Corporate Goverance

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The Prime Cause of its poor state in Pakistani Listed Companies

Dr Safdar A Butt

Karachi Stock Exchange (KSE) outperformed all exchanges in developing countries over the past five years – yet the total number of companies listed at KSE has actually gone down from 701 at end 2002 to 654 at end 2007. This simply means more companies are getting themselves unlisted (or being removed from the list by appropriate authorities) than new companies joining the list. While the KSE index has grown from 2,701 at end 2002 to 14,075 at end 2007, indicating a remarkable annual growth rate of 31.62%, the total paid up share capital of these companies has grown only negligibly if we do not count the bonus issue shares. At the end of 2004, total market capitalization was Rs 1,723 billion and at end 2007 it stood at Rs 4,330 billion; yet the total funds raised through rights or new issues during this period were only Rs 79 billion (inclusive of share premiums). What is this a sign of? Would it be a lack of investors’ confidence in companies? Why is there such a lack of public confidence in companies listed at the best performing exchange in the developing world? In one phrase: perception of poor corporate governance at these companies.

Do not be misled by the notion that corporate governance being a nascent area, general public in Pakistan would not be making any investment decisions on the basis of companies’ performance in this area. Without being formally aware of the term corporate governance, whatever an investor expects from the company which he is investing his money in relates to the manner in which the corporate body governs itself. Just as a villager needs to regularly inhale oxygen without being aware of its scientific name, investors act on their perception of each company’s corporate governance profile when they make their investment decisions.

Corporate Governance is attracting a lot of attention in the developed world. While there have not been any scandals of Enron or WorldCom proportions in Pakistan yet, it is not to say that companies in this country are not exposed to the ills of poor corporate governance policies. The regulators in Pakistan have already brought out a voluntary Code of Corporate Governance while an Institute of Corporate Governance has also been set up through assistance from IFC. All this will certainly lead to improving the situation in the long run, but considerably more needs to be done now.

There are three distinct objectives of writing this article.

The first is to attempt to define corporate governance. The second is to highlight what I consider to be the main cause of the rather poor state of corporate governance among Pakistani listed companies. I wish to clarify that I do not intend to cover all the problems relating to corporate governance in Pakistan – that would require a much longer discourse. My focus is just on one area which I consider to be the prime cause. My third objective is to present a proposal that would help improve the situation, if not substantially solve the problem in so far as it relates to my focus area.

Having sat on the boards of four listed companies for over a decade and later having observed the performance of stock exchanges in the country as an academician for another decade, I have come to believe that the best way to define corporate governance, both as a field of study and a management phenomenon, is to take the stakeholders’ perspective route. For this purpose, the first step is to classify stakeholders.

We can classify stakeholders in a listed company in two different ways.

The first is on the basis of their respective roles in the company. On this basis we can say the stakeholders are owners, lenders, employees, business associates and society at large. Owners include all sorts of shareholders like those who do or do not control the company, individuals as well as institutional investors, long term holders as well...
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