challenges and issues in corporate governance

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					Challenges and Issues in
 Corporate Governance
Scope of Corporate Governance
• “Corporate Governance is concerned with holding the
  balance between economic and social goals and
  between individual and communal goals. The
  governance framework is there to encourage the efficient
  use of resources and equally to require accountability for
  the stewardship of those resources. The aim is to align
  as nearly as possible the interest of individuals,
  corporations and society.

• The foundation of any structure of corporate governance
   is disclosure. Openness is the basis of public confidence
   in the corporate system and funds will flow to centers of
   economic activity that inspire trust.”
  -Sir Adrian Cadbury.
• “Shareholders role in governance is to appoint
  the directors and the auditors. Poor corporate
  governance has ruined companies, sent
  directors to jail, and destroyed a global
  accounting firm and threatened economies and
  governments.”
• e.g., Taj Company
• Cooperatives scandal
• Mohib Textile Mills Ltd
          Cadbury Report (1992)

• Wider use of INDEPENDENT DIRECTOR

• Introduction of AUDIT COMMITTEE

• Separation between CHAIRMAN and CEO

• Adherence to detailed code of BEST
  PRACTICES.
      OECD Principles of Corporate
         Governance, (1999)

• Protect rights of SHAREHOLDERS

• Recognize the rights of STAKEHOLDERS

• Timely and accurate DISCLOSURE

• Responsibility of the BOARD
Scope of Code of Corporate Governance,
                 2002


The code provides a framework for efficient
      and transparent running of listed
 companies to enhance shareholder value.
    The regulators need to be vigilant to
      enforce the code in its true spirit.
    The Code of Corporate Governance
                 (2002)

•   Non Executive Director
•   Qualification of a Director
•   Tenure of Director
•   Governance Policies of the Directors
•   Information to Directors
•   Orientation Courses
•   CFO/ Co. Sec
•   Corporate and Financial Reporting
•   Audit Committees
               BOARD OF DIRECTORS

• Encourage effective representation of independent non-executive
  directors, including those representing minority interests.

• a. minority shareholders as a class are facilitated to contest.
  (through the use of proxy)

• b. At least one independent director representing institutional
  equity interest of financial institution. (a director nominated as a
  director under section 182 and 183 not be taken as independent
  directors)

• c. Executive directors not more than75% of the elected directors.
     (Voluntary provision)

• The directors to give consent that they are aware of their duties
  and powers
    QUALIFICATION AND ELIGIBILITY TO
           ACT AS A DIRECTOR
•    Director, not to be a director in more than ten other listed
    companies.

•      ii. Director needs:
          a. to be registered as a National Tax Payer ; and

         b. Not to a defaulter as convicted by court of a banking
         company, development financial institution, or a non-banking
         financial institution or as a member by the Stock Exchange.

•      iii Not to be director if spouse is engaged in the business of
          Stock    Brokerage (voluntary)

         TENURE OF OFFICE OF DIRECTOR
•      iv. Three years, vacancy to be filled in 30 days
  RESPONSIBILITIES, POWERS AND
FUNCTIONS OF BOARD OF DIRECTORS

Every listed company shall ensure

a. Statement of Ethics and Business practices is prepared

b. Board of directors to adopt vision statement, and overall
 corporate strategy; formulate significant policies (for the
 purpose of risk management, marketing, etc.)

c. Establish internal control

d. Documentation by resolutions passed in meetings on all
 serious issues. i.e. investment and dis-investment of funds,
 loans, write-off of bad debts etc.
      RESPONSIBILITIES, POWERS AND
    FUNCTIONS OF BOARD OF DIRECTORS
e. Appointment etc. of Chief Executive to be determined by the
    board.

f. Investment policy of modaraba institution to be approved and
   reported in annual report.

•     Significant issues to be placed for decision by the board of
    directors (i.e. annual business plan, budgets, joint ventures
    etc.)


• Orientation courses for directors.
     QUALIFICATION OF CFO AND CS

CFO has to be:
  a. professional accountant ;      or
  b. graduate with 5 yrs experience in handling financial
     affairs in a listed company or a bank.

CS has to be:
  a. professional accountant ;     or
  b. member of a recognized body of corporate/chartered
      secretaries or
   c. lawyer ;   or
   d. a graduate with 5 yrs experience of handling corporate
        affairs.
              FINANCIAL REPORTING

      CORPORATE AND FINANCIAL REPORTING
      FRAMEWORK
      Directors report to shareholders. Give complete and candid
      position of the company.


      RESPONSIBILITY FOR FINANCIAL REPORTING
i.    Financial statements to be duly endorsed by CEO and CFO
ii.   Secretarial compliance certificate required with annual
      returns


      DISCLOSURE OF INTEREST BY A DIRECTOR.
                          AUDITORS

AUDITORS NOT TO HOLD SHARES

•    External Auditors and their spouse restricted to purchase shares
     in the company they are auditing.

AUDIT COMMITTEE

i.   not less than three member committee preferably from non-
     executive directors.

ii. Committee to meet at least once every quarter.

iii. CFO to attend meetings of Audit committee.
Enforcement issues of the Code
• INTERNAL DISCIPLINE
• Restricted to listed companies
• Regulation under section 34(4) of the
  Securities Exchange Ordinance, 1969 -
  structurally flawed
• Penalty- section 9(4) of the S.E. Ord, 1969
• Soft law
• Voluntary in nature
• Based on self regulation
• Drivers:
• Incentive for better performance
• higher profits for the shareholders
• attracts more investment
• Shareholders (minority rights under the
  Companies Ordinance, 1984 - sections
  263, 265, 290, 305)
• Institutional investors- eg. Mutual funds,
  financial institutions, insurance companies
  (Calpers, etc)
           EXTERNAL DISCIPLINE

•   Drivers
•   Stakeholders (financial and community)
•   Regulators (SECP Act, 1997/ CO Ord, 1984)
•   Institutional shareholders
•   environmental law
•   labour and taxation laws.
•   Stock exchanges
•   International credit rating firms
•   Media
•   NGOs
            Areas to consider:
• Shareholders rights

• Stakeholders rights (financial institutions, employees,
  Community)

• Corporate Social Responsibility (CSR)

• Union Carbide- Bhopal.

• Exxon Oil Spills in Alsaka

• Cement factories in Kahoon

• Leather Factories of Kasur
  corporate governance: not limited to
                companies
• Public sector corporations – new
  legislations provide better governance
  structure.
• Other corporate vehicles: cooperative
  societies ?
• Other vehicles of business: Partnerships –
  no mention – doing big business
•