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

Overstatement of profits by $3.8 billion

Illegal loan to founder Gross misuse of power by directors Overstatement of earnings by $17 billion over 6 yrs

Adelphia Communications

Enron

Waste Management Inc.

Some Scandals in USA - 2

Tyco

Evasion of sales tax on personal purchases.

Overstatement of earnings by $100 million. Insider trading by CEO Accounting and securities fraud.

Peregrine Systems

Imclone Systems

Rite Aid

Some Scandals in UK

BCCI

Improper accounting and policies

Ineffective internal controls, $1.4 billion loss Gross misappropriation of funds including pensions Diversion of funds to personal use.

Barings Bank

Mirror Group

Polly Peck

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