A Brief History of

Corporate
Governance
Dr Safdar A Butt

CG as field of study

CG has existed for as long as

companies have existed.
But as a field of study it is less than 70
years old.
Last 40 years:
A lot of activity in this field.
Codes, reports and laws have come out.
Number of research papers and theories
have evolved.

Corporate Wrongs -1

Loss of ethics
Earnings became every thing.
Ineffective boards, smart executives.
Huge remunerations for executive
directors.
Greed leading to disparity among
senior managers and other
employees.

Corporate Wrongs - 2

Short term goals and considerations.

Collusion between directors and
auditors.
Pressure from institutional investors
Loss of interest by small investors in
big companies.
In Pakistan, family control of
companies.

Some Scandals in USA -1

WorldCom

Adelphia Communications

Illegal loan to founder

Enron

Overstatement of profits by $3.8 billion

Gross misuse of power by directors

Waste Management Inc.

Overstatement of earnings by $17 billion

over 6 yrs

Some Scandals in USA 2

Tyco

Peregrine Systems

Overstatement of earnings by $100 million.

Imclone Systems

Evasion of sales tax on personal purchases.

Insider trading by CEO

Rite Aid

Accounting and securities fraud.

Some Scandals in UK

BCCI

Barings Bank

Ineffective internal controls, $1.4 billion loss

Mirror Group

Improper accounting and policies

Gross misappropriation of funds including

pensions

Polly Peck

Diversion of funds to personal use.

Some Scandals in
Pakistan

Crescent Bank
Islamic Investment Bank
Bankers Equity
Pakistan Steel Mills
Indus Bank

Evolution of CG

Cadbury Report 1992, UK

Greenbury Report 1995, UK
Hampel Report 1998, UK
Combined Code 1998, UK
Turnbull Report 1999, UK
OECD Principles of CG, 1999

OECD Principles

Rights of shareholders must be

protected.
All shareholders to be treated equitably.
All stakeholders to be allowed to play
due role.
Timely and accurate disclosures.
Accountability and responsibility of
directors.

More Reports

Basle Committee Guidelines 1999 (banks)

Myners Report 2001, UK
Cromme Report 2002, Germany
Higgs Review 2003, UK (INEDs)
Smith Report 2003, UK (Audit committees)
Revised Combined Code, 2003, UK
Kings Reports 1994, 2000, 2009, South
Africa
Sarbanes Oxley Act 2002, USA

CG Models

Anglo American Model (AAM)

Japanese Model
German Model

Anglo American Model

Free economy based: Market sets the price

of capital and expectations of returns.
Company runs for shareholders benefits,
i.e. to maximize their wealth.
Triangular structure:
SH/Board/Management
Most companies run by people owning less
than a quarter of the company.
Major agency and CG issues.

Japanese CG Model

Keiretsu system of ownership:

Large groups own the companies.
Inter-locking directorates and
shareholding.
All policies made by the group.
Group funds, controls and helps where
needed.
Management kept alert all the term.
Agency issues still persist.

German CG Model

Group ownership is common. Strong

hold of investors over the boards.
Two tier boards by law.
Representation of workers and
shareholders in Supervisory Board.
Size of Supervisory Board cannot be
changed by the company; regulated
by law.

CG Related International
Bodies

World Bank and IMF

Global CG Forum
International CG Network
Commission on public trust and
private enterprise.

The Two Perspectives

CG problem in West
CG problem in Pakistan

Thank you.
S A Butt