Corporate Governance in Pakistan

Adopt or Adapt?
University of Cambridge Research By Mahwesh Mumtaz

DECLARATION OF ORIGINALITY

This dissertation is substantially my own work and conforms to the Judge Institute guidelines on plagiarism. Where reference has been made to other research this is acknowledged in the text and bibliography

Abstract
This study discusses the implications for Pakistan, as it adopts the Anglo-Saxon model of corporate governance. It explores the causes of impediments that policymakers face as they try to implement the Code of Corporate Governance. The empirical question that the study poses is whether a Corporate Governance model that works for the US and the UK, also work for a country like Pakistan? We present data and review the literature to show that Pakistan is a country much further down on the development ladder, with ownership structures markedly different from the diluted ownership structures of developed countries; with its stock exchanges displaying shallowness; and its cultural underpinnings heavily influencing how the corporate sector operates. We conclude that the ultimate objective of the Code of Corporate Governance should be to incorporate good governance into the Pakistani corporate environment, in order to enhance productivity and efficiency, rather than trying to emulate the dynamics of those countries which pioneered the Anglo-Saxon model. We argue that the Code for Corporate Governance adopted by Pakistan will need to be adapted keeping the local business environment and market conditions in mind. The study proposes a broader paradigm that views the governance problem as more than mere conflict of interest between owners and managers or minority and majority shareholders, in order to be able to devise better policies that are tailored to the unique corporate context of Pakistan.

Corporate Governance in Pakistan - Adopt or Adapt?

Introduction

Corporations, their conduct, and impact on the social, political and economic sphere of their existence have been much in debate since the last century. In the recent times this debate has only intensified; especially in the wake of Asian crises, and a series of corporate scandals like Enron and WorldCom, much has been said and written about good governance of corporations. In the last decade corporate governance has been a dominant policy issue in developed and developing world alike. The issues that ensue today relate to how these corporations ought to be governed, who should govern them and how best to strike a balance between laissez faire and monitoring. There are countries that have pioneered in developing various legal frameworks, and are actively involved formulating an assortment of codes and statues that govern them. These countries are called the origins of such codes and laws. Then there are countries and territories that receive the laws and codes, which originated in some other country, and adopt them. These are referred to as transplants in the literature. It is imperative to consider that the origins have developed these laws and codes in their unique social, political, economic and cultural context. A number of studies (Pistor et al. 2001, 2003; La Porta et. al. 1999, 2000; Branson 2000; Roe 2003; Lincht et al.2004) suggest that a simple adoption cannot be beneficial to the transplanting country until and unless it is well understood and is meaningful to the users in the country of transplant. This is because unless the regulations are relevant to the people and their implementation holds benefits for the masses, there will be no motivation for the recipients of the legal system to accept it and implement it. Secondly, due to the uniqueness of each country, any law irrespective of which family it has been taken from would need to be adapted to the transplant country. This requires institutions and legal intermediaries, which understand the law and can make changes, thereby making the law more pertinent to their own country, as suggested by Pistor et al. (Pistor, 2001). To be able to make meaningful policy recommendations, the meaning of corporate governance needs to be understood and defined in a country with regard to its prevailing institutions. The source of differences in countries may be entrenched in the uniqueness of social culture, political aspects, history, structure of ownership of

Corporate Governance in Pakistan - Adopt or Adapt? companies, level of socio-economic development, institutional and regulatory capacity, and legality to name a few. It needs to be appreciated that the corporate governance problems in a developing or transition economy country are likely to be different than those of a developed market economy. This is why the solutions that help solve the governance problems in the developed economies may not do the same in developing countries. Developing countries need to study the unique issues they have at hand, and then implant the relevant solutions from other countries, rather than expecting economic turnarounds by adopting solutions of corporate governance lock, stock and barrel.

1.2 Purpose and Significance of the Study

As the global debate on corporate governance heats, the importance of this topic to any countryparticularly any developing countrycannot be ignored. Being one of the important countries of South Asia, with immense trading potential and ideal geopolitical location, Pakistan has proactively pursued various policy reforms to stimulate its economic activity, in recent years. The Securities and Exchange Commission of Pakistan (SECP) issued the Code of Corporate Governance (referred to hereinafter as the Code), in order to establish a framework for good governance of companies listed on Pakistans stock exchanges. This Code drew upon policies of good governance adhered to by the U.K. and U.S. models of corporate governance (the anglo-saxon model). It was assumed that since the origins of Pakistans corporate law lie in the British legal framework, it was only rational that good governance practices in Pakistan follow those prevalent in the U.K.

However it has been repeatedly emphasized in the vast literature that spans the topic of corporate governance, that good governance systems are not only limited to laws and structures, even though they play an important part. What really determines the success of a good corporate governance system is how it governs and influences the interaction between all the stakeholders including firms, regulators, political agents, investors, shareholders, employees. This means that the historical, social, political, economic, and cultural influences that colour the attitudes of these stakeholders need to be reflected in a good corporate governance system.

Corporate Governance in Pakistan - Adopt or Adapt? This study discusses the implications for Pakistan, as it adopts the Anglo-Saxon model of corporate governance. It explores the causes of impediments that policymakers face as they try to implement the Code of Corporate Governance. The empirical question that the study poses is whether a Corporate Governance model that works for the US and the UK, also work for a country like Pakistan? The objective of this study is to explore whether the anglo-saxon model of corporate governance adopted by Pakistan, does indeed fulfil the requirement of being representative of the problems that are peculiar to Pakistan. This study draws on the data and various theories put forth regarding the transplantation of law, and extends them to theorize the impact of transplanting such codes from the field of corporate governance into a developing country like Pakistan. It postulates that even though according to the path dependency argument, following the Anglo-Saxon model of Corporate Governance may make perfect sense for Pakistan, since the roots of Pakistani law lie in the British Common Law family, but does this mean that transplanting this particular code of corporate governance would be successful? Can such a model that works for the US and the UK, also work for a country like Pakistan, which is much far down on the development ladder? What of the differences in ownership structures, the underdeveloped capital markets, and cultural

underpinnings? This thesis aims to observe the factors that may cause hurdles in a simple adoption of the Anglo-Saxon model of Corporate Governance. It points out that the Code for Corporate Governance adopted by Pakistan will need to be adapted keeping the local business environment and market conditions in mind. This study holds significance in terms of contributing to the under-researched area of corporate governance in a Pakistan-specific context. There are subtleties involved in convincing the Pakistani corporate sectorwhich tends to resist changethat good governance is for their own benefit. This study aims to draw the attention of policymakers and implementers towards recognizing these subtleties. It adds value to the limited research done in Pakistan on this topic by outlining the potential sources of problems and hurdles that will need to be removed for an effective implementation of the Code of Corporate Governance. This study has far reaching implications on the implementation policies as well as on espousing further research. This study forms just the groundwork of

Corporate Governance in Pakistan - Adopt or Adapt? much more research that is needed to understand the corporate dynamics of Pakistan, and address issues that impede the development of product and factor markets alike. Corporate governance has received much attention worldwide since the last decade. In Asia particularly the financial crises of the late 90s stirred much debate about the fundamentals of firm dynamics and market interactions. Whereas previously only financially instable economies were struck with crises, the Asian crises struck havoc in some of the fastest growing economies of the world, causing paradigm shifts from what was believed to be the perfect-model-of-Asian-business, into a theory that the institutional structures may be at the root cause of the problem. The importance of good governance cannot be emphasised enough. However, the question that faces policymakers, governments, economists, investors and other stakeholders at large is, what corporate governance means to themin their particular contexts, structures and frameworks? Literature has attempted to answer this question theoretically as well as empirically. Of late, it is being increasingly recognized that a single set of rules-- one model of good governancedoes not suit all the nations. A wide area of topics that the literature covers, while attempting to answer this question, makes it essential to first review how the definition of corporate governance varies according to the context in which it is defined.

1.3 Corporate Governance

Efforts have been made at international and national institutional, academic and corporate levels alike, to promote policy dialogues on corporate governance. In the UK the Cadbury Report (1992) sought to improve standards of corporate behaviour, following a spread of concern over financial reporting and transparency. This was augmented 1995 by the Greenbury report (1996), and the Hampel Report (1998), which stressed the boards of directors role in improving the value of their respective companies. Gillan and Starks (1998) define corporate governance as the system of laws, rules, and factors that control operations at a company. In another paper, Gillian et al. (2003) say that corporate governance involves the monitoring, and control of publicly held corporations in order to ensure that the corporate agents and assets are channelled towards achieving the corporate objectives set out by the owners of the 4

Corporate Governance in Pakistan - Adopt or Adapt? company, i.e. the shareholders. Shleifer and Vishny (1997) characterise corporate governance with the interest of economic participants. They refer to corporate governance as dealing with the ways in which suppliers of finance to corporations assure themselves of getting return on their investment. The differences in the definitions of corporate governance are also reflected in the different models of corporate governance that are used worldwide according to the unique governance requirements of each country.

1.4 Corporate Governance Models

Globally there are several corporate governance models that have been adopted and implemented not only by their countries of origin, but by other nations too. For several years now there has been debate over what the perfect model for governance is, motivating numerous academic studies, both theoretical and empirical in nature. Comparisons between the effectiveness of Anglo-Saxon Model, German Model, Japanese and East Asian Model of corporate governance and the ownership structures in these countries are frequently made (La-Porta et al 1998, Franks and Mayer 1994, Prowse 1992, Charkham 1992). Stephen et al. (1996) point out that the US and UK models of corporate governance are predominantly market based and resemble each other. They espouse the protection of the minority shareholders and focus on solving the agency problem. The UK and US models are also said to be focused on individualism and short-termism by some critics. Independent directors on the board and a non-hierarchical board construct are the norm. The role of the board is to monitor and evaluate the managers and to select or remove the senior executives. The approach used for corporate governance in the UK and US (Anglo-Saxon) is generally referred to as the shareholder approach. Like other literature, Keasey et al. (1997) and Stephen et al. (1996), comment on the differences in the fundamental law that governs both of them, however they claim that both these models are more similar to each other than they are different. Contrary to that, the German model follows what is known as the stakeholder approach. The board is two-tiered, consisting of the supervisory board and the management board. The shareholders interests are represented and protected by a supervisory board that is separate from the management of the company. The German

Corporate Governance in Pakistan - Adopt or Adapt? model enables all the stakeholders- shareholders, creditors, managers, employees, suppliers and customers- to monitor the companys performance. On the other hand, the Japanese model is quite unique in the sense that the most common type of business corporation in Japan is the Kabushiki Kaisha. Banks and financial institutions have substantial holdings of debt and equity in these corporations. The mode of the operation of the board is hierarchical, usually with 25-50 people being on the board. Boot and Macey (2000) suggest that the US system of corporate governance has received much acceptance and acclaim because of the strong protection it provides to small stakes equity claimant. Whereas the German model has been found to provide similar levels of protection for fixed claimants. These different models of corporate governance allow implanting countries to choose from among the different features of different models that suit their economic set up best.

1.5 Ownership Structures and Corporate Governance

A fundamental reason why the agency problems vary from country to country is because the ownership structures are different between these countries. The agency problems stem from the disparity between ownership and control, giving rise to conflicts of interest. Claessens et al. (1999) find that in East Asian countries, control is maintained through pyramiding and cross-holdings between firms. And so the voting rights held by the families exceed the cash flow rights that they hold, thus influencing the decision-making.

1.6 Transplantation and Corporate Governance

The countries that transplant codes of corporate governance need to ensure that the code recognizes the contextual nature of corporate governance and its dependence on the legal, regulatory and institutional environment. There have been several studies to see how the legal developments that take place in one country can be effectively incorporated in another via the process of transplantation (Pistor et al, 2000, 2001 and 2003, La Porta et al 1997, Rodrick 2000). These studies also show that if a law is simply copied-and-pasted without any adaptation to local conditions then it loses its efficiency. Although the focus of these

Corporate Governance in Pakistan - Adopt or Adapt? empirical studies is the legal systems and the law in totality, their argument can be extended to various codes, especially the codes of corporate governance that many countries transplant. The codes of corporate governance are usually used in conjunction with the corporate laws of the countries where they are implemented (La Porta et al., 1999 and 2000, Claessens et al., 2003). This is done to enhance monitoring, and control of publicly held corporations in order to ensure that the corporate agents and assets are channelled towards achieving the corporate objectives set out by the owners of the company, i.e. the shareholders (Morck, 2003). La Porta et al. (2000) advocate that diverse elements of countries financial systems as breadth and depth of their capital markets, the pace of new security issues, corporate ownership structures, dividend policies, and the efficiency of investment allocation seem to be explained conceptually as well as empirically by how well the laws of the country protect outside investors. Gillan and Starks (2003) argue that the governance changes have been more pronounced in countries where there have been dramatic changes in banking sector, capital markets, and legal systemsand particularly in those countries where there is a strong presence of institutional investors. There are a number of models of corporate governance that are followed in different parts of the world today. Each model has its own unique set of characteristics that suit the dynamics of the countries where it originated. Other countries and territories emulate these models and adopt the ones that might fit best with their socio-economic conditions (Claessens et al., 2000). The codes for corporate governance are codes of best practices and do not form part of the statutory legislation in most of the countries. This fact augments the argument that laws and codes need to be changed and manipulated to suit the local conditions, before they can be fully implemented and expected to work as well as they work in the country of origin. Legal scholars like David and Brierley (1985) show that the commercial legal systems of most countries derive from relatively few legal families, including English (common law), the French, and the German, the latter two being derived from the Roman law. These systems spread throughout the world through, conquest, colonialisation, and voluntary adoption. La Porta et al. (2000) suggest that the legal families that countries have

Corporate Governance in Pakistan - Adopt or Adapt? adopted, rather than laws having been written in response to market pressures, shape the regulations for financial markets and companies. There are a number of factors that need to complement each other for a transplant to qualify as successful. The issues of governance vary from country to county depending on the level of development of capital markets, legal institutions, ownership structures, existing rules, codes and laws, receptiveness of masses to change, and culture (Pistor et al., 2000, 2001, 2003). The formal law in the books does not do much for the development of any country, unless it is used. Although it is true that corporate governance systems sprout from legal systems, it is also true that corporate governance tends to deal with softer issues (Roe, 2003). In order to work, the systems of corporate governance should reflect the political and economic history of the country as well as the social and political attitudes of the people (Charkham, 1992). Pistor et al. (2003) analyse that countries, which adopt foreign law, are frequently unprepared for it and for the changes that it brings. Their finding suggest that legal transplants cannot function in the host countries as well as they do in the home countries. The major factors that can help determine the success or failure of a corporate governance code transplant include path dependence, complementary institutions, and social and corporate culture. 1.6.1 Path Dependence The path dependence argument suggests that the initial historical conditions prevalent in a country have a profound impact on the corporate governance practices that it is likely to adopt. This argument helps us in understanding just why Asian firms and institutions continue to be as they have been for centuries, despite the evident success of western models of corporate ownership, structure and culture. The presence of deeply entrenched path dependencies can inhibit a successful transplant, if there are marked differences in the newly acquired code and the path that the importing country has been on for many years. 1.6.2 Corporate Governance and Complementarity Another important consideration to help make an imported model to work is to create a fit of the new model with the prevalent institutions in the economy. One institution or code of law, in isolation, cannot undertake the responsibility of corporate

Corporate Governance in Pakistan - Adopt or Adapt? governance. Explaining the concept of complementarities Schmidt et al., (2000) suggest that a well-integrated network of support institutions is needed to effectively implement corporate governance practices. There have to be well-entrenched support mechanisms at the regulatory level. The legal structure needs to be strong and cohesive to the type of corporate governance that exists in the country. There needs to be adequate support from well functioning stock exchanges. The objectives of the minority and majority shareholders, employees, managers and boards of directors need to be aligned with those of the regulatory authorities. Hence this complementarity argument reinforces the point that what is efficient in one context may not be efficient in another, especially if reforms are implemented on a piecemeal basis (Coffee, 1999). Roe and Bebchuk (1999) view complementarity as not something that concerns the ownership structure of firms for instance, it rather considers other entities and institutions. Such institutions, practices, and professional communities often develop in every country to facilitate the working of the national corporate sector. Hence, the whole national corporate governance system needs to be complementary. Achieving this fit is not an easy task, especially in the less and newly developed countries as well as the transition economies. Such transplanting countries, if they try only to implement corporate governance models imported from developed nations, may hurt their efficiency rather than benefiting from it, because of their lack of support institutions. 1.6.3 Social and Corporate Culture Culture is very deeply entrenched in business practices in Asia It plays a very important role in whether a transplant would succeed or not. Roe (2003) suggests that even the very basic corporate law characteristics could be a function not only of finance, economic rationality and institutional capacity but also of cultural background of the country where the law is being implemented. The national and/or regional culture of any country co-determines what people perceive as right or wrong, what their attitudes are towards change, and the kind of behavioural patterns they display. This in turn affects the way organizations and businesses are run. According to Hofstede (1991) people carry within themselves patterns of thinking, feeling and acting which they have acquired throughout their lifetimes. Once particular patterns

Corporate Governance in Pakistan - Adopt or Adapt? are formed, the person would then need to unlearn them if she is to learn something new. It is believed that unlearning to learn something new is far more difficult than learning something for the first time. As suggested by Redding and Whitley (1990), in a large proportion of Asian cultures firms are not thought of to be separate legal entities distinct from their environment, they operate in the context of the society and hence their form itself is shaped by the culture and the society of the country of origin. Most of the Asian and some European economies follow what Branson (2000) calls family capitalism. This term can be used to explain both, family controlled publicly held companies as well as a family of companies that are highly networked and work towards higher level of integration. For a particular code, law or set or rules to be successfully imported, it is imperative that it meshes well with the pre-existing rules and ownership structures (Pistor et al., 2003). Either that, or the cost of not changing to the newly transplanted system should be substantially higher than the cost of maintaining status quo. There should be motivation to adopt the transplanted code, and this can only come when the demand for the transplant comes from within the importing country and its sub-systems (Schmidt et al., 2002). The demand is necessary so that the law in the books will also be used in practice. However it may never come off the books and practically used unless it is adapted the local conditions (Pistor, 2001). Some countries may be more receptive for a particular transplant because they share common legal history with the origin, where as others may not understand the new transplant (or the new transplant may be unsuited) and as with unsuccessful medical transplants, the recipient corporations may actively develop antigens against the new body of law, rules or codes. Therefore, before deciding what kind of regulatory framework to adopt, it is crucial to look at it from the point of view of the people who will need to accept it and would be finally using it. 1.7 Corporate Governance in Pakistan The literature regarding corporate governance in Pakistan is extremely thin, given the lack of research culture in Pakistani academic and institutional spheres. International literature, reviewed in the earlier subsections has focused on East Asian countries like China, Thailand, Korea, and Japan to name a few. Among the South Asian countries, there is relatively much more literature on India than any other country (Khanna et al.,

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Corporate Governance in Pakistan - Adopt or Adapt? 1996, 1997, 1998, 1999; Pankaj, 1996; Goswami et al., 1996; Singh et al., 2000, 2002, 2003to name a few). Cheema, Bari, and Siddique (2003) summarise the corporate growth history of Pakistan, providing an overview of the ownership structures, state of financial market, and market dynamics. Cheema et al. (2003) contribute to the sparse literature in Pakistan by studying the various determinants of corporate structure in the same pattern that important corporate governance studies (Claessens et al. 1999, LaPorta et al. 1999) have. They show the concentration of ownership and control to determine the ownership structure and capital market structure of Pakistan.

They point out that the recent financial reforms have made the financial sector in Pakistan very risk averse, thereby limiting the amount of credit that is made available to the corporate sector in Pakistan. The appendix of the paper outlines the legal aspects of corporate governance in Pakistan by highlighting the areas where this Code reinforces the current corporate laws and regulations, and where it overlaps them. Cheema et al. (2003) further argue that in the current market structure and corporate environment, many of the provisions of the Code of Corporate Governance (2002) will not be as effective as they would have been in a more developed capital market. The paper provides a good backdrop for further research by showing the ownership structure in Pakistan and the macroeconomic environment with the perspective of applicability of the Code of Corporate Governance (2002).

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Corporate Governance in Pakistan - Adopt or Adapt?

Cheema et al. have highlighted the role of family ownership and their basic premise is based on the theory of path dependence, suggesting that the historical progress of the industry in Pakistan was one whereby family ownerships were promoted.

They show the high evidence of pyramiding in Pakistan in the absence of effective capital market reforms.

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Corporate Governance in Pakistan - Adopt or Adapt?

Their discussion suggests that concentrated control in Pakistan, which is buttressed by interlocking directorships, cross-shareholdings and pyramid structures, may strengthen incentives for excessive private benefit seeking. Analysing the stock market in Pakistan, and the role of brokers therein, Khwaja et al. (2004), find that brokers earn annual rates of return that are 50-90% higher than those earned by outsiders, when they trade on their own behalf. They refer to price manipulations by the brokers as a pump-and-dump phenomenon, i.e., when prices are low, colluding brokers trade amongst themselves to artificially raise the prices and attract positive-feedback traders. Given the distinctive nature of each countrys culture, history, and institutions, as Charkham (2000) points out. it would be impossible for one nation to copy anothers arrangements in their entirety.

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Corporate Governance in Pakistan - Adopt or Adapt?

2
2.1

Results and Discussion

Methodology

Given the dearth of literature in the area of corporate governance in Pakistan, it was felt that meaningful contribution could be made with a study that is exploratory in nature. This study, hence, focuses on the analytical examination of the implanted Code of Corporate Governance and its fit with the country-specific dynamics of Pakistan, using data provided by various sources that are detailed below. The study explores various factors that may determine the implementation of good governance practices in Pakistan. In order to substantiate the theoretical underpinnings of the study, a combination of quantitative and qualitative approaches have been used, depending on the nature of the factors being considered.

2.2

Overview of the Data

Compliance with the Code of Corporate Governance has been incorporated as one the listing requirements for companies in Pakistan. Keeping in line with the objectives of the study, data on stock market liquidity, ownership structure, and the regulatory framework towards compliance with the Code was examined. Given the nature of this study, it was important to identify the softer issues that may be at the core of the Codes implementation strategy, along with supporting the argument with quantifiable data. The data collected for purpose of this study is cross-sectional.

The qualitative information regarding the general response to the Code by listed companies, problems faced in trying to implement the Code, and any shortcomings of the Code, was obtained through interviews. Securities and Exchange Commission of Pakistan (SECP) was the principal source for most of the data collected- both primary as well as secondary. Secondary data included annual reports for companies that constituted the sample of ownership pattern data, stock performance data for all of the 709 companies listed on the Karachi Stock Exchange as at year ending 2003, and published reports, papers and newspaper articles on various aspects of corporate governance in Pakistan.

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Corporate Governance in Pakistan - Adopt or Adapt? Data for the stock market liquidity is a census, where the population is 709 companies listed on the Karachi Stock Exchange. This data was collected from the Karachi Stock Exchange- 2004 diarys section titled Statement of Paid-Up Capital, Dividend, High-Low & Turnover. Data used to infer the ownership structure of listed companies in Pakistan was obtained from the annual reports (year 2003) of a random sample of 30 companies listed on the Karachi Stock Exchange.

2.3

Results & Discussion

The underlying premise of this thesis is that a good corporate governance framework needs to be a system of regulations and best practices that enhances the efficiency of the corporate sector, helps protect the stakeholders interests and gives rise to a vibrant, healthy business culture. To be able to attain these objectives, it is imperative that corporate governance systems mesh well with the existent corporate and institutional systems playing upon the strengths of these systems and eradicating the sources of weaknesses. Hence, to simply transplant a system of governance is not enough. The requirement is to adopt the system to the peculiarities of a countrys business environment.

As mentioned in the previous section, path dependence theory can help explain why particular ownership structures of companies, development level of capital markets, regulatory frameworks, and corporate cultures exist. In this section, we shall look at the historical path that Pakistani corporate sector had taken to reach where it is today, the impact this path dependence has had on the dynamics of Pakistans corporate environment, culture and structure; and finally the implications this has on good governance practices.

2.3.1 The Code of Corporate Governance After a decade of impressive growth in the 80s and early 90s, Pakistan suffered serious setbacks in the mid- to late 90s in terms of most economic and social indicators. The economic growth rates decelerated, inflation rose to peak rates, debt burden escalated substantially and Pakistan had to face international sanctions as a

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Corporate Governance in Pakistan - Adopt or Adapt? consequence of conducting nuclear testing in 1998. Pakistans economy was in dire straights during the latter part of the 1990s when its GDP growth rate had consistently declined each year, from 7.7% in 1991-1992 to a mere 1.7 % in 1997-1998 (Source: ECO Official Website). The nuclear testing and subsequent freezing of foreign currency accounts followed by international sanctions caused a drop in investor confidence in the Pakistani market and led to a flight of capital away from Pakistan.

Table 5: South Asian GDP per Capita Growth Rate

Source: World Development Indicators 2002 Other macro factors like the military takeover of the government, the 9/11 tragedy, as well as the War on Terrorism did little to bolster investors faith in Pakistan. In order to address growth concern, and the evolving international standards regarding monitoring and governance, the Securities and Exchange Commission of Pakistan (SECP) introduced the Code of Corporate Governance in 2002, with the aim of managing listed companies through the stock exchanges, in compliance with international best practices. The Code was formulated by benchmarking several international codes and corporate governance reports including the Code of Best Practice of the Cadbury Committee on the Financial Aspects of Corporate Governance published in December 1992 (U.K.), the Report of the Hampel Committee in Corporate Governance published in January 1998 (U.K.), the Recommendations of the Kings Report (South Africa), and the Principles of Corporate Governance published by the Organisation for Economic Cooperation and Development in 1999.

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Corporate Governance in Pakistan - Adopt or Adapt? The Code is a first step whereby principles of good governance are envisioned to be systematically implemented in Pakistan. According to the project report published by the SECP after the formulation of the Code:

The Code of Corporate Governance primarily aims to establish a system whereby a company is directed and controlled by its directors in compliance with the best practices enunciated by the Code so as to safeguard the interests of diversified stakeholders. It proposes to restructure the composition of the board of directors in order to introduce representation by minority shareholders and broad-based representation by executive and non-executive directors. It seeks to achieve the objectives of good corporate governance by recommending strengthening of corporate working, internal control system and external audit requirements. The Code emphasizes openness and transparency in corporate affairs and the decisionmaking process and requires directors to discharge their fiduciary responsibilities in the larger interest of all stakeholders in a transparent, informed, diligent, and timely manner.

It has been two years since the Code of Corporate Governance was introduced by the SECP as part of the listing requirements of the three stock exchanges in Pakistan, namely Karachi Stock Exchange (KSE), Lahore Stock Exchange (LSE), and the Islamabad Stock Exchange (ISE). Although the Code is very progressive in nature, very little impact, if at all, has been felt by its adoption, because there still needs to be a lot of work done to adapt the Code to the specific needs of Pakistan. Literature suggests that good governance comes when the interests of the stakeholders are protected. According to the agency theory, a good corporate governance system should be able to fundamentally limit the expropriation of minority shareholders at the hands of block holders in instances of concentrated ownership, and/or reduce the conflict of interest between the owners and managers in case of diffused ownership. The role that a corporate governance system is required to play varies with the diverse elements of a countrys financial systems as breadth and depth of the capital markets, the pace of new security issues, corporate ownership structures, dividend policies etc. (La Porta et al., 2000). Our data and the discussion that ensues, outlines the importance of these elements in Pakistan.

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Corporate Governance in Pakistan - Adopt or Adapt? 2.3.2 Liquidity of the Stock Market The Karachi Stock Exchange (KSE) is the largest of the three stock exchanges in Pakistan and an important emerging market of the region among the developing countries. KSE is termed as high-risk high return market where investors seek highrisk premium (Nishat, 1999). Table 1 presents the frequency distribution of percentage turnover of shares during the year 2002-2003 at the Karachi Stock Exchange. The frequency distribution consists of 14 categories, out of which 13 are classes with unequal class interval, while one is a category denoting the number of companies whose shares have not been traded at all throughout the year. The reason for not taking equal class intervals is that the purpose of this table and dataset is to show the liquidity of KSE. With shorter class intervals for the first few classes, it becomes clearer to display the limited level of trading activity, and the large number of companies that fall into the lower trading brackets.

Frequency Distribution of % Turnover of Shares in KSE Listed Companies as at year ended 2003 Cumulative Percent 10.0 34.4 46.3 64.0 73.8 84.1 87.7 92.4 93.9 96.6 97.2 98.0 98.7 100.0

Valid

Not Trading 0%-2% 2%-5% 5%-15% 15%-25% 25%-50% 50%-75% 75%-125% 125%-200% 200%-300% 300%-500% 500%-600% 600%-800% 800%+ Total

Frequency 71 173 84 126 69 73 26 33 11 19 4 6 5 9 709

Percent 10.0 24.4 11.8 17.8 9.7 10.3 3.7 4.7 1.6 2.7 .6 .8 .7 1.3 100.0

Valid Percent 10.0 24.4 11.8 17.8 9.7 10.3 3.7 4.7 1.6 2.7 .6 .8 .7 1.3 100.0

Table 1: Calculated from the Karachi Stock Exchange Annual Diary 2004

Out of 709 listed companies, only 638 companies traded, i.e., 10% of the listed companies did not trade at all during the year. The number of shares traded during the year for nearly 50% of the listed companies is less than 5% of the total number of

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Corporate Governance in Pakistan - Adopt or Adapt? outstanding shares. And the only about 15% of companies display a turnover of 50% or more of their outstanding equity. The data shows the limited liquidity of companies trading on the stock exchange. It shows that a majority of the companies do not rely on stock exchanges to raise capital. On the other hand during the year 2003, KSE index touched its then highest ever mark of 4604 points on September 12. Given the extremely low equity turnovers for a majority of companies on the KSE, the movement in the KSE 100 index may have been displaying the level of trading and market price changes in a small number of listed companies, rather than representing the market as a whole. The lack of liquidity limits the exit options for current investors and minority shareholders, raising their risks. Khwaja et al. (2004), show that the Karachi Stock Exchange is a market that despite being small in size has a high turnover, a phenomenon that they claim to be very common occurrence amongst emerging stock markets. A high overall turnover is attributed to manipulations by the brokers as well as information asymmetry and insider trading. In their study, in 2002, the top 25 stocks accounted for 75% of the overall market capitalization, and 85% of total turnover, with the top 5 most traded shares comprising of 68% of the turnover. Khwaja et al (2004) findings complement our findings and argument that the KSE is a market that is directed by the small number of stocks. The London Stock Exchanges (LSE) top 5 shares on the other hand, accounted for only about 24% of the total turnover.

One of the reasons that companies do not actively trade in the stock exchanges in some Asian countries is because they have alternative modes of raising capital (Khanna et al., 1999). The ownership structure of companies enables them to tap internal sources of financing, or financial credit rather than raising capital at the stock exchanges. The closely related underlying social process is that people prefer to do business with their friends and family members in Pakistan. Hence, inter-corporate financing is a popular option that many companies exercise, especially those belonging to business groups.

Historically too, during the 1960s industrialization in Pakistan, big industrial groups were provided with cheap industrial credit, on lenient termsthe practice has been going on since then until recently, as each new policy trying to stimulate industrial

19

Corporate Governance in Pakistan - Adopt or Adapt? growth and productivity has done so by providing financial incentives in one form or the other. The mode of raising capital is predominantly through financial credit. However, there is no restriction in Pakistan of banks investing in equity; hence there is a conflict because banks are also the lenders and hold about 12% of equity in the manufacturing sector of Pakistan (Mahmood et al. 2003).

With little motivation for companies to raise capital from the stock exchanges, there is a danger of companies wanting to de-list if they perceive complying with the Code as too expensive. An Impact Assessment of the Code of Corporate Governance Report, found that many small companies and subsidiaries of larger companies have expressed their reservations about the publications of quarterly results. They consider the exercise as too costly and negatively affecting their productivity. According to the report, additional cost burden of complying with the Code of Corporate Governance is in the range of Rs. 0.8-1.2 million, for small companies. In the year 2002-2003 four companies de-listed from the stock exchange citing the cost of compliance with the Corporate Governance Code as being too high for it to remain feasible for them to stay listed. In an economy where capital markets need to develop, such a reaction by companies may be counter productive.

2.3.3 Ownership Structure of Companies The anglo-saxon model of corporate governance, adopted by Pakistan lays emphasis on the protection of shareholders in order to limit the agency costs, and ensure the protection of owners interests. The model inherently assumes diluted shareholding and intensive institutional investment (Jensen et al., 1976). Ownership structure of companies plays an integral role in the implementation process of regulations, such as those that the corporate governance code prescribes.

In order see the level of dilution versus concentration of equity ownership in the listed companies, a sample of 30 companies was chosen from 709 companies listed on the KSE.

The annual reports for the year 2003 were used to collect information regarding the shareholding patterns of each of the 30 companies in the sample. Securities and 20

Corporate Governance in Pakistan - Adopt or Adapt? Exchange Commission of Pakistans (SECP) reporting requirements require the annual records to have a Pattern of Shareholding for the year, which tabulates the number of shareholders, the class/category of number of shares held, and finally total number of shares held.

The data for each company was split into the 2 categories: top 5 shareholding classes and bottom 5 shareholding classes. In some instances where there werent 5 classes in either category, then less than 5 classes were taken. The total percentage of shareholding for top 5 and bottom 5 shareholding categories was calculated respectively.

The average number of individuals falling in the category of smallest 5 shareholdings is 5352.533 holding an average of 8.76% of the total equity in the sample. Whereas on average 5.033 individuals held shares that fall in the largest 5 shareholding category and hold about 64.6% of the shares, according the sample of 30 companies.

To draw inferences about the statistical population based on information obtained from the sample dataset, the z-test was chosen as the testing method. Z, a standard normal variable, is used to test for the sample mean.

(a)

Largest 5 (or less) Shareholding Categories:

It is intuitively known that the Pakistani stock market faces the problem of concentration of shareholding. In order to statistically determine whether the ownership of shareholder is concentrated, the shareholding categories were studied. It is hypothesized that ownership is would be considered concentrated if more than 50% shares were held by individuals within the top 5 shareholding categories. 50% is taken as a cut off point because it would suggest that the 5 top shareholding alone accounts for the 50% of share ownership, leaving the other 50% to fall into the 95% shareholding bracket, and hence is a good measure of concentration. If we look at this information from the perspective of how many individuals actually own the shares that fall in the top 5 holding we would be able to see how many shares each individual in the this category holds on average.

21

Corporate Governance in Pakistan - Adopt or Adapt? Hence the hypothesis for this category is: Ho: Largest 5 shareholding categories account for 50% or less shareholding H1: Largest 5 shareholding categories account for more than 50% shareholding
Table 2: Daignostic statistics for largest 5 (or less) shareholdings

Sample size Sample Average Sample Sd Average No. of Shareholders Z test Ho Critical value Test Value Test result :

30 64.59739 24.77173 5.03333 Population average of shareholding by largest five (or less) shareholders <= 50% 1.64 3.227599 Null hypothesis is rejected in favour of H1 and we conclude that the largest 5 shareholders (or less) hold more than 50% of the sharecapital in the company

Testing the hypothesis, we find that on a 95% confidence level for a one-tailed test, the null hypothesis can be rejected, and we can conclude that the largest 5 shareholding categories do indeed account for more that 50% of shares. To establish the fact that there is presence of block holding, we look at the average number of individuals with holdings in these top 5 categories. As can be seen in Table-2, the average number of shareholders controlling more than 50% of the shares is almost 5, this means that each shareholder on average hold almost 10% of the total outstanding shares in the company. The data from annual reports suggests that the block holders in companies are mostly other privately held companies, international parent companies in case of multinationals, financial institutions and in some cases individual persons.

(b)

Smallest 5 (or less) Shareholding Categories:

Following the same methodology as the large shareholding category, the cut-off rate to see the level of dilution at the bottom 5 of shareholding is taken to be 15%. It is hypothesized that the ownership would be considered diluted if the shareholders of the bottom 5 categories held more than 15% of total shares in the company. Again

22

Corporate Governance in Pakistan - Adopt or Adapt? 15% is taken as an arbitrary number, as 3% or less shareholding in each category on average would show limited dilution. If the shareholding in the first 5 categories is not more than 15% then it shows that the concentration may be found in the larger categories, hence suggesting block holding. It would be more meaningful to look at the average number of individuals whose share ownership falls in the smallest-5 shareholding category. Hence the hypothesis for this category is: Ho: Smallest 5 shareholding categories account for 15% or more shareholding H1: Smallest 5 shareholding categories account for less than 15% shareholding
Table 3: Diagnostic statistics for smallest 5 (or less) shareholdings

Sample Size Sample Mean Sample SD Average No. of Shareholders Z Test Ho Critical Value Test Value Test result :

30 8.709707 9.598529 5352.533

Population average of shareholding by smallest five (or less) shareholders > 15% -1.64 -3.589441 Null hypothesis is rejected in favour of H1 and we conclude that the smallest 5% (or less) of the shareholders hold less than 15% of the sharecapital in the company

As for the large shareholding category, we calculated the z-statistic for the small shareholding category too, and on a 95% confidence-level one tailed test, rejected the null hypothesis in favour of our alternative hypothesis. Thereby we infer that the shareholders among the bottom five categories of shareholdings own and control less than 15% of the total shares. The presence of extremely limited dilution can be further noticed when we check the average number of shareholders that do actually fall in this category. As seen in Table 3, above there are approximately 5352 shareholders owning less than 15% of the outstanding shares, this means that each shareholder in this category holds about 0.0028% shares in the company.

23

Corporate Governance in Pakistan - Adopt or Adapt? Amalgamating our findings from both the categories it can be safely said that the majority ownership of shares is in the hand of few shareholders and results in intensive block holding. This result is consistent with international studies that report high levels of ownership concentration in companies in Asia (La Porta et al., 1998, 2000; Claessens et al., 1999; Thadden et al., 1999).

One of the factors to be considered when doing quantitative studies as shown above, is the relative impact that companies have on the capital markets. For instance, a larger company that is has diluted shareholding may neutralise the effect of 4 smaller companies with concentrated shareholding, when seen in the context of the stock market as a whole. Following this line of thinking, it was worthwhile to see if there is a difference in the sample averages when market capitalization is taken as the determinant for firm size, and hence the sample is weighted on it.
Table 4: Comparison of Simple Sample Means and Weighted Sample Means for Largest and Smallest 5(or less)shareholding categories

Sample Mean of 5 (or less) Weighted Sample Mean of Sample Mean of 5 (or Weighted Sample Mean of 5 Largest Shareholding 5 (or less) Largest less) Smallest (or less) Largest Shareholding Categories Shareholding categories Shareholding Categories categories

64.60%

71.17%

8.71%

5.67%

Table 4, shows that when we use the weighted averages the sample mean for largest shareholding categories goes higher, from 64.6% to 71.17% while the shareholding average % for smallest category goes down from 8.71% to 5.67%. This suggests that the weight of the larger companies pulls the percentage shareholding more in favour of concentration. The dilution of share ownership in the smaller firms is not high enough to neutralize the effect of higher concentration in larger firms, hence suggesting an even higher concentration of shares with a few individuals than the data initially suggested.

24

Corporate Governance in Pakistan - Adopt or Adapt? The Code of Corporate Governance, which focuses on solving the corporate governance issues for shareholders, assumes dilution of ownership. In Asia however, the dilution is extremely limited. Another thing that this data has not accounted for is proxy ownership. There may be individuals owning shares of the companies in their own name, but acting as proxies for the majority shareholders. If that is the case then the dejure concentration of shareholder is far more than can be seen from the data.

The concentration of ownership in Pakistan can be attributed to the underdevelopment of institutions and capital markets. Firms need to have highly complex (formal and/or informal) relationships with one another, to make up for the lack of exogenous institutional support. Family ownership facilitates transactions, thus minimising transaction costs. On the other hand with pyramiding and cross-shareholdings, the controlling shareholders can get higher rents, than they would if they paid out dividends.

Another phenomenon observed in the sample annual reports was that the largest 5 shareholders were corporate entities or financial institutions. Hasan (1997) argues that there has been a trend since the 1960s whereby the family members of big business groups in Pakistan have political clout, and hence acquired positions on the boards of different financial institutions that were formed to fulfil the financial requirements of the private sector. This led to an overlap of interests demonstrated in credit raised from sources like the National Investment Trust (NIT) resources and its extension to the business houses. For example, in the 1970s Ahmad Dawood played a dual role as the director of NIT and as an equity owner in the Dawood group investments. Such a path dependency in Pakistan shows that the concentration of ownership structure is not limited to the firm itself, it extends to other institutions like financial institutions as well.

There is little motivation for the traditional big family-owned companies to raise capital from the stock exchange. They skip dividend payments year after year; on the pretext of ploughing back the profits into the business. The public money raised at the stock exchange is tunnelled to associated holdings of the public company. Due to the opaqueness of the family-owned system, and block holding, it becomes very hard to

25

Corporate Governance in Pakistan - Adopt or Adapt? ascertain where this money was utilized. To be able to maintain a position of control via concentrated ownership, family controllers in Pakistan seldom trade company shares. They have much more to gain by retaining opaqueness and control, than to raise more capital by allowing ownership dilution.

Interviews with the SECP officials suggested that most of the companies were in fact complying with the Code. Compliance with the Code in itself does not mean that the ownership structures of the firm would change, and unless these structures change, the Code will have little impact on the economy. This is because the Code draws on the Anglo-Saxon model of corporate governance, with its thrust on protecting the minority shareholders, in order to ensure efficiency in the company. In Pakistan as the data presented in this section shows, the percentage of minority shareholders is too low to ensure productivity in the firm, even if their interests are protected. It is imperative, as claimed by the complementarity arguments (Schmidt et al., 2000; Coffee 1999) that the Codes objectives and the means of achieving those objectives match the structural set up of at least the listed companies.

2.3.4 Corporate Culture Bringing about changes in a culture is a very slow process. However, foreign companies and institutional investors tend to bring about change faster than local entities. Unfortunately, foreign investors shy away from Pakistan, due to its sociopolitical volatility, economic instability, and poor governance within the organisations. This means that Pakistan is caught in a Catch-22, whereby deep meaningful cultural changes that pave way for good corporate practices can result from the presence of international investors; and on the other hand international investors would choose to invest in Pakistan only when the governance of its economy improves.

It is highly unlikely that the rules and business institutions that reformers wish to incorporate for better governance, would work unless they match the politics of the country. As Roe (2003) espouses, if the institutions in a country dont mesh well with the underlying political foundations, reformers need to understand that fixing the

26

Corporate Governance in Pakistan - Adopt or Adapt? institutions mechanics to complement the political foundations will be an uphill climb.

Culture may change as corporate structures change, however if a particular set of cultural traits is too deeply embedded in the society, that it fits many institutions, then it will not change if it is impeding the objectives of one institution (Roe, 2002). In Pakistan, a change in cultural traits cannot occur if the regulatory institutions desire the change only.

With the ownership of financial instruments being concentrated, the number of traders in the market is smaller for these instruments making them less liquid, which in turn reduces the exit option of the small shareholder. Understanding this phenomenon, investors in Pakistan do not enter these markets as frequently as they would enter a more developed instruments market. Khwaja et al (2004) clearly point out that in terms of direct costs the price manipulation done by insiders i.e. the brokers when acting for themselves would discourage investors to invest in the stock market. Corporate governance code in isolation, hence, can achieve little until and unless reforms are extended to complementarity institutions, the stock markets being one of the most important. From policy perspective the goal of Corporate Governance reforms should not be to emulate the Anglo-Saxon model of good governance. The regulators should not try to force a change in ownership structures; instead they should facilitate efficient use of capital. Co-ordinating simultaneous change in

multiple institutions is almost impossible. Policymakers need to emphasise on medium- to long-term planning, and more importantly phased-implementation of these plans. Scope of further research exists in identifying the motivators for firms and corporate sector that may bring about a voluntary change and acceptance of good governance.

Conclusion

The belief that corporations need to be governed in order to mitigate the agency problem that arises between owners and managers due to information asymmetries and incomplete contracts-- the Berle and Means widely held companywas until

27

Corporate Governance in Pakistan - Adopt or Adapt? quite recently, very popular between academic, institutional, regulatory and policymaking circles. However, there is increasing evidence suggesting in developing and transition economiesand even some developed economiesall over the world display ownership structures that do not adhere to the Berle and Means image of a corporation. Studies that look outside the US, particularly into those countries with weak shareholder protection, find that even the largest companies have concentrated shareholding patterns, and thus face a different kind of agency problem. La Porta et al. (1998) discover that the agency problem in large corporations all around the world entails restricting expropriation of minority shareholders by the controlling shareholders, rather than that of restricting empire building by professional managers accountable to shareholders. The results of our study reinforce the point that agency problems differ according to the economic conditions, ownership structures, capital market development, cultural underpinnings and institutional capacity. The empirical question that this study poses is whether or not an Anglo-Saxon corporate governance model that is formulated in a particular corporate context, be applicable to a country like Pakistan that displays very different business and socio-economic characteristics. Given the multitude factors, the interactions of which forms the corporate framework of any country, the study was not expected to give any straightforward answers. This thesis was expected to explore the factors that may potentially impede an effective implementation of good governance in Pakistan. Based on the findings of this study we postulate that before abstract notions of corporate governance are imposed by the regulatory forces in Pakistan, it is imperative that the policy makers understand the dynamics of decision-making, loci of power, the various market inefficiencies and their costs, the social embeddedness of existing governance mechanisms, and above all the role played by various organizational forms and boards in the country's development are understood. If the SECP and stock exchanges try to adopt good governance practices by forcing them on the corporate sector of Pakistan, it is our premise that, such a move would be extremely counter productive to the economy as a whole. We, therefore, strongly recommend that the Code of Corporate Governance by implemented through an iterative process that is phased out over a long-term period. One of the essential

28

Corporate Governance in Pakistan - Adopt or Adapt? features of this phased implementation should be the focus on developing other support institutions simultaneously. Any amount of corporate governance reform cannot work in isolation due to the very nature of good governance. Creating a snug fit between the on-paper policies and de facto implementation can ensure effective governance of the corporations. To achieve this fit, policy-makers need to be appreciative of the uniqueness of the corporate culture of Pakistan and incorporate it in any structural or market reforms that entail good governance. There is a dire need for further research in Pakistan on not only corporate governance, but also in the peripheral areas of ownership structures, and key market forces that impact the dynamics of companies and institutions. These forces need to be identified and understood before they can be used to benefit the economy. This warrants empirical time-series based research on the performance of firms to study increases in productivity, if any, which may have resulted from the introduction of the Code of Corporate Governance. It would also be interesting to see the role of institutional investors, both national and international, in bringing about good governance practices in Pakistan. Exploring these further research areas is extremely important for making sensible policy recommendations. For the time being though, it is safe to conclude by saying that adopting an international code of corporate governance without adapting it to local needs and requirements, will not have the positive impact that is hoped to be brought to the corporate sector through this Code.

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Corporate Governance in Pakistan

Appendix A
A.1 Shareholding patterns of smallest five categories of shareholders
Percentage of Smallest Five (or less) Shareholdings
COMPANIES Jubilee Spinning and Weaving Mills Ltd. Aventis Limited Fauji Fertilizer Company Limited Unilever Pakistan Limited Bawany Air Products Limited Pakistan Synthetics Limited Pak Leather Crafts Limited Taga Pakistan Limited Genertech Pakistan Limited National Bank of Pakistan Engro Chemical (Pakistan) Limited Fauji Fertilizer Bin Qasim Limited Pakistan PTA Limited Burewala Mills Limited Polypropylene Products Ltd. Pakistan Oilfields Limited Sui Nothern Gas Pipelines Limited Nadeem Textile Mills Limited Blessed Textiles Limited Bhanero Textile Mills Limited Sapphire Textile Mills Limited Gammon Pakistan Limited HajraTextile Mills RafhanMaize Products Co. Ltd. Shezan International Limited Gandhara Nissan Limited Kohinoor Genertek Limited Maple Leaf Cement Factory Limited Sui Southern Gas Company Limited Muslim Commercial Bank Limited STANRDARD DEVIATION OF SAMPLE SAMPLE MEAN TOTAL SHAREHOLDING % 12.4 3.9 2.5 9.9 46.1 20.0 7.8 7.3 1.0 2.5 9.4 2.0 1.2 13.6 16.7 0.1 3.4 13.6 7.4 2.9 0.7 27.5 7.4 2.9 1.8 12.9 12.1 6.0 1.8 6.2 9.6 8.8 NO.OF SHAREHOLDERS 1147 834 3571 4491 550 18 509 337 3215 9484 8579 12114 16522 1771 1501 1 17856 115 670 216 7 2737 642 1079 8 2948 1623 9145 10507 48379

5352.5

Z-TEST SI checked against 15%

-3.6

(critical value -1.64)

A.2 Shareholding patterns of largest five categories of shareholders

Percentage of Largest Five (or less) Shareholdings
COMPANIES Jubilee Spinning and Weaving Mills Ltd. Aventis Limited Fauji Fertilizer Company Limited Unilever Pakistan Limited Bawany Air Products Limited Pakistan Synthetics Limited Pak Leather Crafts Limited Taga Pakistan Limited Genertech Pakistan Limited National Bank of Pakistan Engro Chemical (Pakistan) Limited Fauji Fertilizer Bin Qasim Limited Pakistan PTA Limited Burewala Mills Limited Polypropylene Products Ltd. Pakistan Oilfields Limited Sui Nothern Gas Pipelines Limited Nadeem Textile Mills Limited Blessed Textiles Limited Bhanero Textile Mills Limited Sapphire Textile Mills Limited Gammon Pakistan Limited HajraTextile Mills RafhanMaize Products Co. Ltd. Shezan International Limited Gandhara Nissan Limited Kohinoor Genertek Limited Maple Leaf Cement Factory Limited Sui Southern Gas Company Limited Muslim Commercial Bank Limited STANRDARD DEVIATION OF SAMPLE SAMPLE MEAN TOTAL SHAREHOLDING % 24.2 81.4 65.3 80.7 64.0 31.6 57.3 92.7 29.8 81.1 39.2 83.0 95.0 54.7 40.0 99.9 70.4 78.0 50.2 50.6 99.3 22.8 30.7 86.3 99.8 79.5 64.5 68.5 87.1 30.3 24.8 64.6 NO.OF SHAREHOLDERS 5 5 5 5 5 5 6 10 5 5 5 5 5 5 6 3 5 5 5 5 1 8 5 6 1 5 5 5 5 5

5.0

Z-TEST SIGNIFICANCE LEVEL checked against 50%

3.2

Corporate Governance in Pakistan

A.3 Turnover and capital account details of recently listed firms (example set)*
S. No Name of Company Year of listing Paid up Capital 2003 (Million of Par value of Rupees) Shares Year ending No of Outstanding Shares A 35350800 147561300 24186000 15000000 60000000 72162900 175046600 410342200 15000000 53000000 7999800 193469600 90000000 1514207200 73403100 99321200 159264300 22100000 6157600 5002300 15596900 18000000 24200000 185000000 20000000 10000000 77500000 8174700 37400000 Turnover of Shares 2003 B 9205500 82028000 1140500 NT 505203000 NT 196826500 1503450000 1567153500 11903500 105500 425500 1295500 4116000 1492391500 921239500 11001500 694635500 451500 800 4693100 423200 206000 692500 34902000 NT 2697500 12714000 16897000 15470000 % Turonver of Shares 2003 (B/A)*100 26.04 55.59 4.72 842.01 272.75 858.89 381.91 79.36 0.20 5.32 0.67 4.57 98.56 1255.04 11.08 436.15 2.04 0.01 93.82 2.71 1.14 2.86 18.87 26.98 16.41 206.70 41.36

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

D.G. Khan Cement (R.C Perf.) 10% Mashreq Bank Pakistan Nagina Cotton Mills (R.C.Pref) 13% Security Leasing Corp. (Pref) 9.1% TRG Pakistan "A" TRG Pakistan "B" Attock Cement Pakistan Limited Bosicor Pakistan Limited National Bank of Pakistan Natover Lease & Refinance (Pref) l5% WorldCALL Multimedia Limited Arif Habib Securities Limited Bestway Cement Limited Fayzan Manufacturing Modaraba Pakistan PTA Limited Dewan Farooque Motors Limited Meezan Bank Limited WorldCALL Communications Ltd. Altern Energy Limited Rafhan Bestfoods Limited Refrigerators Manufacturing Co. Clairant Pakistan Limited Grays Leasing Company Nina Industries Limited Saadi Cement Limited Sigma Leasing Corporation Limited Al Khair Gadoon Limited Al Meezan Mutual Fund Limited Askari General Insurance Co. Ltd. BSJS Balance Fund Limited

2003 2003 2003 2003 2003 2003 2002 2002 2002 2002 2002 2001 2001 2001 2001 2000 2000 2000 1998 1998 1998 1997 1997 1997 1997 1997 1996 1996 1996 1996

September December September June June June June June December June June June June December December June December June June December December December June June June June June June December June

353508000 1475613000 241860000 150000000 600000000 120000000 721629000 1750466000 4103422000 150000000 530000000 79998000 1934696000 900000000 15142072000 734031000 993212000 1592643000 221000000 61576000 50023000 155969000 180000000 242000000 1850000000 200000000 100000000 775000000 81747000 374000000

10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10 10

*Note: The above table is an abridged version of dataset used (comprising of 709 firms) and is for illustration purposes only.