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 REPORTINGFRAMEWORKDirectors 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 CFOii. 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

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