Pakistan.

The objective pursued was to develop sound corporate practices. The above Code is applicable to listed companies, Banking Companies, Development Finance Institutions (DFls), Non-Banking Financial Institutions (NBFIs), Insurance Companies, Mutual Funds. Unit Trusts, and Companies/Corporations held or controlled by the Government.

Box 5 captures five major aspects governing Code of Corporate Sector in Pakistan.

Box No. 5
CODE OF CORPORATEE GOVERNANCE IN PAKISTAN: MAJOR ASPECTS

MAJOR ASPECTS

Directors

CFO & Company Secretary

Corporate & Financial Reporting Framework

Audit Committee

External Auditors

 

 

The full text of the Code of Corporate Governance is available on website (www.secp.gov.pk). However scope covered in respect of each of the topics listed in foregoing box is reviewed below:

DIRECTORS:

Aspects covered in respect of board of directors include qualifications and eligibility to act as director. tenure, responsibilities, powers and functions of board of directors, meetings of board of directors and key information.

CFO & SECRETARY:

Qualifications and provisions governing the attendance matters relating to CFO and secretary have been prescribed.

CORPORATE & FINANCIAL REPORTING FRAMEWORK:

An expanded version of directors report to shareholders has been included. Frequency of financial report has been increased in terms of releasing quarterly report over and above the half yearly and annual report. Responsibility for release of financial report and corporate compliance has been identified disclosure of interest by a director holding company's shares has been made mandatory. The auditors of the company are forbidden to hold shares. Corporate ownership structure is required to be disclosed. Information relating to divesture of shares by sponsors controlling interest is required to be revealed.

AUDIT COMMITTEE:

An audit committee must be constituted. Provisions governing frequency of meetings, attendance at meetings, term of reference (TOR), and reporting procedures have been laid down. Internal audit has been made compulsory for every listed company. Head of Internal Audit should have access to the chair of Audit Committee.

Internal Audit reports are required to be provided for the review of external auditors. Internal Audit function can be outsourced. However, the person deputed on Internal Audit functions must be on full time basis.

EXTERNAL AUDITORS

Eight points have been included governing strengthened role of external audit. These are summarized in Box 6:

Box No. 6
STRENGTHENED ROLE OF EXTERNAL AUDITORS

FOCUS

EMPHASIS

Appointment (Listed Companies)

Subject ro satisfactory raring under the Quatity Concrol Review (QCR)

Appointment (Listed Companies)

Compliance with IFAC Guidelines on Code of Ethics as adopted by ICAP is a pre-requisite before appointment.

Recommendation by BOD

External auditors are to be appointed for a year on the recommendation of BOD and as suggested by the Audit Committee whose recommendations will be included in Directors' Report.

Services other than audit (Listed Companies)

Auditors are forbidden to provided services in addition to audit except in accordance with the regulations.

Change of External auditor (Listed Companies)

External auditors are to be changed after every five years. Exception requires approvai of SECP.

Restrictions

Some restrictions have been prescribed for appointment of a person as the CEO, the CFO, an internal auditor or a director of the listed company who was a partner of the firms of its external auditors, etc.

Management Letter

This shouid be furnished by external auditors to BOD not later than 30 days from the date of the audit report.

Attending AGM

Attending AGM by external auditor has been made compulsory.

Source: Summarized from Code of Corporate Governance, Islamabad: SECP, Paragraphs (xxxvii to xliv)

 

 

Compliance with the above Code of Corporate Governance must be ensured as per following requirements:

1) The annual reports must set out the status of the compliance with the best practices of corporate governance prescribed in the above Code.
2) Statement of compliance with the best practices of corporate governance is required to be reviewed and certified by statutory auditors before publication by listed companies.
3) SECP has powers to relax I and 2 above for reasons to be recorded for the relaxation.

CONCLUSION

It is high time that we, in SAARC, need to undertake a research to develop a comprehensive Code of Corporate Governance in the light of global experiences and carefully considering our objective conditions. A sound strategy is the crying need to inspire investors' confidence, ensure sound management to enable shareholders to be fairly treated and the stakeholders to be the beneficiaries. Indeed improved Corporate Performance and Corporate Governance are linked to each other.

KEY TERMS

1)

AGM

Annual General Meeting

2)

BOD

Board of Directors

3)

CEO

Chief Executive Officer

4)

CIMA

Chartered Institute of Management Accountams (London)

5)

CFO

Chief Financial Officer

6)

DFls

Development Financial Institutions

7)

FAQ

Frequently Asked Questions

8)

HKSA

Hong Kong Society of Accountants

9)

ICAP

Institute of Chartered Accountants of Pakistan

10)

IFAC

Internationai Federation of Accountants

11)

NBFIs

Non-Banking Financial Institutions

12)

OECD

Organization of Economic Cooperation and Development

13)

QCR

Quality Control Review

14)

SECP

Securities & Exchange Commission of Pakistan

15)

TOR

Terms of Reference

16)

UK

United Kingdom

 

 

*Principal, Hailey College of Banking & Finance, Constituent College of the University of the Punjab, Labore.
Member Governing Council, International Federation of Accouneants (IFAC) (1997-2000).
President South Asian Federation of Accouncants (SAFA) (1997).
President, Institute of Cost and Management Accountants of Pakistan (1997-2000)
President, Association of Management Development Institutions of South Asia (AMDISA) (1993-96)
Pro Vice-Chancellor, University of the Punjab, Lahore (1994-96)
Founder Director, Institute of Business Administration (IBA), University of the Punjab, Lahore (1973-1996)