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Corporate Governance Department
World Bank Group
Corporate Governance in Pakistan:Results from the Corporate Governance
ROSC
Corporate Governance DepartmentPrivate Sector Development Vice Presidency
The World Bank GroupMay 29, 2006
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Outline
• About the CG ROSC for Pakistan
• Findings
• Recommendations
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Introduction to the Corporate Governance ROSC
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The ROSC Assessments Examine:
1.Legal and Regulatory Framework
2.Enforcement Activities
3.Private Sector Business Practices
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Corporate Governance ROSC Assessments
• Assessments are benchmarked against the 33 OECD Principles of Corporate Governance
• Voluntary
• Standardized report (Report on Observance of Standards and Codes, ROSC) including policy recommendations
• Four audiences:– Policymakers: to identify opportunities for legal & regulatory reform
– Private sector: understand strengths and weaknesses
– (International) analysts: benchmarking
– Technical assistance providers, including IFC: Identify key reform areas
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Corporate governance reform:the public policy rationale
An improved corporate governance framework will:
• Protect shareholders and depositors
• Protect public pension savings for retirement
• Improve corporates’ access to finance (both equity and debt)
• Help Pakistan:
– attract, allocate and monitor investment– Increase financial stability– Increase market capitalization and growth
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Overview- World Bank Corporate Governance Assessments
Completed 48Published 37On-going FY06 6
1 0
8
1 0
1 0
1 0
0 1 0 2 0 3 0 4 0 5 0
F Y 0 1
F Y 0 2
F Y 0 3
F Y 0 4
F Y 0 5
A s s e s s m e n t s b y Y e a r Assessments by Region (through 2004)
A s s e s s m e n t s b y R e g i o n
A F R ( 4 )
E A P ( 7 )
E C A ( 2 1 )
L C R ( 8 )
M N A ( 4 )
S A R ( 4 )
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Overview of World Bank Corporate Governance Assessments
2001 2002 2003 2004 2005
Brazil Georgia Mauritius Egypt 2 Armenia
Croatia Czech 2 Brazil 2 Slovenia Poland 2
Czech Rep. Lithuania Hungary Russia Ghana
Egypt Bulgaria Ukraine India 2 Pakistan
India Latvia Korea Peru Thailand
Malaysia Morocco Hong Kong Romania 2 Malaysia 2
Philippines Romania Chile Indonesia Nepal
Poland South Africa Mexico Jordan Brazil 3
Turkey Slovakia Pakistan Macedonia
Zimbabwe Colombia Panama Azerbaijan
Notes: Assessments in bold are in process. Assessments in italics have not been published.
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A Review of Corporate Governance in Pakistan
- Findings -
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Corporate Governance Assessment: Summary of Assessment in Pakistan
• Summary of assessment carried out in May 2004
• Assessment results:– 4 principles “Observed”– 17 principle “Largely Observed”– 10 principles “Partially Observed”– 1 principles “Materially Not Observed”– no principles “Not Observed”
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Pakistan: Corporate Governance Landscape
• Awareness of the importance of corporate governance is rising
• Very important corporate governance code
• Rapidly rising market capitalization (60% last year)
• Creation of PICG
• Unique feature: strong regulator of securities and company law
• Strong concentration of ownership in hands of state/ families
• Relatively little foreign portfolio investment
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Key Issue: Investor Protection
• Basic shareholder rights are respected
• However, shareholder participation in the AGM can be cumbersome
• Concentrated ownership brings minority shareholder rights protection to foreground
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Key Issue: Disclosure
• Improved quality and timeliness of financial reporting in recent years
• Requirement to disclose indirect or ultimate beneficial ownership easily circumvented
• Recent controversy over related party transaction disclosure and transfer pricing
• No system of independent oversight over the audit profession
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Key Issues: Company oversight and the board
• No clear distinction between ownership and control Boards dominated by executives/controlling shareholders
• Insufficient guidance on duties of care and loyalty
• Independent directors are the exception rather than the norm
• Board remuneration is not adequate to attract qualified independent directors
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Key Issues: Enforcement
• Enforcement is centered on the SECP and the State Bank of Pakistan
• The Stock Exchanges are responsible for monitoring and enforcing compliance with the Code
• Market participants consider the judiciary to be inefficient and expensive, and an ineffective source of shareholder redress
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- Recommendations -
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Establish corporate governance enforcement priorities
• SECP should focus on enforcing the rules on the disclosure of ownership and related party transactions
• SECP should continue to work to build its enforcement capacity
• Develop a system of independent audit oversight
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Mobilize the private sector to improve corporate governance
• The Karachi Stock Exchange (and its successors) should consider a market differentiation strategy
• Institutional investors should play a more effective corporate governance role
• Build a core group of effective independent directors
• At the CDC, dematerialization and the move towards a central registry should be encouraged
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Legislative reform should focus on key areas of concern
• Strengthen rules for independent directors, improve board compensation, and clarify the role of the Chairman of the board.
• Improve the ownership disclosure framework
• Strengthen shareholder rights by improving access to the AGM, lowering thresholds for shareholder redress, and updating rules on changes in control
• Increase the accountability of directors
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Focus future technical assistance on high-priority implementation
• Development of a national action plan
• Training and awareness programs to develop a culture of corporate governance that extends beyond the SECP and the larger companies
• Improve corporate governance in the state owned enterprise sector
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Final Remarks
• Excellent progress, have come a long way
• But much now needs to be done in terms of implementation at corporate level
• Law on the books vs. practices
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Thank youFor More information, pls. contact:• Alex Berg - Corporate Governance Department, World Bank
E-mail [email protected]; Tel. +1 202-473-3687
• Kaiser H. Naseem - Manager, IFC Pakistan Corporate Governance Project E-mail [email protected]; Tel. +92 51 909 0658
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Doing Business Indicator of Investor Protection
New Zealand 1
Singapore 2
Canada 3
Hong Kong 4
United States 7
United Kingdom 9
Bangladesh 17
Pakistan 20
India 29
Chile 36
Romania 44
Bhutan 52
France 56
Germany 57
Russia 73
Saudi Arabia 74
Turkey 75
Nepal 90
Spain 94
Egypt 114
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