IMPACT ASSESSMENT

OF THE
CODE OF CORPORATE GOVERNANCE 2002

September 2003

PREFACE
Since its establishment in 1999, the Securities and Exchange Commission of Pakistan (SECP) has
been actively pursuing governance reforms, with a view to creating transparency and accountability
in the corporate and financial sectors and safeguarding the interests of stakeholders, including
protection of monitory shareholders rights.
To achieve this, the SECP implemented the Code of Corporate Governance (the Code) in March
2002 as a first step towards systematic implementation of principles of good corporate governance.
The Code has been incorporated in the listing regulations of the stock exchanges and is applicable to
all public listed companies. It is a compilation of best practices to provide a framework by which the
business and management of listed companies are to be directed and controlled.
Over the last one year, the Code has been generally accepted by companies both large and small.
For the purpose, the SECP undertook a number of targeted measures to promote understanding of
the Code and create widespread awareness of the need for good governance. In an attempt to
determine the extent to which the practices laid down in the Code are being pursued by the
corporate sector, the SECP has commissioned this impact assessment study.
The impact assessment study concludes that the introduction of the Code has significantly raised
transparency and accountability in the affairs of listed companies, their reporting as well as
proceedings of directors. There is a marked realization of role and responsibilities by all concerned,
including directors, key management and auditors. However, the degree of implementation of the
Code varies from business to business; the type of business and ownership pattern plays a vital role
in the implementation process and the extent of its effectiveness. The study has made certain
observations about implementation of the Code of Corporate Governance by family owned
businesses.
The impact assessment study will guide the SECP in identifying impediments to effective
implementation of the Code and addressing institutional constraints. It is imperative that the Code
be followed not only in letter but in spirit as well. It is well accepted that good corporate governance
is one of the key elements in improving economic efficiency and growth. It serves as a deterrent to
mismanagement and infuses discipline in the decision making process of boards of directors. Good
corporate governance encourages companies and those who own and manage them to achieve their
corporate aims through a more efficient use of resources. It has been empirically proven that
countries with good corporate governance attract high volumes of investments easily and quickly. It
is important that investors can trust the effectiveness of the internal checks and balances. Moreover,
reliable and transparent disclosure is essential if the market is to allocate available funds effectively
among various competing ends.
The SECP would like to thank all those companies which participated in the survey, for the purpose
of impact assessment study and provided valuable comments on problems and issues facing them.
The SECP duly acknowledges the role of the United Nations Development Program in providing
assistance in commissioning this study. Finally, we would like to thank the consultants, Mr. Ammar
Ali Qureshi and Mr. Javed Iqbal for their valuable efforts in compiling the survey results and
evaluating the impact of the Code over the last one year.

TABLE OF CONTENTS

1.

Executive Summary

2.

Project Background and Terms Of Reference

3.

Sample Selection and Selection Criteria

4.

Survey Methodology and Findings

5.

Evaluation of Corporate Governance Practices in Sample Companies

19

6.

Assessment of the Impact of the Code Progress and Problems

29

7.

Policy Recommendations

36

Appendix A: Sample Questionnaire

Appendix B: List Of Targeted Companies
Bibliography

1.

EXECUTIVE SUMMARY

The main objective of the study was to assess the extent and effect of the implementation of the
Code of Corporate Governance 2002 on listed companies. The rationale of the study was to identify
operational efficiencies and highlight problems that have resulted after the implementation of the
Code. In order to further refine the Code, a set of recommendations was expected.
As part of this study, a questionnaire was dispatched to 95 companies, out of which 40 responded.
Detailed discussions were held in follow-up meetings with CEOs and CFOs of nearly 15 companies.
Telephonic conversations were also held with various CEOs and CFOs. Head of Auditing firms and
directors of stock exchanges were approached to solicit suggestions regarding further refinement of
the Code.
Key findings of the study are:

The Code is being implemented in letter and spirit by multinational companies, financial
institutions, and big companies. However, small companies are implementing the Code in form
only whereas substance is missing.

The Code has resulted in a number of improvements as Audit Committees have been set up,
external auditors are performing regular audit review, directors take their jobs more seriously and
lot of procedures, which were previously being followed in few companies, have been
formalized and standardized as well. Internal Audit department is gaining significance in
corporate structure.

An additional cost burden of Rs 0.8-1.2 million (mostly in form of additional meeting expenses,
travel expenses, increased paper work and recruitment of additional staff) has been imposed on a
small company due to compliance with and enforcement of the provisions of the Code of
Corporate Governance. This number assumes that the small sized company was well run in the
sense that it was already adhering to the requirements of the stock exchanges listing regulations
and the companies ordinance. In case a company was not adhering to any of the requirements of
the listing regulations and the company ordinance, then the additional cost of complying with
the Code would be higher (one estimate put it at Rs 3 million annually).

Out of 23 companies that have got themselves de-listed since March 2002, only 4 companies
have mentioned the additional cost of complying with the Code of Corporate Governance as
one of the reasons for de-listing of their company. Most of the companies who opted for delisting suffered from various problems such as limited float, illiquid shares, accumulated losses
and lack of ability to pay dividends. Going by the fact that only 4 companies mentioned the
Code as one of the reasons, one can safely say that the listed companies have by and large
accepted the Code and the additional cost burden imposed due to enforcement of the Code is
not prohibitively expensive.

Out of the 40 companies that responded to the questionnaire, an overwhelming majority was
implementing most of the provisions of the Code. Few companies who had not implemented
those provisions were in the process of implementing those requirements (such as orientation
courses etc).

Key recommendations to overcome different problems, identified in the study, can be summarized
as follows:

The Code should continue to be applied to all the listed companies without any discrimination.
However, some degree of flexibility should be shown to small and medium sized companies.
Wherever certain provisions of the Code cannot be complied with, an explanation should be
provided in the Annual Report. As suggested by Higgs report, the action on part of small and
medium companies would be to Act or Explain. The definition of small and medium sized
companies has been given in Section 6.16 and Section 7.1 of this report

In order to encourage and motivate small and medium companies to make greater efforts to
implement the Code, a CCG Implementation Award for Best Practices should be introduced.
The award could be organized under the aegis of the proposed Institute of Directors and the
ICAP.

No director should be allowed to serve on more than 5 Boards.

Time allowed for filling in casual vacancy on the Board should be increased to 90 days (presently
30 days).

At least one member of audit committee should be 'Finance Literate'.

Statement of compliance with the Code of Corporate Governance is unnecessarily long and
needs to be reviewed so that it contains only salient and significant points.

In order to ensure implementation of the Code effectively by small and medium companies, the
constitution of the Board needs to be reviewed - Ratio of non-executive 'independent' directors
should be enhanced to 33 - 50 % in a time frame of 3-5 years.

A time frame (say 3-5 years) should be set to separate the functions of the CEO and the
Chairman in an effort to create a balance of power on the Boards and separate responsibilities of
two distinct functionaries.

An Institute of Directors should be set up, responsible for identifying, recommending and
training Board directors to enhance competency levels.

SECP should develop guidelines for formalizing the role of Remuneration Committees (or HR
Committee/Board Compensation Committee).

SECP, in consultation with ICAP, should develop detailed guidelines for the guidance of
Directors on the Board on internal control and risk management issues.

2.

PROJECT BACKGROUND AND TERMS OF REFERENCE

2.1

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.

2.2

Purpose and Objective of the Study

The SECP, in collaboration with the Institute of Chartered Accountants of Pakistan (ICAP), has
developed the first Code of Corporate Governance for Pakistan. The Code is the first institutional
effort of its kind in Pakistan. Pursuant to the introduction of the Code by the SECP in March 2002,
it has been incorporated in the listing regulations of the three stock exchanges in the country.
Accordingly, the Code is applicable to all public listed companies. It is expected that introduction of
the Code will bring in transparency and efficiency within the corporate sector of the country and will
create an institutional framework for protection of interests of shareholders. One of the key
objectives of the Code is to give voice to minority shareholders and investors in decisions of the
companies that have direct impact on investors. It is empirically tested that an effective governance
structure for corporate sector improves the investment climate by raising investor confidence.
Enforcing good corporate governance practices is the key to attract capital, improve efficiency of
capital and financial markets and achieve sustained economic growth.
Pursuant to implementation of the Code on public listed companies, a systematic and detailed study
is required to evaluate the state of corporate governance in Pakistan, assess the effects of the Code
on the organizational and operational efficiency of companies and determine the major complexities
faced by companies in seeking compliance with the Code. The output of the study will be
instrumental in refining the Code to address the problems faced by the corporate sector and in
improving the overall standard of corporate governance in the country.

2.3

Scope of Work

The study shall involve the following:

1) Selection of a sample of listed companies for the purpose of detailed assessment of implications
of the Code. The sample should be of a reasonable size and should identify companies, on the

basis of their total assets, as small, medium or large. The sample should be drawn to give
representation to listed companies from the sectors indicated in Box 1. This list is not exhaustive
and shall, if necessary, be expanded by the consultant in consultation with the SECP.
2) Survey of corporate governance practices within the sample companies. The survey may be
undertaken through questionnaires or visits to the companies. Major issues that will be covered
in the survey are: protection of shareholder rights; role of non-executive directors; independence
of board of directors; oversight over management; transparency and fairness in board decision
making; quality of financial reporting disclosures; effectiveness of audit committees and internal
audit; quality of external audit; and compliance with legal requirements.
3) A comparison of corporate governance practises adopted by the sample companies prior to and
after the implementation of the Code.
4) An assessment of impact of the implementation of the Code on organizational and operational
efficiency of the sample companies along with identification of major problems faced by
companies as a result of adoption of the Code.
5) Empirically estimate the effects of the Code on the indicators identified in (iv) above and
evaluate the overall standard of corporate governance in the country.
6) Policy guideline to improve effective implementation of the Code, in particular, and promote
good corporate governance practices, in general.

2.4

Deliverables

(i)

An undertaking by the consultant that the information obtained during the course of the
assignment shall be kept confidential.

(ii)

An interim report followed by a final report from the consultant, which should include:
(a)
(b)
(c)
(d)

Executive Summary of the main findings and recommendations, followed by other sections;
Identification of sample companies and basis for their selection;
Methodology of the survey, information obtained and survey findings;
Comprehensive assessment of corporate governance practices adopted by sample
companies;
(e) In-depth analysis of impact of the Code, highlighting the improvements achieved in
corporate governance standard pursuant to implementation of the Code as well as major
problems faced by companies in seeking compliance with the Code; and
(f) Recommendations to refine the Code and address the problems identified in (e) above for
effective implementation of the Code and for improving the level of corporate governance
in Pakistan.
(iii)
A presentation to share the findings of the research in a workshop or to a selective audience
proposed by the project.
(iv)

The consultant will provide three hard copies and one soft copy of the report to the Project
Manager.

Box 1: List of Sectors for the Purpose of Drawing Sample of Listed Companies

Mutual Funds
Modarabas
Leasing
Banks
Investment Companies
Brokerage and Discount Houses
Insurance
Textile Spinning, Weaving and Composite
Woollen
Synthetics and Rayon
Jute
Sugar and Allied
Cement and Building Products
Tobacco
Fuel and Energy
Engineering and Metals
Auto and Allied
Electronics and Electrical Goods
Transport and Communications
Fertilizers
Chemical and Pharmaceutical
Paper and Board
Vanaspati and Allied
Construction
Leather and Tanneries
Food and Allied
Glass and Ceramics

3.

SAMPLE SELECTION AND SELECTION CRITERIA

In order to evaluate the state of corporate governance in the country, a questionnaire was developed
and dispatched, via mail, fax and email, to 95 listed companies. These 95 companies were selected
from a broad array of sectors (31) in order to make the sample of companies as diversified and
representative of the market as possible. In view of limited time frame for the study, the sample size
was restricted to 95 listed companies. The expectation was that nearly 30 companies would respond
to the questionnaire. The figure of 30 was targeted due to the fact that, statistically speaking, a
sample of 30 is considered sufficient for generalization on the basis of normal distribution. In other
words, one can generalize on the basis of sample size of 30 companies.
The companies selected for questionnaire survey belonged to various categories such as
multinational companies, family-dominated businesses, government-owned organizations etc. In
terms of size (as defined by market capitalization), these sample of companies belonged to all three
categories of large cap, medium cap and small cap companies. An effort was also made to have a
geographically diversified sample, but majority of the companies have their head-offices in Karachi
and Lahore.
The complete list of targeted companies is attached in Appendix B. The sector-wise break-up of
these companies has been shown in the table below.
Table 3.1: Sector-wise Break-up of Targeted Companies

SECTOR
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Apparel
Auto
Autoparts
Banks
Cement
Chemicals
Coating
Communication
Construction
Dairy and Beverage
Electrical Goods
Energy
Engineering
Fertilizer
Food
Gas

NO. OF
COMPANIES
2
3
2
7
4
1
2
2
1
3
5
2
2
4
4
3

SECTOR
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.

Glass
Insurance
Leasing
Miscellaneous
Modaraba
Paper and Board
Paper Boards
Petroleum
Pharmaceutical
Polyester Fibre
Sugar
Textiles
Tobacco
Toileteries
Vanaspati
TOTAL

NO. OF
COMPANIES
2
3
4
7
4
2
3
3
3
2
3
5
2
2
2
95

As stated earlier, an attempt was made to achieve a diversified geographical mix in the sample of
companies, selected for questionnaire. However, as most of the corporate headquarters are located
either in Karachi or Lahore, most of the questionnaires were sent to corporations located in these
two major cities. The geographical break-up of companies has been captured in the following table.

Table 3.2: Geographical Mix of Targeted Companies

CITY
1.
2.
3.
4.
5.
6.
7.
8.
9.

Karachi
Lahore
Faisalabad
Sialkot
Mardan
Kasur
Islamabad
Hyderabad
Gujranwala

NUMBER OF COMPANIES TARGETED

63
13
1
1
1
1
13
1
1

In terms of market capitalization, the questionnaire was sent to companies, belonging to all three
categories of small cap, medium cap and large cap. Small cap company has been defined as one
which has market capitalization in the range of Rs. 0-500 million. Medium cap company has been
defined as one with market capitalization between Rs. 501-1500 million. Large cap company has a
market capitalization of more than Rs. 1500 million. All brokerage houses are using their own
categorization of market capitalization. As a result of our discussion with various people we feel that
this is the most logical categorization of market capitalization. The break-up of companies in terms
of market capitalization has been described in the table below.
Table 3.3: Market Capitalization and Targeted Companies

1.
2.
3.

MARKET CAPITALIZATION TYPE

Small Cap (Rs 0 500 million)
Medium Cap (Rs 501-1500 million)
Large Cap (above 1500 million)

NO. OF COMPANIES
39
14
42

4.

SURVEY METHODOLOGY AND FINDINGS

4.1

Methodology

A survey was conducted to assess the implementation of the Code of Corporate Governance,
highlight the progress made in terms of organizations operational efficiencies and to identify
problems being faced by different corporations in implementing the Code. The survey consisted of

A Questionnaire mailed or emailed to 95 listed companies

Telephone interviews and conversations with various CEOs and CFOs of different corporations

Personal visits of different companies

Meetings with directors of Karachi Stock Exchange and exchange of opinion with the Presidents
of Lahore Stock Exchange and Islamabad Stock Exchange personally or through email

Detailed meetings with head of audit firms who have played an important role in the initial
formulation of the Code of Corporate Governance by ICAP

A questionnaire was designed to assess the extent and effect of implementation of the Code of
Corporate Governance on listed companies. Three documents, namely the Code of Corporate
Governance 2002, the Listing Regulations of the Karachi Stock Exchange, and the Companies
Ordinance 1984 were consulted in formulating questions in the questionnaire. The questionnaire
consisted of 62 questions, out of which nearly 50 questions could be answered in a dichotomous
(yes/no) manner. The main purpose and intent behind designing the questionnaire in such a simple
way was to make it easy for the company to respond and thereby get a higher response to the
questionnaire.
All issues in the Code of Corporate Governance 2002 such as minority share-holders, audit
committees, composition of the board, compliance with Code provisions, financial disclosure
requirements and appointment of important officials in line with the Code provisions were covered.
Three descriptive questions were included, dealing with areas such as progress made in terms of
operational and organizational efficiency, problems faced in implementing the Code and suggestions
for improvement in the Code. A sample questionnaire has been attached in Appendix A. The
complete list of 95 listed companies, to which this questionnaire was dispatched, can be found in
Appendix B.
Out of 95 companies targeted, 40 companies responded to the questionnaire-amounting to nearly
42% response rate. Given the limited time frame, this response rate can be termed extremely
encouraging and satisfactory. However, it needs to be mentioned that this satisfactory response was
obtained after persistent follow-up efforts by both consultants. The response received from
different companies was quite diversified in terms of sectoral representation and the responding
companies belonged to all three categories of market capitalization such as large cap, small cap and
medium cap. These companies belonged to different ownership structure categories such as
multinationals, government owned corporations, private companies and family owned entities. The
complete list of the 40 companies who responded to the questionnaire is shown in Table 4.1.

Table 4.1: List of Companies who Responded to the Questionnaire

Sector
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

Auto
Banks
Banks
Banks
Banks
Cement
Cement
Coating
Dairy and Beverages
Electrical Goods
Energy
Engineering
Engineering
Fertilizers
Fertilizers
Food
Food
Insurance
Gas
Insurance
Leasing
Leasing
Leasing
Leasing/Modaraba
Miscellaneous
Modaraba
Paper and Board
Paper and Board
Paper Boards
Paper Boards
Petroleum
Petroleum
Pharmaceutical
Pharmaceutical
Pharmaceutical
Pharmaceutical
Textile
Tobacco
Toiletries
Vanaspati

Company
Atlas Honda
Asset Investment Bank
Askari Commercial Bank
Arif Habib
PICIC
Pioneer Cement
Fauji Cement
Berger Paints
Nestle Milk Pak
Pakistan Cables
Hub Power Company
KSB Pumps
Crescent Steel
Engro Chemicals
Fauji Fertilizers
Lever Brothers
National Foods
International General Insurance
Mari Gas Company
Century Insurance
Dawood Leasing
Crescent Leasing
Orix Leasing
Al-Zamin Leasing Modaraba
General Tyre and Rubber Company
First Grindlays Modaraba
Security Papers
Packages
Century Paper Mills
Merit Packaging
Pakistan Refinery Limited
National Refinery Limited
Glaxo Smith Kline
Reckitt Benkiser
Abbot Laboratories
Wyeth Laboratories
Gul Ahmed
Pakistan Tobacco
Gillete Pakistan
Punjab Ghee Mills

Market Capitalization
(Rs. in million)
as on 12 June, 2003
1,492
33
3,225
1,800
2,616
573
2,021
125
10,051
206
41,253
210
1,195
12,908
22,469
17,548
247
2,242
1,719
425
255
271
1,770
71
2,738
1,403
2,528
6,180
1,822
137
3,645
5,998
7,221
2,036
4,355
1,493
2,089
6,707
1,593
4

Out of these 40 companies, nearly 15 companies were selected for follow up personal visits and
telephonic conversations/interviews. The main purpose of these meetings was to assess corporate
practices prevalent in different companies prior to implementation and introduction of the Code.
Important issues such as problems faced in implementing the code, improvements in organizations
operational efficiency and recommendations for further refining the Code were discussed in detail
with the CEOs and CFOs of those companies who had chosen to respond to the questionnaire.
9

In addition to listed companies, discussions were also held with directors of Karachi Stock
Exchange. The questionnaire was also sent to the Presidents of Lahore Stock Exchange and
Islamabad Stock Exchange. President of Lahore Stock Exchange sent his suggestions by responding
to the last three questions of the Questionnaire.
Detailed opinion was also sought from heads of various audit firms and ICMAP/ICAP, as these
institutes were instrumental in framing the Code in the first place. Mr. S. Masoud Ali Naqvi, Senior
Partner of KPMG, Mr. Ebrahim Sidat, Country Managing Partner/CEO of Ford Rhodes Sidat
Hyder & Company and Mr. Asad Ali Shah, Senior Partner of M.Yousuf Adil Saleem & Company
were approached for their detailed suggestions regarding improvements in the existing Code. All of
them contributed with extremely valuable suggestions, identifying many areas that need to be beefed
up and certain provisions that had resulted in implementation problems.
Other prominent professionals who were approached for suggestions included Mr. Ahmed Patel,
Chairman Executive Board of Ford Rhodes, Mr. Sher Afghan, President of ICMAP, Mr. Aslam
Dossa, Executive Director and Mr. Khaliq-ur-Rehman, Deputy Managing Partner of Anjum Asim
Shahid and Mr. Sohail Hasan Senior Partner, Fergusons.
Our profound thanks are also due to Mr. Zahid Zaheer, Secretary General Overseas Investors
Chamber of Commerce and Industry, Mr. Zafar Abdullah, General Manager Operations, Karachi
Stock Exchange, Mr. Basheer Chaudhry CEO, Al-Zamin Leasing Company, Mr. Ahsan Saleem
CEO, Mr. S. M. Ehtishamullah CFO, Crescent Steel and Allied Products Ltd. Mr. Usman Masood
Khan, Executive Director, Pioneer Cement, Mr. Badruddin Fakhri CFO, Pioneer Cement, Mr.
Tajammal Shah, Company Secretary Pakistan Tobacco Limited, Mr. Arshad Rahim Khan
CEO/Chairman Wyeth Pakistan and Mr. Khawaja Bakhtiar Ahmed CFO, Wyeth Pakistan, who
gave their valuable time to discuss the issues and provided useful and pertinent suggestions and
recommendations.
Mr. Hassan Bilgrami of NIT, a mutual fund represented on more than 240 Boards, provided an indepth analysis of prevalent corporate governance practices and suggestions for improving these
practices.

4.2

Findings of the Questionnaire

The Questionnaire was designed to assess the extent and effect of implementation of the Code. In
this section, findings pertaining to implementation of the Code of Corporate Governance have been
reported. Prevalent and past corporate governance practices have been analyzed in the next section
whereas subsequent sections discuss progress made or problems encountered after the introduction
of the Code. The findings of the Questionnaire have been discussed under the following headings:

Composition of the Board of Directors.

Duties and Responsibilities
Meetings of the Board
Appointment of Officials
Corporate and financial disclosure framework
Audit Committee
Internal Audit
External Audit
Compliance with CCG

10

4.2.1 Composition of the Board of Directors

On average the Board consists of 9 directors, comprising 3 Executive Directors and 6 NonExecutive Directors. The most common board composition is 7 directors, consisting of 4
Executive and 3 Non-Executive/Independent Directors. As most companies thought that the
definition of Independent Directors is not clear, therefore Non-Executive and Independent
Directors were clubbed together in the Questionnaire as single category. Crescent Steel pointed out
that it has recently disclosed the names of two Independent Directors on its Board in their Annual
Report. For the purpose of this study, Non-executive and Independent directors were treated as a
single category.
Detailed profiling of Non-Executive/Independent Directors revealed that on average 1 director
belonged to Financial Institutions, 1 to minority shareholders and 4 belonged to categories other
than financial institutions or minority shareholders.
Out of a sample of 40 companies, 15 companies (38%) had representation of minority shareholders
on their board. 16 out of 40 companies (40%) stated that minority shareholders contested the
election for the slot of non-executive director.
Some organizations also indicated that the elections of the Board of Directors were held before the
introduction of the Code of Corporation Governance and, therefore, there were no minority
shareholders in the current Board.
28 out of 40 Companies (70%) stated that the Chairman of the Board of Directors belonged to the
category of Non-Executive Directors whereas remaining 12 companies (30%) had Chairman elected
from Executive Directors.
Only in 12 companies (30%), the same individual held the offices of both Chairman and the Chief
Executive- 28 companies had different individuals acting as Chairman and Chief Executive of their
organization.
All companies who responded to the questionnaire stated that the functions of the Chief Executive
and Chairman had been clearly defined by the Board and all the requirements regarding
qualifications of a Director, as laid out in the Code, have been complied with.
6 companies (15%) out of 40 stated that the NIT Director serving on the board of their company
was serving on the boards of more than 10 companies. The remaining 34 companies did not have
any director, who was serving on more than 10 boards.
Orientation courses have been arranged for directors by 32 (80%) out of 40 companies, whereas the
remaining 8 were in the process of arranging these courses.
Table 4.2: Responses Regarding Board of Directors

AVERAGE
How many Directors are presently serving on your board?
Of whom:
Executive
Non-Executive/Independent
Representing: Financial Institution/Bank/Modaraba
Minority Shareholders
Others
Has the Chairman of Board of Directors (BOD) been elected from?
Executive Directors
Non-Executive Directors

11

9.1
2.6
6.5
1.6
1.0
4.7
12 (30%)
28 (70%)

Did anyone among minority shareholders contest election for a Director's slot on the
board of your organization?
Is the same individual holding the posts of Chairman and Chief Executive in your
organization?
Are the functions of Chairman/CEO clearly defined by the Board of Directors?
Is any of your Directors serving more than ten BODs of listed Companies
Have you ensured that your Directors meet requirement of qualification as per clause
(iv) & (v) of the Code of Corporate Governance (CCG)?
Have you arranged Orientation Courses for your Directors in order to acquaint
them with their responsibilities as per requirement under the Code of Corporate
Governance (CCG) & the Company Ordinance 1984?

4.2.2

YES

NO

16 (40%)

24 (60%)

12 (30%)

28 (70%)

39 (97%)
6 (15%)

1 (3%)
34 (85%)

40 (100%)

32 (80%)

8 (20%)

Duties and Responsibilities

38 companies (95%) stated that the Statement of Ethics and Business Practices has been issued and
signed by directors and employees. Companies, who stated that the statement has not been issued,
clarified that they were in the process of issuing this statement.
All companies stated that the Board of Directors has formulated corporate strategy and announced
significant policies, and ensured implementation of an effective system of Internal Control. All
companies declared that a complete record of particulars of significant policies is being maintained.
Only 1 company (a family dominated enterprise) stated that all significant matters are not brought to
the attention of the board. The remaining 39 companies declared that all significant matters, as laid
out in the Code of Corporate Governance, are brought to the attention of the Board. Similarly one
company stated that the Mission/Vision statement would be presented in the next Board meeting
whereas the remaining 39 companies stated that the BOD had adopted the mission/vision
statement.
Among 40 companies who responded were 3 Modaraba companies and all three stated that their
company has clearly defined an Investment Policy
39 companies (97%) reported that the BOD has approved the appointment and remuneration
package of the CEO and Executive Directors. Only one company replied in the negative as this
company had its CEO and Directors nominated and their remuneration package approved by the
parent company.
Table 4.3: Responses Regarding Duties and Responsibilities

Has a statement of Ethics and Business Practices been issued by the BOD & has it
been signed by all the Directors & employees?
Has the BOD adopted a vision/mission statement?
Has the BOD formulated Corporate Strategy
&
announced
significant
policies? (Please see viii (b) of the CCG)
Is a complete record of particulars of significant policies being maintained?
Are all significant matters brought to the attention of the board e.g. investments,
divestments, writing off bad debts, inventories etc?
Has the BOD ensured implementation of an effective system of Internal Control?

12

YES

NO

38 (95%)

2 (5%)

39 (97%)

1 (3%)

40 (100%)

40 (100%)

39 (97%)

1 (3%)

40 (100%)

Are the terms of appointment & remuneration package of the CEO & the
Executive-Directors approved by the BOD?
In the case of Modaraba or a Non-Banking Financial Institution, is an Investment
Policy clearly defined & reported in the Annual Report- as per clause viii(f) of
CCG ? If not applicable just write N/A.

4.2.3

39 (97%)

1 (3%)

3 (7%)

37 (N/A)
(93%)

Meetings of the Board

On average 5 Board meetings per company took place during the last year. The highest number of
Board meetings reported was 17 and the lowest was 4. All companies responded that the
management ensures that the notice is sent seven days prior to the Board meeting. Moreover,
minutes are properly recorded in the minutes book and subsequently circulated to the Directors
within 30 days of the meeting for their comments. Similarly all companies stated that all significant
issues are placed at Board meeting for its consideration.
33 companies (83%) reported that no note of dissent has been recorded by the Directors in the
minutes over the last 12 months. Only 1 company reported that a Director has filed an objection
with SECP over non-recording of the note of dissent.
Table 4.4: Responses Regarding Board Meetings

AVERAGE
How many meetings of the BOD have taken place over the last 12
months?

5.85
YES

NO

Does the management ensure that the notice is sent seven days prior to
the meeting (except in case of emergency)?

40 (100%)

Are the minutes of the meeting properly recorded in the minutes book
& subsequently circulated to the Directors within 30 days of the meeting
for their comments?

40 (100%)

7 (17%)

33 (83%)

Have any notes of dissent by the Directors been recorded

in the minutes over the last 12 months?
Has any Director filed any objection with the SECP, in case
a note of dissention has not been recorded in minute book?
Are all significant issues placed at Board meeting for their
consideration, as per terms of clause (viii) of CCG?

4.2.4

1 (3%)
40 (100%)

39 (97%)
0

Appointment of Officials

33 companies (83%) responded that the Board had appointed the CFO after approval. The
remaining 7 companies stated that the appointment was made before the introduction of the Code
and, therefore, the requirement of Board approval would be applicable whenever the next CFO is
appointed. Similarly, 88% and 85% of the companies stated that the Board has appointed the
Company Secretary and Head of Internal Audit respectively after approval. Companies, who had
appointed these officials before the introduction of the Code, did not get the approval from the
Board, as it was not mandatory to get Board approval before the Codes introduction.

13

Three companies reported that the CFO of their organization has been removed during the last one
year after getting approval for removal from the Board. Two different companies stated that the
Head of Internal Audit and the Company Secretary of their respective organizations was removed
after Board approval.
CFO of 30 companies is a member of a recognized body of professional accountants. On the other
hand, 13 companies stated that their CFO was a graduate from a recognized university and had 5
years of professional experience. Some of the CFOs had dual qualifications whereas only 2
companies reported that their CFO did not have any of the aforementioned qualifications.
22 companies reported that the Company Secretary of their organization was a member of body of
professional accountants/corporate secretaries. On the other hand, 20 companies reported that their
Company Secretary was a Lawyer or a recognized university graduate with 5 years of professional
experience.
All companies averred that the CFO and the Company Secretary attended all Board meetings.
Table 4.5: Responses Regarding Appointment of Officials

Has the appointment of the following been approved

by the Board on the recommendation of CEO?
CFO
CS
HIA
Has any one of the following been removed, with the approval of the Board,
over the last 12 months?
CFO
CS
HIA
Which of the following qualifications does the CFO of your
Organization hold?
Member of a recognized body of professional accountant
Graduate from a recognized university and 5 years of experience
None of the above
Which of the following qualifications does the CS of your
Organization hold?
Member of body of professional accountants/corporate secretaries
Lawyer or a recognized university graduate with 5 years experience
None of the above
Do CFO & CS attend all the meetings of the Board?

4.2.4

YES

NO

33 (83%)
35 (88%)
34 (85%)

7 (18%)
5 (12%)
6 (15%)

3 (8%)
1 (3%)
1 (3%)

37 (93%)
39 (97%)
39 (97%)
30
13
2
22
20
0

40 (100%)

Corporate and Financial Reporting Network

All companies, who responded, declared that quarterly un-audited financial statements/ accounts are
circulated to the shareholders after approval by the Board of Directors within 30 days. Similarly, all
companies averred that half yearly accounts are subjected to a limited scope review before approval
by the Board of Directors and circulated to the shareholders
Apart from one company, all other companies, who responded, stated that annual accounts are
circulated not later than four months after the closing of the financial year. The only company that
could not adhere to this provision faced delays due to merger petition filed in the court.
14

Furthermore, all companies also declared that the required information was circulated to the stock
exchange immediately after approval of the accounts by the Board. None of the company that
responded had issued any capital to the public during the last one year, although there were
companies that issued bonus shares.
38 companies (95%) stated that the companies statement of Accounts is signed by the CEO and the
CFO after approval and authorization by the Board and before circulation to the shareholders.
Companies who responded in negative had either signatures of CEO and a Non-Executive Director
or those of Chairman, CEO and a Director on the Accounts statement instead of CEO and CFO.
37 companies (93%) responded that disclosure of interest requirements as laid out in the Code are
being met. Two companies stated that this clause is not applicable to them. Only one company out
of 40 responded that either external auditors or any partner of the firm or his/her spouse or minor
children held any position in the shares of the company and these shares were divested. All other
companies stated that there was no such conflict of interest and therefore no shares had to be
divested due to such conflict of interest.
Table 4.6: Responses Regarding Corporate and Financial Reporting Network

YES
Does the Directors report contain all the statements as required under Sec 236
of Companys Ordinance 1984 & as per guidelines under clause (xiv) of Code of
Corporate Governance?
Are quarterly un audited financial statements circulated to the shareholders after
approval by the BOD within 30 days?
Are half yearly accounts subjected to a limited scope review before approval by
the BOD and circulated to the Shareholders?
Are annual accounts circulated not later than four months from the closing of
the financial year?
Does your company circulate the required information to the Stock Exchange
immediately after approval of the Accounts by the BOD?
Are all your statement of Accounts signed by the CEO & CFO, after approval &
authorization by the BOD before circulation to the Shareholders?
Regarding Disclosure of interest by a Director Holding Company Shares, are
the requirement of clause (xxvi) of CCG being met by the Company?
Do your external Auditors or any partner of the firm or his/her spouse or minor
children hold any position in the shares of your company?
If the external Auditors held any shares in your Company before their
appointment, have those shares been divested? (N/A if not applicable)
If any share capital has been issued over the last 12 months, how much of it was
offered to the general public?

4.2.5

NO

40 (100%)
40 (100%)
40 (100%)
39 (97%)

1 (3%)

40 (100%)

38 (95%)

2 (5%)

37 (93%)

3 (7%)

1 (3%)
1 (3%)

39 (N/A)
(97%)
39 (N/A)
(97%)
40 (N/A)
(100%)

Audit Committee

Most of the companies established Audit Committees during July 2002. Some of the multinationals
reported that audit committee in their organizations was established in the early 1990s whereas the
earliest audit committee was reported to have been established in 1982.
Majority of the committees reported that the audit committee consisted of 3 members, comprising
one Executive Director and two Non-Executive Directors.

15

38 out of 40 companies, amounting to 95%, reported that the Chairman of the Audit Committee
was from the Non-Executive Directors whereas only 2 companies reported that the Executive
Director was the Chairman of the Committee.
In 35% of the companies (14), Internal Auditor was the Secretary of the Audit Committee whereas
12 companies (30%) stated that the Company Secretary of the organization was the Secretary of the
Audit Committee. Similarly, 14 companies (35%) stated that neither Company Secretary nor Internal
Auditor was acting as the Secretary of the Committee.
Only 10% of the companies (4) stated that neither CFO nor CEO attended the meetings of the
Audit Committee. On the other hand, 48% of the companies (19) stated that the CFO attended the
meeting whereas 43% of the companies (17) responded that both CEO and CFO attended the
meetings. In case of CEO attending the meeting, it was the Audit Committee who had invited him
to attend the meeting.
32 out of 40 companies (80%) responded that the Audit Committee met the External Auditors
without the CFO and the Head of Internal Audit. 20% of the companies stated that the Audit
Committee has not met the External Auditors without CFO and the Head of Internal Audit. These
companies were in the process of arranging such meeting.
35 companies (88%) stated that the Audit Committee met the HIA and other members of the
Internal Audit function without the CFO and the external auditors.
On average 7 Internal Audit Reports, in addition to review of financial statements, were presented to
the Audit Committee by the Head of Internal Audit. Most frequently cited number was 1 additional
internal audit report presented to the Audit Committee by the Head of Internal Audit.
Table 4.7: Responses Regarding Audit Committee

AVERAGE
Has an Audit Committee been established in your Company, if so when? (Please
state month/year)
How many Directors are members of the Audit Committee?
Executive
Non-Executive
Is the Chairman of the Committee an
Executive Director
Non-Executive Director
Who acts as the secretary of the Committee?
Internal Auditor
CS
Other
How many meetings of the Audit Committee took place during the last twelve
months?
Did CEO & CFO also attend the Committee meetings?
No
Yes
CFO
During the last 12 months:
Did the Committee meet the External Auditors without CFO and the Head
Of Internal Audit?

16

July 2002
1
2
2 (5%)
38 (95%)
14 (35%)
12 (30%)
14 (35%)
4 (Average)
4 (11%)
19 (47%)
17 (42%)
32 (80%)

8 (20%)

Did the Committee meet the HIA and other members of the Internal Audit
function without CFO and the external Auditors?
In addition to review of financial statements, how many Internal Audit Reports were
presented to the Audit Committee by the Head of Internal Audit?

4.2.6

35 (88%)

5 (12%)

7 (Average)

Internal Audit Function

On average in-house audit department of an organization has 3 members, although most of the
companies reported that the in-house audit department consisted of 1 member only.
29 out of 40 companies (73%) responded that the Head of Internal Audit reported to CEO whereas
3 companies stated that the Head of Internal Audit reported to the CFO. Moreover, 8 companies
(20%) stated that the Head of Internal Audit reports to Audit Committee. 8 companies (20%) stated
that the internal audit function is outsourced whereas 32 companies (80%) responded that the
internal audit function is not outsourced.
Out of the 8 companies who had stated that the internal audit function is outsourced, 3 responded
that the person responsible for liaison in the company is the Head of Internal Audit whereas CFO
was the person responsible for liaison in 4 companies. Company Secretary acted as the liaison officer
in only one company. All companies responded that the Head of Internal Audit had direct access to
the Chairman of Audit Committee.
95% of the companies (38) responded that Internal Audit Reports are provided to the External
Auditors whereas only 2 companies responded that the reports are not provided to the External
Auditors. 33 companies (83%) stated that the auditors have reported significant matters to the Audit
Committee whereas the remaining 17% stated that no significant matters were reported by the
auditors to the Audit Committee.
Table 4.8: Responses regarding Internal Audit Function

If there is an in-house Audit Department, how many members does it

have?
Who does the Head of Internal Audit (HIA) report to?
CEO
CFO
Audit Committee
Is the Internal Audit function outsourced fully/partly?
In case the function is outsourced, who is the person responsible for
liaison in the Company?
HIA
CFO
CS
Does the HIA have direct access to the Chairman Audit Committee?
Are Internal Audit Reports provided to the External Auditors?
Over the last 12 months, have the Auditors, reported any significant
matters to the Audit Committee?

4.2.7

3 (Average)
29 (73%)
3 (7%)
8 (20%)
8 (20%)
32 (80%)
3
4
1
40 (100%)
38 (95%)

0
2 (5%)

7 (17%)

33 (83%)

External Auditors

All companies declared that the External Auditors have been appointed in conformity with the
guidelines stated in the Code of Corporate Governance.

17

21 companies (53%) stated that separate Management Consultants have been appointed to advise on
matters other than audit. 47% of the companies (19) reported that separate Management
Consultants have not been appointed.
83 % of the companies (33) reported that after the last audit a management letter was provided to
the BOD within 30 days from the date of the Audit Report.
95% of the companies responded that the Management Letter was discussed at the Audit
Committee and the response was sent to the Auditors.
97% of the companies responded that a partner representing the External Auditors attended the last
General Meeting when the accounts were discussed.
Table 4.9: Responses Regarding External Auditors

YES
Have your External Auditors been appointed as per guidelines contained in clause
40 (100%)
(xxxvii-xxxix) of CCG?
Have you appointed separate Management Consultants to advise on matters other
19 (48%)
than audit?
After the last annual audit, was a Management letter provided to the BOD within
33 (83%)
30 days from the date of the Audit Report?
Was the Management letter discussed at the Audit Committee /BOD and
38 (95%)
response was sent to the Auditors?
Did a partner representing the External Auditors attend the last annual General
39 (97%)
Meeting, when the when the Accounts were discussed?

4.2.8

NO
0
21 (53%)
7 (17%)
2 (5%)
1 (3%)

Compliance with CCG

All companies declared that the company has published and circulated a statement along with their
annual reports to set out the status of their compliance with the best practices of corporate
governance. All companies also declared that the company has ensured that the statement of
compliance with the best practices of corporate governance is reviewed and certified by statutory
auditors, where such compliance can be objectively verified, before publication by listed company.
Table 4.10: Responses Regarding Compliance with the Code

YES

NO

Has your company published and circulated a statement along with their annual
reports to set out the status of their compliance with the best practices of
corporate governance?

40 (100%)

Has your company ensured that the statement of compliance with the best
practices of corporate governance is reviewed and certified by statutory auditors,
where such compliance can be objectively verified, before publication by listed
companies?

40 (100%)

18

5.

EVALUATION
OF
CORPORATE
PRACTICES IN SAMPLE COMPANIES

5.1

Corporate Governance Reforms

GOVERNANCE

Corporate Governance (CG) reform across the globe has assumed greater importance in the last
couple of years. This global reform effort and policy makers interest in corporate governance has
accelerated in the wake of East Asian crisis followed by a spate of corporate disclosure failures in
leading US corporations like Enron. Governments, stock exchanges and business associations
across the globe are all involved in framing new CG guidelines. Such reforms are of high importance
to a developing country like Pakistan, which is making concerted efforts to attract Foreign Direct
Investment (FDI) and mobilize higher savings through capital markets.
Corporate Governance, in the words of Bob Garret- a visiting professor in Corporate Governance
in Imperial College London and author of Thin on Top-Why Corporate Governance matters, can be
defined as the appropriate board structures, processes and values to cope with the rapidly changing
demands of both shareholders and stakeholders in and around their enterprises.
Corporate Governance (CG) reforms, initiated in the last few years by the Securities and Exchange
Commission of Pakistan (SECP), are a vital component of the growth revival strategy being pursued
by the government. Pakistans economic performance during the 1990s has been quite dismal
compared to its own historical economic growth record and to the economic performance of other
South Asian countries, who have been pursuing similar policies of structural adjustment and
economic liberalization during the 1990s. In view of growth-financing needs of the economy, a lot
of emphasis has been placed on the reform of capital markets in order to increase the depth and
efficiency of capital markets by mobilizing domestic savings and attracting foreign direct investment.
One of the most important features of the growth revival strategy is the introduction of Code of
Corporate Governance 2002, aiming at improvement in existing corporate governance practices and
system. The rationale behind all these reform measures has been to introduce a corporate
governance system that has the ability to efficiently raise external capital, increase corporate
competitiveness, and stimulate organizational growth. The box below compares corporate
governance practices in different developed countries and Pakistan.
Box 2: A Comparison of Corporate Governance Practices

Practice
Auditors are
independent from
consultancy
Auditors are rotated?
Shareholders vote on
executive pay?
Shareholders may
elect own slate of
independent
directors?

Britain

Canada

France

Germany

Japan

USA

Pakistan

Recommend

Yes

Voluntary

No

Yes

Yes

Yes

Voluntary:
5-7 years

Yes
7 years

No

No

Yes
7 years

Yes
5 years

Yes
5 years

Advisory

Yes*

No

No

Yes

No

No

No

No

No

No

Yes

No

Yes

19

Independent
directors in a majority Recommend
No
on board?
Expensing of stock
No
No
option?
Disclose value of
Yes
Yes
options?
Separate
Recommend Voluntary
Chairman/CEO?

Voluntary

Recommend

No

Yes

No

No

No

No

No

N/A

Yes

Recommend

Yes

Yes

N/A

Voluntary

Yes

Voluntary Voluntary Recommend

TSE guidelines require shareholders approval of option plans. Auditors have maximum of 6 years
but it can be renewed by the Board. The Bouton Report advises half of board be independent in
companies with diversified ownership. According to company size, shareholders nominate all, 2/3 or
1/3 of the supervisory board
Shareholders determine total remuneration for the board; the remuneration of each member is then
fixed by the Board.
^ Partners, not firms.
Disclosure in annual report.
Definitions of the terms.
Yes and No: statutory or required by financial exchanges
Recommended- in case of deviation, company must explain why.
Voluntary-provision is recommended, but company is not obliged to explain non-compliance
Source: The Economist (June 28th-July 4th 2003) and the Code of Corporate Governance 2003.

5.1.1

A Brief History of Corporate Growth and Corporate Finance Experience

Before discussing the corporate governance systems prevalent in the country prior to the
introduction of the Code of Corporate Governance, it is important to identify reasons for existence
of weak capital markets in the country and to trace historically Pakistans corporate growth and
corporate finance experience. An analysis of Pakistans industrial and economic growth shows that
state provided incentives, given in different forms and spread over decades, have resulted in
boosting internal profits of industries. One of the most important subsidies extended by the state to
the private sector, over the decades, has been cheap credit. In the 1950s, the government intervened
through heavy protection and provided manufacturing sector with generous fiscal incentives, cheap
imports of capital goods and subsidized credit. A combination of generous state incentives, large
domestic market and cheap industrial raw material helped fuel the first industrialization drive in the
country in the 1950s.
The 1960s was characterized by the introduction of export bonus scheme, which amounted to a
multiple exchange rate system favouring manufacturing exports. However, the government
continued the policy of ensuring the availability of subsidized raw material coupled with subsidized
credit and cheap foreign exchange. The government extended foreign currency and domestic
currency loans on favourable terms to the corporate sector. Easy access to these subsidies was
provided by disbursing foreign exchange loans and grants, provided by multilateral agencies, through
state-run financial institutions such as Pakistan Industrial Credit and Investment Corporation
(PICIC) and Industrial Development Bank of Pakistan (IDBP). This policy of providing subsidized
credit through state run financial institutions benefited local monopoly houses. The defining feature
of these monopoly houses is family ownership under a centralized decision making authority, usually
the patriarch of the family, and comprising various legally separate companies engaged in highly
20

diversified activities. A salient feature of these monopoly houses was the absence of separation of
ownership from control. In addition to having access to subsidized loans, these monopoly houses
also enjoyed institutional access to the boards of state-run financial institutions, the main disbursers
of credit to the manufacturing sector.
In the 1970s, nationalization of economic assets of the monopoly houses completely changed the
corporate landscape. Monopoly houses lost their muscle and power and the state policy shifted
towards public sector industries. The nationalization of the banking sector in the 1970s extended
governments political control over the entire financial sector and this banking system, with some
minor changes, is still in place. Later in the 1980s and the 1990s, an attempt has been made to revive
the role of the private sector. The government continued to extend incentives in form of subsidized
credit and the vehicles for extending subsidized credit were no longer only the state-run financial
institutions but also commercial banks that had been nationalized during the 1970s.
The above economic history analysis shows that the most important subsidy extended by the
government to the private sector since the 1950s has been cheap credit. In a nutshell, cheap credit
has more or less determined the nature of corporate finance in Pakistan and most of the
corporations have financed growth either through debt or internal resources (profits re-invested to
expand existing business). This pattern of corporate finance growth in Pakistan has reduced the
corporate incentive to tap capital through equity markets and, therefore, has resulted in
underdevelopment of the capital markets in Pakistan.

5.2

Trends in Corporate Governance in Pakistan

Corporate Governance reforms in any country are important and essential pre-requisites for the
development of capital markets as they provide necessary protection to the external investor. The
notion of separation of ownership from control in corporations is the core issue of corporate
governance reforms. This separation between control and ownership gives rise to agency costs that
could exist not just between shareholders and managers but also, according to modern research in
the subject, also between controlling and minority shareholders and between shareholders and
creditors.
The presence of these agency costs raises the risk profile of a company and makes the investors shy
of investing in such companies. On the other hand, a well-framed corporate governance system will
not only protect investors investment, but also play an important role in reducing market risk and
ensuring financial stability. In other words, corporate governance system or reforms in any country
is an attempt to create an environment for capital market development and for the growth of the
corporate sector.
According to a study done on corporate governance system in Pakistan, by Dr. Faisal Bari and Dr.
Ali Cheema of LUMS (a draft paper on Corporate Governance in Pakistan presented at a
conference in Bangladesh in 2003), the ownership composition of Pakistans top 40 publicly listed
companies sheds important light on the main features of widely held corporations in the country.
Table 5.1 illustrates the importance of government and semi-government ownership in Pakistans
top listed corporations. It shows the significance of local private companies, both in terms of
numbers and as a percentage of the top 40 companies market capitalization. One interesting point is
that the share of Multinational Companies (MNCs) as a percentage of the market capitalization of
the top 40 companies is, contrary to general opinion, not that high.

21

Table 5.1: Ownership Composition of Pakistans Top 40 Listed Companies

Ownership Type
Local Private
Government
Semi-Government
MNCs

% Of top 40 Companies
All
Non-Financial
52.5
59.0
12.5
12.0
22.5
14.0
12.5
15.0

% Of top 40s Market Capitalization

All
Non-Financial
30.2
29.8
36.5
36.8
16.3
15.6
17.0
18.0

Source: Authors calculation based on information gathered from the Karachi Stock Exchange website.
Note: All companies that are not controlled by either MNCs or by government are classified as Local private companies.

According to the study done by Cheema and Bari, interesting variations across ownership structure
have emerged. The major investors in the multinationals are management followed by financial
institutions; together they own 76% of an average MNCs equity capital. Banks and financial
institutions also emerge as important investors in government corporations; where they own 40%
equity in an average government listed companies, second only to the direct ownership of
government. While direct individual ownership is not insignificant in government corporations and
MNCs, it does not appear to dominate equity ownership in these corporations. This data suggests
that multinational and government listed companies may not be extremely widely held and appear to
be dominated by concentrated ownership in the hands of management and government respectively.
Table 5.2: Investor Composition in Listed Government Companies and MNCs
(percentage shares owned by an investor type)

INVESTOR TYPE
Banks/Financial Institutions
Corporations
Employees
Foreigners
Affiliated Companies
Government
Individuals
Management
Modaraba and Leasing
Companies
Others

GOVERNMENT

MNCS

40.1
1.3
0.01
1.6
0.2
44.4
11.5
0.5

16.9
2.5
0.04
2.8
1.1
4.1
12.3
58.8

0.2

0.6

0.1

1.1

Source: Authors calculation with data obtained from the SECP.

5.3

Majority Shares Owned by the Family - a Dilemma for Corporate

Governance

In the local listed companies, the dominance of the family as a controlling unit is apparent as the
family unit controls half of the equity of an average listed textile company either through direct
ownership or by virtue of ownership through associated companies. Apart from textiles, other
sectors are also characterized by family dominance where the family directly or indirectly controls
approximately one third of the equity of an average company.
A family can control shares in a target company either by owning shares or indirectly through
associated companies, which are under their control. By retaining decision making control over
capital that has been invested by external investors (banks and minority shareholders), the controller

22

(a family-based owner manager in the case of Pakistani listed local companies) exercises and enjoys
considerable discretion over the use and allocation of external investors capital. In developing
countries this discretion is further strengthened due to weak disclosure requirements and poorly
regulated auditing infrastructure. This discretionary power is often exercised to obtain private
benefits and engage in rent-seeking activities which can take various forms such as political lobbying
investment, posh cars and offices, provision of expensive personal housing, and lavish personal
accounts. External investors are concerned at such private rent seeking behaviour of the controller
because they understand that excessive private benefit seeking by the controller often comes at the
expense of their profits and dividends. In a developing country like Pakistan, external investors are
not in a position to control or check the private benefit seeking behaviour of the family controller
due to lack of control in local corporations and the complete dominance of the family members
over the Board of Directors.
Many local corporations in Pakistan use cross-shareholdings and inter-locking directorships to retain
majority control. Family controller find cross-shareholdings, pyramid structures and inter-locking
directorships extremely beneficial as it allows them to make cash transfers across family companies.
These cash transfers can take various forms ranging from companies extending subsidized lending,
transfer price manipulations, and sale of assets at prices different from market prices.
Theoretically speaking, any Board can be characterized by two features: inclusion and understanding.
In the matrix below, four boards have been graphically shown- depending upon their rating on these
two measures, inclusion and understanding. The best board is the one which has high understanding
of the issues and its board members are included to a great extent in the strategic and policy
formulation of the company. This type of the board has been described as the professional board.
A Board whose members have low understanding of the companys operations and issues and are
precluded from influencing companys important strategic and policy decisions is called a passive
board. In Pakistan, given the closely held ownership structure, most boards would belong to the
category of passive board.
Box 3: The Emotional Climate of the Board

High

The
Representative
Board

The
Professional
Board

Understanding
The
Passive
Board

Low

Low

The
Country Club
Board

Inclusion

High

Source: Bob Garret (2003) Thin on Top-Why Corporate Governance Matters and How to Measure and Improve Board Performance

23

5.4

Issues Arising due to Concentrated Control of Families

Concentrated control is a salient characteristic of Pakistani corporate governance and this feature
has a number of consequences for the development of the corporate sector and capital markets in
the country. Some of the important consequences of concentrated control for Pakistani corporate
governance scenario can be summarized as under.
SECP Audit Reports of different sectors (e.g. leasing and modaraba), according to the study done by
Ali and Cheema, suggest that concentrated control may lead to excessive private benefit seeking due
to opaqueness in the use of public money.
Some family dominated businesses have tried to create transparent corporate governance structures
in order to protect the family reputation with external international investors. However, the number
of such family dominated corporations is quite small.
Although concentrated control often results in private benefit seeking behavior, one important point
is that concentrated control also sets strong incentives for these families to maximize operating
surpluses.
Most of the family controlled companies shares are illiquid and infrequently traded. This illiquidity
of stock raises the cost of takeovers and saves family controllers from dilution of control. Share
turnover is extremely low in most family-based listed companies, deterring external investors from
investing due to high risk.
Family dominated corporations are not keen on declaring dividends and prefer to reallocate profits
to obtain private benefits. According to the SECP Annual Report 2002, more than 50% of Pakistani
corporations do not declare dividends. Table 5.3 below shows that the number of companies not
declaring dividends has declined over the years, but even now the number of companies not
declaring dividends remains quite high.
Table 5.3: Dividend Declaration Performance in Pakistans Listed Companies

Year
1999
2000
2001
2002

% of Companies Not Declaring Dividends in each Sector

67.5%
59.1%
52.5%
59.7%

Source: SECP Annual Report 2002

Family dominated corporations are opposed to reforms that affect their control over companies
operations and increase disclosure requirements. As loss of control and increased disclosure
requirements reduce the chances of private benefit seeking, it is quite understandable as to why
family dominated corporations are opposed to any such reforms.
A common feature of these family dominated corporations is a certain degree of collusion between
the BODs and management. This collusion arises because family as a unit calls the shots and
controls both the BOD and management of the company.
It is not just the number of family members itself on the BOD that matters but also the number of
non-family proxy directors appointed by a family on the BOD of companies controlled by them.
Under such a scenario, the separation of the office of the Chairman from the CEO really does not
make a big difference in Pakistans prevailing corporate structure. As a result, there are limitations
to using the BOD as a body that is accountable to all shareholders.

24

The corporate governance reforms, introduced by SECP, tend to be more effective in MNCs and in
widely held companies. Although, presently, there is a dearth of widely-held local private companies,
the Code has played an important role in outlining an environment that in future, once there is a
growth of widely-held companies on the stock market, will make the BOD more accountable.

5.5

Non-Executive Directors

Another important aspect that requires to be examined is the effective role of NEDs as a means of
minority shareholder representation. It has been observed that in the case of local private companies
and MNCs, family and management controller command majority ownership whereas ownership of
the remaining shareholders is quite diluted and attenuated. The matter of NEDs, with small
shareholdings, and independent directors, with no shareholding, has received lot of attention in
corporate governance literature across the globe. Most authors on this subject are of the opinion
that such NEDs and independent directors do not have the right incentives to put in effective
monitoring effort. As long as the issue of the NED incentives is not addressed properly one should
not place high hopes on such directors, having minute or no ownership, to put in required effort on
behalf of external investors. One alternative, suggested in corporate governance literature, is the
induction of high profile professionals who have the incentive to perform in order to protect their
reputation rather than being motivated by monetary incentives only. However, corporations need to
settle the issue of remuneration of these directors to make the system more effective and efficacious.
Holding of Annual General Meetings (AGMs) is one of the important forums for shareholders to
assert their rights. According to SECP Annual Reports, the level of compliance with regard to the
timely holding of AGMs is quite high and the trend is on the rise as well.
Table 5.4: Compliance with Timely Holding of the AGM

Year
2002
2001

Total Listed Companies

617
635

Number of Compliant Companies

548
534

% Compliance
89
84

Source: SECP Annual Report (2002)

5.6

Minority Shareholders

The issue of minority shareholders rights needs to be considered and examined in the local context
of corporate ownership and control structure. External ownership in corporations is diluted as
majority ownership rests with the controllers of MNCs and government corporations or with the
families in most of the local private corporations. Given this scenario of diluted ownership of
external investors, it is worthwhile on the part of SECP to examine the possibility of making the
requirements pertaining to external investor/ minority shareholder less demanding. Certain
provisions appear quite stringent given the diluted and thin shareholding of external investors and
minority shareholders. For example, some of the demanding provisions include requirements such
as a call for an extraordinary shareholder meeting is 10% and calls for special resolution 10%.
The provision of the right to issue non-voting shares in the context of Pakistans inefficient capital
markets may result in making external investor protection even weaker. Another pertinent issue is
that of dividends being declared by the BOD. In Pakistans family dominated local corporations,
BOD may not be the best forum for the protection of cash-flow rights of external investors and
minority shareholders.

25

5.7

Summary of Findings of the Survey and Evaluation of Present Corporate

Governance Practices

Our survey reveals that implementation of the Code has resulted in significant organizational and
corporate culture improvements, as compared to the situation prevalent prior to the implementation
of the Code. It may, however, be added that for well-managed companies, both local and
multinational, best practices of corporate governance were already in vogue to a great extent. The
situation existing in the small and closely held privately owned businesses will be dealt with
separately in the next section.
Prior to implementation of the Code the Boards of directors were not as cognizant of their
responsibilities, as they are now after the implementation of the Code. In view of increased
responsibilities, the discussion at the Board is far more serious and an effort is willingly made to
comply with the Code.
Discussion on Half-Yearly and Annual Accounts was not as thorough in the past, as being seen now
at the Board. In view of the fact that the Accounts are reviewed and approved by the Audit
Committee, a far more serious discussion takes place, as compared to the past practice when literally
no Audit Committees were in existence.
While the phenomenon of directors representing minority interests is yet to emerge in our corporate
boardrooms, the non-executive independent directors are certainly looking at more assertive roles in
the future.
It is our considered opinion, gathered through interviews and discussions, that without bringing a
change in the constitution of the Boards through greater representation of non-executive
independent directors, any efforts in implementing the Code in true substance will not be of much
avail. Needless to mention that finding truly independent directors may continue to remain an
arduous task, unless concerted efforts are made to overcome this dilemma.
Prior to implementation of the Code, barring few exceptions, the Audit Committees were not in
existence and have now become a norm in most of the listed companies. The Annual Reports carry
the names of the Audit Committee members, and, in some cases, the number of meetings that have
taken place during the year are also mentioned. These Committees normally deal with the subjects as
per their terms of reference laid down in the Code, or as per approval by the respective Board of
Directors. However, it must be emphasized that the Audit Committees, being a new phenomenon,
are assuming their fundamental role slowly but seriously. The Committees are also showing some
degree of independence and assertiveness as the majority of membership consists of non-executive
directors.
In the past Internal Audit function has, unfortunately, always been considered as superfluous,
unwanted and creating impediments in efficient running of the business. However, the function is
now gradually gaining acceptance and its efforts are also acknowledged for providing meaningful
assistance to the Audit Committee, and to the Board of Directors, for ensuring implementation of
Internal Control in the organization as envisioned in the Code.
It is our perception that the Internal Audit departments will gradually gain more significance, and
will be accepted as an important segment of the organization. Moreover, the Board of Directors will
rely on Internal Audit departments with greater confidence in the performance of its enhanced
fiduciary responsibilities.

26

While it is believed that External Auditors in Pakistan have always played their due role to a great
extent, they have, after implementation of the Code (and in the post-Enron scenario), assumed a far
more robust role. They are more critical and independent in their approach and in discharging their
legal and professional obligations. The External Auditors are now responsible for limited review of
Half-Yearly Accounts and are required to issue Review Report to the members on Statement of
Compliance. They are also called upon by the Audit Committees for discussion on significant
accounting and financial issues.
The shareholders are now being kept more well-informed through issuance of Quarterly and HalfYearly Accounts. They have greater confidence in the accuracy and transparency of the financial
statements of the companies. Frequent issuance of reports at regular intervals reduces the chance of
insider trading and enhances investor confidence. The directors of the Karachi Stock Exchange cited
this provision of frequent reporting requirement as one of the reasons for the surge in share values
and greater activity at the bourses.
It is generally acknowledged that implementation of the Code has resulted in greater financial
discipline, uniform presentation of financial results and an organized and more disciplined corporate
culture which has, to a great extent, bridged the gap between various stakeholders, the Board of
Directors and the Auditors.
However, it is being argued by some organizations, mostly small sized companies, that it has raised
documentation requirements and has resulted in higher administrative costs, estimated at Rs. 0.8-1.2
million, for a well-run company already complying with the Companies Ordinance and Stock
Exchange Listing Rules, without truly attaining any significant improvement in organizational
efficiency. The detailed breakdown of these costs is given in the next section on impact assessment
of the Code
The common perception points to accepting the fact that the Code is presently passing through an
evolutionary process. It is felt that diligent enforcement and implementation and further
improvement in certain areas will allay the concerns of these companies, leading to acceptance of the
Code as a norm.
Some minor anomalies between the Code and the Companys Ordinance 1984 have come to light,
e.g. the Company Ordinance stipulates 14 days (Sec 173 (1)) for circulation of Minutes of the
meeting, while the Code mentions 30 days. These anomalies will need to be rectified.
Modaraba companies have mentioned that, the Code, as presently drafted, has not specifically
addressed the issue of its applicability to Management Companies of Modarabas who are themselves
not listed companies. Since modarabas are funds and do not have their own Board of Directors or
shareholders with voting rights, some of the provisions of the Code, as presently enforced, may not
be practically applicable in the case of a Modaraba Management Company even if the Management
Company is deemed to be a listed company for the purpose of the Code.
Although the companies are using their good judgement and implementing the spirit of the Code to
the extent possible, further clarification and guidance should be forthcoming for the applicability of
the Code on Modaraba Management Companies (FAQs issued by SECP deals with the subject to
some extent).
It has been pointed out that Regulation No (XXVI) of the Code requires that where any director,
CEO or Executive of listed company or their spouses sell, buy or take any position, whether directly
or indirectly, in shares of the listed companies of which he is director, CEO or executive, as the case
may be, he shall immediately notify in writing the Company Secretary of his intentions. In the event

27

of default by a director, CEO or executive to give notice or deliver a written record, the Company
Secretary shall place the matter before the Board of Directors in its immediate next meeting.
As a result, the onus of non-disclosure of interest seems to be on the shoulders of the Company
Secretary. Consequent upon the induction of companies into Central Depository System of listed
companies, shares are electronically transferred and as such prior approval of physical shares is not
required from the directors. In view of this situation the Company Secretary may find it difficult to
report defaults, if any.
Certain words in the Code (e.g. what does material or significant mean) are vague and have
resulted in certain doubts and confusion. While SECP has undertaken an appropriate initiative of
updating FAQs in response to issues raised from time to time, the matter of revising the text of the
Code, by incorporating these clarifications, needs to be pondered over.

28

6.

ASSESSMENT OF THE IMPACT OF THE CODE

PROGRESS AND PROBLEMS

6.1

Board of Directors

Our discussion with various respondents has revealed that multinationals, major business houses
and financial institutions in Pakistan have implemented the Code both in form and substance.
However, small, medium and closely held organizations have implemented it in form only and the
substance is missing. Discussion with various respondents focused on the issue of the composition
of the Board of Directors. In order to effectively implement the Code, the constitution and
composition of the board will have to be changed, in due course of time, to give more
representation to the non-executive directors. The present rule in the Code provides for up to 25%
of Board members as non-executive independent directors, representing financial institutions or
minority shareholders. The ratio of non-executive independent directors will need to be augmented
as this increase will lead to more open discussion and encourage healthy criticism during the Board
and Committee meetings. Hampel Report had recommended 1/3rd directors to be non-executive
independent directors, while the Higgs Report recommends enhancing this ratio to 50%. In our case
also, it is suggested that we should follow this trend over a period of time. Application of this rule to
closely held/ family owned private companies will help in ensuring that corporate governance
culture develops in such organizations.
Regarding the abovementioned recommendation, it has generally been argued that even at present
finding the right calibre of non-executive independent directors is an onerous task. How shall we
then find directors to fill in additional vacancies? As far as this problem is concerned it is suggested
that an Institute of Directors will need to be established, whose task would be to create a data bank
of persons qualified and experienced enough to serve as directors. A number of organizations e.g.
the SECP, the Institute of Chartered Accounts (ICAP), the Institute of Cost and Management
Accountants of Pakistan (ICMAP) and the Management Association of Pakistan (MAP) can also
play a supportive role in identifying professionals with suitable credentials to serve as independent
non-executive directors.
At present no director is allowed to serve on more than ten Boards (rule iii). However, with
increased responsibilities it is extremely difficult rather demanding for a director to make useful
contribution at ten Boards. In view of this problem, it is felt that that no director should be allowed
to serve on more than 5 boards at one time. One important point that needs to be borne in mind is
that in addition to attending Board meetings, directors have to serve on a number of committees
also. It is pertinent to point out here that National Investment Trust (NIT), represented on almost
240 boards, will then have to double its efforts to identify directors who would represent NIT on
multiple boards.
Rule (vi) of the Code provides that any casual vacancy in the Board of directors of a listed company
shall be filled up by the directors within 30 days thereof. It has been strongly argued that for finding
suitable directors this period is too short, and as such, should be enhanced to a minimum of 90 days,
which sounds reasonable.
One area that needs to be given due consideration is training of directors so that they should
continue to keep themselves informed about changes in legal, corporate, financial and other business
areas to be able to serve their boards in an effective manner and make useful contribution. Here

29

again, suggestion has been made that this task could be achieved to a reasonable level, over a period
of time, through establishment of an Institute of Directors. It has also been proposed by some
professionals, that a minimum number of hours of training (say 10 hours) on issues such as
governance, internal control, risk management, specific courses on the business of the Company etc.
should be made compulsory.
The issue of reasonable remuneration of non-executive directors came up in a number of meetings.
The common perception is that remuneration being paid to non-executive directors per meeting is
not sufficient (ranging from Rs. 500 to Rs. 5000). While any comparison with remuneration being
paid in the U.K, Europe or USA would be out of place, one has no hesitation in saying that unless
there is some incentive for non-executive directors to serve on various boards, most professionals
would not offer themselves to serve on the board. The issue of remuneration of non-executive
directors and proper incentives for these directors to serve on the board needs to be examined in
detail. We feel that it is not possible to deal with this issue in detail in this study of such short
duration.

6.2

Chairman/Chief Executive

This subject attracted lot of discussion as to whether the function of the Chairman and the CEO
should be separated instead of being combined in one person. While Cadbury and Hampel Reports
had only shown preference for keeping the two functions separate, Higgs Report is strongly in
favour of separating the two functions. The argument in favour of separating the two roles is that it
keeps the board properly balanced. In fact, according to a survey in UK almost 90% of the
companies have accepted this principle. In Pakistans case it is suggested that we should not hasten
to make it mandatory for the time being. However, we should continue to show preference for
separation of the two functions. We would suggest putting a time frame of 3-5 years for separating
the two functions. In the meantime the Boards must define the functions of CEO and the Chairman
clearly.
[

6.3

Statement of Ethics and Business Practices

According to Rule viii(a) of the Code the above mentioned statement should be circulated and
signed annually by all the directors and the employees (text of the Code needs to clarify class of
employees as mentioned in FAQs). It is felt that this annual exercise is uncalled for and extremely
cumbersome. It has been proposed by a number of respondents that once the existing directors and
employees have signed the statement, there is no need to repeat this exercise every year. The newly
appointed directors and employees should be asked to sign such a statement at the time of their
appointment. Some companies have also pointed out that company unions are abusing this
provision in the Code to blackmail management.

6.4

Delisting of Companies

A number of companies got themselves de-listed from the Stock Exchanges in Pakistan, for various
reasons, since March 2002. Out of 23 companies that have got themselves de-listed, only 4
companies mentioned the increasing cost burden of complying with stringent CCG provisions as
one of the reasons for de-listing. Most of these companies who got themselves de-listed suffered
from limited share float, illiquid shares, persistent losses and lack of ability to pay dividends. Since
only 4 companies (Souvenir Tobacco, Latif Cotton Mills, Lease Pak Limited, and Alhamd Textile
Mills) have mentioned the additional cost burden of complying with CCG as one of the reasons for

30

de-listing, one can say that operational reasons, instead of additional cost burden of complying with
CCG, is the main rationale behind these de-listings. Table 6.1 provides the list of these companies
and their reasons for de-listing.
Table 6.1: List of De-Listed Companies since March 2002

DE-LISTING
March 2002
April 2002
April 2002

REMARKS/REASONS FOR DE-LISTING

Continuous losses & serious cash flow problems
93% shares held by the directors/sponsors
Only 21,500 shares held by the general public

May 2002
May 2002
June 2002

SECP has approved the de-listing of the company

93% shares held by the directors/sponsors
Continuous losses and illiquid shares
Continuous losses, illiquid shares, additional cost
burden of CCG.
Severe liquidity problems and illiquid shares due to
limited float
Very few minority shareholders and additional cost
burden of CCG
Closely held company with limited float
Losses and inability to pay dividends
Accumulated losses for the last six years
Industry in turmoil, inability to pay dividends

14 Pakistan Fisheries Limited

15 Lease Pak Limited

September
2002
September
2002
September
2002
July 2002
August 2002
August 2002
November
2002
March 2003
March 2003

16
17
18
19

June 2003
July 2003
July 2003
August 2003

1
2
3
4
5
6
7
8
9
10
11
12
13

20
21
22
23

COMPANY
Anwar Textile Mills Limited
Chenab Fibres Limited
Hilal Flour & General Mills
Limited
Ravi Rayon Limited
Elite Publishers Limited
Asia Insurance Company
Limited
Souvenir
Tobacco
Company Limited
Asia
Board
Industries
Limited
Latif
Cotton
Mills
Limited
F. P. Textile Mills Limited
Pioneer Cables Limited
J.K. Spinning Mills Limited
S. S. Oil Mills Limited

Maqbool & Co. Ltd.

Quality Steel Works Limited
Tritex Cotton Mills Limited
Polypropylene
Products
Limited
Alhamd Textile Mills
Limited
Shaigan
Electric
&
Engineering Co. Ltd.
Spencer & Co. (Pakistan)
Limited
Indus Jute

August 2003
September2003
September
2003
September
2003

No reason mentioned
Continuous losses and inability to incur extra burden
of complying with CCG
Persistent losses
Company in-operational for several years
Accumulated losses and inability to pay dividends
Closely held, small paid up capital, suffering heavy
losses
Limited float and additional cost burden of
complying with CCG
Persistent losses due to competition from smuggled
items
Very limited float, illiquid shares, losses and inability to
pay dividends
Inactive shares and persistent losses

Source: Karachi Stock Exchange

6.5

Corporate and Financial Reporting Framework

It has been pointed out that the provision pertaining to the Directors Report, as per Clause xix, be
modified on the pattern of UK Combined Code. Moreover, appropriate guidelines should also be
developed on internal control for directors on the pattern of Turnbull Report of UK.
Alternatively, a report on internal control should be issued by the directors on the same pattern as in
Sarbanes Oxley Act Requirement.

31

6.6

Frequency of Financial Reporting

The issue of fee charged by the External Auditors, for the limited review of half-yearly accounts,
also attracted lot of debate. Although the auditors argue that even a limited scope review audit
means doing a thorough and serious job with lot of additional responsibilities, corporations feel that
it has significantly increased their audit costs. Most corporations were of the view that the fee
charged should be capped and should not exceed more than 25 33 % of the annual audit fees.
As far as the period of 4 months allowed for finalization of annual accounts is concerned, no
complaints were received and this provision seems to have been generally accepted. One
supplementary suggestion made by us to the Karachi Stock Exchange for reducing the period of
notice for holding the Annual General Meetings from 21 days to 15 days was found acceptable to
them. This reduction in time period has now become possible due to holding of shares in CDC
rather than handling physical share certificates.

6.7

Audit Committee

Regarding the composition of the Committee, it has been proposed that the Committee should have
at least one finance literate director as its member. The definition of independent and finance
literate director may be taken from recent Codes developed by NewYork Stock Exchange or
Sarbanes Oxley Act, tailored to local requirements.
It is felt by most of the respondents that the provisions in the Code regarding attendance at
meetings (rule xxxii) are rather complicated and, to a great extent, difficult to implement. For all
practical purposes the CFO and the Head of Internal Audit would invariably be present in all
meetings, as they are likely to handle most of the issues raised either in the Internal Audit reports, or
by the External Auditors. Furthermore, no mention has been made regarding the attendance of the
meetings by the CEO, who is the principal decision maker in the organization. It is opined, that the
clause be simplified by mentioning that the chairman of the Audit Committee may ask any member
of the management (CEO, CFO, HIA and External Auditors) to attend the meeting where he deems
fit. This will be keeping in line with the recommendations of Smith Committee in U.K.

6.8

External Auditors

Rule xii of the Code makes it mandatory for all listed companies to change their external auditors
every five years after 31st Dec 2003. If for any reason this is impractical, with the permission of the
SECP, at least the senior partner in charge of the Audit will need to be rotated. Similarly, it is
believed that in the case of multinational companies who have arrangements with a certain auditing
firm for all their concerns throughout the world, the SECP would show flexibility. Respondents to
our questionnaire have raised this issue by arguing that neither is there any need for such a change,
nor is this an international practice (except for Italy). Corporations and auditing firms are of the
opinion that the SECP, by introducing this provision, has acted in an over cautious manner in the
backdrop of global corporate failures such as Enron, World Com etc. It is further argued that even
Sarbanes-Oxley Act 2002 USA did not prescribe any provision regarding mandatory rotation of
audit firms, although rotation of audit partner is essential and accordingly provided in the regulatory
framework of various countries. It has, therefore, been strongly recommended that the decision
needs to be revisited. Although the regulatory body may be hesitant to re-open an issue that has
been accepted in the Code by the listed companies, we feel that most companies have expressed
genuine concerns about this particular Code provision. It is suggested that SECP should re-initiate

32

dialogue with all the stakeholders (companies, audit firms, ICAP) and modify the provision in the
light of recommendations that emerge after this dialogue.

6.9

Small and Medium Size and Closely-Held Privately-Owned Businesses

The real challenge to implementing the Code of Corporate Governance is presented by the
abovementioned category of business entities. The multi-national companies, large business entities,
and the financial institutions were already following a number of best corporate governance
practices even before the introduction of the Code. In their case, the Code has further strengthened
and streamlined these practices and the corporate sector, as a whole, has adopted uniform policies of
governance. However the implementation of the Code in substance is missing in small and medium
sized companies. Small and medium sized businesses for non-listed companies have been defined in
different ways by different institutions. These definitions have been listed in Table 6.2.
Table 6.2: Present Definitions of SMEs in Pakistan (Applicable to Non-Listed Companies)

INSTITUTION
State Bank of Pakistan

SMALL
MEDIUM
Capital Assets up to Rs. 20 million (excluding
N/A
land and building)
Federal Bureau of Statistics Less than 10 employees
N/A
SME Bank Ltd
Total assets up to Rs. 20 million
Total assets from Rs. 20 100
million
Punjab Small Industries Fixed Investment up to Rs. 20 million
N/A
Corporation
(excluding land and building)
SMEDA
10-35 employees, or productive assets from 36-99
employees
or
Rs 2- 20 million
productive assets from Rs. 2040 million

Recently, the State Bank of Pakistan in its prudential regulation has proposed new definitions of
different categories of Small and Medium Enterprises (Non-Listed companies). These definitions are
given in Table 6.3.
Table 6.3: Definitions given by the Draft of Prudential Regulation issued by State Bank

CLASSIFICATION
Employees
Assets (excluding land &
building)
Annual Sales

SMEs
Manufacturing
Up to 250

Trading
Up to 50

Up to Rs. 30 million

Up to Rs. 50 million

Up to Rs 300 million

From the above discussion, it is quite clear that there is no standard definition of SMEs. In our view,
for listed companies, companies should be categorized as small and medium on the following basis.
Table 6.4: Proposed Definition of SMEs (Public Listed Companies)

Small
Medium

TOTAL ASSETS (Rs. In Million)

Up to 50
51-200

33

TURNOVER (Rs. In Million)

Up to 200
Up to 1 billion

While small and medium sized businesses in the financial sector (Modarabas, Leasing companies,
Insurance companies etc) have adopted these policies to a great extent, small, medium and even
large companies in the non-financial sector, where majority shareholding is family owned have
found it detrimental to their interests to implement these rather stringent restrictions. Few small
companies chose to respond to our questionnaire but these companies raised the issue of extra costs
incurred by these companies due to enforcement of the Code of Corporate Governance. According
to a paper presented by Mr. Mumtaz Abdullah at SAFA conference in Karachi on May 2-3 2003,
these extra costs have been estimated at Rs. 3 million per annum. The detailed breakdown of these
costs is given in Table 6.5.
Table 6.5: Extra Costs in Rs in 000s Due to Implementation of the Code

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11
12.
13.

DEPARTMENT/OFFICIAL/ACTIVITY
Internal Audit
Accounts Department.
Secretarys Department
CFO
Printing of Reports
Printing of Extra Copies of Register of Shareholders Policies etc
Additional Postage
Directors T.A.
Meeting Expenses
Telephone and Fax
Statutory Fees
Registrar and CDC
Audit Fees
TOTAL

EXTRA COST IN RS. (000s)

300
500
100
400
400
100
300
200
150
150
200
100
100
3,000

Our discussion with different small companies has revealed that this figure of Rs 3 million is on the
higher side as it assumes that the company, prior to the introduction of CCG, was not complying
with the Companies Ordinance or Stock Exchange Listing Rules. For a well run company, which
already was publishing annual reports, employed reputed auditors and a CFO in the company, the
additional costs imposed by the introduction of CCG would be in the range of Rs 0.8-1.2 million.
Most of these additional costs would be in the form of additional number of meetings and traveling
expenses of the directors associated with these meetings (depending upon the number of directors
and the residence of these directors). Most small companies did not have audit committees before
the introduction of CCG and therefore holding audit committee meetings imposes additional
burden. Moreover, internal audit department expenses have also gone up and would vary from
company to company depending upon whether these companies have outsourced internal audit
function or have an in-house internal audit department. As a result, additional cost burden imposed
on a small CCG would be in the range of Rs. 0.8-1.2 million
The problem in these closely held companies is that the majority of board members, executive or
non-executive, belong to the same family. The concept of representatives of minority shareholders
or the independent directors is totally missing. Some of the companies may have a lone voice in the
form of a representative from a financial institution (NIT, PICIC, Bank and Investment Companies
etc), who may find it extremely difficult to make any positive contribution or raise voice of dissent.
Similarly, the Audit committees may have been formed with members of the family as non-executive
directors; CFO and Internal Auditors may have been employed, but with a very low key

34

participation in the affairs of the company. In view of this type of corporate environment, any
attempt to implement Code of Corporate Governance will prove to be an exercise in futility only.
The Code may have been implemented in form only, while the substance would be totally missing. It
may be safely concluded that this situation is prevalent in majority of textile, cement and sugar
industry units, which are predominantly closely held business entities-with major shareholding
owned by the families.
It is generally felt that any attempt to further regulate these entities will be met with greater
resistance. Therefore it is important, as mentioned earlier in 6.1, to revise the composition of the
Board in due course of time. It is imperative to beef up, gradually, the number of non-executive
independent directors, and representatives of minority share holdings on the boards, and restrict the
number of directors representing families to say no more than 50%. The number of non-executive
independent directors to be appointed on the Board could be revised to one third for the time being
(from the present 25%) and eventually to 50%.
The question of non-availability of suitably qualified non-executive independent directors should be
discussed at an appropriate time. This would need a certain time frame and review of legislation
(Companies Ordinance 1984 with regard to election of directors based on minority representation)
to incorporate and finalize these changes. Once the number of family members on the Board is
restricted, only then would discussions at board meetings become meaningful and transparent and
the Audit Committees would be able to play a significant role.
It is, therefore, further recommended that the Code should continue to be applied to all the listed
companies without any discrimination. However, a certain degree of flexibility should be allowed in
implementation for small and medium sized companies. Wherever certain provisions of the Code
cannot be complied with, an explanation should be provided in the Annual Report. Thus the rule
would be, as recommended by Higgs, Act or Explain Some sort of incentive e.g. a CCG
Implementation Award for Best Practices should be introduced in order to motivate the
Companies to make greater efforts for implementation of the Code in letter and spirit. This Award
could be organized under the aegis of the proposed Institute of Directors and the Institute of
Chartered Accountants of Pakistan (detailed modalities will need to be worked out). No punitive
action or fine is recommended as it is already in place under the Companies Ordinance 1984.

35

7.

POLICY RECOMMENDATIONS

In view of the key findings of the study regarding progress made and problems encountered due to
the implementation of the Code of Corporate Governance 2002, this chapter focuses on the set of
recommendations. These recommendations, consisting of set of measures that should be
implemented, can be divided into two categories: short term and medium term measures. Short-term
measures are those which can be implemented either immediately or upto the next 2 years. On the
other hand, medium term measures can be implemented in the next 3-5 years.

7.1

Short Term Measures

The Code should continue to be applied to all the listed companies without any discrimination.
However, some degree of flexibility should be shown to small and medium companies. Wherever
certain provisions of the Code cannot be complied with, an explanation should be provided in the
Annual Report. As suggested by Higgs report, the action on part of small and medium sized
companies would be to Act or Explain. Moreover, in order to encourage and motivate these
companies to make greater efforts to implement the Code, a CCG Implementation Award for Best
Practices should be introduced. The award could be organized under the aegis of the proposed
Institute of Directors and the ICAP. The issue of definition of small and medium sized companies
has been discussed in detail in Section 6.16 in this report. The suggested definition of small and
medium enterprises is given as under.
Table 7.1: Proposed Definition of SMEs (Public Listed Companies)

TOTAL ASSETS (Rs. In Millions)

Small
Medium

Up to 50
51-200

TURNOVER (Rs. In Millions)

Up to 200
Up to 1 billion

Time allowed for filling in a casual vacancy on the Board should be increased to 90 days from the
present 30 days, in order to have sufficient time to find a suitable director with right credentials.
No director should be allowed to serve on more than 5 Boards (presently 10), so that they are able
to make positive and meaningful contribution in the Board and Committee meetings.
Signing of Statement of Ethics and Business Practices annually is a cumbersome process and also
uncalled for. It should be signed only once by the directors and the employees (also definition of
employees should be specified in the Code).
It is suggested that a provision be introduced that requires at least one member of the Audit
Committee to be finance literate. This would also curtail the practice of nominating family
members as member of the Audit Committee under the guise of non-executive directors.
Statement of Compliance with the Code of Corporate Governance is unnecessarily long and
suffers from lot of duplication, as most of the information is available in the annual reports and
returns filed with the registrar. Hence, it would be prudent to review the present text and include
only points of substance and significance.
The issue of fee of External Auditors for Audit Review of half-yearly accounts needs to be looked
into. It is suggested that the fee be capped at a certain percentage (say 25-33%) of the annual fee.

36

SECP should approach ICAP on this issue and seek proposals from them about the exact
percentage at which this fee should be capped.
There should be a dialogue between different stakeholders (auditing firms, ICAP, listed companies,
and SECP) over the issue of change of external auditors after December 2003. Although SECP
might be reluctant to re-open an issue that has been accepted by listed companies, most companies
have expressed genuine concern over this provision and, therefore, it is suggested that a dialogue
should take place and subsequent action should be taken in the light of this dialogue.
A separate department within the Enforcement division should be set up that deals specifically with
enforcement issues pertaining to the Code. This cell or department should receive, process and act
on the complaints received from various quarters regarding non-implementation of the Code.
According to our understanding a number of issues pertaining to violation of the Code by different
companies have been pointed out by NIT to SECP in the past but these issues have not been
properly addressed. Establishing a separate cell, within the enforcement division headed by a
specialist in Corporate Governance issues and dealing specifically with the Code issues, can lead to
effective and efficient implementation and enforcement of the Code. Monitoring team should also
be set up which should pay surprise visit periodically to different companies to monitor compliance.
By putting in place this system of incentives and investigation (vigilant monitoring along with awards
and rating of companies on implementing Corporate Governance practices) can SECP ensure
proper enforcement of the Code.
An implementation and review committee should be set up to evaluate, review and implement the
changes recommended in this report.
[

7.2

Medium Term Measures

In order to ensure implementation of the Code of Corporate Governance effectively by small,

medium and closely held privately owned companies, the Constitution of the Boards should be
revisited and, in order to make them effective and robust, the ratio of non-executive independent
directors, representing minority shareholding, financial institutions etc should be enhanced to 33%,
and in a timeframe of 3-5 years, to 50% of the Board excluding the Chairman. The issue of
remuneration of non-executive directors should also reviewed in the next 3-5 years.
An Institute of Directors needs to be formed, which could play an effective role in creating a
database of professionals who would be willing to serve as non-executive independent directors on
the Boards. The Institute would also provide training to the directors (say minimum 10 hours in a
year) in order to enhance their competency level and keep them informed about changes in the legal,
financial and corporate scenario.
A time frame (say 3- 5 years) should be set to separate the functions of the CEO and the Chairman
in an effort to create a balance of power on the Boards and separate responsibilities of two distinct
functionaries. This provision should be made mandatory in the next three years for large companies
whereas small companies should also be encouraged to do so.
It has also been recommended that one way to ensure effective and meaningful implementation of
the Code may be through an independent assessment by a Credit Rating Agency e.g. JCR/VIS. In
fact, certain organizations are already using this method in order to enhance the comfort level of all
the stakeholders and the regulating authorities (SECP, stock exchanges). We, however, believe that
while this process may only be encouraged but no consideration be given to make it mandatory at
this stage, as this would result in additional costs.

37

There is a need to develop detailed guidelines for the guidance of the Directors on the Board on the
issue of Internal Control and Risk Management. The SECP may undertake this task in consultation
with ICAP/ICMAP. These guidelines would not form part of the Code, but would be used as
reference documents
At present, Remuneration Committees (named as Board Compensation Committees in some
companies) have not been formed in majority of the companies, while in some cases HR
Committees are handling the task of recommending salary and benefits for the directors, apart from
reviewing general HR policies. It is recommended that SECP should issue guidelines on formalizing
such Committees in the corporate structure.

38

APPENDIX A: SAMPLE QUESTIONNAIRE

The Sample Questionnaire sent to 95 listed companies is attached on the following page.

39

Project on Corporate Governance

Pakistan

SECP/UNDP/PD/2003/
July 11, 2003

To Whom It May Concern

The Securities and Exchange Commission of Pakistan (SEC), after extensive consultations with the
stakeholders, developed the Code of Corporate Governance in March 2002. Since more than a year
has passed after the introduction of this Code, the SEC, with the assistance from UNDP, has
commissioned a study to assess corporate governance practices within the public listed companies
and evaluate the impact of the aforementioned Code on companies operational and organizational
efficiency.
As a part of this study, a questionnaire has been developed by our consultant, Mr. Ammar Ali
Qureshi to evaluate the impact of the Code on the operations of companies. In this regard, the SEC
has authorized Mr. Ammar Ali Qureshi to seek necessary information from a sample of companies.

Haroon Sharif
National Component Director

40

4-B, Street: 34
F-8/1,
Islamabad
July 18, 2003
Mr. Syed Naseem Ahmed
Chairman
Security Papers Limited
108, Ist Floor. Sidco Avenue Centre
Maulana Din Mohammed Wafai Road
Karachi

SUBJECT: QUESTIONNAIRE ON CODE OF CORPORATE GOVERNANCE

Dear Mr. Ahmed,

As you are aware that SEC has commissioned a study to evaluate the impact of the Code of
Corporate Governance on public listed companies operational and organizational efficiency. As part
of the study, a questionnaire has been developed to evaluate the impact of the Code on your
organizations operations. It would be highly appreciated if you respond to this questionnaire within
7 days of its receipt and return the completed questionnaire to me (contact details below) by mail,
fax, or email. Please do not return the completed questionnaire directly to SEC.
The feedback that we receive from you is extremely critical in refining this Code to better address
the problems faced by the corporate sector and in improving the overall standard of corporate
governance in the country.
We assure you that any information divulged to us in response to the questionnaire shall be treated
confidential.
Responding to the questionnaire would consume approximately 15-20 minutes of your precious
time for which we are very grateful. In case you have any queries about the questionnaire, please do
not hesitate to contact Mr. Ammar Ali Qureshi or Mr. Javed Iqbal whose contact details are given as
follows:
Ammar Ali Qureshi
AMZ-KHN Consulting, 4-B Street: 34, Sector F-8/1, Islamabad.
Tel: 051-2280758 and 2280761/Ext: 205. Fax: 051-2280760. Mobile: 0333-5175903
Email: Ammar_Ali@yahoo.com
Mr. Javed Iqbal (Director Karachi Stock Exchange)
Tel: 021-7237040-2
Email: javediqbal@cyber.net.pk
Thanks and best regards.
Ammar Ali Qureshi

41

COMPANY INFORMATION
Name of the Organization:
Contact Persons Name and Telephone Number:
Date of completing the questionnaire:
QUESTIONNAIRE ON
EVALUATION OF
GOVERNANCE

IMPLEMENTATION

OF

CODE

OF

CORPORATE

RESPONSE
BOARD OF DIRECTORS APPOINTMENT:
1. How many Directors are presently serving on your board?
Of whom:

Executive
Non-Executive/Independent
Representing: Financial Institution/Bank/Modaraba
Minority Shareholders
Others
YES

2.

Did anyone among minority shareholders contest election for a Director's

slot on the board of your organization?

3. Has the Chairman of Board of Directors (BOD) been elected from?

Executive Directors
Non-Executive Directors

42

NO

YES
4. Is the same individual holding the posts of Chairman and Chief
Executive in your organization?
5. Are the functions of Chairman/CEO clearly defined by the Board of
Directors (BOD)?
6. Is any of your Directors serving more than ten BODs of listed Companies?
7. Have you ensured that your Directors meet requirement of qualification
as per clause (iv) & (v) of the Code of Corporate Governance (CCG)?
8. Have you arranged Orientation Courses for your Directors in order to
acquaint them with their responsibilities as per requirement under the Code
of Corporate Governance (CCG) & the Company Ordinance 1984?
DUTIES AND RESPONSIBILITIES:
9. Has a statement of Ethics and Business Practices been issued by the BOD
& has it been signed by all the Directors & employees?
10. Has the BOD adopted a vision/mission statement?
11. Has the BOD formulated Corporate Strategy & announced significant
policies? (Please see viii (b) of the CCG)
12. Is a complete record of particulars of significant policies being maintained?
13. Are all significant matters brought to the attention of the board e.g.
investments, divestments, writing off bad debts, inventories etc?
14. Has the BOD ensured implementation of an effective system of Internal
Control?
15. Are the terms of appointment & remuneration package of the CEO & the
Executive-Directors approved by the BOD?

43

NO

YES

NO

16. In the case of Modaraba or a Non-Banking Financial Institution, is an

Investment Policy clearly defined & reported in the Annual Report- as per
clause viii(f) of CCG ? If not applicable just write N/A
MEETINGS OF THE BOARD:
17. How many meetings of the BOD have taken place over the last 12
months?
18. Does the management ensure that the notice is sent seven days prior to the
meeting (except in case of emergency)?
19. Are the minutes of the meeting properly recorded in the minutes book &
subsequently circulated to the Directors within 30 days of the meeting for
their comments?
20. Have any notes of dissention by the Directors been recorded in the
minutes over the last 12 months?
21. Has any Director filed any objection with the SECP, in case a note of
dissention has not been recorded in minute book?
22. Are all significant issues placed at Board meeting for their consideration, as
per terms of clause (viii) of CCG?
APPOINTMENT OF CHIEF FINANCIAL OFFICER (CFO) & COMPANY SECRETARY (CS)
and THE HEAD OF INTERNAL AUDIT (HIA):
23. Has the appointment of the following been approved by the Board on the recommendation of
CEO?
CFO
CS
HIA

44

24. Has any one of the following been removed, with the approval of the Board, over the last 12
months?
CFO
CS
HIA
25. Which of the following qualifications does the CFO of your organization hold?
Member of a recognized body of professional accountants
Graduate from a recognized university and 5 years of experience
None of the above
26. Which of the following qualifications does the CS of your organization hold?
Member of body of professional accountants/corporate
secretaries
Lawyer or a recognized university graduate with 5 years
experience
None of the above
YES
27. Do CFO & CS attend all the meetings of the Board?

CORPORATE & FINANCIAL REPORTING FRAMEWORK:

28. Does the Directors report contain all the statements as required under Sec
236 of Companys Ordinance1984 & as per guidelines under clause (xiv) of
Code of Corporate Governance?
29. Are quarterly unaudited financial statements circulated to the shareholders
after approval by the BOD within 30 days?
30. Are half yearly accounts subjected to a limited scope review before
approval by the BOD and circulated to the Shareholders?
31. Are annual accounts circulated not later than four months from the closing
of the financial year?

45

NO

YES

32. Does your company circulate the required information to the Stock
Exchange immediately after approval of the Accounts by the BOD?
33. Are all your statement of Accounts signed by the CEO & CFO, after
approval & authorization by the BOD before circulation to the
Shareholders?
34. Regarding Disclosure of interest by a Director Holding Company Shares,
are the requirement of clause (xxvi) of CCG being met by the Company?
35. Do your external Auditors or any partner of the firm or his/her spouse or
minor children hold any position in the shares of your company?
36. If the external Auditors held any shares in your Company before their
appointment, have those shares been divested?
(N/A if not applicable)
37. If any share capital has been issued over the last 12 months, how much
of it was offered to the general public?
AUDIT COMMITTEE:
38. Has an Audit Committee been established in your Company, if so when?
(Please state month/year)
39. How many Directors are members of the Audit Committee?
Executive
Non-Executive
40. Is the Chairman of the Committee an
Executive Director
Non-Executive Director
41. Who acts as the secretary of the Committee?
Internal Auditor
CS
Other

46

NO

42. How many meetings of the Audit Committee took place during the last
twelve months?
YES

NO

43. Did CEO & CFO also attend the Committee meetings?
During the last 12 months:
44. Did the Committee meet the External Auditors without CFO and the
Head Of Internal Audit?
45. Did the Committee meet the HIA and other members of the Internal
Audit function without CFO and theexternal Auditors?
46. In addition to review of financial statements, how many Internal Audit
Reports were presented to the Audit Committee by the Head of Internal
Audit?
INTERNAL AUDIT FUNCTION:
47. If there is an in-house Audit Department, how many members does it
have?
48. Who does the Head of Internal (HIA) Audit report to?
CEO
CFO
49. Is the Internal Audit function outsourced fully/partly?
50. In case the function is outsourced, who is the person responsible for liaison in the Company?
HIA
CFO
CS

51. Does the HIA have direct access to the Chairman Audit Committee?
52. Are Internal Audit Reports provided to the External Auditors?

47

YES

NO

53. Over the last 12 months, have the Auditors, reported any significant
matters to the Audit Committee?
EXTERNAL AUDITORS:
54. Have your External Auditors been appointed as per guidelines contained in
clause (xxxvii-xxxix) of CCG?
55. Have you appointed separate Management Consultants to advise on
matters other than audit?
56. After the last annual audit, was a Management letter provided to the BOD
within 30 days from the date of the Audit Report?
57. Was the Management letter discussed at the Audit Committee/BOD and
response was sent to the Auditors?
58. Did a partner representing the External Auditors attend the last Annual
General Meeting, when the Accounts were discussed?
COMPLIANCE WITH THE CCG:
59. Has your company published and circulated a statement along with their
annual reports to set out the status of their compliance with the best
practices of corporate governance?
60. Has your company ensured that the statement of compliance with the best
practices of corporate governance is reviewed and certified by statutory
auditors, where such compliance can be objectively verified, before
publication by listed companies?
SUGGESTIONS
GOVERNANCE

AND

PROBLEMS

REGARDING

CODE

OF

CORPORRATE

61. Has the implementation of the Code of Corporate Governance contributed to any improvement
in operational and organizational efficiency? Please Comment.

48

62. Are you facing any problems in implementing the requirements of the Code of Corporate
Governance (CCG)? Do you have any proposals to overcome these impediments to make CCG
more effective?

63. Any other comments that you might have about the code or state of corporate governance in
the organization.

49

APPENDIX B: LIST OF TARGETED COMPANIES

SECTOR

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

Apparel
Apparel
Auto
Auto
Auto
Auto Parts
Auto Parts
Banks
Banks
Banks
Banks
Banks
Banks
Banks
Cement
Cement
Cement
Cement
Chemicals
Coating
Coating
Communications
Communications
Construction
Dairy and Beverages
Dairy and Beverages
Dairy and Beverages
Electrical Goods
Electrical Goods
Electrical Goods
Electrical Goods
Electrical Goods
Energy
Energy
Engineering
Engineering
Fertilizer
Fertilizer
Fertilizer
Fertilizer

COMPANY

Fateh Sports
Kaiser Arts
Atlas Honda
Indus Motors
Pak Suzuki Motors
Allwin Engineering
Atlas Battery
Arif Habib
Askari Bank
Asset Investment Bank
Bank Al-Habib
KASB Bank
PICIC Commercial Bank
Soneri Bank
Cherat Cement
Dadabhoy Cement
Fauji Cement
Pioneer Cement
Sitara Chemicals
Berger Paints
Wyeth Pak Ltd
PTCL
World Call
Haydari Construction
Muree Brewery
Nestle Milkpak
Pak Dairies
Climax Engineering
Pakistan Cables
PEL Appliances
Siemens Engineering
UDL
Hub Power Co
SEPCOL
Crescent Steel
KSB Pumps
Dawood Hercules
Engro Chemical
Fauji Fertilizer
FFC Jordan

50

MARKET
CAPITALIZATION IN
RS. IN MILLION (AS ON
JUNE 12, 2003)
58
14
1,492
4,975
4,348
67
1,872
1,800
3,225
33
2,813
1,127
2,616
1,709
1,625
241
2,021
573
1,201
125
1,493
100,766
879
24
147
10,051
3
23
206
5
3,287
23
41,253
2,019
1,195
210
11,046
12,908
22,469
10,610

41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58
59.
60.
61.
62.
63
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.

Food
Food
Food
Food
Gas
Gas
Gas
Glass
Glass
Insurance
Insurance
Insurance
Leasing
Leasing
Leasing
Leasing
Leather
Miscellaneous
Miscellaneous
Miscellaneous
Miscellaneous
Miscellaneous
Miscellaneous
Miscellaneous
Modaraba
Modaraba
Modaraba
Modaraba
Paper and Board
Paper and Board
Paper Boards
Paper Boards
Paper Boards
Petroleum
Petroleum
Petroleum
Pharmaceutical
Pharmaceutical
Pharmaceutical
Polyester Fibre
Polyester Fibre
Sugar
Sugar
Sugar
Textiles
Textiles
Textiles

Unilever Pakistan
Rafhan Best Food
Indus Fruit
National Foods
BOC
Mari Gas
Sui Southern
Baluchistan Glass
Ghani Glass
Adamjee Insurance
Century Insurance
IGI Insurance
Dawood Leasing
Crescent Leasing
Orix Leasing
Saudi Pak Leasing
Service Industries
Biafo Industries
AKD Securities
Elite Publisher
Grays of Cambridge
General Tyre
Shifa International
Spencer and Co.
Al-Zamin Modaraba
Crescent Modaraba
Grindlays Modaraba
Imroz Modaraba
Century Paper
Packages Ltd
Cherat Paper
Security Paper Limited
Merit Packages
National Refinery
Pakistan Refinery
PSO
Abbott Laboratories
Glaxo Smith Kline
Reckitt Benckiser
Dewan Salman Fibre
S.G Fiber
Dewan Sugar
Premier Sugar
Habib Arkady
Nayab Spinning
Nishat Chunian
Crescent Textile

51

17,548
1,385
18
247
3,480
2,242
13,960
1,033
942
3,495
425
1,719
255
271
1,770
154
331
109
8
50
441
2,738
631
146
71
181
1,403
356
1,822
6,180
322
2,528
137
5,997
3,645
37,048
4,355
3,993
2,036
5,503
792
219
197
212
86
175
1,078

88.
89.
90.
91.
92.
93.
94.
95

Textiles
Textiles
Tobacco
Tobacco
Toiletries
Toiletries
Vanaspati
Vanaspati

Gul Ahmed Textile

Sapphire Textiles
Lakson Tobacco
Pak Tobacco
Colgate Palmolive
Gillette Pak
Punjab Oil Mills
Suraj Ghee

52

2,089
107
4,407
6,707
1,592
1,593
4
7

BIBLIOGRAPHY
Bari, F. Cheema, A. & Osama Siddique (2003). Corporate Governance in Pakistan: Ownership, Control and
the Law. Draft Paper read at a conference in Dhaka, Bangladesh in 2003.
Garrat, Bob. (2003). Thin on Top-Why Corporate Governance Matters and How to Measure and
Improve Board Performance. London UK.
Noman, Omar (1990). Political and Economic History of Pakistan (1947-1990). London UK
Sarbanes-Oxley Act (2002). USA
Securities and Exchange Commission of Pakistan (2002).
Islamabad.

Code of Corporate Governance 2002.

Securities and Exchange Commission of Pakistan (2002). Code of Corporate Governance 2002-FAQS.
Islamabad
Securities and Exchange Commission of Pakistan (2002). Annual Report 2002. Islamabad.
The Cadbury Committee (1992). Report of the Committee on the Financial Aspects of Corporate
Governance. London UK
The Companies Ordinance (1984). Islamabad.
The Hampel Committee (1998). Committee on Corporate Governance: Final Report. London UK
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UK
The King Report (1994). King Report on Corporate Governance for South Africa. South Africa
The Listing Regulations of the Karachi Stock Exchange (2003). Karachi
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practices in G-7 countries. London UK.

53