Chapter 26

An Overview of Corporate Governance

Practices in Pakistan
Robert W. McGee

Introduction
The World Bank has published a series of reports on corporate governance as part of
its project on the Reports on the Observance of Standards and Codes (ROSC). The
corporate governance principles in its ROSC are benchmarked against the OECDs
Principles of Corporate Governance (OECD, 2004). The main categories of principles are discussed below.

Methodology
The corporate governance topics discussed in the World Banks ROSC were classified into categories based on the extent of compliance with the OECDs Principles
of Corporate Governance (OECD, 2004). Points were then assigned to each category, as follows:
O = Observed = 5 points
LO = Largely Observed = 4 points
PO = Partially Observed = 3 points
MNO = Materially Not Observed = 2 points
NO = Not Observed = 1 point

Summary of Findings
Table 26.1 summarizes the scores in the various categories. The table categorizes
compliance with corporate governance principles into five categories.

R.W. McGee ( )
Florida International University, Miami, FL, USA
e-mail: bob414@hotmail.com

R.W. McGee (ed.), Corporate Governance in Developing Economies,

DOI 10.1007/978-0-387-84833-4_26, Springer Science+Business Media, LLC 2009

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R.W. McGee
Table 26.1 Summary of scores by category
O

I
A
B

D
E

F
II
A

B
C

III
A
B

D
IV
A

C
D

Rights of shareholders
Protect shareholder rights
Shareholders have the right to participate
in, and to be sufficiently informed on,
decisions concerning fundamental corporate changes
Shareholders should have the opportunity to
participate effectively and vote in general
shareholder meetings
Capital structures and arrangements that allow
disproportionate control
Markets for corporate control should be
allowed to function in an efficient and
transparent manner
Shareholders should consider the costs and
benefits of exercising their voting rights

Disclosure and transparency

The corporate governance framework should
ensure that timely and accurate disclosure
is made on all material matters
Information should be prepared, audited, and
disclosed in accordance with high quality
standards of accounting, financial and
nonfinancial disclosure, and audit
An independent audit should be conducted by
an independent auditor
Channels for disseminating information should
provide for fair, timely, and cost-effective
access to relevant information by users

PO

MNO

X
X

X
X

Equitable treatment of shareholders

The corporate governance framework should
ensure the equitable treatment of all
shareholders, including minority and
foreign shareholders
Insider trading and abusive self-dealing should
be prohibited
Board members and managers should be required
to disclose material interests in transactions or
matters affecting the corporation
Role of stakeholders in corporate governance
The corporate governance framework should
recognize the rights of stakeholders
Stakeholders should have the opportunity to
obtain effective redress for violation of
their rights
The corporate governance framework should
permit performance-enhancement mechanisms for stakeholder participation
Stakeholders should have access to relevant
information

LO

X
X

X
X

X
X

NO

26 An Overview of Corporate Governance Practices in Pakistan

Table 26.1 (continued)
O
V
A

The responsibility of the board

Board members should act on a fully informed
basis, in good faith, with due diligence
and care, and in the best interests of the
company and the shareholders
The board should treat all shareholders fairly
The board should ensure compliance with
applicable law and take into account the
interests of stakeholders
The board should fulfill certain board functions
The board should be able to exercise objective
judgment on corporate affairs independent
from management
Board members should have access to accurate,
relevant, and timely information

B
C

D
E

221

LO

PO

MNO

NO

X
X

X
X

Table 26.2 Corporate governance scores

Category
Rights of shareholders
Equitable treatment of shareholders
Role of stakeholders in corporate
governance
Disclosure and transparency
The responsibility of the board
Overall average

Total points
20
11
17

Number of items
6
3
4

Average
3.33
3.67
4.25

16
21

4
6

4.00
3.50
3.70

Table 26.2 shows the scores for each subcategory. The overall average was 3.70.
The graph below shows the relative scores. All of the scores are at least 3.33 or
higher. The top score was in the category of Role (4.25).
Corporate Governance Scores - Pakistan
5
4

3.67

4.25

3.33

3.5

3
2
1
0
Rights

Treatment

Role

D&T

Board

Recommendations
The ROSC made several recommendations. It recognizes the major reforms that
Pakistan has made in the last few years and urges the reforms to continue. The Securities and Exchange Commission of Pakistan (SECP) should take as its primary

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priority compliance in the following three areas: (1) the disclosure of beneficial
ownership and control by shareholders and by companies; (2) reporting-related party
transactions; and (3) compliance with regard to the annual general shareholders
meeting.
The ROSC recommends building the enforcement authority of the SECP in
order to achieve these goals. Raising the technical level of its legal and accounting
experts was also recommended.
The accounting and audit professions are currently self-regulated. The ROSC
believes that self-regulation will not be adequate in the future. It recommends independent oversight.
The present situation in Pakistan involves a wide variety of listed companies
with varying corporate governance rules. Board independence is a controversial
issue. The ROSC recommends developing a new corporate governance listing tier.
Companies that list on that tier would agree to comply with all code provisions,
including board independence, mandatory director certification, and strengthened
audit committees. It is hoped that the differentiation provided by this tier will, over
time, encourage companies to upgrade to international standards.
Institutional investors should play a more active role in monitoring companies
and should demand governance changes. Those that are acting in a fiduciary role
should disclose their voting and corporate governance policies.

References
OECD. (2004). OECD Principles of Corporate Governance. Paris: Author. Retrieved from www.
oecd.org/dataoecd/32/18/31557724.pdf
World Bank. (2005). Report on the Observance of Standards and Codes (ROSC), Corporate
Governance Country Assessment: Pakistan..
World Bank. (2008). Reports on the Observance of Standards and Codes (ROSC) for Corporate
Governance. Retrieved from www.worldbank.org/ifa/rosc_cg.html