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Table of contents
Executive Summary.............................................................................................................1
Corporate Governance.........................................................................................................2
Components of corporate governance.................................................................................3
The Board of Directors (BOD)........................................................................................4
The CEO, Company Secretary and CFO.........................................................................5
Reporting and Meetings...................................................................................................8
The System of good corporate governance....................................................................11
............................................................................................................................................12
Corporate governance in Pakistan.....................................................................................12
PICG at Present..............................................................................................................14
PICG Code of Corporate governance............................................................................15
Corporate Governance Case studies..................................................................................20
The Lubrizol Corporation..............................................................................................20
Cairo and Alexandria stock exchange (CASE)..............................................................21
Cases in Pakistan............................................................................................................25
Conclusion.........................................................................................................................27
Bibliography......................................................................................................................28
Executive Summary
Corporate Governance
Corporate governance can be both good and bad. The Securities and
Exchange Commission try’s to ensure that sound corporate governance
is maintained in all businesses by regulating corporations. Further
business expansion is also dependent on sound corporate governance.
Good corporate governance is always trickled down from the top of the
organization. Therefore the role of the board of directors plays a
significant role in the overall corporate governance of any organization.
The BOD is responsible for developing policies and communicating the
company objectives to the operational levels. These objectives must be
developed in line with the regulations and demands of the various
stake holders. The BOD appoints a chief executive officer (CEO) to play
an intermediary role between the principal (Owners) and the Agents
(Management and Employees) in order to achieve company goals.
Three of the most crucial executive offices are; Chief Executive, Chief
Financial Officer (CFO), and the Company secretary. These offices are
run through high ranked personalities who posses sound knowledge of
running corporations. The regulators keep close checks on these
officers and their selection process is the outcome of several
scrutinizing procedures. The selection of these individuals is done
through an election process and the final approval is given by the
regulators after assessing the various eligibility requirements such as
qualification and experience. All of these individuals have tremendous
responsibility and are to be held accountable for approximately all of
the company activities. They are also given the highest remunerations
and authority.
They must be well aware of all the rules and regulations defined in the
country’s corporate law.
The CEO plays the most significant role in managing the organisation
and the principal-agency relationship. The CEO is the highest paid
individual and is responsible and accountable for all business activities
and performance. A good CEO is pivotal for the prosperous functioning
of the organisation. An effective CEO must possess sufficient
qualification and skill to communicate Board objectives to the lower
layers of the hierarchy and to execute them in to performance.
The appointment of the CEO is done by the BOD, however once the
BOD has selected a CEO he is finally approved by the relevant
regulatory body. Much scrutiny is done on the character, skills and
abilities, qualification and experience of the CEO before he is
appointed. The CEO is accountable to the directors and should be held
responsible for all performances of his subordinates.
The Chief Financial Officer is perhaps the most important post after
the CEO. The CFO has a significant amount of power and say in the
company and is in charge, accountable and in control of all the
company’s financial activities. The CFO must also be approved by the
Securities and Exchange Commission, and is also required to possess
suitable financial qualifications in order to hold the office of CFO. CFO’s
are usually the second highest ranked officers in organisations and
receive a healthy remuneration.
The Regulators
Primary Regulatory Bodies are those regulators that are the same for
all businesses regardless of the industry. The securities and exchange
commission of Pakistan (SECP) is one such example. The SECP is the
primary regulator for limited liability companies. Each corporation must
register itself with the SECP in Pakistan. The companies are also
obliged to provide a number of documents and information to the
SECP.
⇒ Creditors
⇒ Customers
⇒ Society
⇒ Media
⇒ The general public
⇒ Other rights groups
There are some conflicts in this regard occurring between the various
components of the corporate governance. The cost of mailing reports
to each and every shareholder is seen at times burdensome, especially
when it is of reporting to a small shareholder.
⇒ Annual Reports
⇒ Quarterly reports
⇒ Reports for the regulators
⇒ Reports for the stock exchanges
⇒ CSR Reports
⇒ Marketing Reports
⇒ Investment Reports
⇒ Performance evaluation Reports
The Annual report and quarterly reports are considered to be the most
significant reports for all stake holders. They provide a thorough
financial analysis, performance analysis and information that is vital for
investors, regulators and the general public.
⇒ Financial statement
⇒ Auditors report
⇒ Directors, CEO and CFO’s Report
⇒ Statement of ownership equity
⇒ Dividend Policy disclosures
⇒ Any other reports considered to be necessary for the stake
holders
The CFO plays a crucial role in the reporting process. The financial
statement are the major part of the report and consist of the Balance
Sheet, the Income Statement, statement of cash flows, statement of
owners equity, financial derivatives and notes attached to the report
which assist in comprehending the report, the dividend policy must
also be elaborated in the report. These statements have to be
approved by both the CFO and CEO, however they are more relevant to
the CFO.
It was felt that the existing business schools were not providing
sufficient focus on developing strong corporate governance. The
institute of corporate governance would focus on:
The project was executed in collaboration with the UNDP. The PICG was
developed to form a bridge between two prominent stake holders in
the corporate world, namely; 1) The Regulators, 2) The Corporations.
PICG at Present
♦
The PICG offers a membership program. Members obtain facilities
such as:
The tenure of office for the elected director is three years. A casual
vacancy shall be filled up within thirty days.
Orientation Courses:
For more than 20 years, Lubrizol’s Board has consisted of at least 75%
non-employee directors and only non-employee directors have been
members of the key Board Committees. For more than 10 years,
Lubrizol’s outside Board members have met regularly without
In 2004 and 2005, the Cairo and Alexandria Stock Exchange (CASE)
was the world’s best performing emerging markets exchange, driven
by Egypt’s impressive economic growth. Newsweek magazine named it
one of the world’s ten best stock markets for 2005.
Booming capitalization and good liquidity were the reward for the
exchange’s tough decision to demand more disclosure from listed
companies and to weed out those companies not considered investor
grade. Tellingly, after the CASE instituted new disclosure rules, about
one third of companies de-listed from the exchange.
But the first to gain from increased transparency are the companies
themselves, stresses CASE management. “This is for the benefit of the
company, not of the exchange. We tell our members that if you do this,
investors will reward you. They will hold your shares even in the bad
moments. This rang a bell with them,” says Shahira Abdel Shahid,
advisor to the CASE chairman.
In mid-2002, the CASE implemented new rules that set the minimum
standard of transparency, focused mainly on reporting requirements.
“Before this, there was no emphasis on disclosure in exchange rules,”
she explains. “There is more understanding by the new regulator that
transparency is important – the case was different in the past.”
“We inherited a lot of companies that were listed simply for tax
benefits. So we set about to weed these companies out,” says Ms
Abdel Shahid. The exchange backed up the new rules with aggressive
fines and suspensions from trading, encouraging many illiquid
companies to de-list. New rules this year will set the corporate tax rate
at 20 per cent for all companies, eliminating any tax breaks for listed
companies. “We expect a lot of voluntary delisting as a result. But we
are happy with this. We will have fewer but better capitalized
companies,” she says.
Some of the steps taken have made disclosure easier for companies.
For instance, a web-based filing system for CASE 30 companies has
replaced paper forms and faxes. But most of the CASE’s efforts are
focused on
Perhaps the most important initiative has been the exchange’s Investor
Relations and Corporate Governance Committee, which is made up of
representatives from ten CASE-listed companies. “These are the
companies best in disclosure. They act as the blue chip companies to
Separately, the CASE audit committee has met with all of the CASE 50
companies to explain the role of audit committees in good corporate
governance.
Cases in Pakistan
Conclusion
Bibliography
o www.wikipedia.com
Special thanks to: Mr.Humayun Zafar; Visiting faculty IoBM for his
precious inputs.