Pakistan Corporate Governance Project

Khawar Ansari: “I think the first thing to do is to explain what corporate governance is. If you look at the formal definition, it’s how companies are directed and controlled. Put simply, corporate governance is: what directors do; how do they work more effectively; how do they relate to shareholders and to the top management; and where do you draw the line between directors and senior management. The dominant perception in Pakistan is that the majority of organizations are complying with good corporate governance practices in letter but not in spirit. The market need for education on the ‘real’ benefits of good corporate governance, such as improved operational efficiency and financial performance, better access to capital at lower costs, higher reputation, and better retention rates of employees still persists.”

Mohsin Ali Chaudhry: “Over the past few years, the corporate governance regime in Pakistan has witnessed important developments. A corporate governance code for listed companies was issued by the Securities and Exchange Commission of Pakistan in 2002. The State Bank of Pakistan has, in addition, issued prudential regulations for banks that, among other things, regulate their governance practices. A recent ruling of the High Court of Sindh has paved the way for a thorough scrutiny by government agencies of corporate governance practices of bidders for various state-owned assets. The emphasis should be on benchmarking local governance practices with global practices and procedures and building sufficient corporate governance training and advisory capacity in the country to strengthen the existing legal and policy framework. IFC’s Pakistan Corporate Governance project has been at the forefront in stimulating a debate over global corporate governance practices and creating capacity to improve the corporate governance of Pakistani companies and banks. For example, the Pakistan Institute of Corporate Governance (PICG), a corporate governance institute based in Karachi, has been running a certified board training program since 2007 in association with IFC. In addition, IFC, through its investments, has been helping client companies improve their corporate governance in accordance with international best practices.”

Mahwesh Bilal Khan: “Since inception, our project has been focused on improving corporate governance of key stakeholders. We have been active in creating awareness and providing training and advisory services to banks and companies to improve their corporate governance. We have, in addition, worked with journalists, lawyers, judges, and educational institutions to create momentum for our work. The project has increased its outreach and diversified services over time. Initially, there were a lot of awareness-raising workshops and seminars to educate companies about corporate governance and how it was going to benefit them. Over time, we have started to target specific segments of the market such as microfinance institutions, family owned companies, collectively, as well as individually. We work directly with companies. How do we do that? Now that we feel that the market knows about corporate governance and is more receptive towards the idea, we are working on a one-on-one basis with companies. The kind of recommendations that we make to them and the kind of presentations we give them are tailored to the kind of business that they are in. For banks, it is going to be more focused on risk management and internal control procedures. For family-owned businesses, it is more focused on internal controls and succession planning, because these businesses are based on a hierarchy and most family businesses in Pakistan are either in their second or third generation. We also do formal corporate governance assessments for companies, which are very intense. During these assessments, we identify governance challenges for organizations and provide recommendations, which are very company specific. Increasingly, we are working with the PICG.”

KA: “One of our project objectives is to help make the PICG become self-sustainable.

The PICG is providing director training to improve good corporate governance practices of banks and companies in Pakistan. Developed by IFC, the training is internationally accredited. The whole idea is to have at least one director who understands corporate governance best practice on each board of a listed company. The other thing they are doing is increasing membership. They have corporate membership as well as individual membership, and the corporate membership is split into two: affiliated member and full member. The full member has to allow its corporate governance practices to be scrutinized by the PICG methodology designed for this purpose.

You may ask: who would want to have these kinds of workshops? Well, these are the companies that are looking for external funding, or wanting to do a joint venture with somebody from another country, or exporting their products, or setting up business abroad, or selling a part of their company — all of these are cases for director workshops. They know that as soon as they go to a third party, the third party will ask about their corporate governance. Then, there comes a realization that they do need to improve, and they may ask for a review or an assessment, which is a more detailed analysis. We look through all the papers, investigate the trends, look at board meeting minutes, at declarations they’ve made, check their website and company literature, and interview directors and senior management. It is a very thorough process followed by a report including recommendations for a three-year time period.”

MAC: “The following steps could be instrumental in improving corporate governance practices of local companies and ensuring effective implementation of corporate governance regulations in Pakistan. First, there is a need to strengthen the role of independent, non-executive directors in Pakistan to ensure objective decision-making and effective managerial oversight by corporate boards. Second, alternative dispute resolution methods (such as mediation) for resolving corporate governance-related disputes need to be encouraged by building capacity of corporate governance institutes to mediate these disputes. Third, a court-sanctioned process in Pakistan for minority shareholders’ protection is fraught with unnecessary delays, expense, and uncertain outcome. The process should be speedy and more accessible to aggrieved shareholders. Last, stock exchanges (which regulate compliance with the code as part of their listing regulations) should build their capacity to improve implementation of good corporate governance practices.”

KA: “It is a gradual thing. The situation now is that there is almost an obligation for Pakistani companies to change attitudes and behavior. People ask me why corporate governance is important to Pakistan. The simple answer is that Pakistani companies need to compete globally. Pakistan is the sixth largest country in the world in terms of population, so we need to create employment. And where is the employment going to come from? It is not going to come from the government or the public sectors, it has to come from the private sector and, therefore, the private sector needs to grow and become more robust. The only way this can be achieved is if the directors behave according to international best practice. Their planning, decision-making, and risk management have to be of international quality. That means corporate governance has to follow international best practice.”

MBK: “To answer your question very specifically, before joining IFC, I had been working with the securities regulator where I witnessed opposition by owners of family businesses to improving their corporate governance. There was very strong resistance, and, over the last four to five years, you can see that they have accepted the fact that this is for their own good. There has been a shift in mentality. There are still people and organizations who say that this doesn’t really apply to their business because they are a small business or because they are doing business locally so are not affected by globalization.”

MBK: “You have to realize that when you are giving international benchmarks, you are conscious of the peculiarities of the local market. Being a country project, we have to tailor our services to local business needs and that is what we try to tell them also.”

KA: “The other way we convince boards of adopting good practice is by giving them examples from personal experience. What we found is that whenever we have done a workshop or had a discussion with directors, initially there is resistance, but when they begin to understand what we are saying, they realize it’s in their own best interest to improve corporate governance practices. For example, one of the components of good practice is to make sure that directors are responsible for corporate strategy. Many companies don’t even have a strategy, so when the board realizes it ought to think and plan ahead, determine where the market is going, what the competition is doing, how to mitigate risk, and how to have a board where responsibility is shared, it all adds up.”

MAC: “Major corporate governance improvement areas for a company include board composition, transparency and disclosure, internal controls, risk management, and protection of shareholders. However, a corporate governance reform agenda must be owned by a company. Without commitment from its directors and senior executives, corporate governance practices of a company are hard to change. A board of directors of a company that hasn’t fully embraced its role as a ‘front-line regulator’ in implementing good corporate governance practices encourages window-dressing by the company. The business case for good corporate governance should, therefore, be built for the board and the senior management.

Further, the perceived value of improving corporate governance is an important factor. Some corporate governance improvement criteria are more important than others. Organizations that feel that it is not worth improving corporate governance in all areas therefore see improvement as expensive and not urgent. Consequently, customized solutions need to be developed for different categories of companies (such as, small, medium, large, family owned, listed companies and state-owned enterprises) as opposed to wholesale corporate governance improvement programs. In its second phase, the project intends to engage specifically with family-owned companies, microfinance institutions, and Islamic financial institutions in Pakistan.”

MAC: “To start with, it is of critical importance to have buy-in from owners and managers of companies to internationally accepted corporate governance practices which are invariably more stringent than the local standards. The benefits of global corporate governance practices to businesses should in addition be clearly spelt out to encourage board’s ownership of these practices. Training opportunities for directors and senior managers through various programs being offered by the PICG are important in highlighting global governance practices and associated benefits to encourage convergence of corporate governance standards.”

On an international level, what kind of legal requirements do you feel will be implemented in the wake of the current financial crisis?

MAC: “Corporate governance areas that have recently been scrutinized in the wake of the current global financial crises include executive remuneration, effective risk management, and adequate exercise of shareholder rights. There is also an ongoing debate on the role of credit rating agencies as they face potential conflict of interest in rating (and getting paid by) clients. Further, the OECD has been working on developing a set of corporate governance recommendations since the onslaught of global financial crises to deal with some of the above governance challenges.”

KA: “We have to get business leaders to embrace good corporate governance practice, project what they’ve achieved, and correlate this with their success. We have to demonstrate to the Pakistani market that good corporate governance practices make business sense and lead to improved good business performance and enhance share value — the vision is to be able to communicate that to the market. The other part is to segment and develop the market for corporate governance so that all the key players are included.”