The results of survey on "The state of corporate governance practices in Pakistan," conducted by Association of Chartered Certified Accountants (ACCA), will be discussed at a hotel here on July 26.
The survey was commissioned by the Securities and Exchange Commission of Pakistan (SECP), International Finance Corporation (IFC) and Pakistan Institute of Corporate Governance (PICG). A 157-page draft report has been prepared for the round-table discussion. ACCA Pakistan Head Arif Masud Mirza and Policy Development Head Dr Afra Sajjad would be at hand to conduct the presentation.
The draft report in its introduction highlights that there is growing interest in the concept of corporate governance in Pakistan mainly because corporate governance is a key to develop a market economy and civil society in transitioning economies such as Pakistan. Suggestions for the need for enhanced standards of corporate governance are reverberating throughout the country.
Globalisation, the need to attract foreign investment to ensure sustainable development of Pakistan, maintaining the performance par-excellence of the stock exchanges, recent corporate scandals such as the Crescent Standard Bank, greater transparency in financial reporting and 'shareholders' rights protection - to name a few, are among the reasons for suggesting enhanced standards of corporate governance.
Even though corporate governance is now a frequent topic of conversation for directors of large companies and in government circles in Pakistan, there is a surprising lack of consensus about why corporate governance is important.
It is therefore not surprising that, for some, corporate governance is seen as a passing fad, a necessary evil to put up with, while for others it is fundamental to what a company does, how it achieves its objectives and how it works in the interests of its shareholders. The survey is aimed at outlining corporate governance practices in Pakistan and offers a select number of recommendations for reform.
It has been highlighted in the recommendations that specific families dominate a large number of firms in Pakistan. Even prominent, publicly listed firms are parts of networks of firms, each supervised by a family-owned holding company. Public investors in such companies are, in effect, minority shareholders in the family's business undertakings. The main problem with these family-owned businesses is conflict of interest between majority shareholders and minority shareholders. In family-owned businesses, there is a strong possibility that the controlling shareholder may expropriate profits that would have otherwise gone to outside investors.
In family-owned companies and family-dominated enterprise networks, a sense of privacy about the business and a possessive feeling of entitlement to unquestioned and unfettered discretion in decision making naturally arise. Under these psychological conditions, changes in corporate governance are resisted.
The family may aspire to 'have their cake and eat it', thereafter, running the company broadly as if it were still a family business. Outside shareholders' interests may not be paramount. The composition of the board may still be dominated by members of the family or by directors sourced by the family.
Concentrated control limits the influence that non-controlling shareholders can have on the company, and effectively reduces their protection from abuse. When families dominate the shareholder meetings and the board, director accountability to other shareholders becomes critical. Currently in Pakistan this accountability is absent in many companies.
ACCA noted that in only half of Pakistan companies surveyed do the minority shareholders have the right to join the transaction and sell their minority stakes in the company if a majority shareholder sells their own stakes in the company.
ACCA survey found that concentrated control could be associated with poor corporate governance practices in other respects. For instance, significant proportions of companies that appear to have no succession plans at board level are family-owned businesses, where the need for succession plans is arguably greater.
Even family owned companies with no outside, minority shareholders will benefit from high standards of corporate governance. For instance, inclusion of independent directors will bring a valuable, independent perspective to a range of issues.
The idea of corporate governance has to be understood by family-owned businesses. The business case for family council and family constitutions needs to be communicated to these businesses. State-owned enterprises, ACCA report says, are an important part of an economy. There is a need to undertake a project on corporate governance practices among state-owned enterprises that may result in a code of corporate governance being developed specifically for these enterprises.
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