ISSN 2222-1905 (Paper) ISSN 2222-2839 (Online)
Vol 4, No.6, 2012
Two-Tier Corporate Governance Model for Pakistan
Safdar Hussain Tahir1* Hazoor Muhammad Sabir2 Adnan Arshad1 Muhammad Anwar ul Haq1 1.
Department of Banking & Finance, Government College University, Faisalabad, Pakistan.
Department of Economics, Government College University, Faisalabad, Pakistan.
* E-mail of the corresponding author: firstname.lastname@example.org
The main purpose of this study was to formulate a model of corporate governance suitable for the Pakistani environment. For this the corporate governance models like Anglo-US, German and Japanese working for the companies of developed and developing nations were critically reviewed. After studying the pros and cons of these models, a hybrid model for Pakistani companies was proposed. According to this model, twotier boards’ i.e. supervisory board and management board have been suggested instead of one-tier board. Entire supervisory board will be comprised of non-executive directors (NEDs) whereas management board will consist of only executive directors (EDs). These boards will together constitute a joint board headed by a chairman (an INED) who will also head the supervisory board and management boards. Supervisory board will conduct its affairs with the help of subcommittees. The hybrid model would aim to fill the board room in the sense of ensuring the balance of representation, talents, power and attitude which is the prime source of poor corporate governance in Pakistan.
Keywords: Corporate Governance, Two-tier boards, hybrid CG model, Pakistan
Corporate governance is a way of governing activities of a corporation for the well being of all stakeholders (not only for shareholders) that ultimately leads to better financial performance. It is the set of process, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. “Corporate governance refers to the manner in which the affairs of a corporate body are or should be conducted in order to serve and protect the individual and collective interests of all stakeholders” (Butt 2008)
According to OECD “Corporate Governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set”. According to La Porta et al., (2000), “corporate governance is a set of mechanisms through which outside investors protect themselves against expropriation by the insiders. They define “the insiders” as both managers and controlling shareholders.” Therefore, corporate governance refers to the manner in which the affairs of a corporate body are or should be conducted in order to serve and protect the individual and collective interests of all stakeholders.
Corporate governance is a subject with various facets like all stakeholders with different interests. An important subject matter of corporate governance is to make sure the accountability of individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the conduct of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. This subject has become a focal interest in the world especially after crisis of Enron and WorldCom. In 2002, U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate system.
European Journal of Business and Management