Corporate Governance in an Emerging Market: A Perspective on Pakistan
Journal of Legal Technology Risk Management, Vol. 1, No. 1, Fall 2006
12 Pages Posted: 30 May 2007
Corporate governance in Pakistan has significantly improved over the past few years although much remains to be done. In 2002, the Securities and Exchange Commission of Pakistan promulgated Pakistan's first Code of Corporate Governance. This Code, along with the Companies Ordinance of 1984, forms the legal basis for corporate governance in the country. The majority of corporations in Pakistan are family-controlled. Although there is a trend towards establishing good corporate governance, most of these corporations still prefer to retain their family structure that disfavors the minority investor. Moreover, the equity culture has been slow to develop, the market remains shallow and is skewed towards a few major companies. The Code is a "comply or explain" regime that applies only to listed companies. Listed companies are encouraged to have independent directors but are not required to do so. Many unlisted companies have voluntarily complied with the Code to become more successful. Some listed companies, however, have de-listed after the Code came into effect because they found the new requirements burdensome. State-owned enterprises do not comply with the Code. A corporate governance code targeted specifically towards these enterprises was scheduled to be released in Summer 2006. The government is aggressively privatizing state-owned enterprises, including some major companies such as Pakistan Telecommunications Ltd. that now has a major foreign shareholder. Unfortunately, obstacles to good corporate governance remain. Some of these include the lack of penal provisions in the Code, a passive financial press, the lack of active monitoring by the Securities and Exchange Commission of Pakistan, an overburdened court system, inadequate remuneration of directors, and a fragmented corporate governance law. However, several factors demonstrate that corporate governance is taking hold in Pakistan - minority shareholders may exit at a favorable share price during a merger, education and training in corporate governance is improving, the government is supporting corporate governance initiatives and many companies are voluntarily complying with the Code. Furthermore, the New York Convention has been ratified and arbitration is increasingly used as a method of settling disputes. Proactive changes in the Code as demonstrated by an upcoming corporate governance code for state-owned enterprises and anti-corruption measures are also encouraging prospects for corporate governance.
Keywords: Corporate Governance, Pakistan, International Securities Market
JEL Classification: K00, K20, K22, K23, K33, L10, L11, L12, L13, K34
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