Cadbury Committee defined Corporate Governance as the "the system by which companies are directed and controlled ". This definition was broadened by the Hampel Committee to include the "importance of corporate governance in its contribution both to business prosperity and accountability". I would like here to give examples of two countries where strong corporate governance framework has been developed in the recent past. the countries are United Kingdom and Malaysia. In UK, 1980's saw a dramitice change in the shareholding patterns of the listed companies ans resulted in increased institutional shareholdings and their activism. There was a lot of criticism about level of disclosure in the annual reports of the companies listed at London Stock Exchange (LSE). London Stock Exchange being the listing authority regulates the disclosures regime and is part of its listing rules. in 1991, London Stock Exchange constituted Cadbury Committee to arrest the situation. Cadbury Committee was followed by the Greenbury Committee, which looked into remuneration issue. Finally Hampel Committee gave its report in 1998 to complete the process. The pioneering work of Cadbury and Greebury Committees focused on accountability through transparency. Sir Ronald Hampel consolidated his committee's recommendations with earlier code of corporate governance and named it the Combined Code. London Stock Exchange incorporate the combined code in its listing rules as disclosure requirements. the aim was to provide investors and shareholders with sufficient information in order to evaluate the performance and governance of their companies. The process of development of codes of corporate governance in UK was spanned over a decade and was implemented in phases. It was also a result of a consensus from the trade and industry bodies representing the regulatees who had to comply with the code of corporate governance. Malaysia is another example, where declining corporate governance practices were largely responsible for a member of publicized financial failure like Perwaja Berhad in the mid-1990s. Amid economic downturn in 1997, a high level Finance Committee on Corporate Governance was formulated whose main task was to comprehensively review and reform corporate governance in Malaysia. The committee comprised representatives from government, its regulatory agencies, industry bodies and professional associations. A Joint Survey of Corporate Governance Practices of Public Listed Companies by Kaula Lumpur Stock Exchange and Price Waterhouse Coopers was conducted to investigate the following lapses in corporate governance practices :
Based on its deliberations, the Committee produced 65 recommendations to strengthen laws, enhance disclosures and transparency, promote effective enforcement, develop a Malaysian Code on Corporate Governance and signal an emphasis on training and education of directors and company sectretaries. As a result of recommendations of the committee, a Malaysian Code on Corporate Governance has been developed and other rules and regulations have been amended to provide an efficient disclosure based regime. Malaysian Institute of Corporate Governance has also been formed to address Corporate Governance issues in the public arena. Besides England, Malaysia is another example where the code was developed with the consensus of trade and industry. They have been involved in the process of change form the very beginning. Another feature of the Malaysian experience is its emphasis on education of directors and company secretaries. These company executives are being taught how to manage their companies in strict compliance with requirements of the corporate governance framework as defined by the Malaysian Code. Coming to the domestic scene, the first move towards developing a formal framework of corporate governance code was made by the institute of chartered accountants of Pakistan. it organized a seminar in December 1998 on the subject, which was followed by the establishment of a board based committee on corporate governance with representations from SECP, Stock Exchange and the accounting professionals. The Committee issued its draft recommendations for Code of Corporate Governance in Pakistan in October last year for public opinion. The Code has been drafted with a lot of effort and careful consideration of all relevant aspects and covers almost all the areas, which have been referred to in any code introduced in any other country. Stock Exchanges constitute an important organ of the capital market and have a very important role to play in the economic of the country. they channel investment into the corporate sector. The investors invest their savings in listed companies only if they have confidence in capital markets and the corporate sector. it is very important that both capital market and corporate sector have standard corporate governance framework. A good Corporate Governance Framework requires essential elements like efficiency, transparency and accountability. In the after math of large scale economic reforms in 1991, Pakistani capital market attracted a massive inflow of foreign investment. The Stock market index reached new heights with a 'Big Bang' and Pakistan was ranked as third emerging market in the world by IFC. The liberalization was not accompanied by the structural reforms ion the capital market in corporate sector. Therefore, foreign investment gradually withered away on account of lack of transparency, accountability and efficiency. A lot of foreign investors have expressed their utter dissatisfaction with the governance mechanism both in the capital market and corporate sector. This has resulted into a gradual flight of badly needed foreign investment. With the establishment of SECP and under the able guidance of Chairman, Khalid Mirza, capital market reforms process already initiated was accelerated with renewed vigor to bring about enhancement inefficiency, transparency and accountability in the system. All the three stock exchanges in Pakistan have carried out changes in their organizational structures and operational framework in the recent past. Now the capital markets in Pakistan present a much improved picture. Some of the measures, which have been carried out, are highlighted as under: Reconstitution of the Boards The Board of Directors of the three stock exchanges have been reconstituted with 42% representation from outside the exchange. Appointment of Managing Director by SECP The Management of the Exchanges has been separated with appointment of an independent full time Managing Directors who look after the day to day affairs of the bourses. Screen-based trading The introduction of automated trading mechanism has replaced the outdated outcry system. It has brought efficiency and transparency to the system. Central Depository System The establishment of the Central Depository Company of Pakistan has resulted in dematerialization of the shares and has eliminated the risks of fake shares and added efficiency to the operations. Risk Management regime The new exposure limits have enabled the exchanges to improve its risk management regime. Clearing and Settlement cycle (T+3) The Clearing and settlement risk has been reduced to 3 days from 10 days which is an important part of capital market reforms. Member's Protection Fund The fund has been created to protect those members who are facing financial constraints.
Investor's Protection Fund The main objective of establishing the fund is to make available certain amount for distribution amongst the investors in case of default of a member. Capital Adequacy Now all the market players are required to comply with the minimum capital requirements of capital adequacy which is 25 times of the minimum capital balance being maintained by the members. Complaints Cell A complaint cell at SECP has been set up to address investors complaints. This is a measure, which will enhance the investors confidence on the regulators and regulatees of the security market. National Clearing System National Clearing System is being put in place to link clearing systems of all the stock exchanges at national level. Demutualization of Stock Exchanges In order to eliminate the conflict of interests form the capital markets, it is being considered to demutualize the stock exchanges. Under demutualized set up, governance structure will entrust ownership, management and trading with three different sets of people. A few stock exchanges around the world have already been demutualized while a few others have started the process. There is a dire need for change in the corporate culture in Pakistan. the Corporate sector is under the domination of family directorship. There is no separation of management from the ownership. The ordered function is very weak and results into lapses in disclosures. There is disinterest of shareholders in participation in the governance framework. The Managements of listed companies do not care about the interests of the minority shareholders. In whole, there is a lack of good governance in the corporate sector, which is the main reason why investors do not seem to be interested to invest in equity. SECP, ICAP and Stock Exchanges have provided a very good opportunity to the corporate sectors to improve its image. First of all, I must recommend that the change process may be devised in consensus with the corporate sector and be divided into manageable phases. The current agenda for change has been organized and managed by the regulatory bodies like SECP, Stock Exchanges and the accounting professional. The corporate sector has not been involved in the process from the very beginning. It is not yet too late and a consensus may be developed with the corporate sector. A consultation process with trade and industry bodies like federation of chambers of commerce and industry, APTMA, association of sugar manufacturers, leasing association of Pakistan, Modaraba Association of Pakistan, etc be initiated to ensure compliance with the code. It will help strengthen relations between the regulators and the regulatees and improve national harmony. The corporate sector is on the receiving end not only from its regulators but also from the global recession. The recet events have accelerated the speed of the growing problems. The Corporate sector in its current state cannot take take too many shocks at a time. It would be too much too soon and can result into disruption rather then any good to the business and industry in particular and to the economy as a whole. In the wake of recnet events it is desired that the process of change should not be imposed upon the regulatiees and they should also be included in the process of change. There should be a consensus among the regulators and regulatees about the phases and speed of change. Secondly, monitoring of disclosure regime in Pakistan is the domain of SECP therefore they should also monitor compliance of the code of corporate governance. Thirdly, a corporate governance index be developed for the companies which measures the level of compliance with the code. A similar exercise is being done in India where companies are graded on a scale of five to one (excellent, very good, good, satisfactory and unsatisfactory) according to their responsibilities towards following factors:
Such an index will instill a sense of competition among the companies to step ahead of other companies to improve their image in the corporate arena. Fourthly, I want to propose the establishment of an institute of corporate governance in Pakistan. This institute will not only educate and train the directors and secretaries of the listed companies but also disseminate the corporate governance issues in the public arena. it can be very useful in educating the shareholders and investors about thier responsibilities so that they can actively take part in governance process. Finally, I want to express my sincere gratitude to the organizers for giving me an opportunity to speak on this auspicious occasion. Thank you for listening patiently.
|
||
|
||
|
Copyright �2000-2003
Islamabad Stock exchange. All Rights Reserved |
