Oct 29 - Nov 4, 2012

The World has, by now, gone through several stages of emphasis on economic development. Agriculture was the mainstay of population during the early past. Later, Industrial and Commercial revolutions were witnessed in Europe during 16th & 17th centuries. Two significant shifts were conspicuous. The first one saw replacement of physical muscle with machines. However, the second redeeming feature was on the organizational front. The World saw the rise of Joint Stock Companies with limited liability concept. The interesting outcome was divorce of those who contributed capital for financing the needs of the enterprise with those who were vested with control and management in a few, generally known as Board of Directors (BODs). The only accountability forum of BOD was annual general meeting of shareholders. The third revolution has been informational technology which has given rise to "New Economy" which is cushioned with internet and web use. These developments have given rise to new challenges to management.


This paper looks at three time scenarios namely:

1) Past
2) Present Position
3) Future Outlook
of Corporate Governance.

These are explained below.


The then British India saw the legislation of Companies Act, 1850. This was a law in rudimentary form and saw changes in 1857 and 1882. Later, a comprehensive Companies Act, 1913 was enacted to be effective from 1914 and onward. Pakistan emerged as a sovereign nation on the political map of the World on August 14, 1947 and adopted it as a piece of legislation. During late 1950s some changes were made. However, the corporate challenges on management front had become much bigger and their response needed a sunshine legislation of management of corporate entities. Accordingly, Companies Ordinance, 1984 was enforced to govern Joint Stock Companies of all types namely, public companies (listed and non-listed), private companies, foreign companies, non-profit companies for welfare purpose etc. Special sections were contained governing maintenance of financial and costing records, their audit, management by BOD, role of shareholders through accountability forums, financial statements and disclosure of information and other related aspects. With rapid growth of corporate entities, increasing risks, need for sound internal controls, requirements for full disclosure of financial information, requirements for strengthening BOD, greater on watch by stakeholders and other ever growing challenges, existing legislation needed sweeping changes to ensure sound financial and administrative management and introduction of all such steps which should ensure sound "Corporate Governance".


The term "Corporate Governance" is also known as "Enterprise Governance". This term is currently getting popular now because the "Governance" alone is used for excellent role by the Government in Power on the state front. In a country where State affairs are governed in a nice, elegant and befitting manner, it is said to be nicely governed and people generally believe that the particular country had Good Governance. However, the term Corporate Governance became very popular as it focused on Governance in action relating to an enterprise at the macro level. Macro level efficiencies are aggregated together and contribute to the Good Governance of a country. Consequently Corporate Governance has sprung into prominence. Its benefits are enjoyed across the board by the shareholders through higher dividends and other benefits to the government in terms of higher taxes, to the society in respect of providing goods and services at affordable prices and to consumers with goods and services of their choice. Therefore, to begin with, it is important to comprehend the rise of Corporate Governance till now. In this respect, the kick start was given in United Kingdom during 1990s when firstly Cadbury Committee was set up which concentrated in developing good Charter for Corporate Governance through the publication of their Report, concentrating on the following four areas:

1) Board of Directors (BODs).
2) Non-Executive Directors.
3) Executive Directors.
4) Reporting and Controls.

Later in 1995, Hamphel Committee was set up in United Kingdom and their Report was officially released in January 1997. They were given two years to complete their assignments. However, major topics covered by them in their Report focused on the following seven areas:

1) Principles of Corporate Governance.
2) Application of Principles.
3) The Future.
4) Directors.
5) Directors' Remunerations.
6) Shareholders and the Annual General Meeting (AGM).
7) Recommendations.

After United Kingdom provided the lead, several countries in Asia ( particularly, Malaysia, Hong Kong, Japan, etc.) and in Africa (South Africa) and even in North America greater and greater interest grew for development of sound Code of Corporate Governance for implementation to ensure healthy and officially stable Corporate sector. In this respect, we have selected Hong Kong to highlight the efforts made by them for strengthening Corporate Governance. Hong Kong was ranked as the top scorer through World Governance Index released by World Bank. Going by three set of criteria Hong Kong scored 99% in regulations, 92% in corruption and 90.5 in rule of law. Hong Kong obtained Position No. 1 in sound Corporate Governance in the world. Several institutionalized measures were undertaken by them which fortified foundations of Corporate Governance. In this respect, Table-1 shows ten points for sharing their experiences.


1 Compliance Matters to be identified
2 Board Same family members not to have more Than 50%
3 CFO Mandatory for appointment
4 AGM Attendance record was made mandatory
5 Board Meeting Frequency of four Compulsory every year, Six preferred.
6 Auditors Other Fees Separate disclosure
7 Annual Report Separate Disclosure on: Corporate Governance
8 Audit Committee Be established with Defined Functions
9 Interim Report Be released. Scope: Balance Sheet, Income Statement and Cash Flow Statement
10 Auditors To Review No. 9 above

It may be of interest to know that there are several definitions available relating to Corporate Governance. Definition by OECD of Europe ( Organization for Economic Cooperation and Development ) is stated below:

"Corporate Governance comprehends that structure of relationship and corresponding responsibilities among a Core Group consisting of:

- Shareholders.
- Board Members.
- Corporate Managers.

designed to best poster the competitive performance required to achieve the Corporation's primary objectives". The first Code of Corporate Governance was issued in Pakistan in 2002. The then Chairman of Securities and Exchange Commission of Pakistan took a lead and asked the listed companies to enforce the Code. Earlier, initial efforts were made by the Institute of Chartered Accountants of Pakistan and Institute of Cost and Management Accountants of Pakistan to help develop draft Code of Corporate Governance. After national debate, it was submitted to the Securities and Exchange Commission of Pakistan which, after discussion and debate, finalized it and with the cooperation of listed Stock Exchanges enforced it. Later, State Bank of Pakistan played a prominent role and enforced Code of Corporate Governance for financial sector. The initial lead brought lot of improvements and enforced in the Corporate Sector. However, the process of going through the legislation via changes to be introduced through the Companies Ordinance, 1984 remained uncrystallized. Parliament has its own agenda and priorities and the members take their own times for finalizing such matters. Since Pakistan experience of democracy is democracy in transition, and therefore we have to go a long way in strengthening financial frontiers at all levels including Corporate Level. One wonders how long the Parliament of Pakistan will take to address these issues. However, it may be interesting to note that International Finance Corporation, lending arm of the private sector of the World Bank took the initiative and through the institutionalized approach in Pakistan helped the Securities and Exchange Commission of Pakistan alongwith Pakistan Institute of Corporate Governance issued Corporate Governance Code, 2012 to be enforced on listed companies of Pakistan effective April 2012.

For quick comprehension, Table-2 presents a comparative Chart of salient features of major issues relating to Code of Corporate Governance as released in 2002 alongwith Code of Corporate Governance released in 2012.


S.# ISSUE CODE 2002 CODE 2012
1. Independent Director

Encouraged a minimum of one independent director on the board of a listed company.

One independent director is mandatory while preference is for 1/3rd of the total members of the board to be independent directors.

2. Criteria for assessment of independence

Very scanty criteria provided

Criteria has been substantially expanded

3. Executive Directors

Number of Executive Directors not to be more than 75% of elected directors including CEO

Maximum number of Executive Directors cannot be more than 1/3rd of elected directors including CEO.

4. Number of directorships

A director can be on the board of no more than 10 listed companies at any one time.

A director can be on the board of 7 listed companies at the most at any one time. However, the limit does not include directorship in listed subsidiaries of a listed holding company.

5. Board evaluation


Within two years of the implementation of the Code 2012, the Board has to put in place a mechanism for undertaking annual evaluation of the performance of the Board.

6. Office of Chairman and CEO

The Chairman of a listed company shall preferably be elected form among the non-executive directors of the listed company.

The Chairman and CEO shall not be the same person, unless specifically provided in any other law.
The Chairman shall be elected from amongst the non-executive directors of the listed company.

7. Training of the Board of Directors

It is mandatory for directors of listed companies to attain certification. Initially, the PICG was to provide the training but later it was opened to other institutions, provided they met the criteria specified by the SECP.

It will be mandatory for directors of listed companies to attain certification under any director training program (DTP) offered by any institution (local or foreign), which meets the criteria specified by the SECP. The criteria are available at the websites of the stock exchanges and the SECP.


Appointment and removal and qualification criteria for Chief Financial Officer (CFO) and Company Secretary (CS)

Appointment, remuneration and terms and conditions of employment of CFO and CS determined by CEO and approved by Board. The same mechanism followed for removal.

The appointment, remuneration and terms and conditions of employment of the CFO, CS and the Head of Internal Audit (IA) of listed companies shall be determined by the Board. The removal will also be by the Board for CS and CFO.

9. The Head of Internal Audit (IA)


Qualification introduced for Head of IA. The removal of Head of IA is with the approval of the Board only upon recommendation of the Chairman of the Audit Committee.

10. Remuneration of Directors


A formal and transparent procedure to be followed and disclosure of aggregate remuneration in the annual report.

11. Board Committees

Audit Committee: The Chairman of the audit committee shall preferably be a non-executive director.
Reporting Procedure:
The Audit Committee of a listed company shall appoint a secretary of the Committee

Audit Committee: The Chairman of the audit committee shall be an independent director, who shall not be the chairman of the board. Audit Committee shall comprise of non-executive directors.
The secretary of Audit Committee shall either be the Company Secretary or Head of Internal Audit. However, the CFO shall not be appointed as the secretary to the Audit Committee.
Human Resources and Remuneration Committee introduced.

12. Internal Audit

There shall be an internal audit function in every listed company. The head of internal audit shall have access to the chair of the Audit Committee

The internal audit function may be outsourced by a listed company to a professional services firm or be performed by the internal audit staff of the holding company. In the event of outsourcing the internal audit function, the company shall appoint or designate a fulltime employee other than the CFO, as Head of Internal Audit, to act as coordinator between the firm providing internal audit services and the board.

Source: Annexure "C" attached with Code of Corporate Governance 2012 released by Securities & Exchange Commission of Pakistan, April 10, 2012. PP 43-44.

Currently the following documents are enclosed with the Annual Audited Financial Statements in Pakistan relating to listed companies on Stock Exchanges:

1. Statement of Compliance duly signed by the President / Chief Executive Officer.

2. Statement of Internal Control duly signed by Chief Compliance Officer, Chief Financial Officer and Chief Internal Auditor.

3. Review Report addressed to the Members, Statement of Compliance with the best practices of Code of Corporate Governance duly signed by External Auditors.

Concurrent to efforts continuing in Pakistan, there is another platform namely SAFA (South Asian Federation of Accountants). This consists of Professional Bodies in the area of Accounting, Finance, Economy and related subjects. At present Statutory recognitions have been given to some Chartered / Management Accountant Bodies in five countries namely; Bangladesh, India, Nepal, Pakistan and Sri Lanka. These countries had earlier released a comprehensive document entitled: "Best Practices on Corporate Governance of South Asian countries: A comparative Analysis". In the first quarter of 2012, SAFA organized a Regional Conference on the Theme of "Enterprise Governance": Best Practices in SAFA Region". Accordingly, search is going on to develop a sound and comprehensive Code of Corporate Governance for SAFA region. SAFA is an apex body of SAARC countries.


Overall Corporate Governance Index was first released by the World Bank and was published in DAWN, Lahore on January 10, 2009. It ranked countries out of a maximum of 100. Germany scored 90.8% at the top. Selected ranking of some SAFA countries was as under:


1 Germany 90.8
2 United States 89.8
3 Singapore 80.9
4 Hong Kong 69.2
5 Malaysia 66.7
6 India 55.4
7 South Korea 55.4
8 Thailand 49.7
9 Philippines 48.9
10 Indonesia 44.7
11 Vietnam 38.1
12 China 35.3
13 Pakistan 34.3
14 Bangladesh 24.3
Source: Extracted from the Dawn, Lahore, January 10, 2009.

Further, the World Bank also released World Governance Index. Four blocks were made. Block-A had four top countries namely; Hong Kong, Singapore, Germany and United States. The first position was held by Hong Kong. Block-B: consisted of six countries in which Sri Lanka ranked No. 5 in the above block. Block-C: Included five countries in which India obtained rank No. 1. Block-D: Included four countries with Pakistan scored rank No. 1. Three indicators were used for developing the above index namely; Regulations, Corruption and Rule of Law. Table No 4: shows overall position.


BLOCK A % % %
Hong Kong 99.0 92.3 90.5
Singapore 95.5 96.1 95.2
Germany 92.7 93.2 94.3
United States 90.8 91.3 91.9
Taiwan 79.6 70.0 70.5
South Korea 78.6 68.1 74.8
Malaysia 67.0 62.3 65.2
Thailand 56.3 44.0 52.9
Sri Lanka 51.5 57.5 55.7
Philippines 50.5 22.2 33.8
India 46.1 47.3 56.2
China 45.6 30.9 42.4
Vietnam 43.7 27.1 27.1
Cambodia 35.9 28.0 38.6
Papu New Guinea 30.1 9.2 21.0
Pakistan 28.6 21.3 19.5
Bangladesh 20.9 9.7 24.8
Laos 15.0 13.0 17.1
Myanmar 1.5 1.4 5.2
Source: Extracted from the Dawn, Lahore, January 10, 2009


There is a crying need that a Charter for Corporate Governance be developed in Pakistan. Accordingly, suggested framework is given below.


Improvements in the system has all along been talked everywhere. Huge funds in the name of research and development have been invested in the past. This is a welcome step. However, one of the most important aspects is to fortify ethical and moral front. "Persons" in the system are very important to implement the developed Corporate Governance Charter. In this respect, two aspects are important for giving appropriate attention. The first aspect is to operationalize Divine Value System which is quoted below:

"Indeed, Allah orders justice and conduct and giving to relatives and forbids immorality and bad conduct and oppression. He admonishes you that perhaps perhaps you will be reminded" [ Al - Quran: 16: 90 ]

Chief Executives / Chief Financial Officers and others holding high management level positions are suggested to follow the seven principles of public life as suggested in the First Report of Committee of Standards in Public Life and published in UK in May 1995 and are tabulated in Table-5.



Holders of public office should take decisions solely in terms of the public interest. They should not do so in order to gain financial or other material benefits for themselves, their family, or their friends.


In carrying out public business, including making public appointments, awarding contracts, or recommending individuals for reward and benefits, holders of public office should make choice on merit.


Holders of public office should not place themselves under any financial or other obligation to outside individuals or organizations that might influence them in the performance of their official duties.


Holders of public office are accountable for their decisions and Actions to the public and must submit themselves to whatever scrutiny is appropriate to their office.


Holders of public office should be as open as possible about all the decisions and actions that they take. They should give reasons for their decisions and restrict information only when the wider public interest clearly demands.


Holders of public office have a duty to declare any private interests Relating to their public duties and to take steps to resolve any Conflicts arising in a way that protects the public interest.


Holders of public office should promote and support these Principles by leadership and example.

Source: First Report of Committee of Standards in Public Life ( May 1995 ), published in UK.


It is suggested that instead of issuing Codes of Corporate Governance by Regulatory Authorities or by Professional Institutes, it is suggested that specific provisions should be included in the Company Laws of respective SAFA countries. This thought is shared by some countries including Bangladesh. However, its implementation is through the Parliaments of various countries for which the SAFA Member Professional Institutes and relevant Regulatory Bodies e.g. Securities and Exchange Commission, or Securities Exchange Board etc. may kindly initiate the process to pave the way for implementation of the above suggested course of action. The scope of application should extend itself to a comprehensive perspective including Corporate Sector, Financial Sector or other sectors where Joint Stock Companies are operating.

It is generally believed that scope in some countries extend to only listed companies. The recent example is that of Code of Corporate Governance 2012, released in Pakistan is applicable only to all listed companies which as on April 17, 2012 numbered around 600 with market capitalization of US$ 39 billion.

Standardized format regarding Secretarial Compliance Survey and Statement of Compliance that the Code of Corporate Governance may be followed through the SAFA countries may be developed. In this respect, the most recently released formats included in the Code of Corporate Governance, 2012 are as under:

Appendix - "A": Secretarial Compliance Survey
Appendix - "B": Statement of Compliance with the Code of Corporate Governance.


SAFA countries have gained some experience in the application of Code of Corporate Governance. It is high time that they may also initiate research work by highlighting the beneficial impact of the application of Best Enterprise Governance Practices in respective countries to inspire others to follow the same. Each country may commission a research and the SAFA Assembly / Executive Board may finalize this document for the guidance and benefit of respective professional accounting institutes, regulatory bodies and various governments in the region. In this respect, it may be interesting to note that International Finance Corporation (IFC), Securities and Exchange Commission of Pakistan (SECP), and Pakistan Institute of Corporate Governance (PICG) have commissioned a survey in Pakistan. The hope is to provide a baseline for future Corporate Governance requirements and initiatives under IFCs Pakistan Corporate Governance Project.


It has generally been seen that excellent work is carried out while developing various Codes of Corporate Governance. The crying need is to ensure the implementation which requires total commitment by all the stakeholders namely; Management of Corporates, Regulatory Bodies, Shareholders, Stock Exchanges, Society, Governments etc. and an all encompassing campaign ought to be carried out to reflect the spirit of various Codes of Corporate Governance in practical action with beneficially demonstrated results. This will help indoctrinating the spirit of translating various Codes of Corporate Governance of respective SAFA countries into real life situation with consequential benefits by all the stakeholders.


The outcry today is to develop a holistic system for evolving sound and stable Governance system for the Government and as a sub-set solidify frontiers of Corporate Governance so that efforts at macro and micro levels could contribute for the good of society across the board. This piece has shared productive thoughts for positive roles by all the stakeholders so that benefits arising out of Corporate Governance are reaped and Pakistan achieves financial stability at enterprise level of Corporate Governance. We all need to stay committed to the above mission and indeed success will embrace us.