The national bourse, Pakistan Stock Exchange (the 'PSX') has around 534* companies listed on it with several others in the pipeline for obtaining listing courtesy of government's confidence building measures for businesses resulting in take-off of economy and steps taken by the Securities & Exchange Commission of Pakistan (SECP) such as easing the Public Offering Regulations and introduction of Growth Emerging Market (GEM) Regulations etc. In terms of capital listed on the stock exchange, we are talking about a staggering 1.377 trillion rupees. The question is: Who owns these public listed companies?
Generally speaking, owners/shareholders of these listed companies include mutual funds, insurance companies, banks, non-banking financial institutions, foreign companies, government (in certain cases), various families (directly or through corporates) and general public. Yes, general public!
Public as shareholder with limited access to structured information and with the right and power to buy/sell shares at any time from the market makes these public listed companies the most regulated lot. To set the context straight as to how much this public stake is widespread, here are some numbers:
As per 2018 edition of the Institute of Chartered Accountants of Pakistan's magazine 'The Pakistan Accountant', largest company listed on the PSX in terms of revenue was Pakistan State Oil Company Limited, in terms of profit Engro Corporation Limited and in terms of equity Oil & Gas Development Company Limited with total number of shareholders of 16,837, 12,232 and 22,997 respectively. Amongst these, general public shareholders were 16,221, 11,499 and 21,890, respectively.
Technically, all shareholders are owners of the companies in which they are shareholders. However, shareholders running these companies themselves like owners is practically impossible owing to their huge number, geographical dispersion, fluid status etc. Therefore, here comes the concept of separation of ownership from the management. Under Pakistan's corporate law regime, the shareholders on a certain day elect a certain number of directors in a certain manner for a certain time period. These elected directors run the affairs of the company. This is a prime example of Agency Theory where the shareholders are principals and directors are their agents. The model may have its limitations and weaknesses but the same is generally being followed around the globe.
Corporate law imposes numerous duties on the directors who owe fiduciary responsibility towards the shareholders, whom they represent. The mother of corporate laws in Pakistan is the Companies Act, 2017 (CA 2017) which replaced the Companies Ordinance, 1984. To the writer, one of the most vital and foremost responsibilities that the CA 2017 spells out for the directors is communication of financial position and financial performance of the company to the shareholders. The financial statements!
For those of us who think of financial statements as mere numbers with no informative value, just consider this illustration. Your cousin or a close friend starts a business with extremely lucrative prospects. He invites you into investing in his business on profit/loss sharing basis. You invest (all of) your hard earned money with him. One year down the road he stops telling you how much the business is making or losing and what is it worth. The possibility that he is paying you returns (dividends) in a timely manner and as promised, trust me, does not fill the void of that missing information. He could be earning a lot more than anticipated and your investment is an equity investment and not a debt investment with fixed return.
CA 2017 requires preparation and circulation of financial statements by a public listed company to be periodic (in a summary form every quarter and in detailed form annually), timely, true and fair. Provisions of law as to frequency and timing of financial statements are unambiguous and definite. The question remains, what is true and fair.
The accounting framework for preparation of financial statements by public listed companies, by and large, is the International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB) and notified by the Securities & Exchange Commission of Pakistan (SECP). With SECP's timely decisions, almost all the IFRS issued globally have been adopted for application in Pakistan except for a few gaps however, which the SECP is striving to bridge, and this convergence is expected to be achieved soon. Over and above these IFRS, the CA 2017 provides for various other disclosure requirements for financial statements of these public listed companies. Although these additional disclosure requirements existed in the repealed Companies Ordinance, 1984 also, the CA 2017 beefed them up and added value to them in the light of recent trends, politico-economic developments (read: the Panama, Bahamas and Paradise leaks) and removed redundancies with one clear objective; to address the information needs of the stakeholder.
In the opinion of this writer, these financial statement disclosures introduced have the potential to materially affect the decision making of a shareholder especially the information to individual shareholder. However, agonizing is the fact that no individual shareholder, i.e., general public has ever raised voice in favour of increased disclosures in the financial statements. Analysis of shareholder complaints received at the SECP reflects that most individual shareholders do not go through the financial statements when making investment decisions which tantamount that they are not effectively utilizing their due right to information.
SECP, on a continued basis, reviews the disclosure requirements and amends the same from time to time on the pretext of removal of anomalies and duplications and for bringing clarity. Bodies of professional accountants, business associations and even companies themselves contribute in this process. However, an individual is yet to come up with a proposal to enhance and enrich value adding disclosure requirements for financial statements.
The external auditor is the first line of defence against the possible misstatements and under disclosures in the financial statements. The SECP's officers also keeps a vigilant eye on these financial statements to protect public interest. However, this does not equate with the individual shareholder himself taking interest in the information provided or supposed to be provided in those financial statements. Subsequently and consequent to shareholders not basing their decisions on the financial statements, in case of a major corporate wrongs, the shareholders are left with no practical recourse, due to the nature of a limited liability company, except hue and cry and reactive tantrums. Proactive approach is the need of the day.
Shareholders should use financial statements disclosures based informed decision making as their only tool in the stock market and should place lesser reliance on technical analysis, historical trends and hear say by giving due weightage to the fundamentals.
(The writer is Executive Director - Company Law Division at the Securities & Exchange Commission of Pakistan. The Commission, however, may not necessarily subscribe to his aforementioned views. Moreover, the views expressed in this article are not necessarily those of the newspaper)