Challenges and Issues in

Corporate Governance

Scope of Corporate Governance

Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interest of individuals, corporations and society.

The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to centers of economic activity that inspire trust.

-Sir Adrian Cadbury.

Shareholders role in governance is to appoint the directors and the auditors. Poor corporate governance has ruined companies, sent directors to jail, and destroyed a global accounting firm and threatened economies and governments.

e.g., Taj Company Cooperatives scandal Mohib Textile Mills Ltd

Cadbury Report (1992)

Wider use of INDEPENDENT DIRECTOR

Introduction of AUDIT COMMITTEE

Separation between CHAIRMAN and CEO

Adherence to detailed code of BEST PRACTICES.

OECD Principles of Corporate

Governance, (1999)

Protect rights of SHAREHOLDERS

Recognize the rights of STAKEHOLDERS

Timely and accurate DISCLOSURE

Responsibility of the BOARD

Scope of Code of Corporate

Governance, 2002

The code provides a framework for efficient

and transparent running of listed

companies to enhance shareholder value.

The regulators need to be vigilant to

enforce the code in its true spirit.

The Code of Corporate Governance

(2002)

Non Executive Director Qualification of a Director Tenure of Director Governance Policies of the Directors Information to Directors Orientation Courses CFO/ Co. Sec Corporate and Financial Reporting Audit Committees

BOARD OF DIRECTORS

Encourage effective representation of independent non-executive directors, including those representing minority interests.

a. minority shareholders as a class are facilitated to contest. (through the use of proxy)

b. At least one independent director representing institutional equity interest of financial institution. (a director nominated as a director under section 182 and 183 not be taken as independent directors)

c. Executive directors not more than75% of the elected directors.(Voluntary provision)

The directors to give consent that they are aware of their duties and powers

QUALIFICATION AND ELIGIBILITY TO

ACT AS A DIRECTOR

Director, not to be a director in more than ten other listed companies.

ii. Director needs:a. to be registered as a National Tax Payer ; and

b. Not to a defaulter as convicted by court of a banking

company, development financial institution, or a non-banking

financial institution or as a member by the Stock Exchange.

iii Not to be director if spouse is engaged in the business of Stock Brokerage (voluntary)

TENURE OF OFFICE OF DIRECTOR

iv. Three years, vacancy to be filled in 30 days

RESPONSIBILITIES, POWERS AND

FUNCTIONS OF BOARD OF DIRECTORS

Every listed company shall ensure

a. Statement of Ethics and Business practices is prepared

b. Board of directors to adopt vision statement, and overall corporate strategy; formulate significant policies (for the purpose of risk management, marketing, etc.)

c. Establish internal control

d. Documentation by resolutions passed in meetings on all serious issues. i.e. investment and dis-investment of funds, loans, write-off of bad debts etc.

RESPONSIBILITIES, POWERS AND

FUNCTIONS OF BOARD OF DIRECTORS

e. Appointment etc. of Chief Executive to be determined by the board.

f. Investment policy of modaraba institution to be approved and

reported in annual report.

Significant issues to be placed for decision by the board of directors (i.e. annual business plan, budgets, joint ventures

etc.)

Orientation courses for directors.

QUALIFICATION OF CFO AND CS

CFO has to be:

a. professional accountant ; or

b. graduate with 5 yrs experience in handling financial affairs in a listed company or a bank.

CS has to be:

a. professional accountant ; or

b. member of a recognized body of corporate/chartered

secretaries or

c. lawyer ; or

d. a graduate with 5 yrs experience of handling corporate

affairs.

FINANCIAL REPORTING

CORPORATE AND FINANCIAL REPORTING

FRAMEWORK

Directors report to shareholders. Give complete and candid position of the company.

RESPONSIBILITY FOR FINANCIAL REPORTING

i. Financial statements to be duly endorsed by CEO and CFO

ii. Secretarial compliance certificate required with annual returns

DISCLOSURE OF INTEREST BY A DIRECTOR.

AUDITORS

AUDITORS NOT TO HOLD SHARES

External Auditors and their spouse restricted to purchase shares in the company they are auditing.

AUDIT COMMITTEE

i. not less than three member committee preferably from non-executive directors.

ii. Committee to meet at least once every quarter.

iii. CFO to attend meetings of Audit committee.

Enforcement issues of the Code

INTERNAL DISCIPLINE

Restricted to listed companies

Regulation under section 34(4) of the Securities Exchange Ordinance, 1969 -

structurally flawed

Penalty- section 9(4) of the S.E. Ord, 1969

Soft law

Voluntary in nature

Based on self regulation

Drivers:

Incentive for better performance

higher profits for the shareholders

attracts more investment

Shareholders (minority rights under the Companies Ordinance, 1984 - sections 263, 265, 290, 305)

Institutional investors- eg. Mutual funds, financial institutions, insurance companies (Calpers, etc)

EXTERNAL DISCIPLINE

Drivers Stakeholders (financial and community) Regulators (SECP Act, 1997/ CO Ord, 1984) Institutional shareholders environmental law labour and taxation laws. Stock exchanges International credit rating firms Media NGOs

Areas to consider:

Shareholders rights

Stakeholders rights (financial institutions, employees, Community)

Corporate Social Responsibility (CSR)

Union Carbide- Bhopal.

Exxon Oil Spills in Alsaka

Cement factories in Kahoon

Leather Factories of Kasur

corporate governance: not limited to

companies

Public sector corporations new legislations provide better governance

structure.

Other corporate vehicles: cooperative societies ?

Other vehicles of business: Partnerships no mention doing big business

Thank You!