IMPROVING CORPORATE GOVERNANCE

USING CORPORATE SOCIAL RESPONSIBILITIES

THROUGH ANALYTICAL METHODOLOGIES

Fahad Mahmud Mirza

CASE, G-5/1, Attaturk Avenue, Islamabad, Pakistan
fahad.mirza@gmail.com

Muhammad Umer Arfi

Technology Nucleus (Pvt) Ltd., Islamabad, Pakistan
arfeenrwp@gmail.com

Mr. Tahir Shamshad

Member Engineering, Main CDA Secretariat, G-7, Islamabad, Pakistan
tahirshamshad@yahoo.com

ABSTRACT

Corporate Governance is generally a skeleton of rules and practices by which a board of directors
ensures accountability, equality, and lucidity in the firm's relationship. Corporate Social
Responsibility (CSR) is an effort to operate a company or a business organization in an economical
and socially sustaining environment. This paper is written keeping in view, the major and minor
bits necessary of administering a corporation governance and the increasing importance and
adaptation of CSR in organizations. This paper discusses up to one-hundred vital pointers having
positive effect on the framework of Corporate Governance, and later mentions a Spiral Model of
Success, called CGSMS (Corporate Governance- Spiral Model of Success). Secondly, to start
CSR department in some organizations, there should be some specific CSR performance measures
and analysis tools.

This paper proposes not only some major analysis tools but also gives the new and improved
concept of proper implementation of CSR. A new and improved CSR System Design and
Implementation Technique for CSR Model is developed for implementation in any general
corporate body. The CSR model was first proposed in MEQA 2nd Quality Conference, Dubai, at its
first phase. The model then has been revised and upgraded for more applied, professional and
progressive approach and assured for being more practically efficient. This paper establishes a
relationship between CSR and Corporate Governance and proves how proper implementation of
CSR results in progressive improvement of Corporate Governance.

Purpose: The purpose of the paper is to establish and vitalize importance of Corporate Social
Responsibilities (CSR) and a new, improved CSR model application for the organizations leading
to Corporal Success in a competitive environment by improving Corporate Governance using CSR
in any corporation.

Methodology: The research strategy involves the revision of previous case studies along with the
surveys and a humongous amount of data collected relating the nucleus of Corporate Governance in
Pakistan and the studies and issues related with CSR. The methodology also involves the
conceptual and thorough study of international scenarios incorporated and duly presented by the
global corporate sector. Various organizations in the corporate sector would be visited to cover up
the research. During the research, an organization has been incorporated under Securities and
Exchange Commission of Pakistan (SECP, The corporate regulatory authority).
Findings: The first and foremost conclusion devised through the research is that the Corporate
Governance has ended up as nothing more than a legal requirement and obligation implied by the
government of Pakistan, through studying the heavy surveys conducted. Along with that, the
findings in this research also involve up to hundred fundamental parameters related to Corporate
Governance and practical application outcomes of the CSR model proposed at MEQA 2nd
Conference, Dubai. Moreover the CSR model presented here; is proven as true for internal CSR
dimensions as were justified for external CSR indicators.

Value of Paper: This paper enables the decision makers to review the guiding principles of
Corporate Governance for making proper decisions in relation to understand the necessary
parameters, and further more to utilize the models of corporate governance along with the model
proposed for CSR as primary tool for sustainable corporate growth and development.

Keywords: Improvement of Corporate Governance, Corporate Social Responsibilities, CSR

Models, Quality of Service, Business sustainability, Analytical Models.

Category: The paper is categorized to be a Research Paper

1. Introduction

Corporate Governance is not much of a vintage topic. The Securities and Exchange
Commission of Pakistan (SECP) is a regulatory body that regulates the corporate entities under the
company ordinance 1969 and SECP Act 1997. Special companies, like telecommunication
companies are regulated under Pakistan Telecommunication Authority (PTA) and the banks are
regulated under State Bank, asides the SECP supervision. Listed companies are regulated also by
Stock Exchanges of Pakistan. SECP took charge of Corporate Law in 1999, and took serious view
and considerations over the governing acts and principles of international corporate bodies.
Institute of Chartered Accountants of Pakistan (ICAP) took initial steps towards incorporating, and
developed a framework of good governance. The SECP, ICAP, Stock Exchanges and the Institute
of Cost and Management Accountants of Pakistan (ICMAP) created a committee, and sub-
committees, with the pledge to develop and draft the first Code of Corporate Governance in
Pakistan. On March 28th, 2002, the finalized draft of the Code was released by the SECP. This
Code of Corporate Governance is the compilation of good governance and combined code of good
practices. The compulsions included within the Code were made mandatory for all the companies
of Pakistan to abide by the rules and regulations set by SECP ([1] SECP, 2002).
After the efforts of SECP and the Corporate Governance Code developing committee
members, the perception acknowledged by the corporate culture and society of Pakistan, is well
conceived, perceived and understood as a legal framework and an applied liability over an
organization enforced by the government. Furthermore, resulting from the ambiguous and hideous
obligations implicated by the code has promoted as meant to be for paperwork only, and the
importance of Corporate Governance is neglected. This argument is justified as referred and
concluded by the survey of Corporate Governance Practices in Pakistan, conducted in 2007 by the
collaboration of IFC (International Finance Corporation), ACCA (Association of Chartered
Certified Accountants), PICG (Pakistan Institute of Corporate Governance) and SECP ([2] ACCA,
2007). Due to this reason, the popularity of Corporate Governance structure and culture is being
less promoted, and the companies are not taking favorable advantages from it, resulting in the poor
fiscal stature of the corporate sector of Pakistan.
The company incorporated, named Technology Nucleus (Pvt.) Ltd. (as discussed in the
research methodology), from the day of its promotion to incorporation, and from incorporation to a
proper business flow, the problems faced and tackled during this process and the analysis made
through the rigorous study and surveys have devised a formal conclusion that the regulatory bodies
are victim of poor Quality of Service (QoS). For this reason, as mentioned before, the economic
crisis is sweeping away the corporal stability in Pakistan. The regulatory bodies on producing the
Code of Corporate Governance should have launched and worked out the training workshops for
the Board of Directors of the companies of Pakistan the interest of the shareholders is being catered
for, but the concern of management, employees and the society is also observed. Hence, this results
in a swift and durable success of a corporate, and is proven by concluding in our research using the
competitive models of Corporate Governance and Corporate Social Responsibilities. These models
are step-wise progressive tools from a company’s incorporation leading to a smooth business-flow
to success, and can serve as a benchmark for existing and newly emerging corporate.
In this perspective, the concept and purpose of the paper is to propose the idea and a
functional model to identify and rectify the basic parameters involved in Corporate Governance,
providing ease to understand the importance with improvement methodology to cater the issues
faced by the corporate sector. Defining the four pillars and structural constituents of Corporate
Governance and establishing the essential bond with Corporate Social Responsibilities, as a vital
tool for improving the administrative body.
The analytical tool for proper and improper implementation of CSR, as proposed in our
previous research on CSR Modeling and Implementation ([4] Arfi and Mirza, 2008), was
mentioned with addressing the purely society’s issues, such as education, natural disasters etc. Now
this model has been proved to be adaptive, that it is as much effective for the social and ethical
culture within the corporate as for outside the corporate. The budget distribution in this proposed
model will be more effective for corporal business elevation and growth.
2. Highlighting the Culture of Corporate Governance

The highlights specified here are related to the results of the surveys conducted in 2007 by
the above mentioned organizations ([2] ACCA, 2007). The survey has been conducted in Pakistan
and on International basis also. Among the respondents from surveys, none of them have devised
any such code for Corporate Governance, and up to 82% of them impose the idea for the only
benefit of Corporate Governance implementation is as compliance with the legal and regulatory
requirements. About 98% of the respondents have stated they complied with the code of Corporate
Governance.
A CEO of a family-owned business stated, “Do I have an option, but to consider the
Corporate Governance very important? The SECP wants it to be very important. If I do not think
corporate governance is important, I might end up in jail and my company will be de-listed and I
will go out of business” (Chief Executive of a Family Owned Business [2] ACCA, 2007). Among
the top-listed 1,000 UK companies, as surveyed by ACCA, 62% respondents considered corporate
governance to be a system by which companies are intended for and controlled. But only 1% of the
respondents considered corporate governance to be compliance with legal and regulatory
requirements, unlike Pakistan where (as mentioned) 82% think opposite to it ([2] ACCA, 2007).

3. Broader Perspective of Corporate Governance and CSR

The practical incorporation of a company, surveys and on discussions with the corporate
officials, helped in developing the models of Corporate Governance leading to success of any
corporate. Among all the milestones and prerequisites for accomplishment, the most important of
them is Corporate Social Responsibilities but any corporate cannot integrate CSR from its birth
date. Unless the stages of Financial and Operational are in cycle to throttle the ample amount of
business to work and return on society through CSR. On the survey conducted by ACCA in UK,
none of the respondents mixed Corporate Governance with CSR ([3] Moxey, P., 2004). In Pakistan,
about 31% of the respondents believed Corporate Governance to be same as CSR. Although both
are different, but in the wider scenario of Corporate Governance, one could go still further to bring
about the social and cultural norms of the society, as mentioned by Kenneth Scott of Stanford
Law School ([1] SECP, 2002). In this context, we can utilize the concept of CSR as an ingredient
of Corporate Governance. The broader perspective of CSR is the improvement and betterment of
the society, which is achieved by applying the care and concern concept of CSR on the employees
and managerial staff, as being the vital part of the society. This in return generates sustainability
and productive results for any corporate to provide beneficiary input to the society.

4. Corporate Governance Pyramid (CGP) Model

After the study and initial research conducted, the pillars of Corporate Governance are
devised as Legal, Financial, Operational and Social aspects. All the aspects will be discussed in
detail, with their significance and relationship towards Corporate Governance. This model can be
further granulized. This is a bottom to top methodology, where every next step of the model is
attained through the base step. After much cyclic operation, their inter-dependency on each other
grows prominently.
 Figure 1: Corporate Governance Pyramid (CGP) Model

4.1. Legal-
The first pillar, being the Legal part, covers the compliance to the law and code of
Corporate Governance by the regulatory authorities. This includes many factors; such as law for
incorporation, appointment and selection of directors, CEO, company secretaries, auditors, legal
advisors etc. compliance would also be established after first cycle through proper reporting about
companies’ operations to regulatory authorities, tax returns, annual statements and annual reports
etc., all the mentioned can be summed up as Legal Corporal Requirements. The company business
may end up with jurisdiction applied on the business owner and directors, if these legalities are not
fulfilled according to the law. So, this pillar is mandatory and establishes the very first step towards
Corporate Governance.

4.2. Financial-
After fulfilling the legal requirements comes the decision-making phase of financial
management, and companies economic growth is catered for by the company’s CFO or related
staff. Proper auditing procedures are involved in this step, which is also a legal obligation
(overlapped with the first step). This step also involves the planning on selection of company’s
future operations and business directions. This should lead to maximum financial stability of the
company. The early portion of financial step is devised through initial investment by shareholders,
and all these preliminary decisions are made through this share of investment. Afterwards, the
company’s circuit of profits is established for future operations and the cycle of financial
management grows firm to conduct more business.

4.3. Operational-
Operations include business planning, controlling, decision-making, reporting, human
resource management and other managerial factors necessary to conduct business efficiently. This
cycle of operations conform to the financial and managerial stability and strength of the business,
as the loop goes on and on. The managerial and directorial staff from bottom to top is the key
success factor on company’s potency and competency. The financial stature depends on the
operational outputs, and the operational outputs depend on the workforce of the employees. Better
the fiscal conditions better are the chances of improved operations. These three factors of finance,
operations and workforce are interrelated on the basis of corporal functioning.

4.4. Social-
The main purpose of any corporate is to two-fold the shareholders’ investment. Until the
time is achieved when the company is able to generate enough profits to satisfy the shareholders
and the business requirements, no corporation can easily apply CSR. It is necessary to have enough
profit to serve the society, but not on the stake of company’s operational deeds. On the other hand,
the corporal staff is also a part of society. Improving their working environment and taking care of
their needs and bare necessities is mandatory for good governance and falls under the early
mandatory steps of CSR. All the parts of the above mentioned system of corporate governance lead
to business elevation on proper application of the major and minor governing aspects. The second
step on this issue will be returning benefits and helping the society by working for its development.
The society’s fiscal situation itself improves when the corporate sector adds in to it. Resulting from
this, the corporate itself grows sustainable subject to the sustainable progress of the society. Hence,
the promotion of the company’s status and achievement of appreciation towards the products
produced, and a strong customer relationship established on the basis of social, moral and ethical
values is the by-product.

5. Corporate Governance – Decagon Model (CG-Decagon Model)

Above mentioned do the fundamental steps of Corporate Goverrnance, which do the bases
of developing the Corporate Governance- Decagon Model (CG-Decagon Model), comprising the
ten (10) essential parameters. This model helps in defining and deriving the further aspects and the
pointers of Corporate Governance, with the consideration of steps widely ranging from a corporate
promotion to a successful business flow. The priorities of the essential aspects of governance vary
with the corporal phases, such as promotion, incorporation and steady operations etc. If these
priorities are neglected and small corporate are operated with heavy governance rules and
regulations and vice versa, the corporate may face termination. The CG- Decagon model highlights
the increasing complexity of the governance according to the corporal phases. The CG- Decagon
involves:
• Promoters’ Role
• Formation of Incorporation
• Directors’ Role
• Financial Aspects
• Resource Allocation
• Operations
• Reporting and Communication
• Business Development
• Accountability
• Social Responsibilities

For starting a business from scratch, a strong business idea, the team workforce of
promoters, their capacity according to the business-type considerations and capability of reaching
the markup, the willingness, commitment and consent, the leadership qualities and up to the mark
business feasibility decides and engraves the success of the business from day one. The decision-
making and planning should cater for the initial business strategy to the exit policies covering all
the necessary parameters in view. After setting the promotion phase, the governance up till the
phase of incorporation should only cover and meet the legal requirements related towards the
company’s incorporation. Later on, after appointing the directors, they carry on with the policy-
making and decision-making which does reflect the future of the corporate governance and forecast
the success in future. The eligibility, ethical conduct, successive planning, business expertise,
competitiveness and having promoter’s characteristics of directors are the prime obligations. The
resource allocation certifies the smooth company operations and productive results. Cost-benefit
analysis, organizational collaborations, time and assets management and contract management etc.
are key factors among them. Up to this level, by the proper running cycle of the company and
involvement of the staff, increases the intricacy level in the corporate governance. Here comes the
important role of the top-level management to introduce regular reporting about operations and
providing a proper and sound medium of communication among the workforce employed.
Another important factor is the business development, which can fit in and preserve its identity at
any phase of corporal emergence. This is also necessary in the view that the business development
plays a vital role from the start of company to get successfully in business operations. Relationships
management, diversity of business areas, growth control, think-tank development, geographical
considerations, risk analysis and management and cyclic improvements etc. are the core indicators
involved in business development. The process of business flow for the success needs a platform of
proper and a strong accountability environment, meaning more than just appointing an auditor to
do the job during the incorporation phase at the start. This stand covers the corruption control,
company-person independency, avoiding conflicts of interests, the lingual, sexual and racial
discrimination control, decision-making irrespective of blood relations etc. The loading effect of
imposing the corporate governance rules are mentioned here step-wise to minimize such an effect
which depraves the governing principles as a congested job, and in return the benefit of corporate
governance offered is two-fold.
The foremost indispensable factor for company’s ultimate success, after the top-level
managerial competency, is the employees, including the lower-level management, workers and
official staff; reason being the dependence of the proper business cycle, company’s product
promotion and projects’ completion and delivery. They are all the essential part of corporal society.
These working-class bodies are the ambassadors of the public. If the corporate is in the feasible
condition to invest for the positive development of the society, then this workforce within the
company deserve the first and the best part of it. These are the fundamental basis of introduction
and implementation of Corporate Social Responsibilities (CSR) within a corporate culture. The
advantage generated and projected will be the faith and loyalty of the staff with a strong sense of
empowerment. The goal of helping the society will be achieved and the fair chances of corporate
strength and growth will be magnified. Employee counseling, wisdom of speech, Mudarbah
contracts, motivation / mobilization / encouragement, rewarding on achievement (such as security,
housing, medical etc.), allowances and bonuses, therapeutic and psychological analysis with
treatments, employee welfare services and recreational activities and safeguarding the employee’s
self-respect are the important factors adding to the Corporate Social Responsibilities (CSR) within
a corporate sector.

Figure 2: Corporate Governance- Decagon (CG- Decagon) Model

These pointers are dependent on each other on every other basis involved. The whole cyclic
order may vary to some extent depending on the business composition, but as far as the business
success and proceeding to achievements is concerned, the study shows that CSR pointers
mentioned here are same and important for any business formation on grounds. The strength and
sustainability is achieved on proper application of CSR within the corporate, by enhancing the
ethical and moral conduct. This model best suits the private companies which are about to start
or being at early stages, and also for the private companies switching to the public sector.
And this model is as much beneficiary towards the public sector if included the following
models, to strengthen the concept.

6. CGSMS (Corporate Governance - Spiral Model of Success)

CGSMS (Corporate Governance - Spiral Model of Success) is used to enhance the

functional, organizational, social, ethical and moral values of a corporate, within the broader
perspective of Corporate Social Responsibility. All the rules applied can set essential marks
globally as a new concept on rectifying Corporate Governance with a completely new idea. The
pointers derived for establishing the Spiral Model of Corporate Governance are extracted and
justified on the basis from legal to social aspects and all the governing rules and principles with the
applied organizational team and workforce factors. On this research, up to one hundred (100) points
of effecting the role of Corporate Governance have been projected which are vital and prominent
fractions within a corporate, and necessary from promoting, incorporating, running and ruling in
the business sector. These points can be increased and more ideas can be brought forward.
The indicators mentioned on the CG- Spiral Model are derived from the ten (10) parameters
of CG- Decagon Model, and it itself is an elaborated version of Decagon Model with the translation
of Corporate Social Responsibilities implying accomplishment. It is a self-explanatory model and
the parameters justified here are in the same step-wise manner as discussed in the previous model,
and the importance increases with the Spiral narrowing towards the centre towards the ultimate
success, proposed to be achieved.

Figure 3: Corporate Governance- Spiral Model of Success (CGSMS)

To be in the scope of the paper, only some of the important and essential parameters for
corporate success has been arranged on the spiral. The arrangement and the addition of parameters
is highly adaptive and and could vary from organization to organization and business type
considerations. The spiral only highlights the heirarchy towards success.

7. Arfi Proper and Improper OSR Model

This model was firstly presented and acknowledged at MEQA 2nd Annual Congress at
Dubai, 2008. It has been proposed that CSR be pronounced or evolve out to be Organizational
Social Responsibilities (OSR), and this model was created under the consideration to measure
proper and improper budgeting scheme of an organization’s social responsibilities department ([4]
Arfi and Mirza, 2008).
 The fundamental indicators mentioned before, especialy related to improving socio-ethical
parameters, need proper investemnt. For example, arrangement for housing and medical for
employees and/or employee’s family, need proper budgeting plan. It has already been discussed
that once the corporate is on the smooth sail, having favorable financial conditions, should and
must get involved in dealing with this intensity of good governance. As many of the attributes been
disclosed, their importance and priorities are different for every other organization and budget must
be allocated on the basis of their priorities. For example, if a corporate needs to cater for three
different types of attributes, such as an employee’s housing, medical and training, then budgeting
will be dependent on the importance of these attributes accordingly to the corporate. Seemingly, if
many of the employees need to be trained, then the most share of budget should be allocated to this
indicator. Arfi Proper and Improper OSR Model utilized here as an analytical tool, which
generates automatically the proper budget allocation and/or compare the already allocated
budget and calculates its proper and improper impact. This model generates mentioned results
subjected to the provided percentage of the importance at the input. For the sake of ease, the
functional operation of the model is duly explained briefly. The model is based on weighted-
average principle.
The terminologies used here are explained in the model mentioned as a reference on the
subsequent page. If we, as an example, employ numbers to the previously perscribed attributes that
70% of employees require medical, 56% of them need housing and 7% necessitate training for the
sake of corporate interest. These percentages in original scenario are extracted from the corporal
records of the preceding years, with the effect of planning for the coming year. Coming back to the
model, the Attribute Percentages (AP) are justified as

AP 1 = 70%, AP 2 =56%, AP 3 = 7% … (1)

Smallest Value (SV) among attributes is

SV = AP 3 = 7% … (2)

Weight of Attribute Percentages is

W n = int (AP n / SV) … (3)

W 1 = 10, W 2 = 8, W 3 = 1 … (4)
N = W1 + W2 + W 3 = 19 … (5)

Calculated Budget Weights are shown in the equation below, which are significant as A, B and C
for the three mentioned attriutes

A = W 1 /N, B = W2 /N, C = W 3 /N … Z = Wn /N … (6)

A+B+C…Z=1 … (7)
A = 0.52, B = 0.42, C = 0.05 … (8)

The equation (8) shows that 52% of the total budget should be allocated to providing medical
reqirements of the employees, 42% should go for the favor of housing and 5% should be reserved
for training. For the calculation of the proper and improper impact factor, one should consult the
previous research version [4] on CSR, discussing the in-depth analysis and calculating parameters
used for applying Arfi Proper and Improper OSR Model.
This model is currently being implemented at NESPAK (Pvt.) Limited, at initial stages to
produce practical results over for a certain period. NESPAK (National Engineering Services
Pakistan) (Pvt.) Ltd. Is Pakistan’s premier consultancy organization. Its international stature is well
established and it enjoys the reputation of being one of the top engineering consultancy
organizations in Asia and Africa and is ranked amongst the world’s top 200 consulting firms ([5]
NESPAK, 2009).
l

Figure 4: Arfi Proper and Improper OSR Model

8. Conclusion

The improvements in corporate governance within the corporate sector are in process, but
still this concept is taken as a hurdle and a compelling phenomenon among the general public. The
regulatory authorities need to play their cards by educating and providing training on proper
governance rules and regulations. The models mentioned above provide a whole new inspiration
and impression of good governance devised in a proper step-by-step fashion to mitigate the
loading-effect perception, and two-folds the outcome. The concept of CSR to be used as a tool for
improving the governance stature and structure is basically to highlight the observable fact of
dealing with the society in the way of helping and providing them a good livelihood, which in
return generates the successive mark up of the business promotion and sustainability in the market
(as mentioned in CG- Spiral Model). The CG-Pyramid Model, in its nature is a conceptual
presentation of corporate governance pillars with the step wise procedural representation of
governance burden in any corporate with the use of CG-Decagon Model for getting maximum out
of the efforts. The CG-SMS may serve as a guiding principle for growing corporate and manifold
the outputs for all corporate considerations when used with “Arfi Proper and Improper OSR Model
due to its applied nature. The Arfi OSR Model, being an adaptive analytical budgeting analysis
tool; is as much beneficial for the corporal workforce and staff within the company, as it is for the
general society.

9. References

[1] SECP (2002), Manual of Corporate Governance,

Securities and Exchange Commission of Pakistan (SECP)
www.secp.gov.pk
[2] ACCA Pakistan (2007), A Survey of Corporate Governance Practices in Pakistan 2007,
Commissioned and edited by IFC, SECP and PICG.
[3] Moxey, P. (2004) Corporate Governance and Wealth Creation,
ACCA Occasional Research Paper No. 37
[4] Umer Arfi, H. M. and Mirza, Fahad M. (2008), “CSR, AN OVERALL SYSTEM DESIGN
AND EFFECT OF ITS PROPER AND IMPROPER IMPLEMENTATION ON
ORGANIZATIONS”, Proceedings of MEQA 2nd Annual Congress, Dubai, April 7-9, 2008.
[5] National Engineering Services Pakistan (NESPAK), Introduction to NESPAK,
Available at: http://www.nespak.com.pk/about/intro.asp (accessed 12 May 2009).