Documente Academic
Documente Profesional
Documente Cultură
M. Mujahid Malik
Student of C.A & M.B.A
Robina Iqbal
Freelance Researcher
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording or otherwisewithout prior permission of the Publications Division, Pakistan Institute of Development
Economics, P. O. Box 1091, Islamabad 44000. Pakistan Institute of Development Economics, 2010.
Pakistan Institute of Development Economics Islamabad, Pakistan E-mail: Website: publications@pide.org.pk http://www.pide.org.pk
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ABSTRACT
In this paper, governance is defined as the manner in which power is exercised in the management of a countrys economic and social resources for development. Good Governance is then synonymous with sound development practices. Vital reforms for public expenditure may flounder if accounting systems are so weak that budgetary policies cannot be implemented or even monitored; if poor procurement systems encourage corruption and distort public investment priorities. This only illustrates a broader point; good governance is central to creating and sustaining an environment which fosters strong and equitable development. Governments play a key role in the provision of public goods. They establish the rules that make markets work efficiently, and they correct for market failure. In order to play this role, they need revenues, and agents to collect these revenues. This in turn requires systems of accountability, adequate and reliable information, and further, efficiency in resource management and delivery of public services.
The main focus of the study is to investigate does corporate governance matters in Pakistan equity market? What are its implications for corporate valuation, corporate, ownership and corporate financing? The first dimension of this issue is measuring the corporate governance in Pakistan. Corporate governance is interpreted as mechanismboth institutional and market based, that induces the self-interested managers (controllers of the firm) to make decisions that maximise the value of the firm to its shareholders (owners of the firm) [OECD (1999)]. The aim of these mechanisms is to reduce agency costs that arise from principle agent problem; and they could be internal and/or external in nature [Klapper and Love (2002)]. Internal mechanism deals with the composition of the board of directors, such as proportion of independent outside directors, distinction of CEO and chairperson etc. another important mechanism is ownership structure, or the degree at which the ownership by managers obvious trade-off between alignment and entrenchment effects. External mechanism on the other hand rely on takeover market in addition to regulatory system, whereas the take-over market act as a treat to existing controllers in that it enable outsiders to seek control of the firm if bad corporate governance results in significant gap between potential and actual value of the firm. So given these mechanisms, it is investigated that the legal system is the only way to ensure good corporate governance. It is also examined that effective presence of these mechanisms positively associated with firm value.
Establishment of Institute
The Pakistan Institute of Corporate Governance (PICG) has been set up as a not-for-profit company, limited by guarantee and without share capital. It has been licensed under Section 42 of the Companies Ordinance, 1984. The PICG will undertake activities geared towards
achieving good corporate governance in the country and creating an enabling environment for effective implementation of the Code of Corporate Governance. The PICG anticipates becoming a leading provider of knowledge and awareness in the country related to corporate governance practices. It will strive to encourage best practices in corporate governance in public and private sectors, with focus on capacity building of board of directors, management, policy makers, investors, and other stakeholders. It shall also endeavour to cover all the issues related to corporate governance at national and international level.
Promoters
The PICG has been formed through initial sponsors, which comprise a balanced representation of major stakeholders from public and private sectors. The promoters of PICG are as follows:
Corporate Regulator
Securities and Exchange Commission of Pakistan
Banking Regulator
State Bank of Pakistan
Corporate Sector
Federation of Pakistan Chambers of Commerce and Industry Overseas Investors Chambers of Commerce and Industry
Banking Sector
Pakistan Banks Association
Stock Exchanges
Karachi Stock Exchange Lahore Stock Exchange Islamabad Stock Exchange
Academia
Institute of Business Administration Lahore University of Management Sciences
Professional Institutions
Institute of Chartered Accountants of Pakistan Institute of Cost and Management Accountants of Pakistan Institute of Corporate Secretaries of Pakistan Institute of Chartered Secretaries and Managers Management Association of Pakistan
Project Background
In August 2002, the Securities and Exchange Commission of Pakistan (SECP), the United Nations Development Programme (UNDP) and the Economic Affairs Division (EAD) signed a Memorandum of Understanding. Under this umbrella agreement, UNDP provided technical and financial assistance to the SECP in encouraging good corporate governance practices and establishing a sound regulatory framework for the corporate sector in Pakistan. The primary objective of the Project on Corporate Governance is to introduce and encourage compliance with good corporate governance practices in order to revive investors confidence that is
critical for sustainable economic growth, which in the long run will lead to poverty alleviation. It follows, therefore, that the Project will aim to: develop and implement a sound corporate governance framework in Pakistan enhance the capacity of the SECP; and promote private institutions that encourage participation of stakeholders in ensuring good corporate governance practices.
Bureaucratic Layers
Corporate governance structures are very top heavy. They require many layers of management and long lists of vice presidents and presidents for information to pass
through. This makes it very difficult for the company leaders to receive accurate, important data from the lower levels of the company, especially if managers along the way want to distort the message to make themselves sound better. Ultimately, the chain of command becomes so long that the business is unwieldy, responding slowly to change. Flat business structures with few layers of management are the goal of many corporations.
Accountability
Corporate governance has earned a negative connotation in society, mostly because of the questionable practices of key executives and board members. Not all corporations commit fraud, of course, but those that do receive a lot of attention, and many executives have become used to taking questionably large bonuses even in a contracting economy. This has lead to an atmosphere of distrust among consumers and investors, which corporations fight by showing increased transparency in their work and mission.
Governance Standards
Internally, corporate governance faces a different type of struggle. A board of executives can make good decisions on company policy and propagate standards throughout the business. But what if managers prefer not to listen? Rebellious managers can ignore or subvert corporate decisions at many levels of the business, and there are often a few troublemakers in all businesses. Corporate boards need methods of enforcing standards and disciplining managers when necessary, a component of governance few boards consider.
Board Terms
Board terms are a complex issue. In a board of directors, directors typically only sit on the board for a brief term, rarely more than several years. Life-term board
members can cause problems with ingrained beliefs and concentration of power, so businesses prefer to cycle board members. But the corporation must decide how to cycle. If all directors switch around at the same time, the corporation may be left open for a hostile acquisition. If the board decides to stagger member terms, it must decide when to stagger and how to accomplish it.
interference from outside. They are not prepared to grant any of their powers to outsiders. It all depends on controlling shareholders whether they really want to have independent non-executive directors on their companys board or not.
References
http://en.wikipedia.org/ or htt or