The Corporate Governance Practices Accounting Essay
The issue of corporate governance continues to attract a high level of attention. Valuable lessons have been learned from the series of corporate collapses that occurred in different parts of the world in the past decade. This is due to the fact that financial mishandling and lack of attention by the board have put many companies into an embarrassing position. There is now a growing realization that unless the tone is set at the top, stakeholders' confidence in all likelihood will remain at the lowest rate. The purpose of this study is to seek insight into the best practices being followed by the eight listed companies of Pakistan under observation. In turn find out whether the companies are complying with the code and how actively they support the emerging concept of corporate governance. To make this report more meaningful, the report also analyzes the international code of corporate governance.
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Key words: Corporate Governance, SECP Code, Pakistan, Corporate governance ratings, independent directors
Recent developments that have occurred in corporate governance during the past decade have been majorly due to corporate scandals. Since then the subject of corporate governance practices has gained interest especially after to the high-profile collapses of large corporations mostly involving accounting frauds. When investing in any company, stakeholders would like to be guaranteed of one thing: that their investment is in safe hands and it is being deployed efficiently, according to a strategy to ensure sufficient controls to guard the Shareholders from excessive risk. Given this, and this is perhaps in the definitions of corporate governance that - good corporate governance is not some subjective number of executive versus non-executive directors, in fact it is the support system of the world's best companies to streamline business and to put sufficient checks and balances in place.
Since it involves the relationship between the Board of Directors, Management, Shareholders and other Stakeholders, it enhances the companies' sustainable performance while contributing to the overall economic development and allowing them access to outside capital.
"Corporate governance refers to the structures and processes for the direction and control of companies." 
In spite of the recent interest and the relative development of Pakistani capital markets in comparison with other countries of the region, corporate governance in Pakistan is far from perfect. During the past decades, the matter of corporate governance in the U.S. received significant press interest due to the wave of CEO dismissals (e.g.:Â IBM,Â Kodak,Â Honeywell) by their boards. Studies like, Sandra (2002) provide some indicators; a major problem remains that we lack a definite measure of the strength of our corporate governance mechanisms. A standard framework to analyze corporate governance practices is provided by the OECD principles. These principles acknowledge not only the importance of legal protection, but also other mechanisms of corporate governance.
Adrian Cadbury in 1992, made major contribution in the wake of corporate catastrophes in the United Kingdom, the Cadbury Report titled Financial Aspects of Corporate Governance concluded that related fiascos could be mitigated by way of greater disclosure by management and better oversight by boards of directors. The present version of Cadbury is now seen in Combined Code 2010.
The Wal-Mart Mexican bribery case  highlights the poor governance framework. It shows that company's several internal governing systems, processes and procedures have been non-existent or have failed. In Wal-Mart's case it appears to have been no honesty hotline or whistle-blowing culture in place, because the suspected bribery scheme went on for years without anyone reporting it. The question that must be raised is, where was the board? And what role should board play now to safeguard shareholders interest and retain their confidence?
Since Pakistan is a common law country, corporate entities in Pakistan are primarily regulated under the Companies Ordinance 1984, the Banking Companies Ordinance 1962, Securities and Exchange Ordinance, 1969, Securities and Exchange Commission of Pakistan Act, 1997, Insurance Ordinance 2000 and the various rules and regulations made there under.
The introduction of the Code of Corporate Governance in Pakistan in March 2002 (Code) by Securities and Exchange Commission of Pakistan (SECP) has been a major step in corporate governance reforms in Pakistan to establish a framework for good governance of companies listed on Pakistan's stock exchanges. This was soon followed by two reports issued by SECP in April 2003 on harmonizing the Code of Corporate Governance with the other laws/regulations in Pakistan and in September 2003 on Impact Assessment of the Code. In keeping with recommended practice, World Bank carried out a Review of Observance of Standards & Codes (ROSC) in 2005.
The Pakistan Institute of Corporate Governance (PICG), although still in its growing stage, is taking key initiative to train the directors, increase awareness towards importance od corporate governance and provides an enabling environment for implementation of Code of Corporate Governance issued by SECP. It is also, working in collaboration with IFC's objective that aims to enhance the infusion and culture of good corporate governance.
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Over the years corporate governance has managed to attract much public attention since it involves the financial health of the companies in general. High profile failures lead to a strong need for ratings, since there is strong linkage between sustainable financial performance and corporate governance. Although there is a code and it has been made mandatory for the companies to comply with the code as a minimum requirement, a need for third party evaluation as an outsider can provide a good feedback as to the standard of compliance and the area (s) that need particular attention.
In Pakistan, JCR-VIS has emerged as a leader in corporate governance rating, apart from credit rating. JCR-VIS Credit Rating Co. Ltd. (JCR-VIS), approved by Securities & Exchange Commission of Pakistan and State Bank of Pakistan, is operating as a 'Full Service' rating agency providing independent rating services in Pakistan. Corporate governance ratings involve critical areas of the rated enterprise, which include regulatory compliance; ownership structure; composition and operations of the board; financial transparency and relationship with stakeholders. Companies are required to keep these ratings current. The model developed by JCR-VIS to evaluate companies' governance and rating criteria is broadly defined under the following key areas:
Involvement of board members in stock exchange
No. of independent directors
No. of executive directors
Board operations/ duties and Responsibilities
Management Profile - that includes the composition and scope of operations
Evaluation and Remuneration criteria
Financial reporting, Transparency and Disclosure
Self - Regulation
Corporate Social Responsibility
While commenting on the corporate governance rating methodology, the deputy CEO, Jamal Abbas Zaidi said: "Fast growth is always risky, unless supported by good corporate governance".
PACRA apart from JCR-VIS, is also involved in corporate governance rating but it also examines other aspects of corporate governance include equity ownership by executives and directors.
Drawing some attention to the international corporate governance rating agencies, Standard and Poor use the four core principles: Fairness, Transparency, Accountability, Responsibility as cornerstones in a corporate governance scoring methodology for individual companies. This methodology presents Standard & Poor's  approach to analyzing corporate governance both at a country and at a company level. Companies that conform to these "best" practices are deemed to have "good" corporate governance and those that do not are given bad ratings. Simple enough, but the end results don't measure up.
The purpose of this research is of two folds:
To seek insight into the compliance of code of corporate governance vis a vis are the actual practices. Whether the companies are complying with the code and how they support this emerging concept of Corporate Governance being integral to business operations.
Also, compare the codes of Corporate Governance of three countries ie. Malaysia, Singapore and Hong Kong with the code given by SECP applicable to listed companies in Pakistan.
For this purpose keeping certain limitations of resources and time constraints, directors of 8 listed companies in Pakistan were interviewed to understand their point of view on corporate governance practices.
This study is based on qualitative research to find out the Corporate Governance practices used in different listed Pakistani companies. Our survey companies include, Engro Corp which has won the Merit Certificate for Best Sustainability Report - 2010 and NJI which is a SAFA Winner - 2010 Pakistan.
Conceptual Frame Work
Conceptual frame work for research is present below:
How it was addressed?
Exploratory Qualitative Research
Through personal Interviews
CEO, MD, Chairman, Executive and Non- Executive Directors, CFO
Companies listed in Karachi Stock Exchange.
08 Companies. GSK, HBL, AgriAutos, Engro Corp, EFU, New Jubliee Insurance, Abbott, Indus Motors.
Semi Structured Questionnaire and Interviews
It is vital to note that most the responding companies agree that proper implementation of the code will provide intrinsic benefit beyond mere compliance. Though almost all the companies have responded in affirmative but what is actually to be judged is, whether the Boards have come out of the tick- box approach and have implemented the Code in spirit? The general impression is that, majority of the companies tend to comply with the code as a mere obligation. Hence, it can be noted that the soul of corporate governance is still missing.
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It is evident from the survey that the cosmetic ingredients which are disclosed to the regulatory bodies and stake holders, are in place but the true spirit that forms the culture of corporate governance in an organization was lacking.
Although many of the directors in these companies mentioned that corporate governance is mindset and the way stakeholders steer the company, yet the practices revealed some interesting facts that negate the approach. The survey results have been summarized below under the broad categories.
Board Composition and Size
The new code of corporate governance of Pakistan as given by the SECP emphasize on the presence of more independent directors vs non-executive directors. Preferably, 3 independent directors on the board while executive directors should be 1/3 of the total board size.
Looking at the international practices, Singapore code gives companies the leverage on the board size as long as 1/3 of the size comprise of independent directors. Malaysian code as such doesn't put much emphasis on the board size and its composition specifically but, it says that the board should have a balance of executive and non executive/independent directors. And, the Hong Kong code proposes that there should be 3 independent directors on the board out of which one must have profession qualification or accounting or management experience. Ideally comparing all the four codes, Singapore and Pakistan's code emphasize on 1/3 representation of independent directors on the board.
During the study it was found that majority of the boards comprises of mostly non-executive directors. The rationale behind having independent directors in that, they bring a fresh perspective and independent thinking on the board and into the governance. Since independent directors contribute greater impartiality in their judgments. Minimum requirement of 7 members is being followed in all these companies, but sufficiency of members remained a question mark.
Qualification of Board
Neither the Code of Corporate Governance Pakistan nor international codes of Hong Kong, Malaysia and Singapore mention the qualification criteria for the selection of board members. However, the international code of Hong Kong does mention the eligibility criteria for the board member.
Survey revealed that none of the companies had a written or required qualification criterion for the board members. However, it was observed that all these companies considered the blend of business knowledge, industry exposure and area of their expertise, imperative to their presence on the board. Only 3 out of 8 companies had few certified directors on their board through PICG and IoDUK (Institute of Directors, UK). Minimum weightage was assigned to the significance of certification of directors. None of these companies mentioned the importance of education as qualification criteria for the board members, as long as they act, in the best interest of the company and shareholders, in good faith.
No code of corporate governance whether Pakistan or international talk about the board responsibilities and duties. However, importance has been laid on the training and orientation of the board members upon their appointment. The orientation covers the scope responsibilities and extent of engagement at the board level. Pakistan Code emphasizes of the directors training. Similarly Singapore code mentions the importance of directors training on their responsibilities and duties. However, Malaysian code only talks about director's orientation. While Hong Kong code does not cover board responsibilities area.
Usually under the best practices, the board members are provided with a guideline to assist the members to clarify and understand their roles and duties. None of the companies (non-financial sector), under observation had any such written document or format in this respect, but directors were given a ToR (Term of Reference) with their appointment.
While commenting of the board responsibility, Shabbir Hashim - Independent Director said: "Ideally a board's 30% of the scope of responsibility should be towards compliance and control, while 70% focus should be on Risk Management"
ERM appeared to be another turning point in the best practices of corporate governance, which is a good discipline if followed.
Chairman and CEO of the Board
According to the Code of Corporate Governance by SECP, the chairman should be elected among the non-executive directors of the listed companies. While as per the international code of Hong Kong and Malaysia, the chairman is given a leadership role. Also, all these three codes say that the chairman is responsible for the coordination among the board members. Singapore code does not talk about the role of chairman on the board at all.
Subsequently, all the four codes mention that the chairman and the CEO should be a different person.
Generally it is observed that, in the family owned businesses and in certain MNCs the Chairman and the CEO is the same person, while the survey results indicate that in only 1 out of 8 companies, the Chairman was also the CEO. Under the best practices and as mentioned in the Code the Chairman and CEO, should be different to separate the control and ownership, benefit the minority shareholders and bring more accountability into the strategic decisions.
A strong CEO and Chairman as a person is not a bad thing, as long as the team has the stake in the decisionsâ€¦. Jamal Abbas Zaidi - Deputy CEO JCR-VIS
Previously, code of corporate governance of Pakistan emphasized on the importance of audit committed, but the new code draws attention towards HR and Remuneration committee too at the board level. The international code of Hong Kong, Malaysia and Singapore, doesn't highlight the mandatory presence of Audit or HR/ Remuneration committee on the board.
The general practice followed by the surveyed companies mainly had the following board committees, apart from Management Committees; Audit Committee, Investment Committee, Risk Management Committee, all chaired by the non-executive directors. All the directors interviewed, laid utmost importance on the board audit committee.
Few discussion points that were brought forward are summarized below:
Compensation committee has to be headed by the Chairman, and CEO should be part of this committed on invitation only, as per corporate governance best practices.
The key to good corporate governance is that there should be a strong reporting line of internal auditor into the board audit committee.
Companies should internalize internal audit as much as they can.
One point that is held controversial is, internal auditor can/cannot be the secretary to the board audit committee, as per the independent director during the interview.
The new code by SECP has made the audit committee very powerful. Regarding the composition of the audit committee, both Pakistan and Singapore code mentions the size of 3 member, and all should be non-executive. In Pakistan atleast one member on the committee should have related financial expertise and knowledge and Singapore requires atleast two members with relevant finance skills/ expertise and experience. SECP code emphasized on meeting once every quarter, whereas Singapore only stipulates that committee should meet with the internal and external auditor atleast once in a year in the absence of company's management.
Malaysian code states that no executive director can be a member of the audit committee and does not comment the size and composition of the audit committee either. The committee should meet with the external auditors twice a year in the absence of management.
Hong Kong code does not cover audit committee composition and qualification at all. But, it restricts the partner of the former auditing firm to be part of another audit committee for atleast one year, to avoid the conflict of interest. None of the other codes under study mentions such restrictions. Committee shall meet atleast one a year as per the Code.
Only SECP code talks about the powerfulness of the audit committee, but doesn't mention the limitations of external or internal auditors unlike other international codes. All the Codes, besides reviewing the financial and quarterly accounts and compliance, empower the audit committee to recommend the board on the matters of appointment and removals of external auditor.
Survey reveals that's, as per the best practices and minimum compliance, all the companies under study have met atleast four times a year, have audit charter in place that states the agenda and responsibilities of the audit committee. The chairmen on the audit committee however have the financial knowledge and expertise, but no specific qualification criteria is followed for the selected on chairman of the audit committee. It was highlight that the key to good corporate governance is to have a strong reporting line of internal audit committee into board audit committee. Companies should internalize their audit function as much as possible.
International corporate governance standards and codes are increasingly emphasizing the need for boards to evaluate their effectiveness. Code of corporate of Hong Kong, Malaysia and Singapore all emphasize on the board evaluation and highlight the parameters of the evaluation criteria. In Singapore and Malaysia nomination committee should be responsible to undertake the board evaluation and its sub-committees.
As per SECP, the board has to put in place the mechanism for its evaluation within two years of the introduction of the code of 2012. However it does not define any kind of parameter on which the board's performance should be evaluated.
None of the companies had a set mechanism for board evaluation or individual directors, neither its sub committees. However, the new code emphasizes that there should be a formal system for board of directors' evaluation but why code specifies a delay for two year is again a question mark that regulator need to revisit. Now the critics and the supporter of the corporate governance await to see which companies lead and are proactive to put an evaluation system in place for the board and its sub committees. This will create more transparency and disclosure on part of the company's compliance to best practices.
Under the best practices of corporate governance, importance of succession planning can be overlooked. Almost all the international codes recommend on having a HR committee responsible mainly to ensure that the succession planning is in place. In all the companies under observation, succession planning is being done for the key positions like CEO, CFO, Internal Auditor, and one level below for each business unit as well, from the pool of high potential employees.
Corporate Social Responsibility
Internationally the relationship between organizations and society has moved on from paternalistic philanthropy to reexamination of business, its role and responsibilities. Corporate responsibility and corporate governance are inextricably entangled, especially in the global context which indicates that CSR has become a marketing gimmick.
The true essence of CSR probes organizations to contribute a lot towards society where they are operating their businesses. During the survey it has been found that most of the companies have a certain percentage of PAT that is used for CSR activities. But a question remains is it enough from big conglomerates towards the wellbeing of society?
It is observed that majority of the companies listed in Pakistan have been unable to touch the soul of corporate governance. The execution of best governance has always been a resistance from many companies, mainly due to the reason that many companies in Pakistan are family owned, and decision are dominated by the owners in their own interest; hence they lack the long term vision and direction for the company and economy as a whole. This in turn is unable to develop a professional environment to cultivate the ecosystem for corporate governance.
It was observed that few companies had incorporated the concept of whistle blowing in the corporate culture; this shows these companies understand the true essence of corporate governance. These companies have started to adopt whistleblower policies, e.g. by creating websites, where employees can anonymously post complaints. Labor/trade unions have a "collective bargaining agent" who presents the grievances of employees on their behalf.
What actually needs to judged is, if the boards have come out of the tick-box approach to implement the code in spirit than just mere compliance. Also, if the system laid by the board ensures full disclosure of material information. Although all the listed companies now issues a statement of compliance of code of corporate governance but the question is, if this statement sufficient enough to prove the compliance with the best practices?
The code of corporate governance requires the directors to "carry out their fiduciary duties with a senseÂ of objective judgment and independence inÂ the best interests of the company".
Â However, the expression "fiduciary duties" is not defined in the Code.Â SECP mayÂ
consider listing out the fiduciary duties to make this provision more definite and, thus,Â effectively enforceable.Â
There is a conservative bias in every country that impedes institutional change.Â Corporations do not take Corporate Governance seriously considering that it hampers their attention from business operation and bottom line is the financial strength which they do possess but when crisis strikes, that bias lessens and at times vanishes,Â bringing openness towardsÂ the long awaitedÂ change.Â Hopefully with the passage of time similar change will outburst in Pakistan.
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