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Stakeholders Approach to Corporate Governance of Banks- The German Model

LETTER OF TRANSMITTAL
Mr. Banking Policy & Regulation Department State Bank of Pakistan Karachi. Dear Sir, Please accept our internship report on Stakeholders Approach to Corporate Governance of Banks- The German Model During the process of preparing this report, we have learnt valuable amount of practical Knowledge regarding the corporate governance practices and prevailing laws and regulation in Pakistan. We hope the work comes up to your expectations. Yours Sincerely, Mr. Mehtab Hussain Shah Project Supervisor, Assistant Director, BPRD Dated: August 03, 2012

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Stakeholders Approach to Corporate Governance of Banks- The German Model

ACKNOWLEDGEMENTS

In the Name of ALLAH, the Most BENEFICIENT, the Most Merciful:


All praise is for due to ALLAH, to who belongs, the dominion of the Heaven and the Earth. Peace and mercy be upon His Prophet who gave us the way of peace and real success in our lives. We thank our ALMIGHTY ALLAH who furnished us with the essential knowledge and patience to carry out such a challenging,, we must acknowledge the continuous motivation and prayers of our parents which are always there for helping us reaching at major milestones of our life. We would like to offer our indebtedness and sincere appreciation to our projects supervisor Mr. Mehtab Hussain Shah, Assistant Director, BPRD and our training coordinator Mrs. Gulzar Amin Merchant, Deputy Director. During the course of the report, they were always available and ready to help even at the very busy hours of their work. We would also like to thank Mr. Muhammad Ali, Assistant Director, Training and Development Department for arranging orientation of different departments and divisions of SBP to increase our understanding of the functions of SBP. In the last but not the least, we would like to thank our teachers without whom we would not be able to get such a big opportunity.

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Stakeholders Approach to Corporate Governance of Banks- The German Model

Table of Contents
Table of Contents................................................................3 Corporate Governance- An Overview: ...................................................................................4 Some Definitions of Corporate Governance:.......................................................................5 Role of Banks and Good Corporate Governance:...................................................................5 Background:....................................................................................................................... 7 Stakeholders:......................................................................................................................... 8 Banks and the stake holders:............................................................................................. 9 Employees:.................................................................................................................... 10 Shareholders:................................................................................................................ 10 Board of Directors:........................................................................................................ 11 Management:................................................................................................................ 11 Clients:.......................................................................................................................... 12 Customers:.................................................................................................................... 12 Three Models of Corporate Governance from Developed Capital Markets...........................15 Introduction ..................................................................................................................... 15 The Anglo-US Model............................................................................................................. 16 Key Players in the Anglo-US Model ..................................................................................16 Share Ownership Pattern in the Anglo-US Model..............................................................17 Composition of the Board of Directors in the Anglo-US Model..........................................17 Disclosure Requirements in the Anglo-US Model..............................................................18 Corporate Actions Requiring Shareholder Approval in the Anglo-US ................................18 Interaction among Players in the Anglo-US Model............................................................19 The Japanese Model............................................................................................................. 20 Key Players in the Japanese Model...................................................................................20 Share Ownership Pattern in the Japanese Model..............................................................21 Composition of the Board of Directors in the Japanese Model..........................................21 Regulatory Framework in the Japanese Model..................................................................22 Disclosure Requirements in the Japanese Model..............................................................22 Corporate Actions Requiring Shareholder Approval in the Japanese Model......................23 Interaction Among Players in the Japanese Model............................................................24 Regulatory Framework in the German Model:..................................................................27 Disclosure Requirements in the German Model:...............................................................27 Corporate Actions Requiring Shareholder Approval in the German Model:.......................28 German Panel on Corporate Governance: ...........................................................................30 Institutional Ownership........................................................................................................ 40

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Stakeholders Approach to Corporate Governance of Banks- The German Model


Issues involved in Institutional Shareholding ...................................................................41 Institutional Investors in Pakistan........................................................................................42 Legal Conditions in Pakistan................................................................................................ 44 Institutional Activism in Pakistan......................................................................................46 Corporate Governance in Pakistan; a review.......................................................................47 Anglo-American Model Adopted by Pakistan:.......................................................................49 Recommendations:.............................................................................................................. 50 Current Challenges and Suggested Measures:....................................................................57 Additional Measures:........................................................................................................ 59 Work Cited........................................................................................................................... 62

Corporate Governance- An Overview:


In discussing the corporate governance, first we need to have a full understanding of what governance is. To govern means to run and rule over an institution with the authority in policies and procedure of that institution. Similarly governance is the central point of efforts in order to ensure the best value of money. Governance in an organization is important to ensure the quality of their products and their efficiency. . In this global world every business or institution need to be governed by some set of rules made by the board of directors of that institution or business. The rules must reflect the interest of all the related stakeholders irrespective of any discrimination. Countries that pay no attention to the corporate governance reforms will quickly find themselves in difficulty as compared to others in pulling the long term resources (Capital) for the purpose of growth. Corporate Governance on one hand deals with a system of assigning managers and directors with responsibilities in order to run the business dealings and, on the other hand, it is anxious with the accountability of those managers and directors on their responsibilities. A corporation is needed to be run by using several golden principles that lies in the concept of accountability, transparency, fairness, honesty, and responsibility. the responsibilities are mapped both vertically and horizontally among the directors and managers so that they should make the decisions without any bias towards a certain class of society i.e. once a decision is made it should be known to all the people who are related with the corporation or
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Stakeholders Approach to Corporate Governance of Banks- The German Model business. All the decisions taken should be transparent so that no question should be posed against any of them. This could be done easily by both internal and external audit systems.

Some Definitions of Corporate Governance:


There are a lot of definitions to the corporate governance and we will discuss some of the popular definitions here in this section. "It is a system by which companies are directed and controlled." (Cadbury Committee) "A set of relationship between a company's management, its board, its shareholders, and other stakeholders is CG. Corporate Governance also provides the structure through which the objectives of a company are set, and the means of attaining those objectives and monitoring performances are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives which are in the interest of the company and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently." (OCED) We can define it as follow; ''Corporate Governance is the system in which businesses and corporations are controlled by some personals such as Board of directors, shareholders, managers, regulators and stakeholders. These personals are provided with some powers and rights and at the same times some responsibilities too, so that they could exercise their powers effectively and use the available resources efficiently to produce quality output."

Role of Banks and Good Corporate Governance:


Banks play an important role in boosting the economy of a country. Their role varies from one model to another. This is due to the banks function as credit issuers, as banks still remain main donor of credit to almost all of the markets (economies) in the world, to their borrower monitoring task, as well as to their ownership functions done within corporations or banks. Banks are also business units and as such they rank among some of the largest corporations on a global, regional and local scale. The interest in corporate governance in
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Stakeholders Approach to Corporate Governance of Banks- The German Model banking has been growing in recent years, primarily because of the sustained high share of debt financing of the economy, systemic transformations taking place in many countries, and the role of banks in ensuring financial stability. In Pakistan, we have been witnessing significant changes in the banking sector over the last decade or so, following start of the liberalization of the financial system and privatization of the nationalized banks (except NBP) and emergence of a few new private banks. As a result, the ownership structure of some banks and the entire banking system has changed which emitted significant improvements in the banking industry of Pakistan and enabling it to be ranked on scale of global admiration. The purpose of the study is to make an assessment of the corporate governance of banking industry considering different approaches adopted by the stakeholders worldwide with a view to improve the governance structure of Pakistani banking industry. Banks are a critical component of any economy. Corporate governance is important in banks because: a.) They provide financing for commercial enterprises, basic financial services to a broad segment of the population and access to payment systems. b.) In addition, some banks are expected to make credit and liquidity available in difficult market conditions. c.) The importance of banks to national economies is underscored by the fact that banking is, almost universally, a regulated industry and that banks have access to government safety nets. It is of crucial importance therefore that banks have strong corporate governance. Although, banks are similar to other firms in terms of the composition of shareholders, debt holders, board of directors, competitors, etc, there in one important distinction between banks and other firms. The nature of transaction banks are involved in suggests that banks are expected utility maximize, (sometimes, it takes more than 20 years to complete a transaction). As a result, the risk factor increases substantially and hence risk management becomes important. In an emerging economy where banks are the main source of generating savings and investment, these concerns are even more important.

Corporate Governance in Pakistans Banks:


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Stakeholders Approach to Corporate Governance of Banks- The German Model State Bank of Pakistan, during 1990s and the decade that follows it, has implemented policies to improve and reform the banking sector in Pakistan. These reforms were initiated in 1990s and were slow in nature at the start. Although slow, these reforms have been consistent and continuous recently. As a result of these reforms, the commercial banking industry in Pakistan has taken a new shape and is working on a new vision. Part of these reforms is also related to the issue of corporate governance of banks in Pakistan. This is the main focus of the remainder of this study. It is, however, imperative to have a brief discussion of the banking sector restructuring before we embark on the issue of corporate governance.

Background:
At the time of independence, out of 99 commercial banks only one, Habib Bank, had its head office located in the area that was to become the new country named Pakistan. From 1947 to 1974 the banking sector grew rapidly. The private sector started investing in the commercial banks with branching network. In 1974 the ruling political party decided to nationalize the banks which were working at that time. These banks were collectively called as nationalized commercial banks (NCBs). In 1980s the military regime decided to denationalize the banks with a purpose of to enhance competition among the banks. Following policies were introduced: a). The partial deregulation of interest rates. b). The expansion rates of NCBs were reduced deliberately. c.) Foreign banks were allowed entry in order to improve the competition by providing those licenses.

Developments in Governance Structure of Pakistani Banks :


Across the globe particularly in the aftermath of the 1997 Asian financial crisis, the basic objective of good corporate governance is to avoid the events of banks failures and run-onbanks. The issue of corporate governance of banks in Pakistan received special attention because Pakistani regulatory authorities took necessary measures of including restructuring and privatization of the financial institutions at the same time when deliberations were underway to devise some code of ethics for corporate governance of the financial and corporate sector including banks. A major step towards good corporate governance was a joint project by the Securities and Exchange Commission of Pakistan and the UNDP (SECP-UNDP) in
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Stakeholders Approach to Corporate Governance of Banks- The German Model collaboration with the Economic Affairs Division (EAD) of the Ministry of Finance. The project was launched in August 2002 with the objective to design, develop and implement a Code of Corporate Governance. Though this project had some discussion on corporate governance for banks but its main focus was the corporate sector in Pakistan and issued measures to create stakeholder awareness, capacity building and networking with other emerging economies. To address the problems of banking sector, the State Bank of Pakistan (SBP) issued a Handbook of Corporate Governance in 2003. The objective of this handbook is to provide guidelines for Board of Directors, managers and shareholders. Most of the recommendations and guidelines stated in the handbook are directly drawn from the recommendations made by Basel Committee on corporate governance and OECD. These guidelines cover four important areas, namely, Board of Directors, Management, Financial Disclosure, and Auditors.

Stakeholders:
A corporation enjoys the status of a separate legal entity; however, the formation of a public listed company is such that its success is dependent upon the performance of a contribution of factors encompassing a number of stakeholders. A stakeholder is a person (including an entity or group) that has an interest or concern in a business or enterprise though not necessarily as an owner. The ownership of listed companies is comprised of a large number of shareholders drawn from institutional investors to members of public and thus it is impossible for it to be managed and controlled by such a large number of diversified minds. Hence, management and control is delegated by the shareholders to agents called the Board of directors. In order to achieve maximum success, the Board of directors is further assisted by managers, employees, contractors, creditors, etc. Therefore it is imperative to recognize the importance of stakeholders and their rights. Communication with stakeholders is considered to be an important feature of corporate governance as cooperation between stakeholders and corporations allows for the creation of wealth, jobs and sustain ability of financially sound enterprises. It is the Board's duty to present a balanced assessment of the company's position when reporting to stakeholders. Both positive and negative aspects of the activities of the company should be presented to give an open and transparent account thereof. The annual report is a vital link and, in most instances, the only link between the company and its stakeholders. The Companies Ordinance requires
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Stakeholders Approach to Corporate Governance of Banks- The German Model directors to attach in the annual report a directors' report on certain specific matters. The Code expands the content of the directors' report and requires greater disclosure on a number of matters that traditionally were not reported on. The aim is for the directors to discuss and interpret the financial statements to give a meaningful overview of the enterprise's activities to stakeholders and to give users a better foundation on which to base decisions. Specific emphasis has been placed upon the fiduciary obligations of directors and hence the need to understand the implications of such obligations also arises.

Banks and the stake holders:


When a bank is established some of the core values are set, some mission statements are shaped. Some of the objectives are given as under. Creating a distinctive brand identity by providing the highest standards of services. Adopting the best international vu solutions copy right data management practices Maximizing stakeholder's value. Discharging their responsibility as a good corporate citizen of Pakistan and in countries Where they operate And some of the core values are also considered like: Highest standards of Integrity. Institutionalizing team work and performance culture. Excellence in service. Advancement of skills for tomorrows challenges. Awareness of social and community responsibility. Value creation for all the stakeholders. There are some entities which are related to banks, directly or indirectly, known as stakeholders of the banks. A person, group, or organization that has direct or indirect stake in an organization because it can affect or be affected by the organization's actions, objectives, and policies.
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Stakeholders Approach to Corporate Governance of Banks- The German Model

Key stakeholders in a business organization include creditors, customers, directors, employees, government (and its agencies), owners (shareholders), suppliers, unions, and the community from which the business draws its resources. Shareholders Board of Directors Management o CEO o Key Executives Clients/Customers Pier Groups Government Regulators Employees Creditors Employees: There is widespread agreement that they are a prime stakeholder. They work in the corporations (company) or in the banks. The primary interest of the employees should be the profit maximization of their firm which is indirectly related with their benefit i.e. if a corporation or bank functions well then it will provide bonuses to their employees. Shareholders: A shareholder is a one who holds stocks of a company/ bank. A share holder has the right to vote in certain matters of the company. For each share a shareholder owns he earns some dividend, which is some amount of money given to shareholder yearly/monthly/quarterly/semi annually depending on the nature of the share.

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Stakeholders Approach to Corporate Governance of Banks- The German Model The objective of share holders is to maximize their profit i.e. get the shares of the company whose dividends are high. Board of Directors: The Board of Directors has most of the powers to take decisions in respect of loans, guarantees and borrowings as well as seeing that the Bank is properly run, it ensures that the Bank is managed in keeping with the provisions of the Treaty and the Statute. The board of directors is selected by share holders in general elections/ meetings. Once they are selected there are some responsibilities which they need to fulfill: The board of directors will be responsible for the review and update of the existing policies. The board will ensure effective Management information system to cater the needs of changing markets conditions. The board of directors should clearly define the authorities and key responsibilities of both directors and senior management. The board of directors should meet frequently i.e. in monthly or weekly basis in order to discuss the matters of the corporation or bank. Management: The management includes CEO and other key executives who act as custodians of their respective departments. They are answerable to the BODs on the matters and decision of the departments in the banks. However, the banks are required to adhere to the SBPs guidelines including the Fit and Proper Test Criteria for the appointment of CEOs and key executives, non compliance to which may result into punitive actions against the banking company. The key criterions of the Fit and Proper test include: The incumbent should have a track record of Honesty, integrity and reputation, not convicted of any criminal offence including fraud or financial crime. Should be competent and capable of fulfilling his/her duties, having adequate qualification and experience. Should not have been removed/ dismissed from service in the capacity of an employee, director or chairman on account of financial crime or moral conduct. Should not be defaulter of payment(s) due to any financial institutions or tax office.
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Stakeholders Approach to Corporate Governance of Banks- The German Model Should not supervise more than one functional areas that give rise to conflict of interest within the banking company and should not hold directorship of a company that is a client to the bank. Clients: There are some of the discussions about the differences between clients and the stake holders. One of the differences told by Dr. Ichak Adizes was Stakeholders are all those who have a stake in the organization, i.e., who have a certain interest in the existence of the organization, but the organization does not EXIST for the stakeholder. It tries to satisfy the needs of stakeholders by satisfying the needs of its clients. Stakeholders are the driven force. Not the driving force. Clients are the purpose for which the organization exists and stakeholders are all those interests, internal and external, that came together for the purpose of satisfying client needs and in doing so expect some return for their effort.

Creditors: Creditors rights are often protected under contract and backed by collateral so they are seldom treated as owners as the shareholders are treated. Future generations: Sustainable development is at the center of the stakeholder debate and this suggests a responsibility to future generations --those who will one day be reliant upon the physical environment-- as a stakeholder group. Sometimes they are included as stake holders and sometimes not. Customers: A customer can be external or internal to banks. Our understanding of our

customers/stakeholders should be at a depth appropriate to our role. When you demonstrate this level of understanding, it enables you and banks to deliver a comprehensive service with impact for customers/stakeholders. You are responsive to customer and stakeholder needs and understand the business environment in which they operate. You also appreciate the diverse challenges they face and maintain an impartial and independent view, as necessary.
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Stakeholders Approach to Corporate Governance of Banks- The German Model

Types of Stakeholders:
Stakeholders are people/communities who may - directly or indirectly, positively or negatively affect or be affected by the outcomes of projects or programs. 2.2.1 Primary stakeholders are the beneficiaries of a development intervention or those directly affected (positively or negatively) by it. They include local populations (individuals and communitybased organizations) in the project/program area, in particular, poor and marginalized groups who have traditionally been excluded from participating in development efforts. 2.2.2 Secondary stakeholders are those who influence a development intervention or areindirectly affected by it. They include the borrowing government, line ministry and project staff, implementing agencies, local governments, civil society organizations, private sector firms, the Bank and its shareholders and other development agencies. 2.2.3 A key element in participatory development is the ability to identify stakeholders, their needs, interests, relative power and potential impact on project outcomes. Stakeholder analysis, as described

Groups / individuals that are affected by and/or have an interest in the operations and objectives of the business

Stakeholder groups vary both in terms of their interest in the business activities and also their power to influence business decisions. Here is a useful summary :

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Stakeholders Approach to Corporate Governance of Banks- The German Model

Stakeholder Shareholders Banks Lenders Directors managers Employees Suppliers Customers Community Government &

Main Interests dividends

Power and influence

Profit growth, Share price growth, Election of directors other Interest and principal to be repaid, Can maintain credit rating and Salary ,share options, satisfaction, status satisfaction & motivation Long term contracts, payment, growth of purchasing Reliable quality, value for money, Revenue Environment, local jobs, local impact Indirect Operate legally, tax receipts, jobs / via repeat local business and product availability, customer service Word of mouth recommendation planning opinion leaders Regulation, planning subsidies, taxation, job Make enforce decisions, turnover, loan have industrial covenants detailed action,

Can withdraw banking facilities information service quality prompt Pricing, quality, product availability

Salaries & wages, job security, job Staff

Stakeholder power is an important factor to consider whenever you are asked to write about the relationship between a business and its stakeholders. In the context of strategy, what is important is the power and influence that a stakeholder has over the business objectives. For stakeholders to have power and influence, their desire to exert influence must be combined with their ability to exert influence on the business. The power a stakeholder can exert will reflect the extent to which: The stakeholder can disrupt the business plans The stakeholder causes uncertainty in the plans The business needs and relies on the stakeholder The reality is that stakeholders do not have equality in terms of their power and influence. For example:

Senior managers have more influence than environmental activists


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Stakeholders Approach to Corporate Governance of Banks- The German Model

A venture capitalist with 40% of the companys share capital will have a greater influence that a small shareholder

Banks have a considerable impact on firms facing cash flow problems but can be ignored by a cash rich firm

A customer that provides 50% of a business revenues exerts significantly more influence than several smaller customer accounts

Businesses that operate from many locations across the country will be less relevant to the local community than a business which is the dominant employer in a town or village

Governments exercise relatively little influence on many well-established and competitive business-to-business markets. However their power is much stronger over businesses in markets which are regulated (e.g. water, gas & electricity) or where the public sector has a direct stake (e.g. retail banking)

Employees have traditionally sought to increase their power as stakeholders by grouping together in trade unions and exercising that power through industrial action. However, in the last two decades the level of union membership has declined significantly as has the total time lost to industrial act.

Three Models of Corporate Governance from Developed Capital Markets


Introduction
The corporate governance structure of joint stock corporations in a given country is determined by several factors: the legal and regulatory framework outlining the rights and responsibilities of all parties involved in corporate governance; the de facto realities of the corporate environment in the country; and each corporations articles of association. While corporate governance provisions may differ from corporation to corporation, many de facto and de jure factors affect corporations in a similar way. In each country, the corporate governance structure has certain characteristics or constituent elements, which distinguish it from structures in other countries. To date, researchers have identified three models of corporate governance in developed capital markets. These are the Anglo-US model, the Japanese model, and the German model.

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Stakeholders Approach to Corporate Governance of Banks- The German Model

The Anglo-US Model


The Anglo-US model is characterized by share ownership of individual, and increasingly institutional, investors not affiliated with the corporation (known as outside shareholders or outsiders); a well-developed legal framework defining the rights and responsibilities of three key players, namely management, directors and shareholders; and a comparatively uncomplicated procedure for interaction between shareholder and corporation as well as among shareholders during or outside the AGM.

Key Players in the Anglo-US Model


Players in the Anglo-US model include management, directors, shareholders (especially institutional investors), government agencies, stock exchanges, self-regulatory organizations and consulting firms which advise corporations and/or shareholders on corporate governance and proxy voting. Of these, the three major players are management, directors and shareholders: The Anglo-US model, developed within the context of the free market economy, assumes the separation of ownership and control in most publicly-held corporations. This important legal distinction serves a valuable business and social purpose: investors contribute capital and maintain ownership in the enterprise, while generally avoiding legal liability for the acts of the corporation. Investors avoid legal liability by ceding to management control of the corporation, and paying management for acting as their agent by undertaking the affairs of the corporation. The cost of this separation of ownership and control is defined as agency costs. The interests of shareholders and management may not always coincide. Laws governing corporations in countries using the Anglo-US model attempt to reconcile this conflict in several ways. Most importantly, they prescribe the election of a board of directors by shareholders and require that boards act as fiduciaries for shareholders interests by overseeing management on behalf of shareholders.

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Stakeholders Approach to Corporate Governance of Banks- The German Model

Share Ownership Pattern in the Anglo-US Model


In both the UK and the US, there has been a marked shift of stock ownership during the postwar period from individual shareholders to institutional shareholders. In 1990, institutional investors held approximately 61 percent of the shares of UK corporations, and individuals held approximately 21 percent. (In1981, individuals held 38 percent.) In 1990, institutions held 53.3 percent of the shares of US corporations. The increase in ownership by institutions has resulted in their increasing influence. In turn, this has triggered regulatory changes designed to facilitate their interests and interaction in the corporate governance process.

Composition of the Board of Directors in the Anglo-US Model


The board of directors of most corporations that follow the Anglo-US model includes both insiders and outsiders. An insider is as a person who is either employed by the corporation (an executive, manager or employee) or who has significant personal or business relationships with corporate management. management. A synonym for insider is executive director; a synonym for outsider is non-executive director or independent director. In response, individual and institutional investors began to inform themselves about trends, conduct research and organize themselves in order to represent their interests as shareholders. Their findings were interesting. For example, research conducted by diverse organizations indicated that in many cases a relationship exists between lack of effective oversight by the board of directors and poor corporate financial performance. In addition, corporate governance analysts noted that outside directors often suffered an informational disadvantage vis--vis inside directors and were therefore limited in their ability to provide effective oversight. Several factors influenced the trend towards an increasing percentage of outsiders on boards of directors of UK and US corporations. These include: the pattern of stock ownership, specifically the above-mentioned increase in institutional investment the growing importance of institutional investors and their voting behavior at AGMs; and recommendations of self-regulatory organizations such as the Committee on the
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An outsider is a person or

institution which has no direct relationship with the corporation or corporate

Stakeholders Approach to Corporate Governance of Banks- The German Model Financial Aspects of Corporate Governance in the UK and shareholder organizations in the US.

Disclosure Requirements in the Anglo-US Model


As noted above, the US has the most comprehensive disclosure requirements of any jurisdiction. While disclosure requirements are high in other jurisdictions where the Anglo-US model is followed, none are as stringent as those in the US. US corporations are required to disclose a wide range of information. The following information is included either in the annual report or in the agenda of the annual general meeting (formally known as the proxy statement): corporate financial data ( this is reported on a quarterly basis in the US); a breakdown of the corporations capital structure; substantial background information on each nominee to the board of directors (including name, occupation, relationship with the company, and ownership of stock in the corporation); the aggregate compensation paid to all executive officers (upper management) as well as individual compensation data for each of the five highest paid executive officers, who are to be named; all shareholders holding more than five percent of the corporations total share capital; information on proposed mergers and restructurings; proposed amendments to the articles of association; and names of individuals and/or companies proposed as auditors. Disclosure requirements in the UK and other countries that follow the Anglo-US model are similar. However, they generally require semi-annual reporting and less data in most categories, including financial statistics and the information provided on nominees.

Corporate Actions Requiring Shareholder Approval in the Anglo-US


The two routine corporate actions requiring shareholder approval under the Anglo-US model are elections of directors and appointment of auditors. Non-routine corporate actions which also require shareholder approval include: the establishment or amendment of stock option plans (because these plans affect executive and board compensation); mergers and takeovers; restructurings; and amendment of the articles of incorporation.

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Stakeholders Approach to Corporate Governance of Banks- The German Model There is one important distinction between the US and the UK: in the US, shareholders do not have the right to vote on the dividend proposed by the board of directors. In the UK, shareholders do vote on the dividend proposal. Anglo-US model also permits shareholders to submit proposals to be included on the agenda of the AGM. The proposals - known as shareholder proposals - must relate to Shareholders owning at least ten percent of a a corporations business activity. (EGM) of shareholders. In the US, the SEC has issued a wide range of regulations concerning the format, substance, timing and publication of shareholder proposals. The SEC also regulates communication among shareholders.

corporations total share capital may also convene an extraordinary general meeting

Interaction among Players in the Anglo-US Model


As noted above, the Anglo-US model establishes a complex, well-regulated system for communication and interaction between shareholders and corporations. A wide range of regulatory and independent organizations play an important role in corporate governance. Shareholders may exercise their voting rights without attending the annual general meeting in person. All registered shareholders receive the following by mail: the agenda for the meeting including background information an all proposals ("proxy statement"), the corporations annual report and a voting card. In the Anglo-US model, a wide range of institutional investors and financial specialists monitor a corporation's performance and corporate governance. These include: a variety of specialized investment funds (for example, index funds or funds that target specific industries); venture-capital funds, or funds that invest in new or "start-up" corporations; rating agencies; auditors; and funds that target investment in bankrupt or problem corporations. See the diagram "Diversified monitoring in Anglo-US Corporate Governance" for a pectoral explanation of this phenomenon. In contrast, one bank serves many of these (and other) functions in the Japanese and German models. As a result, one important element of both of these models is the strong relationship between a corporation and its main bank.

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Stakeholders Approach to Corporate Governance of Banks- The German Model

The Japanese Model


The Japanese model is characterized by a high level of stock ownership by affiliated banks and companies; a banking system characterized by strong, long-term links between bank and corporation; a legal, public policy and industrial policy framework designed to support and promote keiretsu (industrial groups linked by trading relationships as well as cross-shareholdings of debt and equity); boards of directors composed almost solely of insiders; and a comparatively low (in some corporations, non-existent) level of input of outside shareholders, caused and exacerbated by complicated procedures for exercising shareholders votes. Equity financing is important for Japanese corporations. However, insiders and their affiliates are the major shareholders in most Japanese corporations. Consequently, they play a major role in individual corporations and in the system as a whole. Conversely, the interests of outside shareholders are marginal. The percentage of foreign ownership of Japanese stocks is small, but it may become an important factor in making the model more responsive to outside shareholders.

Key Players in the Japanese Model


The Japanese system of corporate governance is many-sided, centering around a main bank and a financial/industrial network or keiretsu. The main bank system and the keiretsu are two different, yet overlapping and complementary, elements of the Japanese model. Almost all Japanese corporations have a close relationship with a main bank. The bank provides its corporate client with loans as well as services related to bond issues, equity issues, settlement accounts, and related consulting services. The main bank is generally a major shareholder in the corporation. Many Japanese corporations also have strong financial relationships with a network of affiliated companies. keiretsu. In the Japanese model, the four key players are: main bank (a major inside shareholder), affiliated company or keiretsu (a major inside shareholder), management and the government. Note that the interaction among these players serves to link relationships rather than balance powers, as in the case in the Anglo-US model.
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These networks, characterized by crossholdings of debt and

equity, trading of goods and services, and informal business contacts, are known as

Stakeholders Approach to Corporate Governance of Banks- The German Model In contrast with the Anglo-US model, non-affiliated shareholders have little or no voice in Japanese governance. As a result, there are few truly independent directors, that is, directors representing outside shareholders.

Share Ownership Pattern in the Japanese Model


In Japan, financial institutions and corporations firmly hold ownership of the equity market. Similar to the trend in the UK and US, the shift during the post-war period has been away from individual ownership to institutional and corporate ownership. In 1990, financial institutions (insurance companies and banks) held approximately 43 percent of the Japanese equity market, and corporations (excluding financial institutions) held 25 percent. Foreigners currently own approximately three percent. In both the Japanese and the German model, banks are key shareholders and develop strong relationships with corporations, due to overlapping roles and multiple services provided. This distinguishes both models from the Anglo-US model, where such relationships are prohibited by antitrust legislation. Instead of relying on a single bank, US and UK corporations obtain financing and other services from a wide range of sources, including the well-developed securities market.

Composition of the Board of Directors in the Japanese Model


The board of directors of Japanese corporations is composed almost completely of insiders, that is, executive managers, usually the heads of major divisions of the company and its central administrative body. If a companys profits fall over an extended period, the main bank and members of the keiretsu may remove directors and appoint their own candidates to the companys board. Another practice common in Japan is the appointment of retiring government bureaucrats to corporate boards; for example, the Ministry of Finance may appoint a retiring official to a banks board. In the Japanese model the composition of the board of directors is conditional upon the corporations financial performance. A diagram of the Japanese model at the end of this article provides a pictorial explanation. Note the relationship between the share ownership structure and the composition of Japanese boards. In contrast with the Anglo-US model, representatives of unaffiliated shareholders (that is, outsiders) seldom sit on Japanese boards.

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Stakeholders Approach to Corporate Governance of Banks- The German Model Japanese boards are generally larger than boards in the UK, the US and Germany. The average Japanese board contains 50 members.

Regulatory Framework in the Japanese Model


In Japan, government ministries have traditionally been extremely influential in developing industrial policy. The ministries also wield enormous regulatory control. However, in recent years, several factors have weakened the development and implementation of a comprehensive industrial policy. First, due to the growing role of Japanese corporations at home and abroad, policy formation became fragmented due to the involvement of numerous ministries, most importantly, the Ministry of Finance and the Ministry of International Trade and Industry. Second, the increasing internationalization of Japanese corporations made them less dependent on their domestic market and therefore somewhat less dependent on industrial policy. Third, the growth of Japanese capital markets led to their partial liberalization and an opening, albeit small, to global standards. While these and other factors have limited the cohesion of Japanese industrial policy in recent years, it is still an important regulatory factor, especially in comparison with the Anglo-US model. In contrast, government agencies provide little effective, independent regulation of the Japanese securities industry. This is somewhat ironic, because the regulatory framework in Japan was modeled on the US system by US occupation forces after the Second World War. Despite numerous revisions, the core of Japans securities laws remains very similar to US laws. In 1971, in response to the first wave of foreign investment in Japan, new laws were enacted to improve corporate disclosure. The primary regulatory bodies are the Securities Bureau of the Ministry of Finance, and the Securities Exchange Surveillance Committee, established under the auspices of the Securities Bureau in 1992. The latter is responsible for monitoring corporate compliance and investigating violations. Despite their legal powers, these agencies have yet to exert de facto independent regulatory influence

Disclosure Requirements in the Japanese Model


Disclosure requirements in Japan are relatively stringent, but not as stringent as in the US. Corporations are required to disclose a wide range of information in the annual report and or agenda for the AGM, including: financial data on the corporation (required on a semi-annual basis); data on the corporations capital structure; background
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Stakeholders Approach to Corporate Governance of Banks- The German Model information on each nominee to the board of directors (including name, occupation, relationship with the corporation, and ownership of stock in the corporation); aggregate date on compensation, namely the maximum amount of compensation payable to all executive officers and the board of directors; information on proposed mergers and restructurings; proposed amendments to the articles of association; and names of individuals and/or companies proposed as auditors. Japans disclosure regime differs from the US regime (generally considered the worlds strictest) in several notable ways. These include: semi-annual disclosure of financial data, compared with quarterly disclosure in the US; aggregate disclosure of executive and board compensation, compared with individual data on the executive compensation in the US; disclosure of the corporations ten largest shareholders, compared with the US requirement to disclose all shareholders holding more than five percent of the corporations total share capital; and significant differences between Japanese accounting standards and US Generally Accepted Accounting Practices (US GAAP).

Corporate Actions Requiring Shareholder Approval in the Japanese Model


In Japan, the routine corporate actions requiring shareholder approval are: payment of dividends and allocation of reserves; election of directors; and appointment of auditors. Other common corporate actions which also require shareholder approval include capital authorizations; amendments to the articles of association and/or charter (for example, a change in the size and/or composition of the board of directors, or a change in approved business activities); payment of retirement bonuses to directors and auditors; and increase of the aggregate compensation ceilings for directors and auditors. Non-routine corporate actions which also require shareholder approval include mergers, takeovers and restructurings. Shareholder proposals are a relatively new phenomenon in Japan. Prior to 1981, Japanese law did not permit shareholders to put resolutions on the agenda for the annual meeting. A 1981 amendment to the Commercial Code states that a registered shareholder holding at least 10 percent of a companys shares may propose an issue to be included on the agenda for the AGM or EGM.

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Stakeholders Approach to Corporate Governance of Banks- The German Model

Interaction Among Players in the Japanese Model


Interaction among the key players in the Japanese model generally links and strengthens relationships. This is a fundamental characteristic of the Japanese model. Japanese corporations prefer that a majority of its shareholders be long-term, preferably affiliated, parties. In contrast, outside shareholders represent a small constituency and are largely excluded from the process. Annual reports and materials related to the AGM are available to all shareholders. Shareholders may attend the annual general meeting, vote by proxy or vote by mail. In theory, the system is simple; however, the mechanical system of voting is more complicated for non-Japanese shareholders. Annual general meetings are almost always pro forma, and corporations actively discourage shareholder dissent. Shareholder activism is restricted by an informal yet important aspect of the Japanese system: the vast majority of Japanese corporations hold their annual meetings on the same day each year, making it difficult for institutional investors to coordinate voting and impossible to attend more than one meeting in person.

The German Model:


The German model governs German and Austrian corporations. Some elements of the model also apply in the Netherlands and Scandinavia. Furthermore, some corporations in France and Belgium have recently introduced some elements of the German model. The German
corporate governance model differs significantly from both the Anglo-US and the Japanese model, although some of its elements resemble the Japanese model. Banks hold long-term stakes in German corporations 6, and, as in Japan, bank representatives are elected to German boards. However, this representation is constant, unlike the situation in Japan where bank representatives were elected to a corporate board only in times of financial distress. Germanys three largest universal banks (banks that provide a multiplicity of services) play a major role; in some parts of the country, public-sector banks are also key shareholders. There are three unique elements of the German model that distinguish it from the other models outlined in this article. Two of these elements pertain to board composition and one concern shareholders rights: First, the German model prescribes two boards with separate members. German corporations have a two-tiered board structure consisting of a management board Internship Report | State Bank of Pakistan
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Stakeholders Approach to Corporate Governance of Banks- The German Model


(composed entirely of insiders, that is, executives of the corporation) and a supervisory board (composed of labor/employee representatives and shareholder representatives). The two boards are completely distinct; no one may serve simultaneously on a corporations management board and supervisory board. Second, the size of the supervisory board is set by law and cannot be changed by shareholders. Third, in Germany and other countries following this model, voting right restrictions are legal; these limit a shareholder to voting a certain percentage of the corporations total share capital, regardless of share ownership position. Most German corporations have traditionally preferred bank financing over equity financing. As a result, German stock market capitalization is small in relation to the size of the German economy. Furthermore, the level of individual stock ownership in Germany is low, reflecting Germans conservative investment strategy. It is not surprising therefore, that the corporate governance structure is geared towards preserving relationships between the key players, notably banks and corporations. The system is somewhat ambivalent towards minority shareholders, allowing them scope for interaction by permitting shareholder proposals, but also permitting companies to impose voting rights restrictions. The percentage of foreign ownership of German equity is significant; in 1990, it was 19 percent. This factor is slowly beginning to affect the German model, as foreign investors from inside and outside the European Union begin to advocate for their interests. The globalization of capital markets is also forcing German corporations to change their ways. When Daimler-Benz AG decided to list its shares on the NYSE in 1993, it was forced to adopt US GAAP. These accounting principles provide much greater financial transparency than German accounting standards. Specifically, Daimler-Benz AG was forced to account for huge losses that it could have hidden under German accounting rules.

Key Players in the German Model:


German banks, and to a lesser extent, corporate shareholders, are the key players in the German corporate governance. Similar to the Japanese system described above, banks usually play a multi-faceted role as shareholder, lender, and issuer of both equity and debt, depository (custodian bank) and voting agent at AGMs. In 1990, the three largest German banks (Deutsche Bank AG, Dresdner Bank AG and Commerz bank AG) held seats on the supervisory boards of 85 of the 100 largest German corporations. In Germany, corporations are also shareholders, sometimes holding long-term stakes in other corporations, even where there is no industrial or commercial Internship Report | State Bank of Pakistan
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Stakeholders Approach to Corporate Governance of Banks- The German Model


affiliation between the two. This is somewhat similar, but not parallel, to the Japanese model, yet very different from the Anglo-US model where neither banks nor corporations are key institutional investors. The mandatory inclusion of labor/employee representatives on larger German supervisory boards further distinguishes the German model from both the Anglo-US and Japanese models.

Share Ownership Pattern in the German Model:


German banks and corporations are the dominant shareholders in Germany. In 1990, corporations held 41 percent of the German equity market, and institutional owners (primarily banks) held 27 percent. Neither institutional agents, such as pension funds (three percent) or individual owners (four percent) are significant in Germany. Foreign investors held 19 percent in 1990, and their impact on the German corporate governance system is increasing.

Composition of the Management Board (Vorstand) and Supervisory Board (Aufsichtsrat) in the German Model:
The two-tiered board structure is a unique construction of the German model. German corporations are governed by a supervisory board and a management board. The supervisory board appoints and dismisses the management board, approves major management decisions; and advises the management board. The supervisory board usually meets once a month. A corporations articles of association sets the financial threshold of corporate acts requiring supervisory board approval. The management board is responsible for daily management of the company. The management board is composed solely of insiders, or executives. The supervisory board contains no insiders, it is composed of labor/employee representatives and shareholder representatives. The Industrial Democracy Act and the Law on Employee Co-determination regulate the size and determine the composition of the supervisory board; they stipulate the number of members elected by labor/employees and the number elected by shareholders. The numbers of members of the supervisory board is set by law. In small corporations (with less than 500 employees), shareholders elect the entire supervisory board. In medium-size corporations (defined by assets and number of employees) employees elect one-third of a nine member supervisory board. In larger corporations, employees elect one-half of a 20-member supervisory board.

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Stakeholders Approach to Corporate Governance of Banks- The German Model


Note these two key differences between the German model and the other two models. First, the size of the supervisory board is set by law and cannot be changed. Second, the supervisory board includes labor/employee representatives. While the supervisory board includes no insiders, it does not necessarily include only outsiders. The members of the supervisory board elected by shareholders are usually representatives of banks and corporations which are substantial shareholders. It would be more appropriate to define some of these as affiliated outsiders. For a pictorial explanation of board composition in the German model, please refer to the diagram of the German model at the end of this article.

Regulatory Framework in the German Model:


Germany has a strong federal tradition; both federal and state ( Laender) law influence corporate governance. Federal laws include: the Stock Corporation Law, Stock Exchange Law and Commercial Law, as well as the above-mentioned laws governing the composition of the supervisory board are all federal laws. Regulation of Germanys stock exchanges is, however, the mandate of the states. A federal regulatory agency for the securities industry was established in 1995. It fills a former void in the German regulatory environment.

Disclosure Requirements in the German Model:


Disclosure requirements in Germany are relatively stringent, but not as stringent as in the US. Corporations are required to disclose a wide range of information in the annual report and or agenda for the AGM, including: corporate financial data (required on a semi-annual basis); data on the capital structure; limited information on each supervisory board nominee (including name, hometown and occupation/affiliation); aggregate data for compensation of the management board and supervisory board; any substantial shareholder holding more than 5 percent of the corporations total share capital; information on proposed mergers and restructurings; proposed amendments to the articles of association; and names of individuals and/or companies proposed as auditors. The disclosure regime in Germany differs from the US regime, generally considered the worlds strictest, in several notable ways. These include: semi-annual disclosure of financial data, compared with quarterly disclosure in the US; aggregate disclosure of executive Internship Report | State Bank of Pakistan
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Stakeholders Approach to Corporate Governance of Banks- The German Model


compensation and supervisory board compensation, compared with individual data on executive and board compensation in the US; no disclosure of share ownership of members of the supervisory board, compared with disclosure of executive and directors stock ownership in the US; and significant differences between German accounting standards and US GAAP. One key accounting difference in Germany is that corporations are permitted to amass considerable reserves. These reserves enable German corporations to understate their value. This practice is not permitted under US GAAP. Until 1995, German corporations were required to disclose shareholders holding more than 25 percent of the total share capital. In 1995, this threshold was lowered to 5 percent, bringing Germany in line with international standards.

Corporate Actions Requiring Shareholder Approval in the German Model:


The routine corporate actions requiring shareholder approval under the German model are: allocation of net income (payment of dividends and allocation to reserves); ratification of the acts of the management board for the previous fiscal year; ratification of the acts of the supervisory board for the previous fiscal year; election of the supervisory board; and appointment of auditors. Approval of the acts of the management board and supervisory board are basically a seal of approval or vote of confidence. If shareholders wish to take legal action against individual members of either board or against either board as a whole, they refrain from ratifying the acts of the board for the previous year. In contrast with the Anglo-US and the Japanese models, shareholders do not possess the authority to alter the size or composition of the supervisory board. These are determined by law. Other common corporate actions which also require shareholder approval include capital authorizations (which automatically recognize preemptive rights, unless revoked by shareholder approval); affiliation agreements with subsidiaries; amendments to the articles of association and/or charter (for example, a change of approved business activities); and increase of the aggregate compensation ceiling for the supervisory board. Non-routine corporate actions which also require shareholder approval include mergers, takeovers, and restructurings. Shareholder proposals are common in Germany. Following announcement of the agenda for the meeting, shareholders may submit in writing two types of proposals. A shareholder counterproposal opposes the proposal made by the management board and/or supervisory board in an existing agenda item and presents an alternative. For example, a counterproposal would suggest a dividend Internship Report | State Bank of Pakistan
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Stakeholders Approach to Corporate Governance of Banks- The German Model


higher or lower than that proposed by the management board, or an alternative nominee to the supervisory board. A shareholder proposal requests the addition of an issue not included on the original agenda. Examples of shareholder proposals include: alternate nominees to the supervisory board; authorization of a special investigation or audit; suggestions to abolish voting rights restrictions; and recommendations for changes to the capital structure. Provided that such proposals meet legal requirements, the corporation is required to publish these shareholder proposals in an amended agenda and forward them to shareholders prior to the meeting.

Interaction among Players in the German Model:


The German legal and public-policy framework is designed to include the interests of labor, corporations, banks, and shareholders in the corporate governance system. The multi-faceted role of banks has been described above. On the whole, the system is geared towards the interests of the key players. There is, nevertheless, some scope for participation by minority shareholders, such as the above-mentioned provisions concerning shareholder proposals. There also exist several obstacles to shareholder participation, especially in terms of banks powers as depositories and voting agents. The majority of German shares are issued in bearer (not registered) form. Corporations with bearer shares are required to announce their annual general meeting in an official government bulletin and forward the annual report and agenda for meeting to custody banks. The banks forward these materials to the beneficial owners of the shares. This often complicates the procedure for receipt of materials, especially for foreign shareholders. In Germany, most shareholders purchase shares through a bank, and banks are permitted to vote the shares of German they hold on deposit. The procedure is as follows: The beneficial shareholder grants a general power of attorney to the bank, and the bank is permitted to vote the shares for a period up to 15 months. The corporation sends the meeting agenda and annual report to its custody bank. The bank forwards these materials and it's (the bank's) voting recommendations to the German shareholder. If the beneficial shareholder does not provide the bank with his/her specific voting instructions, the bank may vote the shares according to its own interpretation. This leads to potential conflict of interest between the bank and the beneficial shareholder. It also increases the potential voting power of the bank, because some shareholders might not provide specific voting instructions and the bank may exercise the votes according to its interpretation. Because the level of Internship Report | State Bank of Pakistan
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Stakeholders Approach to Corporate Governance of Banks- The German Model


individual share ownership in Germany is very low, this is not a huge problem. Nevertheless, it reflects a certain pro-bank and anti-shareholder tendency of the system. Other obstacles to shareholder participation include the above-mentioned legality of voting right restrictions, and the fact that shareholders may not vote by mail. As noted above, shareholders must either attend the meeting in person or to be represented in person, i.e., by their custodian bank. Despite these obstacles, minority German shareholders are not inactive. In fact, they often oppose management proposals and present a wide range of counterproposals and proposals at the AGMs and EGMs of many German corporations each year.

German Panel on Corporate Governance:


I.

General questions of Corporate Governance

The purpose of Corporate Governance is to achieve a responsible, value-oriented management and control of companies. Corporate Governance Rules promote and reinforce the confidence of current and future shareholders, lenders, employees, business partners and the general public in
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Stakeholders Approach to Corporate Governance of Banks- The German Model national and international markets. The Supervisory Board, Management Board and Executive Staff of the Company identify themselves with these Rules and are contractually bound by them. They are part of the general obligation to observe other interests related to the corporate activity. The Rules of the Code serve as general guidelines for Corporate Governance for quoted German companies. Quoted companies are all enterprises whose shares are officially listed on a German stock exchange or traded over-the counter. The Rules, their acceptance, implementation and respective adjustments to the specifics of the individual Company shall be communicated in the Annual Report. Due to the various legal systems, institutional parameters, and traditions, there is presently no internationally accepted universal model for Corporate Governance. The parameters for the code are provided by codified law and leading cases, generally accepted national and international codes of good conduct and market practice. They include the directly relevant provisions of company and group law, in particular, the law governing stock corporations, financial accounting, banking supervision and the capital market as well as the Company's Memorandum and Articles of Association. From these derive the provisions, some of them detailed, with regard to the responsibilities and duties of the governing bodies: Supervisory Board (German Stock Corporation Act), Management Board (76-94 German Stock Corporation Act) and General Meeting (118-147 German Stock Corporation Act) as well as the code of conduct of the members of the governing bodies. The essential points of the OECD Principles for Corporate Governance of May 1999 are covered as follows: Protection of Shareholders' rights: Following the introduction of the German Act on Corporate Control and Transparency (KonTraG) in 1998, there are adequate provisions safeguarding the rights of shareholders through the comprehensive mandatory rules under the German Stock Corporation Act. In particular, the following OECD points are covered by mandatory law (23 German Stock Corporation Act):

Full voting right for each ordinary share (12 German Stock Corporation Act) No impediments with regard to ownership or registration (67 German Stock Corporation Act) Transferability of shares at any time (68 German Stock Corporation Act) Participation, proxy and exercise of voting rights at General Meetings (134 German Stock Corporation Act) Election of members of the Supervisory Board (101 German Stock Corporation Act)
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Stakeholders Approach to Corporate Governance of Banks- The German Model Participation in company profits. (58 German Stock Corporation Act). These points are mandatorily covered by German Law (23 German Stock Corporation Act). An authorization to increase the share capital with exclusion of shareholder participation rights in order to pursue either an acquisition or a share placement near the prevailing market price will only be exercised by the Management Board if the share capital increase does not exceed 10 % of the then existing share capital. In this calculation the re-utilization of any repurchased shares will be included. Equal treatment of shareholders: The 'Equal treatment of shareholders' stipulated by the OECD is also in place for German companies. The precautionary measures against insider trading, selfdealing and disclosure of any personal interests in transactions or matters are extended beyond the legal requirements by the subsequent points i.e. Two and three, Management board' and the Supervisory Board'. Until the enactment of the German Takeover Law, the voluntary Takeover Code of the Capital Markets Expert Commission of the German Ministry of Finance applies. This Code is accepted by the Company. In the case of repurchase of own shares according to 71, subparagraph 1, No. 8 German Stock Corporation Act, the Company shall observe the principle of equal treatment of all shareholders. Disclosure and transparency: The point 'Disclosure and transparency' of the OECD Principles is generally covered by law for German companies through the corresponding provisions on the obligation to provide and enclose information (20 - 22, 160, 328 German Stock Corporation Act; 15, 25 German Securities Trading Act; 285, 325 German Commercial Code; 35, 39 German Antitrust Act; 24 German Banking Act). In addition, the Management Board shall regularly and with due regard to equal treatment of all shareholders ('Fair Disclosure') report on all Company matters through Annual and Interim Reports, 'ad hoc' communications, analyst and press conferences. The OECD information requirements are covered by these publicity undertakings. The Company shall adopt an accounting standard that is suitable for international comparison purposes. As the Management Board and Supervisory Board of German companies have the decisive functions for Corporate Governance, the relevant points are dealt with in detail below:

II. Management Board


1.) Responsibilities and duties
In the management of the Company, the Management Board is bound by Corporate interest, Company policy and the Group's guidelines as well as the basic principles of proper management (76 German Stock Corporation Act).
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Stakeholders Approach to Corporate Governance of Banks- The German Model The Management Board develops, in consultation with the Supervisory Board, the strategy for the Group and is responsible for its implementation. The Management Board is responsible for ensuring compliance with legal provisions within the Group and to ensure their observation by Group companies.

2.) Information and disclosure requirements


The Management Board will publish without delay any new facts arising in the sphere of the Company's activities which are not yet publicly known and, due to their impact on their financial position of the Company or its general course of business, are likely to impact significantly on the price of the Company's listed securities (15 German Securities Trading Act). As part of its regular communication efforts, the dates of major regular publications (such as annual and quarterly reports, General Meetings) shall be published in a 'Financial Calendar' (at least one year) in advance. The information published by the company shall also be available in the 'Internet'. This is to include the invitation to General Meetings, their agenda, as well as shareholder initiatives and management comments hereto as well as voting results of such meetings. If possible, all publications are provided in the English language. The company shall pursue the principle of equal treatment of all shareholders in the matter of information dissemination. The regular financial reporting (annual and quarterly reports) will be timely. The quarterly reports contain segment reporting as well as results per share. d) The Management Board shall inform the Supervisory Board on a regular basis, in good time and comprehensively about all relevant matters regarding business development, risk exposure and risk management of the company and major group subsidiaries. e) Should the business trend or risk exposure of the Group change significantly against plan, the Management Board must immediately inform the Supervisory Board through its Chairman, who will call an extraordinary Supervisory Board meeting if so indicated. f) The Management Board shall list in the Notes to the Company Accounts the corporations in which the Company holds a minimum of 10% of the share capital. Exempt from this are participations that are of immaterial importance for the Company's asset, financial and profit situation. Equally, any existing mutual shareholdings and any shareholdings in the Company which have been notified by third parties as well as the owner(s) of such shareholdings must be reported in the Notes to the Accounts.

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Stakeholders Approach to Corporate Governance of Banks- The German Model g) As soon as the Company is notified (25 German Securities Trading Act), or becomes otherwise aware that another party has obtained, exceeds or no longer holds 5, 10, 25, 50 or 75% of the voting rights in the Company, this will immediately be published by the Management Board. h) In the Notes to the Company Accounts details with regard to the Management Board's interest in shares of the Company (including any existing option rights) and their changes in relation to the previous year have to be published.

2.) Remuneration
The remuneration of the Management Board and the Executive Staff shall include sufficient motivation to ensure long-term corporate value creation. This includes share option programs and performance-related incentives related to the share price development and the continuing success of the company. In connection with the granting of share options and similar rights to members of the Management Board and the executive staff the following points shall be observed: The initial exercise of the rights arising from share option programs shall not be possible before two years since the grant. To document the incentive character as well as to balance the surrender of the subscription right by the shareholders, the exercise shall depend on achieving or exceeding relevant and transparent benchmarks (e.g. the development of an industry index). The structure, total amount, exercise prices and exercise periods as well as the allocations of share options and similar rights in the reporting period shall be published in the Notes to the Company Accounts, separately by members of the Management Board and Executive Staff. To ensure compliance with insider laws, suitable precautions like closed periods of time are implemented. The fixed and variable remuneration elements of the Management Board shall be detailed in the Annual Report.

3.) Rules governing conflicts of interest and own-account transactions

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Stakeholders Approach to Corporate Governance of Banks- The German Model In the running of the management of the company, the Management Board members must not pursue any own interest that could be in conflict with the interest of the Company. Members of the Management Board must disclose to the Supervisory Board material personal interests in transactions of the Company and Group companies as well as other conflicts of interest. They must also inform their Management Board colleagues. All transactions between the Company or any Group company and Management Board members as well as associated persons or companies must comply with normal industry standards. The transactions and the terms and conditions thereof must be approved in advance by the Supervisory Board. They may not run counter to the interests of the Company or any Group company. The granting of loans to Management Board members must be approved by the Supervisory Board with advance notice to the Management Board. In all such transactions, the Company shall be represented by the Supervisory Board. Management Board members and senior Group executives may not exploit business opportunities available to the Company or Group companies for themselves or for the benefit of associated persons or companies. Management Board members and senior Group executives are also prohibited from conducting transactions, conflicting with the interests of the Company or any Group company, for themselves or for associated persons. This prohibition also extends beyond their business duties. Management Board members must disclose to the whole Management Board transactions (except daily life transactions) among themselves or with Supervisory Board members or senior Group executives. The transactions require the approval of the Supervisory Board. Management Board members and senior Group executives are during their employment subject to a comprehensive prohibition of competition (Members of the Management Board: 88 German Stock Corporation Act). Any other activities of Management Board members, in particular the acceptance of Supervisory Board appointments, require the approval of the Supervisory Board. Any other activities of senior Group executives require the approval of the Management Board. The purchase and sale of Company shares, options or other share derivatives by members of the Management Board and senior Group executives are subject to special rules. It is generally welcomed that the Management Board and senior Group executives document their identification with the Company through a shareholder status. However,
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Stakeholders Approach to Corporate Governance of Banks- The German Model they should refrain from frequent transactions and counter transactions which aim to achieve very short term gains (speculative deals). Appropriate measures such as closed periods for the purchase or sale of shares should ensure the observation of the provisions of the insider laws. The Management Board shall ensure the compliance through a Compliance Officer that shall report to the Supervisory Board at least once a year. i) Management Board members and Group employees may in connection with their activity neither request nor receive gifts or other advantages for themselves or third parties, if this could jeopardize the interests of the Group or the interests of customers.

III. Supervisory Board


1.) Composition
The proposals for election of Supervisory Board members to the General Meeting shall ensure that the proposed candidates have the required knowledge and skills as well as the relevant professional experience. To ensure efficiency, regard will be given to size and composition of the Supervisory Board. Board Members must make sufficient time available to exercise their activity in a diligent manner. The Supervisory Board shall ensure independent advice and monitoring of the Management Board through a sufficient number of independent persons who have no current or former business association with the Group. This shall also be taken into consideration for the composition of the Supervisory Board committees. The proposal for election to the Supervisory Board shall not include as a matter of course the election of retiring Management Board members. If a member of the Supervisory Board does not participate personally in more than half of the Board Meetings of any given fiscal year, this has to be notified in the Annual Report. The remuneration of the Supervisory Board shall appropriately reflect the responsibility, the work performed and the increase in the corporate value. The total remuneration shall be listed in the Notes to the Company Accounts. The Notes to the Company Accounts shall contain details of the share ownership (including existing option rights) of the Supervisory Board members and their changes in relation to the previous year.
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Stakeholders Approach to Corporate Governance of Banks- The German Model

2.) Responsibilities and duties


The Supervisory Board advises the Management Board on a regular basis regarding the management of the Company and the Group and monitors the achievement of the long term corporate goals (monitoring: 111 German Stock Corporation Act). The Supervisory Board appoints the members of the Management Board and ensures an orderly longterm succession planning ( 84 German Stock Corporation Act). The Supervisory Board can subject certain transactions to its approval (111 German Stock Corporation Act). This refers in particular to investment projects, loans, the establishment of subsidiaries as well as the acquisition or disposal of shareholdings above a certain size. The members are bound to confidentiality with regard to all specific information and company secrets. The Supervisory Board issues its own Standing Rules and stipulates the information and reporting duties of the Management Board. The Supervisory Board mandates the Auditors to audit the Company and the Group annual accounts (111 German Stock Corporation Act). Particular regard shall be given to: that the mandated Auditor has not achieved during the last five years with the Audit and advice of the Company (or with corporations where the Company is a shareholder with more than 20%) more than 30% of his total revenue. This should also not be expected for the current fiscal year, that no auditor is employed in the Audit that has issued the auditors' confirmation for the Annual Accounts or Group Accounts in more than 6 instances in the 10 years preceding the audit, That no conflicts of interest exist for the Auditor. All members of the Supervisory Board shall receive the Audit Reports in good time before the pertinent Supervisory Board meetings (170 German Stock Corporation Act). Audit related meetings shall be held in the presence of the Auditors (171 German Stock Corporation Act). f) Contracts, in particular consulting contracts of the company with members of Supervisory Board require the approval of Supervisory Board (except every day transactions).

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Stakeholders Approach to Corporate Governance of Banks- The German Model g) The Supervisory Board shall receive regularly (at least annually) a report by the Management Board with regard to donations exceeding an amount determined by the Supervisory Board.

3.) Establishment of Committees


The Supervisory Board shall establish in line with its Standing Rules various committees to deal with complex business matters. With regard to the composition of such committees, the Supervisory Board shall ensure the requisite professional experience. Incorporation and duties of committees are subject to the specific circumstances and the size of the Company. The following committees could be instituted: The General Committee: The General Committee shall advise the Management Board and prepare the decisions to be taken by the Supervisory Board. The General Committee deals with general policy matters for the Group. It discusses the strategy and planning for the Group and its business segments submitted by the Management Board on the basis of different scenarios and their feasibility. The General Committee assesses the internal state of the Group with regard to its operating strength, efficiency, and potential to achieve the formulated targets. It reviews the Corporate Governance Rules and their compliance on a regular basis (generally once a year). Accounts and Audit Committee: The Accounts and Audit Committee is responsible for matters pertaining to the accounting and auditing for the Company and the Group. The Committee evaluates the Auditor's reports and reports to the Supervisory Board on its assessment of the comments in the audit report, particularly with regard to the future development of the Group. It verifies the Management Board's assumptions on the budget figures for the Group and its business segments. Important other documents issued to shareholders shall be presented before publication to the Committee. The tasks of the Accounts and Audit Committee regularly comprise: - The preparation of the selection of the Auditor, the determination of major auditing issues, even if exceeding the legally required points and content of the Audit, as well as the determination of the Auditors' fee, - The preparation of the audit of the Annual and Group Accounts by the Supervisory Board, including the relevant business reports on the basis of the results of the audit and additional points raised by the Auditor,

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Stakeholders Approach to Corporate Governance of Banks- The German Model - The preparation of a report by the Management Board with regard to corporate donations exceeding an amount determined by the Supervisory Board, And, if applicable, - The discussion of partial auditing results during the year (e.g. of the internal control system), - The discussion of Interim Accounts and the results of any audits performed therefore. Personnel Committee: The Personnel Committee deals with the personnel issues of the Management Board (including its succession planning). The Personnel Committee shall recommend with regard to the content of the employment contracts of the Management Board including their remuneration. In addition, the Committee is responsible for the approval of paid for outside company work by members of the Management Board. The granting of loans to members of the Management Board and the Supervisory Board shall also be dealt with by the Committee. Nomination Committee: The Nomination Committee is in charge of the composition, size, and balance of the Supervisory Board and the proposals for election to the General Meeting.

Market- and Credit Risk Committee: This Committee supervises the handling of
market risks and credit matters of the Group. It handles loans and other transactions requiring its approval and is informed of loans requiring its notification. For urgent matters, decisions can be delegated to nominated Committee members.

Mediation Committee: German Stock companies that are subject to codetermination by


law are legally required to establish a Mediation Committee (27 sub-para 3 Co Determination Act of 1976). This Committee delivers proposals for the appointment of Management Board members if the required two thirds majorities for the appointment or termination of Management Board members has not been achieved.

4.) Rules governing conflicts of interest and own-account transactions


The Supervisory Board members must disclose any conflicts of interest to the Chairman of the Supervisory Board or his deputy unless they retire for cause. In the event of conflicts of interests, the Chairman of the Supervisory Board or his deputy shall decide to whom the information should be forwarded and whether the member of the Supervisory Board in question shall participate in meetings. In their decisions Supervisory Board members must not pursue their own interests or those of associated persons or companies, which are in conflict with the interests of the Company or any Group company. They may not pursue for their own benefit business
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Stakeholders Approach to Corporate Governance of Banks- The German Model available to the Company or its Group companies. In the event of possible conflicts of interest, the interests of the Company and its Group companies must take priority and the Supervisory Board members concerned must abstain from voting. All transactions between the Company, any Group company, and Supervisory Board members as well as associated persons or companies must comply with normal industry standards. The transactions (except: daily life transactions) and their terms must be approved in advance by the Supervisory Board. They may not run counter to the interests of the Company or any Group company. The granting of loans to Supervisory Board members by the Company or Group companies requires the agreement of the Management Board and the Supervisory Board. Supervisory Board members may, in conjunction with their activity, neither request nor receive gifts or other advantages for themselves or third parties, if this could jeopardize the interests of the Group or customers. Frankfurt, January 2003

Institutional Ownership
Institutional ownership is defined as share ownership by financial institutions (both banks and non-bank financial companies) and non-financial corporations. These include both the publicowned as well as privately owned institutions. Typically institutions are categorized as follows: 1. Non-banking Finance Companies (NBFC): insurance companies, mutual funds, investment companies, leasing, venture capital companies etc 2. Banking Companies: These include the commercial banks 3. Non-financial Corporation 4. All other non-financial entities including trusts and non-profit organizations 5. Development Financial Institutions and International organizations/fund managers The scope of this paper is limited to only local financial institutions, which includes both banking and non-banking institutions.

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Stakeholders Approach to Corporate Governance of Banks- The German Model

Issues involved in Institutional Shareholding


The objectives of both bank-based and market-based financial systems are to promote efficient allocation of resources, lower transaction cost, provide liquidity to investors and efficient project monitoring. Market based system provides greater incentives to gather information because trading takes place on the basis of that information. This information is also indicated in the share price (according to efficient market hypothesis). Another advantage is that this market-based system provides means for efficient risk sharing and diversification. In this way, risk return preferences of all categories of investors can be satisfied. With poor corporate performance, share price will fall which can result in takeover and expulsion of management. Therefore efficient market based systems maintain managerial incentives to maximize profit. The distinguishing characteristics of the large shareholders include: 1. Substantial investment 2. Non-homogenous grouping Apart from controlling shareowners and directors, individual stockholders usually have smaller level of investment. Financial institutions can have different investment objectives for example some institutions have short-term investment objective and have therefore higher liquidity preferences. Financial institutions invest and manage funds on behalf of other investors. These institutions have the voting authority of the investors. These institutions have professional portfolio managers who bring more expertise than individual investors. Since the financial institutions are block holders, their monitoring can reduce the shirking behavior of managers and induce them to maximizing shareholder wealth. However, Institutional investors have been criticized for not investing sufficient resources in monitoring corporate managers. They are usually either voting with managers or abstaining from voting. This reluctance to vote against management stems from conflict of interest caused by their other business relations with corporations.

Shareholder Activism
Institutional investor activism is defined as monitoring of performance and corporate governance of portfolio companies by institutions, which include both banks and non-bank financial companies. But the scope of activism also includes attempts made to bring about

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Stakeholders Approach to Corporate Governance of Banks- The German Model changes in a companys behavior for adoption of good governance practices. Generally there can be two modes of institutional shareholder activism: 1. Block holders who buy shares in a company and are determined to bring about changes in decision-making policies of the firm 2. Market for Corporate Control

Institutional Investors in Pakistan


In this section we examine the ownership structure of institutional investors in Pakistan for a selected group of companies for the year 2001. Our sample consists of 244 non-financial privately-owned companies. The total number of listed companies on Karachi Stock Exchange is 713, out of which financial and government owned companies are 208. Our sample therefore represents approximately 50% of the total population of non-financial and privately owned companies. Data was collected from various Divisions within the Securities and Exchange Commission of Pakistan. The Commission is making every effort to adopt state-of-the-art procedures for data collection. We observe the pattern of institutional investors. For this purpose, the institutional investors are divided into following categories: 1. Government-owned Financial Institutions a) b) c) d) e) f) g) Banks DFI National Investment Trust (NIT) Investment Corporation of Pakistan (ICP) Insurance Companies Leasing Companies Modarbas
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Private-owned Financial Institutions

Stakeholders Approach to Corporate Governance of Banks- The German Model h) Mutual Funds

2. Foreign Institutional Investors Pakistan like other developing markets has certain characteristics, which differ, from developed countries. These include: 1. Family-owned business: Many listed companies especially in the textile sector in Pakistan are family-owned. This leads to insider control and concentrated ownership. 2. Less developed Capital Market. The capital market in Pakistan is less developed. Active trading is done in only a few companies. Also there have not been many new listings which means that there is less reliance on market for raising capital 3. Absence of market for corporate control: Market for corporate control does not exist. There is hardly any incident of corporate control and takeovers. The reason again is that controlling ownership lies with Directors. 4. Heavy reliance on Bank financing 5. With the Initial Public Offering, share distribution is done in such a way that majority of the shareholding lies with directors directly or indirectly. The Directors of the company endeavor to spread the remaining share ownership making it as diverse as possible so as to avoid possibility of corporate control. Table 1: Pattern of ownership in Pakistan

Bank Domestic Foreign Total 7.64 3.87 11.51

Insuranc e 2.26 0.37 2.63

Leasing 0.02 0.23 0.25

Mutual Fund 0.75 0.41 1.16

Modarab a 0.02 0.00 0.02

DFI 8.33 0.24 8.56

Total 19.22 4.91 24.13

Table 1 above shows pattern of ownership in Pakistan. As we can see, total financial institutions ownership in the manufacturing sector of Pakistan is 24%. Apart from financial institutions, other major shareholders can be directors and sponsors. It is pertinent to mention
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Stakeholders Approach to Corporate Governance of Banks- The German Model here that the sample for this study excludes financial institutions ownership in financial and government-owned companies. Banking sector turns out to be the most significant equity holder with around 12% holding. This is because there is no restriction currently on bank investment in equity and banks tend to diversify their portfolio by investing in equity. There is also a conflict because banks are also lenders and are interested in timely loan payment. Stock market responds positively to improvement in credit rating of a company. So banks can also gain benefit if they give loan to a company. One interesting aspect from this data is that Development Financial Institutions (DFI) has turned out to be significant equity holders with 8.56% holding. In Pakistan like many other developing countries DFIs usually play a very important role in termfinancing. However, it is evident from the table that financial institutions holding become insignificant if we remove bank holdings. One striking feature is that Mutual Funds have very low equity holding. This is probably due to market volatility, less developed mutual fund industry and lack of fund management skills. Lack of sophisticated financial instruments and price discovery mechanism in the market are also major deterrent for non-bank institutional investors We now examine investment of government-owned financial institutions namely National Investment Trust and Investment Corporation of Pakistan. Both are currently going through the process of privatization but these were government owned for the sample period. Therefore we treat ICP and NIT as government-owned financial institution as well. It turns out that ICP has 0.61% equity holding while stockholding of NIT is around 5%. NIT has high holding because according to Capital Issues Act it was mandatory for all companies to offer 20% of the paid up capital to NIT during IPO. This act was, however repealed in 1995.

Legal Conditions in Pakistan


There have been various changes brought about in the legal governance of the financial institutions. Limitations on total equity holding as percentage of total equity are as follows: Associated Company 30% Modaraba 20%

Leasing Upto 30% of its total assets It is however pertinent to mention here that investment companies (closed-end mutual funds) are allowed to hold in a company an amount not exceeding 10% of the total paid-up capital of
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Stakeholders Approach to Corporate Governance of Banks- The German Model the Fund or the investee company as per investment companies and investment advisors rules 1971. According to Asset Management Companies Rules of 1995, open-end companies cannot invest more than 25% of its net asset value in securities of any one sector. Further Modaraba cannot make an investment in the shares of a listed company of an amount exceeding 5% of its own equity or 10% of paid up capital of that company whichever is less (Prudential Regulations for Modarabas, 2002). As we can see that law in Pakistan imposes limitations on Institutional shareholding. For Institutional shareholder activism this can be deterrent. This also means that corporate control market has no incentives to develop. However, recently promulgated ordinance on take over and acquisition states that prospective acquirers have to disclose information regarding their intension to acquire within the range of 25% to 50% holding. It is mandatory upon the company to give proportionate representation to these shareholders according to their controlling shares. Companies ordinance in Pakistan (1984) gives description of the way voting shall be carried out at AGM. Section 165 states At any general meeting, a resolution put to the vote of the meeting shall, unless a poll is demanded, be decided on a show of hands.Furthermore the law has clear provisions for proxy voting. It says that all the members may participate in the meeting (AGM) either personally or through proxy. Section 161 states Any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person, as his proxy to attend and vote instead of him, and a proxy so appointed shall have such rights as respects speaking and voting at the meeting as are available to a member. It further states Every notice of a meeting of a company shall prominently set out the members right to appoint a proxy and the right of such proxy to attend, speak and vote in the place of the member at the meeting and every such notice shall be accompanied by a proxy form.So the law is not discouraging proxy voting. This law is protective for minority shareholders in particular. However according to section 167, demand for poll may also be made subject to discretion of the chairman by following persons: a) In the case of a public company, by at least five members having the right to vote on the

resolution and present in person or by proxy. b) c) total d) In the case of a private company, by one member having the right to vote on resolution By any member present in person or by proxy and having not less than one-tenth of the voting power in respect of the resolution Also if shares confer right to vote on the resolution From the law, it is obvious that

institutional shareholders can demand poll. They may do so if they have other conflicts of interest e.g. if they have other business with the company as well. The board of directors sends
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Stakeholders Approach to Corporate Governance of Banks- The German Model proxy forms to the shareholders. This proxy form allows for two-way voting on all resolutions which are to be proposed i.e. shareholders has the choice to vote for or against any resolution. If a shareholder does not specify how the proxy should vote on the different issues, the proxy will be free to vote as he pleases.

Institutional Activism in Pakistan


During the course of this research work, efforts were made to study the voting behavior of the financial institutions at Annual General Meeting for two aspects of Corporate Governance: appointment of directors and of auditors. This could not be done because of two reasons: 1. Lack of complete data 2. Improper way of recording minutes of Annual General Meeting During the scrutiny of the available data on recorded minutes of AGM, it was found that because of the lack of proper methodology for recording minutes of the meeting, this exercise couldnt be carried out. The minutes are recorded in a vague and unclear way. For example it could not ascertain whether financial institutions have submitted any resolution at AGM of a company for appointment of external auditor. It is only mentioned in the AGM that an auditor has been appointed. It has been generally observed that financial institutions tend to remain passive and do not exercise the votes attached to their shares. This increases the already significant power of directors. It is obvious that if financial institutions do not vote actively at AGM, then the directors will be able to get all resolutions passed in their own favor. Since majority of directors on the board are executive directors, it means that management of company gets stronger which leaves lesser scope for shareholder monitoring. In Pakistan, judicial system lacks capacity to keep pace with market developments. This could also be one of the reasons that benefits owners and undermines rights of other stakeholders. Recently powers of mergers and amalgamation and appointment of administrator for non-bank finance companies have been transferred to Securities and Exchange Commission of Pakistan (NBFC Ordinance 2002). However, these decisions can be challenged in the courts so that judiciary still retains powers. Moreover, some of the powers like liquidation still lie with the courts. Judicial and legal system in Pakistan has to adapt to changing economic demands in order to satisfy investors. Pakistan needs to reform its judicial system focusing on following areas: protection of rights of investors, efficient decision-making, and contract enforcement.
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Stakeholders Approach to Corporate Governance of Banks- The German Model In short, Financial Institutions are block-holders in Pakistan. We find that 45% of companies have holding greater than 20%. Therefore stakes are high and incentive for shareholder activism is present. Although the legal conditions in Pakistan are not helping to flourish the market for corporate control particularly for non-banking financial sector, proxy voting is allowed and there is no restriction on co-ordination among institutions Most of the banks nominee directors lack expertise. In addition, there is always conflict of interest involved as banks are only interested in quick recovery of their loans. It is therefore imperative to develop non-bank financial companies as fund managers possess skills and knowledge to monitor. As these non-bank finance companies develop, potential for institutional shareholder activism will increase in Pakistan. In this regard SEC has been taking various steps for market deepening and introduction of sophisticated financial instruments. With T+3 system in place, it is expected that price discovery mechanism will also improve. Moreover, two private pension funds have also been approved. It is expected that these steps will help in development of non-bank institutional investors and their activism.

Corporate Governance in Pakistan; a review


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., 1996, 1997, 1998, 1999; Pankaj, 1996; Goswami et al., 1996; Singhet 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.

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Stakeholders Approach to Corporate Governance of Banks- The German Model

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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Stakeholders Approach to Corporate Governance of Banks- The German Model 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. 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. Analyzing 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 that the distinctive nature of each country's' culture, history, and institutions as Charkham (2000) points out. it would be impossible for one nation to copy anothers arrangements in their entirety.

Anglo-American Model Adopted by Pakistan:


The Anglo-American 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.
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Stakeholders Approach to Corporate Governance of Banks- The German Model 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 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.

Recommendations:
After coming to know that what "Corporate Governance" is. Who are the stakeholders of a corporation and studying the "German Model" in-depth, we can now easily draw out the setbacks in the Anglo-American model of corporate governance and similarly, the problems faced by stakeholders in Pakistani system as a result of the implications of this model. We can also discuss the impacts if the German Model was to be implied in the Pakistani system. So, for this purpose we are going to jot down the recommendations which we think could be helpful in the proper understanding of this complex setup. First of all we are going to criticize the Anglo-America model. What is important here to understand is that what we will criticize in this model can easily be related to the problems which are faced by the stakeholders in the Pakistani system.

Criticism on the Basis of Capitalism:

The diversity of corporate models is valuable and is rooted in societal characteristics that together shape the competitiveness of the different models. Though shareholder value may be gaining ground due to the influence of Anglo-Saxon institutional investors, a stakeholder
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Stakeholders Approach to Corporate Governance of Banks- The German Model approach is closer to the reality of European social democracies, and the outcome of the confrontation between the two competing philosophies is highly uncertain. It is unlikely that imported Anglo-Saxon capital market related features of corporate governance will work well with Continental labor-related aspects of corporate governance as represented in supervisory boards. It is likely any such European compromise would be more unstable than existing systems (Reberioux 2000; Cernat 2004). Christel Lane (2003) said that, "Because forms of corporate governance structure most other relationships within firms and even in society as a whole, they are inherently connected with a distribution of power and material welfare. They therefore decisively shape the logic of the whole political economy. Hence there is strong concern, particularly but not only on the part of labor, with the consequences of change for the distribution of surplus and control to various stakeholders in the firm, as well as the future viability of the production paradigm of diversified quality production. She has a pessimist view about the Anglo-American model and its impact on the global corporate governance.

US CEO Power and Reward:

The person increasingly at the centre of defining and projecting the responsibilities and objectives of the corporation in the Anglo-American mode of corporate governance is the Chief Executive Officer (CEO). The position of CEO has grown in status and public recognition as corporations have become larger and more powerful and extended their reach globally. The leadership qualities of CEOs are celebrated in business bookshops in the way once reserved for statesmen, generals, or explorers. Among the qualities expected of CEOs is the vision to see a new future for the corporation (a sage CEO once said there is a hairs breadth difference between a vision and an hallucination), and as John Harvey-Jones the former CEO of ICI described it the capacity to make things happen. As CEO of Disney Michael Eisner made things happen when in 1998 he appropriated a total compensation package of $576 million. (This was greater than the combined compensation of all 100 CEOs of the FTSE 100 companies at the time, and greater than the combined salaries of similar large groups of CEOs of leading companies in other parts of the world). Though the board of directors is invested with the responsibility for the company in law, the practical reality is often that the CEO is very much in charge. In the United States CEOs accumulated power to themselves as their corporations began to dominate world markets in the middle decades of the 20th century, and the role of the board was marginalized: Corporate boards, asserts legal tradition, are the sovereigns of their realm.
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Stakeholders Approach to Corporate Governance of Banks- The German Model But until they began to flex their muscles during the 1990s, boards rarely behaved that way, leaving most decisions in the hands of management (Lorsch and MacIver 1989; Useem 1996). State corporation laws that assign ultimate responsibility for company affairs to the governing body permit directors to delegate the running of the company to management. The problem is that, until recently, managements power in large American companies reflected less a deliberate delegation of authority by a sovereign body than a de facto reality in which management had become dominant, effectively controlling the agenda of the board to which it was only nominally subordinate. (Useem and Zelleke 2006:2) Chief executives used their control of boards not only to prevent any challenge to their position, but to aggregate to themselves an increasing share of the wealth generated by the company, both in terms of rapidly inflating salaries, and massively growing stock options. A comparative perspective underscores the immense power, charisma and leadership given in the US corporate governance system to the chief executive officer (CEO), who usually also exercises the role of chairman of the board. In fact, in the USA, the split of these two roles is generally perceived as a transitional arrangement or a sign of weakness, particularly in the case of new outside CEOs. The over-centralization of power in the CEO is evident in the gap between the CEOs salary and that of other executives (Aguilera 2005:45; Khurana 2002)

CEO'S Pay in United States:

During the boom years of the 1990s there was a rapid and sustained escalation in CEO salaries in the United States, and any expected adjustment downwards in executive reward with the market crash of 2001, and the halving of the market capitalization of many large corporations, did not occur. Though there were more stringent efforts to link CEO compensation to performance, CEO reward remained at incredibly high levels whether the companies they managed did well or not. Extremely lucrative share option schemes continued, and if the options packages became more sophisticated, there were many devices such as backdating widely employed to ensure executives extracted the best possible reward from their options. Looking at the extremes of this profligacy, Table 1 indicates the total remuneration of the ten highest paid CEOs in public corporations in the US in 2006, and in contrast the total remuneration of the ten highest paid CEOs in European listed public corporations is given in Table 2. Included in the compensation figures are base salary, bonuses, benefits, long term incentive plans, and profits from cashing out on stock options where this information was accessible. The inflation of US CEO salaries relative to their colleague CEOs in Europe is
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Stakeholders Approach to Corporate Governance of Banks- The German Model demonstrated by the fact that the US average top CEO salary is almost three times greater than their counterparts in Europe. While these comparisons are inevitably crude since much compensation of different forms is hidden in the US, and probably more so in other countries, these astonishing disparities are an indication of how out of control US CEOs reward has been for a long time. CEO salaries are only a part of wider structures of inequality that have become more extreme in recent years, and rewards for executives in the finance sector have become even more astronomically inflated: James Simons the Director of Renaissance Technologies received $1.5 billion in compensation in 2006, Steven Cohen of SAC Capital received $1.2 billion, Kenneth Griffin of Citadel Investment Group also received $1.2 billion, T.Boone Pickens of BP Capital picked up $1.1 trillion, and George Soros earned a modest $950 million. While CEOs of corporations might be criticized for putting their self-interest before that of the companies they manage, the directors of fringe financial institutions appear to have manipulated and destabilized world markets to secure even greater personal reward (IPS 2007; Soros 2008). Whatever loss occurs to shareholder funds due to excessive CEO salaries in U.S. corporations and financial institutions the wider implications of this extravagance are more serious, in terms of how the corporations are managed, the objectives they pursue, and the consequences for the wider economy and community.

Compounding Inequality:

More critical than the detachment of US executives from their shareholders interests that occurred in the 1990s, was the distance that grew between the rewards and lifestyle of executives and their employees. In 1980 the ratio of CEO and worker compensation in the US was approximately 50:1 in the S & P 500 companies, and by 1990 this had risen to a ratio of 107:1. With the meteoric rise in executive pay in the 1990s the ratio expanded to an unprecedented 525:1 (Institute for a Fair Economy 2006; Ertuk et al 2005). Though there was productivity growth during this era almost all the benefits went to top management: As Dew-Becker and Gordon who examined the distribution of the benefits of growth in the U.S. comment Our results show the dominant share of real income gains accruing to the top 10 percent and top 1 percent is almost as large for labor income as total income...It is not that all gains went to capital and none to labor; rather, our finding is that the share of gains that went to labor went to the very top of the distribution of wage and salary incomes (2005:77). In two decades US workers saw no measurable improvement in their wages, while US executives enjoyed the experience of
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Stakeholders Approach to Corporate Governance of Banks- The German Model becoming multi-millionaires en masse. This is hardly a recipe for a well integrated and orderly economy and society, and it is not surprising that the US now has among the worst social and health problems of any advanced industrial country. Among the arguments used to justify the enormous increases in US CEO reward are the effects of the bull market and the greater demands made upon executives, when it could be argued greater demands are actually made upon executives when the market is falling (Bebchuk and Grinstein 2005:299). A further argument put is that in these competitive times greater rewards are required as an incentive to executives, when there is little evidence that reward has been effectively linked to CEOs own performance. It appears that neither boards or shareholders have been able to prevent an unprecedented inflation in US executive reward which Bebchuck and Grinstein calculate cost US$250 billion for the top five executives in all US listed corporations between 1993-2002, and saw the earnings of the top five executives as a proportion of aggregate firm earnings rise from 5% in 1993 to 12.8% in 2000-2002 (Bebchuk and Grinstein 2005:297). When shareholder returns collapsed dramatically in 2001/2002, lavish CEO compensation in the S&P 500 continued regardless; and CEO compensation per dollar of net profit between 1960 and 2000 increased exponentially (Economist 25 October 2003). The out of control inflation in executive pay in the United States threatens to impact upon executive reward internationally. In the past there was some resistance to this, when the first President Bush took a large party of U.S. executives to Japan to examine the reasons why U.S. industry had failed to compete in the 1980s, the first suggestion of the Japanese executives to their American counterparts was, why dont you try paying yourselves less money? (At the time Japanese executive salaries in manufacturing industries were a small fraction of U.S. salaries, and have remained modest in comparison). Today many European and Asian executives look upon swollen U.S. executive salaries more as a benchmark to aspire towards. Already a higher proportion of executive pay is being offered in equity-based compensation and in incentive payments in other parts of the world, which were significant stages in the acceleration of the inflation of U.S. executive pay. As Table 3 reveals, though US CEO compensation across a sample of 350 large public companies remains more than double the reward of CEOs drawn from similar samples of public companies in other advanced industrial countries, the rate of growth of CEO compensation in many other countries in the last decade exceeds that of the United States.

Executive Remuneration Reforms :


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Stakeholders Approach to Corporate Governance of Banks- The German Model

In 2006 a survey of 768 directors in the 2,000 largest U.S. corporations by Heidrick and Struggles and the USC Marshall School of Business, nearly 40 percent of directors said CEO pay was too high in most cases, and yet 64 percent of directors expected to see continued increases in cash compensation, and 58 percent expected an increase in stock-based compensation (2006:1). Nevertheless efforts continue to be made to make executive reward systems more rigorous and to eliminate fundamental problems such as mismatched time horizons and the gaming that can lead to fraudulent accounting (Hall 2003). Bebchuk and Fried (2005) recommend a series of measures to increase the transparency of executive pay arrangements including placing a dollar value on all forms of compensation, and to include these amounts in compensation reports; expensing options to make the costs more visible to investors; and reporting how much executive remuneration results from general market and industry movements. They recommend strengthening the link between pay and performance by reducing windfalls in equity-based compensation, filtering out gains in stock price due to general market movements; attaching bonuses to long term performance rather than short term accounting results, and including claw back provisions if accounting numbers are subsequently restated; not paying for simply expanding the company through acquisition; and avoiding soft landing for executives where generous exit packages eliminates any gap between the rewards of good and poor performance. However executive reward will remain an issue when there are questions regarding boards accountability, and CEOs dominating influence over boards. More fundamentally it may be questioned whether executive performance pay should be in the form of stock options at all, since these create an incentive for management to manage performance of financial results in order to maximize share price. Pay for performance might better be linked to the underlying drivers of performance that impact on the financials, and to non-financial performance indicators in a more balanced scorecard. The focus could then be upon management for sustainability, rather than short term performance management aimed at the stock price.

The 2008 International Financial Crisis:


Americas financial institutions have not managed risk; they have created it (Joseph Stiglitz 2008a). The apparent ascendancy of Anglo-American markets and governance institutions was profoundly questioned by the scale and contagion of the 2008 global financial crisis. The crisis
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Stakeholders Approach to Corporate Governance of Banks- The German Model originated in Wall Street where de-regulation unleashed highly incentivized investment banks to flood world markets with toxic financial products. As the accumulated cost of the financial crisis was realized the commitment to establish a new international financial regulatory framework increased. The market capitalization of the stock markets of the world had peaked at $62 trillion at the end of 2007, followed by a calamitous fall to $33 trillion by October 2008 (Figure 4), as derivatives markets that had reached $500 trillion dollars unwound. The general market assistance and specific rescue packages for individual financial institutions amounted to almost $4 trillion worldwide by October 2008 (Table 4). As the financial crisis impacted upon the real economy the fears of a prolonged recession grew, with US industrial production falling further than it had for over 30 years, and for example the US automotive industry becoming increasingly precarious announcing further major redundancies and looking for support from the federal government. The International Labor Organization in Geneva estimated that up to 20 million people in the world would lose their employment as a consequence of the financial crisis, and that for the first time in a decade the global total of unemployed would be above 200 million (Associated Press, 21 October 2008). The explanation of why investment banks and other financial institutions took such spectacular risks with extremely leveraged positions on many securities and derivatives, and the risk management, governance and ethical environment that allowed such conduct to take place is worth further analysis. With the recovery of US financial markets after the Enron debacle, the explosion of financial innovation gave the world a new breed of Masters of the Universe in the derivatives dealers and hedge fund managers who manipulated trillions of dollars, while charging immense fees. This long financial boom of recent years saw the culture of financial excess permeate through swathes of the rich industrial countries as people were encouraged to live on debt. The attractiveness of the Anglo-American finance and governance institutions permeated with inequality and subject to recurrent severe market cycles and financial crisis is open to question as a model for universal applicability. Indeed the damaging consequences of the 2008 financial crisis will impact severely upon the world economy, and could well dislodge the faith that the market based governance system is the only rational and efficient one for the future. It is more likely that solutions will be found to pressing problems of equity, sustainability and innovation in a diversity of finance and governance systems, responsive to deeper and wider concerns than the self-interest of the executives who control corporations, financial institutions and hedge funds (Lazonick 2007).

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Stakeholders Approach to Corporate Governance of Banks- The German Model After discussing the cons of the Anglo-American model, we shall now ponder upon the current challenges faced by Pakistani system and also the future recommendations will also be discussed.

Current Challenges and Suggested Measures:


Ownership Structure, Common Law, and Civil Law unlike the Berle & Means model of separation of ownership and control, Pakistans dominant corporate ownership structure resembles a concentrated family ownership structure. Majority shareholders not only retain control of a company but also are engaged in managing it. Because of Pakistans common law background, the countrys legal system resembles the Anglo-American model; however, Pakistans ownership structure is the opposite of the Anglo-American structure of dispersed ownership. The issuance of the Code ignores this distinction and benefits from the U.K. and South African reform initiatives. Corporate governance mechanisms devised for markets with dispersed ownership may not offer the right cure for the governance issues that a concentrated ownership structure may cause. A regulatory response will be more informed if it also takes into consideration East-Asian reform initiatives, even though some East-Asian countries have civil law traditions. For instance, a regulatory analysis of family ownership structures in the capital markets of Hong Kong, Japan, and South Korea may provide insights into similar governance issues arising out of concentrated ownership structures, and may thus be helpful in devising better solutions and in achieving higher standards of corporate governance.

Minority Shareholders:
Under the Companies Ordinance, 1984, the minimum threshold for seeking a remedy from the Court against mismanagement and oppression requires that at least twenty percent of the shareholders initiate a complaint. Shareholders representing at least ten percent but less than twenty percent of the companys shares can apply to the SECP to appoint an inspector to investigate the companys affairs. Because neither the Companies Ordinance nor the Code recognizes shareholders who represent less than ten percent of the companys shares (the minority shareholders), no analogous provision exists for these shareholders. Minority shareholders can enforce their claims in civil cases by suing for tortious loss in accordance with general laws. Claimants routinely seek interim and permanent injunctive relief against management. Pending final adjudication of the matter, interim relief is invariably granted, thus hindering a companys business. To provide minority shareholders with an
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Stakeholders Approach to Corporate Governance of Banks- The German Model effective remedy while minimizing interference with a companys business, an internal grievance and redress mechanism should be considered for listed companies. The SECP should establish a grievance and redress committee consisting of executive and independent directors and formulate a list of maintainable grievances. Furthermore, the SECP should expand quasijudicial functions of the stock exchanges by granting minority shareholders an appellate remedy before a frontline regulator, and thereafter to the SECP. To make reports and disclosures more reliable, the SECP should encourage minority shareholders to report any noncompliance directly to an audit committee and to the relevant stock exchange. Legal protections for whistleblowers, that is, corporate managers and employees, will help establish an additional monitoring system over the controlling majority.

Expansion of Audit CommitteeLegal Expertise:

The introduction of internal and external audit mechanisms are the most prominent achievements of the evolution and development of global corporate governance initiatives, and the SECP has tried to incorporate these international developments into the Code. Generally, the primary function of an internal audit committee is to assist a companys Board of Directors, while the external audit committee addresses the concerns of the shareholders at large. In both cases, the audit committees can only offer financial and accounting expertise. Because internal and external audit committees lack legal expertise, they cannot ensure that a companys affairs are managed in accordance with the applicable laws. The Code requires companies not only to comply with the provisions of the Code and Companies Ordinance, but also to certify that they are in compliance. A proper certification as to compliance with the Companies Ordinance and the Code can only be done on the basis of professional legal advice. The Code should require the certification and actual compliance with all applicable laws, not just those of the Code and the Companies Ordinance. Although such compliance would expand the scope of the corporate governance regime, this expansion would remain consistent with the purposes for which the issuance of the Code was considered appropriate. Such certification will improve adherence to Corporate Social Responsibility (CSR) policies by companies. Accordingly, the Code will become instrumental in introducing CSR to listed companies, making them more attractive to local and international investors. In addition, compliance with a broader legal certification requirement would discourage transactions between associated companies. To achieve these objectives, the SECP should consider expanding the scope of internal and external audits to include legal expertise for evaluating a companys business and affairs from a legal perspective. In this respect, the following initiatives should be taken:
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Stakeholders Approach to Corporate Governance of Banks- The German Model 1. One of the independent, non-executive directors should be a professional lawyer. Companies may consider retaining the services of their legal advisors appointed pursuant to the Companies (Appointment of Legal Advisors) Act37 and May, alternatively, be deemed to be a member of the Board. 2. One of the non-executive directors on the audit committee should be a professional lawyer or a legal advisor; 3. With the assistance of a professional lawyer or legal advisor, the audit committee should certify each companys compliance with all applicable laws; and 4. The audit committee should be empowered to use its legal expertise to entertain and resolve grievances lodged by minority shareholders as discussed above.

Additional Measures:
The Code requires directors to carry out their fiduciary duties with a sense of objective judgment and independence in the best interests of the company. However, the Code does not define fiduciary duties. To clarify this provision and improve the effectiveness of its enforcement, the SECP should consider listing fiduciary duties. It could borrow from the list of fiduciary duties in the Manual of Corporate Governance, although the SECP does not consider that document binding. In addition, companies should be required to draft and comply with the Statement of Ethics and Business Practices. To ensure a uniform ethical standard, the SECP should provide a general statement setting out minimum ethical standards; companies can set higher standards to meet their particular needs. To minimize noncompliance, companies should have a duty to comply or explain.

Future Challanges:
The most profound issue in corporate governance is how to weigh criminal liability for senior executives for non-compliance of mandatory disclosure and certification requirements against the constitutional right to be free from self-incrimination. For instance, the United States Supreme Court prohibits corporate custodians from successfully invoking their Fifth Amendment protection against self-incrimination when the custodians are served with a regulatory subpoena to disclose corporate records. Since the Pakistan Supreme Court has not made a similar pronouncement, corporate representatives may appeal to the privilege against self-incrimination in this situation. As the SECP expands its role in regulating corporate governance, the following issues should be considered for formulating future policies:
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Stakeholders Approach to Corporate Governance of Banks- The German Model 1. What are the repercussions of over-institutionalizing internal corporate structures by forming committees and sub-committees? 2. Would externalization of the Board cause cost overruns or greater administrative or organizational expenses? If so, what alternatives exist to minimize such costs without compromising effectiveness and transparency? 3. Would a good faith presumption in favor of management be revoked, and if so, under what circumstances?

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 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 AngloSaxon 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.

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Stakeholders Approach to Corporate Governance of Banks- The German Model 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 counterproductive 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 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, policymakers 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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Stakeholders Approach to Corporate Governance of Banks- The German Model

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