Corporate Governance

Corporate Governance
in Pakistan
Adopt or Adapt?
University of Cambridge Research
By
Mahwesh Mumtaz
DECLARATION OF ORIGINALITY
“This dissertation is substantially my own work and conforms to the Judge
Institute guidelines on plagiarism. Where reference has been made to
other research this is acknowledged in the text and bibliography”
Abstract
This study discusses the implications for Pakistan, as it adopts the Anglo-Saxon model of
corporate governance. It explores the causes of impediments that policymakers face as
they try to implement the Code of Corporate Governance. The empirical question that the
study poses is whether a Corporate Governance model that works for the US and the UK,
also work for a country like Pakistan? We present data and review the literature to show
that Pakistan is a country much further down on the development ladder, with ownership
structures markedly different from the diluted ownership structures of developed
countries; with its stock exchanges displaying shallowness; and its cultural underpinnings
heavily influencing how the corporate sector operates. We conclude that the ultimate
objective of the Code of Corporate Governance should be to incorporate good
governance into the Pakistani corporate environment, in order to enhance productivity
and efficiency, rather than trying to emulate the dynamics of those countries which
pioneered the Anglo-Saxon model. We argue that the Code for Corporate Governance
adopted by Pakistan will need to be adapted keeping the local business environment and
market conditions in mind. The study proposes a broader paradigm that views the
governance problem as more than mere conflict of interest between owners and managers
or minority and majority shareholders, in order to be able to devise better policies that are
tailored to the unique corporate context of Pakistan.
Corporate Governance in Pakistan - Adopt or Adapt?
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1 Introduction
Corporations, their conduct, and impact on the social, political and economic sphere
of their existence have been much in debate since the last century. In the recent times
this debate has only intensified; especially in the wake of Asian crises, and a series of
corporate scandals like Enron and WorldCom, much has been said and written about
good governance of corporations. In the last decade corporate governance has been a
dominant policy issue in developed and developing world alike. The issues that ensue
today relate to how these corporations ought to be governed, who should govern them
and how best to strike a balance between laissez faire and monitoring.
There are countries that have pioneered in developing various legal frameworks, and
are actively involved formulating an assortment of codes and statues that govern
them. These countries are called the origins of such codes and laws. Then there are
countries and territories that receive the laws and codes, which originated in some
other country, and adopt them. These are referred to as transplants in the literature. It
is imperative to consider that the origins have developed these laws and codes in their
unique social, political, economic and cultural context. A number of studies (Pistor et
al. 2001, 2003; La Porta et. al. 1999, 2000; Branson 2000; Roe 2003; Lincht et
al.2004) suggest that a simple adoption cannot be beneficial to the transplanting
country until and unless it is well understood and is meaningful to the users in the
country of transplant. This is because unless the regulations are relevant to the people
and their implementation holds benefits for the masses, there will be no motivation for
the recipients of the legal system to accept it and implement it. Secondly, due to the
uniqueness of each country, any law irrespective of which family it has been taken
from would need to be adapted to the transplant country. This requires institutions and
legal intermediaries, which understand the law and can make changes, thereby
making the law more pertinent to their own country, as suggested by Pistor et al.
(Pistor, 2001).
To be able to make meaningful policy recommendations, the meaning of corporate
governance needs to be understood and defined in a country with regard to its
prevailing institutions. The source of differences in countries may be entrenched in
the uniqueness of social culture, political aspects, history, structure of ownership of
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companies, level of socio-economic development, institutional and regulatory
capacity, and legality to name a few. It needs to be appreciated that the corporate
governance problems in a developing or transition economy country are likely to be
different than those of a developed market economy. This is why the solutions that
help solve the governance problems in the developed economies may not do the same
in developing countries. Developing countries need to study the unique issues they
have at hand, and then implant the relevant solutions from other countries, rather than
expecting economic turnarounds by adopting solutions of corporate governance lock,
stock and barrel.
1.2 Purpose and Significance of the Study
As the global debate on corporate governance heats, the importance of this topic to
any country—particularly any developing country—cannot be ignored. Being one of
the important countries of South Asia, with immense trading potential and ideal geopolitical
location, Pakistan has proactively pursued various policy reforms to
stimulate its economic activity, in recent years. The Securities and Exchange
Commission of Pakistan (SECP) issued the Code of Corporate Governance (referred
to hereinafter as the Code), in order to establish a framework for good governance of
companies listed on Pakistan’s stock exchanges. This Code drew upon policies of
good governance adhered to by the U.K. and U.S. models of corporate governance
(the anglo-saxon model). It was assumed that since the origins of Pakistan’s corporate
law lie in the British legal framework, it was only rational that good governance
practices in Pakistan follow those prevalent in the U.K.
However it has been repeatedly emphasized in the vast literature that spans the topic
of corporate governance, that good governance systems are not only limited to laws
and structures, even though they play an important part. What really determines the
success of a good corporate governance system is how it governs and influences the
interaction between all the stakeholders including firms, regulators, political agents,
investors, shareholders, employees. This means that the historical, social, political,
economic, and cultural influences that colour the attitudes of these stakeholders need
to be reflected in a good corporate governance system.
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This study discusses the implications for Pakistan, as it adopts the Anglo-Saxon
model of corporate governance. It explores the causes of impediments that
policymakers face as they try to implement the Code of Corporate Governance. The
empirical question that the study poses is whether a Corporate Governance model that
works for the US and the UK, also work for a country like Pakistan?
The objective of this study is to explore whether the anglo-saxon model of corporate
governance adopted by Pakistan, does indeed fulfil the requirement of being
representative of the problems that are peculiar to Pakistan. This study draws on the
data and various theories put forth regarding the transplantation of law, and extends
them to theorize the impact of transplanting such codes from the field of corporate
governance into a developing country like Pakistan. It postulates that even though
according to the path dependency argument, following the Anglo-Saxon model of
Corporate Governance may make perfect sense for Pakistan, since the roots of
Pakistani law lie in the British Common Law family, but does this mean that
transplanting this particular code of corporate governance would be successful? Can
such a model that works for the US and the UK, also work for a country like Pakistan,
which is much far down on the development ladder? What of the differences in
ownership structures, the underdeveloped capital markets, and cultural
underpinnings?
This thesis aims to observe the factors that may cause hurdles in a simple adoption of
the Anglo-Saxon model of Corporate Governance. It points out that the Code for
Corporate Governance adopted by Pakistan will need to be adapted keeping the local
business environment and market conditions in mind. This study holds significance in
terms of contributing to the under-researched area of corporate governance in a
Pakistan-specific context. There are subtleties involved in convincing the Pakistani
corporate sector—which tends to resist change—that good governance is for their
own benefit. This study aims to draw the attention of policymakers and implementers
towards recognizing these subtleties. It adds value to the limited research done in
Pakistan on this topic by outlining the potential sources of problems and hurdles that
will need to be removed for an effective implementation of the Code of Corporate
Governance. This study has far reaching implications on the implementation policies
as well as on espousing further research. This study forms just the groundwork of
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much more research that is needed to understand the corporate dynamics of Pakistan,
and address issues that impede the development of product and factor markets alike.
Corporate governance has received much attention worldwide since the last decade. In
Asia particularly the financial crises of the late 90s stirred much debate about the
fundamentals of firm dynamics and market interactions. Whereas previously only
financially instable economies were struck with crises, the Asian crises struck havoc
in some of the fastest growing economies of the world, causing paradigm shifts from
what was believed to be the ‘perfect-model-of-Asian-business’, into a theory that the
institutional structures may be at the root cause of the problem.
The importance of good governance cannot be emphasised enough. However, the
question that faces policymakers, governments, economists, investors and other
stakeholders at large is, what corporate governance means to them—in their
particular contexts, structures and frameworks? Literature has attempted to answer
this question theoretically as well as empirically. Of late, it is being increasingly
recognized that a single set of rules-- one model of good governance—does not suit
all the nations. A wide area of topics that the literature covers, while attempting to
answer this question, makes it essential to first review how the definition of corporate
governance varies according to the context in which it is defined.
1.3 Corporate Governance
Efforts have been made at international and national institutional, academic and
corporate levels alike, to promote policy dialogues on corporate governance. In the
UK the Cadbury Report (1992) sought to improve standards of corporate behaviour,
following a spread of concern over financial reporting and transparency. This was
augmented 1995 by the Greenbury report (1996), and the Hampel Report (1998),
which stressed the boards of directors’ role in improving the value of their respective
companies.
Gillan and Starks (1998) define corporate governance as ‘the system of laws, rules,
and factors that control operations at a company.’ In another paper, Gillian et al.
(2003) say that corporate governance involves the monitoring, and control of publicly
held corporations in order to ensure that the corporate agents and assets are
channelled towards achieving the corporate objectives set out by the owners of the
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company, i.e. the shareholders. Shleifer and Vishny (1997) characterise corporate
governance with the interest of economic participants. They refer to corporate
governance as dealing ‘…with the ways in which suppliers of finance to corporations
assure themselves of getting return on their investment’. The differences in the
definitions of corporate governance are also reflected in the different models of
corporate governance that are used worldwide according to the unique governance
requirements of each country.
1.4 Corporate Governance Models
Globally there are several corporate governance models that have been adopted and
implemented not only by their countries of origin, but by other nations too. For
several years now there has been debate over what the perfect model for governance
is, motivating numerous academic studies, both theoretical and empirical in nature.
Comparisons between the effectiveness of Anglo-Saxon Model, German Model,
Japanese and East Asian Model of corporate governance and the ownership structures
in these countries are frequently made (La-Porta et al 1998, Franks and Mayer 1994,
Prowse 1992, Charkham 1992).
Stephen et al. (1996) point out that the US and UK models of corporate governance
are predominantly market based and resemble each other. They espouse the protection
of the minority shareholders and focus on solving the agency problem. The UK and
US models are also said to be focused on individualism and short-termism by some
critics. Independent directors on the board and a non-hierarchical board construct are
the norm. The role of the board is to monitor and evaluate the managers and to select
or remove the senior executives. The approach used for corporate governance in the
UK and US (Anglo-Saxon) is generally referred to as the shareholder approach. Like
other literature, Keasey et al. (1997) and Stephen et al. (1996), comment on the
differences in the fundamental law that governs both of them, however they claim that
both these models are more similar to each other than they are different.
Contrary to that, the German model follows what is known as the stakeholder
approach. The board is two-tiered, consisting of the supervisory board and the
management board. The shareholders’ interests are represented and protected by a
supervisory board that is separate from the management of the company. The German
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model enables all the stakeholders- shareholders, creditors, managers, employees,
suppliers and customers- to monitor the company’s performance. On the other hand,
the Japanese model is quite unique in the sense that the most common type of
business corporation in Japan is the Kabushiki Kaisha. Banks and financial
institutions have substantial holdings of debt and equity in these corporations. The
mode of the operation of the board is hierarchical, usually with 25-50 people being on
the board.
Boot and Macey (2000) suggest that the US system of corporate governance has
received much acceptance and acclaim because of the strong protection it provides to
‘small stakes equity claimant’. Whereas the German model has been found to provide
similar levels of protection for ‘fixed claimants’. These different models of corporate
governance allow implanting countries to choose from among the different features of
different models that suit their economic set up best.
1.5 Ownership Structures and Corporate Governance
A fundamental reason why the agency problems vary from country to country is
because the ownership structures are different between these countries. The agency
problems stem from the disparity between ownership and control, giving rise to
conflicts of interest. Claessens et al. (1999) find that in East Asian countries, control
is maintained through pyramiding and cross-holdings between firms. And so the
voting rights held by the families exceed the cash flow rights that they hold, thus
influencing the decision-making.
1.6 Transplantation and Corporate Governance
The countries that transplant codes of corporate governance need to ensure that the
code recognizes the contextual nature of corporate governance and its dependence on
the legal, regulatory and institutional environment.
There have been several studies to see how the legal developments that take place in
one country can be effectively incorporated in another via the process of
transplantation (Pistor et al, 2000, 2001 and 2003, La Porta et al 1997, Rodrick 2000).
These studies also show that if a law is simply copied-and-pasted without any
adaptation to local conditions then it loses its efficiency. Although the focus of these
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empirical studies is the legal systems and the law in totality, their argument can be
extended to various codes, especially the codes of corporate governance that many
countries transplant. The codes of corporate governance are usually used in
conjunction with the corporate laws of the countries where they are implemented (La
Porta et al., 1999 and 2000, Claessens et al., 2003). This is done to enhance
monitoring, and control of publicly held corporations in order to ensure that the
corporate agents and assets are channelled towards achieving the corporate objectives
set out by the owners of the company, i.e. the shareholders (Morck, 2003). La Porta
et al. (2000) advocate that diverse elements of countries’ financial systems as breadth
and depth of their capital markets, the pace of new security issues, corporate
ownership structures, dividend policies, and the efficiency of investment allocation
seem to be explained conceptually as well as empirically by how well the laws of the
country protect outside investors.
Gillan and Starks (2003) argue that the governance changes have been more
pronounced in countries where there have been dramatic changes in banking sector,
capital markets, and legal systems—and particularly in those countries where there is
a strong presence of institutional investors.
There are a number of models of corporate governance that are followed in different
parts of the world today. Each model has its own unique set of characteristics that suit
the dynamics of the countries where it originated. Other countries and territories
emulate these models and adopt the ones that might fit best with their socio-economic
conditions (Claessens et al., 2000). The codes for corporate governance are codes of
best practices and do not form part of the statutory legislation in most of the countries.
This fact augments the argument that laws and codes need to be changed and
manipulated to suit the local conditions, before they can be fully implemented and
expected to work as well as they work in the country of origin. Legal scholars like
David and Brierley (1985) show that the commercial legal systems of most countries
derive from relatively few legal ‘families’, including English (common law), the
French, and the German, the latter two being derived from the Roman law. These
systems spread throughout the world through, conquest, colonialisation, and voluntary
adoption. La Porta et al. (2000) suggest that the legal families that countries have
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adopted, rather than laws having been written in response to market pressures, shape
the regulations for financial markets and companies.
There are a number of factors that need to complement each other for a transplant to
qualify as successful. The issues of governance vary from country to county
depending on the level of development of capital markets, legal institutions,
ownership structures, existing rules, codes and laws, receptiveness of masses to
change, and culture (Pistor et al., 2000, 2001, 2003). The formal law in the books
does not do much for the development of any country, unless it is used. Although it is
true that corporate governance systems sprout from legal systems, it is also true that
corporate governance tends to deal with softer issues (Roe, 2003). In order to work,
the systems of corporate governance should reflect the political and economic history
of the country as well as the social and political attitudes of the people (Charkham,
1992). Pistor et al. (2003) analyse that countries, which adopt foreign law, are
frequently unprepared for it and for the changes that it brings. Their finding suggest
that ‘…legal transplants cannot function in the host countries as well as they do in the
home countries.’ The major factors that can help determine the success or failure of a
corporate governance code transplant include path dependence, complementary
institutions, and social and corporate culture.
1.6.1 Path Dependence
The path dependence argument suggests that the initial historical conditions prevalent
in a country have a profound impact on the corporate governance practices that it is
likely to adopt. This argument helps us in understanding just why Asian firms and
institutions continue to be as they have been for centuries, despite the evident success
of western models of corporate ownership, structure and culture.
The presence of deeply entrenched path dependencies can inhibit a successful
transplant, if there are marked differences in the newly acquired code and the path
that the importing country has been on for many years.
1.6.2 Corporate Governance and Complementarity
Another important consideration to help make an imported model to work is to create
a ‘fit’ of the new model with the prevalent institutions in the economy. One institution
or code of law, in isolation, cannot undertake the responsibility of corporate
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governance. Explaining the concept of complementarities Schmidt et al., (2000)
suggest that a well-integrated network of support institutions is needed to effectively
implement corporate governance practices. There have to be well-entrenched support
mechanisms at the regulatory level. The legal structure needs to be strong and
cohesive to the type of corporate governance that exists in the country. There needs to
be adequate support from well functioning stock exchanges. The objectives of the
minority and majority shareholders, employees, managers and boards of directors
need to be aligned with those of the regulatory authorities. Hence this
complementarity argument reinforces the point that what is efficient in one context
may not be efficient in another, especially if reforms are implemented on a piecemeal
basis (Coffee, 1999). Roe and Bebchuk (1999) view complementarity as not
something that concerns the ownership structure of firms for instance, it rather
considers other entities and institutions. Such institutions, practices, and professional
communities often develop in every country to facilitate the working of the national
corporate sector.
Hence, the whole national corporate governance system needs to be complementary.
Achieving this fit is not an easy task, especially in the less and newly developed
countries as well as the transition economies. Such transplanting countries, if they try
only to implement corporate governance models imported from developed nations,
may hurt their efficiency rather than benefiting from it, because of their lack of
support institutions.
1.6.3 Social and Corporate Culture
Culture is very deeply entrenched in business practices in Asia It plays a very
important role in whether a transplant would succeed or not. Roe (2003) suggests that
even the very basic corporate law characteristics could be a function not only of
finance, economic rationality and institutional capacity but also of cultural
background of the country where the law is being implemented. The national and/or
regional culture of any country co-determines what people perceive as right or wrong,
what their attitudes are towards change, and the kind of behavioural patterns they
display. This in turn affects the way organizations and businesses are run. According
to Hofstede (1991) people carry within themselves patterns of thinking, feeling and
acting which they have acquired throughout their lifetimes. Once particular patterns
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are formed, the person would then need to unlearn them if she is to learn something
new. It is believed that unlearning to learn something new is far more difficult than
learning something for the first time. As suggested by Redding and Whitley (1990),
in a large proportion of Asian cultures firms are not thought of to be separate legal
entities distinct from their environment, they operate in the context of the society and
hence their form itself is shaped by the culture and the society of the country of
origin. Most of the Asian and some European economies follow what Branson (2000)
calls ‘family capitalism’. This term can be used to explain both, family controlled
publicly held companies as well as a family of companies that are highly networked
and work towards higher level of integration.
For a particular code, law or set or rules to be successfully imported, it is imperative
that it meshes well with the pre-existing rules and ownership structures (Pistor et al.,
2003). Either that, or the cost of not changing to the newly transplanted system should
be substantially higher than the cost of maintaining status quo. There should be
motivation to adopt the transplanted code, and this can only come when the demand
for the transplant comes from within the importing country and its sub-systems
(Schmidt et al., 2002). The demand is necessary so that the law in the books will also
be used in practice. However it may never come off the books and practically used
unless it is adapted the local conditions (Pistor, 2001). Some countries may be more
receptive for a particular transplant because they share common legal history with the
origin, where as others may not understand the new transplant (or the new transplant
may be unsuited) and as with unsuccessful medical transplants, the recipient
corporations may actively develop antigens against the new body of law, rules or
codes. Therefore, before deciding what kind of regulatory framework to adopt, it is
crucial to look at it from the point of view of the people who will need to accept it and
would be finally using it.
1.7 Corporate Governance in Pakistan
The literature regarding corporate governance in Pakistan is extremely thin, given the
lack of research culture in Pakistani academic and institutional spheres. International
literature, reviewed in the earlier subsections has focused on East Asian countries like
China, Thailand, Korea, and Japan to name a few. Among the South Asian countries,
there is relatively much more literature on India than any other country (Khanna et al.,
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1996, 1997, 1998, 1999; Pankaj, 1996; Goswami et al., 1996; Singh et al., 2000,
2002, 2003—to name a few).
Cheema, Bari, and Siddique (2003) summarise the corporate growth history of
Pakistan, providing an overview of the ownership structures, state of financial market,
and market dynamics. Cheema et al. (2003) contribute to the sparse literature in
Pakistan by studying the various determinants of corporate structure in the same
pattern that important corporate governance studies (Claessens et al. 1999, LaPorta et
al. 1999) have. They show the concentration of ownership and control to determine
the ownership structure and capital market structure of Pakistan.
They point out that the recent financial reforms have made the financial sector in
Pakistan very risk averse, thereby limiting the amount of credit that is made available
to the corporate sector in Pakistan. The appendix of the paper outlines the legal
aspects of corporate governance in Pakistan by highlighting the areas where this Code
reinforces the current corporate laws and regulations, and where it overlaps them.
Cheema et al. (2003) further argue that in the current market structure and corporate
environment, many of the provisions of the Code of Corporate Governance (2002)
will not be as effective as they would have been in a more developed capital market.
The paper provides a good backdrop for further research by showing the ownership
structure in Pakistan and the macroeconomic environment with the perspective of
applicability of the Code of Corporate Governance (2002).
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Cheema et al. have highlighted the role of family ownership and their basic premise is
based on the theory of path dependence, suggesting that the historical progress of the
industry in Pakistan was one whereby family ownerships were promoted.
They show the high evidence of pyramiding in Pakistan in the absence of effective
capital market reforms.
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Their discussion suggests that concentrated control in Pakistan, which is buttressed by
interlocking directorships, cross-shareholdings and pyramid structures, may
strengthen incentives for excessive private benefit seeking.
Analysing the stock market in Pakistan, and the role of brokers therein, Khwaja et al.
(2004), find that brokers earn annual rates of return that are 50-90% higher than those
earned by outsiders, when they trade on their own behalf. They refer to price
manipulations by the brokers as a ‘pump-and-dump’ phenomenon, i.e., ‘…when
prices are low, colluding brokers trade amongst themselves to artificially raise the
prices and attract positive-feedback traders’.
Given the distinctive nature of each country’s culture, history, and institutions, as
Charkham (2000) points out. ‘…it would be impossible for one nation to copy
another’s arrangements in their entirety’.
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2 Results and Discussion
2.1 Methodology
Given the dearth of literature in the area of corporate governance in Pakistan, it was
felt that meaningful contribution could be made with a study that is exploratory in
nature. This study, hence, focuses on the analytical examination of the implanted
Code of Corporate Governance and its fit with the country-specific dynamics of
Pakistan, using data provided by various sources that are detailed below.
The study explores various factors that may determine the implementation of good
governance practices in Pakistan. In order to substantiate the theoretical
underpinnings of the study, a combination of quantitative and qualitative approaches
have been used, depending on the nature of the factors being considered.
2.2 Overview of the Data
Compliance with the Code of Corporate Governance has been incorporated as one the
listing requirements for companies in Pakistan. Keeping in line with the objectives of
the study, data on stock market liquidity, ownership structure, and the regulatory
framework towards compliance with the Code was examined. Given the nature of this
study, it was important to identify the softer issues that may be at the core of the
Code’s implementation strategy, along with supporting the argument with quantifiable
data. The data collected for purpose of this study is cross-sectional.
The qualitative information regarding the general response to the Code by listed
companies, problems faced in trying to implement the Code, and any shortcomings of
the Code, was obtained through interviews. Securities and Exchange Commission of
Pakistan (SECP) was the principal source for most of the data collected- both primary
as well as secondary. Secondary data included annual reports for companies that
constituted the sample of ownership pattern data, stock performance data for all of the
709 companies listed on the Karachi Stock Exchange as at year ending 2003, and
published reports, papers and newspaper articles on various aspects of corporate
governance in Pakistan.
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Data for the stock market liquidity is a census, where the population is 709 companies
listed on the Karachi Stock Exchange. This data was collected from the ‘Karachi
Stock Exchange- 2004’ diary’s section titled ‘Statement of Paid-Up Capital,
Dividend, High-Low & Turnover’.
Data used to infer the ownership structure of listed companies in Pakistan was
obtained from the annual reports (year 2003) of a random sample of 30 companies
listed on the Karachi Stock Exchange.
2.3 Results & Discussion
The underlying premise of this thesis is that a good corporate governance framework
needs to be a system of regulations and best practices that enhances the efficiency of
the corporate sector, helps protect the stakeholders’ interests and gives rise to a
vibrant, healthy business culture. To be able to attain these objectives, it is imperative
that corporate governance systems mesh well with the existent corporate and
institutional systems – playing upon the strengths of these systems and eradicating the
sources of weaknesses. Hence, to simply transplant a system of governance is not
enough. The requirement is to adopt the system to the peculiarities of a country’s
business environment.
As mentioned in the previous section, path dependence theory can help explain why
particular ownership structures of companies, development level of capital markets,
regulatory frameworks, and corporate cultures exist. In this section, we shall look at
the historical path that Pakistani corporate sector had taken to reach where it is today,
the impact this path dependence has had on the dynamics of Pakistan’s corporate
environment, culture and structure; and finally the implications this has on good
governance practices.
2.3.1 The Code of Corporate Governance
After a decade of impressive growth in the 80s and early 90s, Pakistan suffered
serious setbacks in the mid- to late 90s in terms of most economic and social
indicators. The economic growth rates decelerated, inflation rose to peak rates, debt
burden escalated substantially and Pakistan had to face international sanctions as a
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consequence of conducting nuclear testing in 1998. Pakistan’s economy was in dire
straights during the latter part of the 1990s when its GDP growth rate had consistently
declined each year, from 7.7% in 1991-1992 to a mere 1.7 % in 1997-1998 (Source:
ECO Official Website). The nuclear testing and subsequent freezing of foreign
currency accounts followed by international sanctions caused a drop in investor
confidence in the Pakistani market and led to a flight of capital away from Pakistan.
Table 5: South Asian GDP per Capita Growth Rate
Source: World Development Indicators 2002
Other macro factors like the military takeover of the government, the 9/11 tragedy, as
well as the War on Terrorism did little to bolster investor’s faith in Pakistan. In order
to address growth concern, and the evolving international standards regarding
monitoring and governance, the Securities and Exchange Commission of Pakistan
(SECP) introduced the Code of Corporate Governance in 2002, with the aim of
managing listed companies through the stock exchanges, in compliance with
international best practices. The Code was formulated by benchmarking several
international codes and corporate governance reports including the Code of Best
Practice of the Cadbury Committee on the Financial Aspects of Corporate
Governance published in December 1992 (U.K.), the Report of the Hampel
Committee in Corporate Governance published in January 1998 (U.K.), the
Recommendations of the King’s Report (South Africa), and the Principles of
Corporate Governance published by the Organisation for Economic Cooperation and
Development in 1999.
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The Code is a first step whereby principles of good governance are envisioned to be
systematically implemented in Pakistan. According to the project report published by
the SECP after the formulation of the Code:
“The Code of Corporate Governance primarily aims to establish a system whereby a
company is directed and controlled by its directors in compliance with the best
practices enunciated by the Code so as to safeguard the interests of diversified
stakeholders. It proposes to restructure the composition of the board of directors in
order to introduce representation by minority shareholders and broad-based
representation by executive and non-executive directors. It seeks to achieve the
objectives of good corporate governance by recommending strengthening of
corporate working, internal control system and external audit requirements. The
Code emphasizes openness and transparency in corporate affairs and the decisionmaking
process and requires directors to discharge their fiduciary responsibilities in
the larger interest of all stakeholders in a transparent, informed, diligent, and timely
manner.”
It has been two years since the Code of Corporate Governance was introduced by the
SECP as part of the listing requirements of the three stock exchanges in Pakistan,
namely Karachi Stock Exchange (KSE), Lahore Stock Exchange (LSE), and the
Islamabad Stock Exchange (ISE). Although the Code is very progressive in nature,
very little impact, if at all, has been felt by its adoption, because there still needs to be
a lot of work done to adapt the Code to the specific needs of Pakistan.
Literature suggests that good governance comes when the interests of the stakeholders
are protected. According to the agency theory, a good corporate governance system
should be able to fundamentally limit the expropriation of minority shareholders at the
hands of block holders in instances of concentrated ownership, and/or reduce the
conflict of interest between the owners and managers in case of diffused ownership.
The role that a corporate governance system is required to play varies with the diverse
elements of a country’s financial systems as breadth and depth of the capital markets,
the pace of new security issues, corporate ownership structures, dividend policies etc.
(La Porta et al., 2000). Our data and the discussion that ensues, outlines the
importance of these elements in Pakistan.
18
2.3.2 Liquidity of the Stock Market
The Karachi Stock Exchange (KSE) is the largest of the three stock exchanges in
Pakistan and an important emerging market of the region among the developing
countries. KSE is termed as high-risk high return market where investors seek highrisk
premium (Nishat, 1999).
Table 1 presents the frequency distribution of percentage turnover of shares during the
year 2002-2003 at the Karachi Stock Exchange. The frequency distribution consists of
14 categories, out of which 13 are classes with unequal class interval, while one is a
category denoting the number of companies whose shares have not been traded at all
throughout the year. The reason for not taking equal class intervals is that the purpose
of this table and dataset is to show the liquidity of KSE. With shorter class intervals
for the first few classes, it becomes clearer to display the limited level of trading
activity, and the large number of companies that fall into the lower trading brackets.
Table 1: Calculated from the Karachi Stock Exchange Annual Diary 2004
Out of 709 listed companies, only 638 companies traded, i.e., 10% of the listed
companies did not trade at all during the year. The number of shares traded during the
year for nearly 50% of the listed companies is less than 5% of the total number of
Frequency Distribution of % Turnover of Shares in KSE Listed Companies as at
year ended 2003
71 10.0 10.0 10.0
173 24.4 24.4 34.4
84 11.8 11.8 46.3
126 17.8 17.8 64.0
69 9.7 9.7 73.8
73 10.3 10.3 84.1
26 3.7 3.7 87.7
33 4.7 4.7 92.4
11 1.6 1.6 93.9
19 2.7 2.7 96.6
4 .6 .6 97.2
6 .8 .8 98.0
5 .7 .7 98.7
9 1.3 1.3 100.0
709 100.0 100.0
Not Trading
0%-2%
2%-5%
5%-15%
15%-25%
25%-50%
50%-75%
75%-125%
125%-200%
200%-300%
300%-500%
500%-600%
600%-800%
800%+
Total
Valid
Frequency Percent Valid Percent
Cumulative
Percent
19
outstanding shares. And the only about 15% of companies display a turnover of 50%
or more of their outstanding equity. The data shows the limited liquidity of companies
trading on the stock exchange. It shows that a majority of the companies do not rely
on stock exchanges to raise capital. On the other hand during the year 2003, KSE
index touched its then highest ever mark of 4604 points on September 12. Given the
extremely low equity turnovers for a majority of companies on the KSE, the
movement in the KSE 100 index may have been displaying the level of trading and
market price changes in a small number of listed companies, rather than representing
the market as a whole. The lack of liquidity limits the exit options for current
investors and minority shareholders, raising their risks. Khwaja et al. (2004), show
that the Karachi Stock Exchange is a market that despite being small in size has a high
turnover, a phenomenon that they claim to be very common occurrence amongst
emerging stock markets. A high overall turnover is attributed to manipulations by the
brokers as well as information asymmetry and insider trading. In their study, in 2002,
the top 25 stocks accounted for 75% of the overall market capitalization, and 85% of
total turnover, with the top 5 most traded shares comprising of 68% of the turnover.
Khwaja et al (2004) findings complement our findings and argument that the KSE is a
market that is directed by the small number of stocks. The London Stock Exchange’s
(LSE) top 5 shares on the other hand, accounted for only about 24% of the total
turnover.
One of the reasons that companies do not actively trade in the stock exchanges in
some Asian countries is because they have alternative modes of raising capital
(Khanna et al., 1999). The ownership structure of companies enables them to tap
internal sources of financing, or financial credit rather than raising capital at the stock
exchanges. The closely related underlying social process is that people prefer to do
business with their friends and family members in Pakistan. Hence, inter-corporate
financing is a popular option that many companies exercise, especially those
belonging to business groups.
Historically too, during the 1960s industrialization in Pakistan, big industrial groups
were provided with cheap industrial credit, on lenient terms—the practice has been
going on since then until recently, as each new policy trying to stimulate industrial
20
growth and productivity has done so by providing financial incentives in one form or
the other. The mode of raising capital is predominantly through financial credit.
However, there is no restriction in Pakistan of banks investing in equity; hence there
is a conflict because banks are also the lenders and hold about 12% of equity in the
manufacturing sector of Pakistan (Mahmood et al. 2003).
With little motivation for companies to raise capital from the stock exchanges, there is
a danger of companies wanting to de-list if they perceive complying with the Code as
too expensive. An ‘Impact Assessment of the Code of Corporate Governance Report’,
found that many small companies and subsidiaries of larger companies have
expressed their reservations about the publications of quarterly results. They consider
the exercise as too costly and negatively affecting their productivity. According to the
report, additional cost burden of complying with the Code of Corporate Governance is
in the range of Rs. 0.8-1.2 million, for small companies. In the year 2002-2003 four
companies de-listed from the stock exchange citing the cost of compliance with the
Corporate Governance Code as being too high for it to remain feasible for them to
stay listed. In an economy where capital markets need to develop, such a reaction by
companies may be counter productive.
2.3.3 Ownership Structure of Companies
The anglo-saxon model of corporate governance, adopted by Pakistan lays emphasis
on the protection of shareholders in order to limit the agency costs, and ensure the
protection of owners’ interests. The model inherently assumes diluted shareholding
and intensive institutional investment (Jensen et al., 1976). Ownership structure of
companies plays an integral role in the implementation process of regulations, such as
those that the corporate governance code prescribes.
In order see the level of dilution versus concentration of equity ownership in the listed
companies, a sample of 30 companies was chosen from 709 companies listed on the
KSE.
The annual reports for the year 2003 were used to collect information regarding the
shareholding patterns of each of the 30 companies in the sample. Securities and
21
Exchange Commission of Pakistan’s (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 weren’t 5 classes in
either category, then less than 5 classes were taken. The total percentage of
shareholding for top 5 and bottom 5 shareholding categories was calculated
respectively.
The average number of individuals falling in the category of smallest 5 shareholdings
is 5352.533 holding an average of 8.76% of the total equity in the sample. Whereas on
average 5.033 individuals held shares that fall in the largest 5 shareholding category
and hold about 64.6% of the shares, according the sample of 30 companies.
To draw inferences about the statistical population based on information obtained
from the sample dataset, the z-test was chosen as the testing method. Z, a standard
normal variable, is used to test for the sample mean.
(a) Largest 5 (or less) Shareholding Categories:
It is intuitively known that the Pakistani stock market faces the problem of
concentration of shareholding. In order to statistically determine whether the
ownership of shareholder is concentrated, the shareholding categories were studied. It
is hypothesized that ownership is would be considered concentrated if more than 50%
shares were held by individuals within the top 5 shareholding categories. 50% is taken
as a cut off point because it would suggest that the 5 top shareholding alone accounts
for the 50% of share ownership, leaving the other 50% to fall into the 95%
shareholding bracket, and hence is a good measure of concentration. If we look at this
information from the perspective of how many individuals actually own the shares
that fall in the top 5 holding we would be able to see how many shares each individual
in the this category holds on average.
22
Hence the hypothesis for this category is:
Ho: Largest 5 shareholding categories account for 50% or less shareholding
H1: Largest 5 shareholding categories account for more than 50% shareholding
Testing the hypothesis, we find that on a 95% confidence level for a one-tailed test,
the null hypothesis can be rejected, and we can conclude that the largest 5
shareholding categories do indeed account for more that 50% of shares. To establish
the fact that there is presence of block holding, we look at the average number of
individuals with holdings in these top 5 categories. As can be seen in Table-2, the
average number of shareholders controlling more than 50% of the shares is almost 5,
this means that each shareholder on average hold almost 10% of the total outstanding
shares in the company. The data from annual reports suggests that the block holders in
companies are mostly other privately held companies, international parent companies
in case of multinationals, financial institutions and in some cases individual persons.
(b) Smallest 5 (or less) Shareholding Categories:
Following the same methodology as the large shareholding category, the cut-off rate
to see the level of dilution at the bottom 5 of shareholding is taken to be 15%. It is
hypothesized that the ownership would be considered diluted if the shareholders of
the bottom 5 categories held more than 15% of total shares in the company. Again
Table 2: Daignostic statistics for largest 5 (or less) shareholdings
Sample size 30
Sample Average 64.59739
Sample Sd 24.77173
Average No. of Shareholders 5.03333
Z test
Ho Population average of shareholding by largest five (or less) shareholders <= 50%
Critical value 1.64
Test Value 3.227599
Test result : Null hypothesis is rejected in favour of H1 and we conclude that the largest 5
shareholders
(or less) hold more than 50% of the sharecapital in the company
23
15% is taken as an arbitrary number, as 3% or less shareholding in each category on
average would show limited dilution. If the shareholding in the first 5 categories is not
more than 15% then it shows that the concentration may be found in the larger
categories, hence suggesting block holding. It would be more meaningful to look at
the average number of individuals whose share ownership falls in the smallest-5
shareholding category.
Hence the hypothesis for this category is:
Ho: Smallest 5 shareholding categories account for 15% or more shareholding
H1: Smallest 5 shareholding categories account for less than 15% shareholding
As for the large shareholding category, we calculated the z-statistic for the small
shareholding category too, and on a 95% confidence-level one tailed test, rejected the
null hypothesis in favour of our alternative hypothesis. Thereby we infer that the
shareholders among the bottom five categories of shareholdings own and control less
than 15% of the total shares. The presence of extremely limited dilution can be further
noticed when we check the average number of shareholders that do actually fall in this
category. As seen in Table 3, above there are approximately 5352 shareholders
owning less than 15% of the outstanding shares, this means that each shareholder in
this category holds about 0.0028% shares in the company.
Table 3: Diagnostic statistics for smallest 5 (or less) shareholdings
Sample Size 30
Sample Mean 8.709707
Sample SD 9.598529
Average No. of Shareholders 5352.533
Z Test
Ho Population average of shareholding by smallest five (or less) shareholders > 15%
Critical Value -1.64
Test Value -3.589441
Test result : Null hypothesis is rejected in favour of H1 and we conclude that the smallest 5% (or less)
of the shareholders hold less than 15% of the sharecapital in the company
24
Amalgamating our findings from both the categories it can be safely said that the
majority ownership of shares is in the hand of few shareholders and results in
intensive block holding. This result is consistent with international studies that report
high levels of ownership concentration in companies in Asia (La Porta et al., 1998,
2000; Claessens et al., 1999; Thadden et al., 1999).
One of the factors to be considered when doing quantitative studies as shown above,
is the relative impact that companies have on the capital markets. For instance, a
larger company that is has diluted shareholding may neutralise the effect of 4 smaller
companies with concentrated shareholding, when seen in the context of the stock
market as a whole. Following this line of thinking, it was worthwhile to see if there is
a difference in the sample averages when market capitalization is taken as the
determinant for firm size, and hence the sample is weighted on it.
Table 4, shows that when we use the weighted averages the sample mean for largest
shareholding categories goes higher, from 64.6% to 71.17% while the shareholding
average % for smallest category goes down from 8.71% to 5.67%. This suggests that
the weight of the larger companies pulls the percentage shareholding more in favour
of concentration. The dilution of share ownership in the smaller firms is not high
enough to neutralize the effect of higher concentration in larger firms, hence
suggesting an even higher concentration of shares with a few individuals than the data
initially suggested.
Table 4: Comparison of Simple Sample Means and Weighted Sample Means for
Largest and Smallest 5(or less)shareholding categories
Sample Mean of 5 (or less)
Largest Shareholding
Categories
Weighted Sample Mean of
5 (or less) Largest
Shareholding categories
Sample Mean of 5 (or
less) Smallest
Shareholding Categories
Weighted Sample Mean of 5
(or less) Largest Shareholding
categories
64.60% 71.17% 8.71% 5.67%
25
The Code of Corporate Governance, which focuses on solving the corporate
governance issues for shareholders, assumes dilution of ownership. In Asia however,
the dilution is extremely limited. Another thing that this data has not accounted for is
proxy ownership. There may be individuals owning shares of the companies in their
own name, but acting as proxies for the majority shareholders. If that is the case then
the dejure concentration of shareholder is far more than can be seen from the data.
The concentration of ownership in Pakistan can be attributed to the underdevelopment
of institutions and capital markets. Firms need to have highly complex (formal and/or
informal) relationships with one another, to make up for the lack of exogenous
institutional support. Family ownership facilitates transactions, thus minimising
transaction costs. On the other hand with pyramiding and cross-shareholdings, the
controlling shareholders can get higher rents, than they would if they paid out
dividends.
Another phenomenon observed in the sample annual reports was that the largest 5
shareholders were corporate entities or financial institutions. Hasan (1997) argues that
there has been a trend since the 1960s whereby the family members of big business
groups in Pakistan have political clout, and hence acquired positions on the boards of
different financial institutions that were formed to fulfil the financial requirements of
the private sector. This led to an overlap of interests demonstrated in credit raised
from sources like the National Investment Trust (NIT) resources and its extension to
the business houses. For example, in the 1970s Ahmad Dawood played a dual role as
the director of NIT and as an equity owner in the Dawood group investments. Such a
path dependency in Pakistan shows that the concentration of ownership structure is
not limited to the firm itself, it extends to other institutions like financial institutions
as well.
There is little motivation for the traditional big family-owned companies to raise
capital from the stock exchange. They skip dividend payments year after year; on the
pretext of ploughing back the profits into the business. The public money raised at the
stock exchange is tunnelled to associated holdings of the public company. Due to the
opaqueness of the family-owned system, and block holding, it becomes very hard to
26
ascertain where this money was utilized. To be able to maintain a position of control
via concentrated ownership, family controllers in Pakistan seldom trade company
shares. They have much more to gain by retaining opaqueness and control, than to
raise more capital by allowing ownership dilution.
Interviews with the SECP officials suggested that most of the companies were in fact
complying with the Code. Compliance with the Code in itself does not mean that the
ownership structures of the firm would change, and unless these structures change, the
Code will have little impact on the economy. This is because the Code draws on the
Anglo-Saxon model of corporate governance, with its thrust on protecting the
minority shareholders, in order to ensure efficiency in the company. In Pakistan as the
data presented in this section shows, the percentage of minority shareholders is too
low to ensure productivity in the firm, even if their interests are protected. It is
imperative, as claimed by the complementarity arguments (Schmidt et al., 2000;
Coffee 1999) that the Code’s objectives and the means of achieving those objectives
match the structural set up of at least the listed companies.
2.3.4 Corporate Culture
Bringing about changes in a culture is a very slow process. However, foreign
companies and institutional investors tend to bring about change faster than local
entities. Unfortunately, foreign investors shy away from Pakistan, due to its sociopolitical
volatility, economic instability, and poor governance within the
organisations. This means that Pakistan is caught in a Catch-22, whereby deep
meaningful cultural changes that pave way for good corporate practices can result
from the presence of international investors; and on the other hand international
investors would choose to invest in Pakistan only when the governance of its
economy improves.
It is highly unlikely that the rules and business institutions that reformers’ wish to
incorporate for better governance, would work unless they match the politics of the
country. As Roe (2003) espouses, if the institutions in a country don’t mesh well with
the underlying political foundations, reformers need to understand that fixing the
27
institutions ‘mechanics’ to complement the political foundations will be an uphill
climb.
Culture may change as corporate structures change, however if a particular set of
cultural traits is too deeply embedded in the society, that it fits many institutions, then
it will not change if it is impeding the objectives of one institution (Roe, 2002). In
Pakistan, a change in cultural traits cannot occur if the regulatory institutions desire
the change only.
With the ownership of financial instruments being concentrated, the number of traders
in the market is smaller for these instruments making them less liquid, which in turn
reduces the ‘exit’ option of the small shareholder. Understanding this phenomenon,
investors in Pakistan do not enter these markets as frequently as they would enter a
more developed instruments market. Khwaja et al (2004) clearly point out that in
terms of direct costs the price manipulation done by insiders i.e. the brokers when
acting for themselves would discourage investors to invest in the stock market.
Corporate governance code in isolation, hence, can achieve little until and unless
reforms are extended to complementarity institutions, the stock markets being one of
the most important. From policy perspective the goal of Corporate Governance
reforms should not be to emulate the Anglo-Saxon model of good governance. The
regulators should not try to force a change in ownership structures; instead they
should facilitate efficient use of capital. Co-ordinating simultaneous change in
multiple institutions is almost impossible. Policymakers need to emphasise on
medium- to long-term planning, and more importantly ‘phased-implementation’ of
these plans. Scope of further research exists in identifying the motivators for firms
and corporate sector that may bring about a voluntary change and acceptance of good
governance.
3 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 company—was until
28
quite recently, very popular between academic, institutional, regulatory and policymaking
circles. However, there is increasing evidence suggesting in developing and
transition economies—and even some developed economies—all over the world
display ownership structures that do not adhere to the Berle and Means image of a
corporation. Studies that look outside the US, particularly into those countries with
weak shareholder protection, find that even the largest companies have concentrated
shareholding patterns, and thus face a different kind of agency problem. La Porta et
al. (1998) discover that the agency problem in large corporations all around the world
entails restricting expropriation of minority shareholders by the controlling
shareholders, rather than that of restricting empire building by professional managers
accountable to shareholders.
The results of our study reinforce the point that agency problems differ according to
the economic conditions, ownership structures, capital market development, cultural
underpinnings and institutional capacity. The empirical question that this study poses
is whether or not an Anglo-Saxon corporate governance model that is formulated in a
particular corporate context, be applicable to a country like Pakistan that displays very
different business and socio-economic characteristics. Given the multitude factors, the
interactions of which forms the corporate framework of any country, the study was
not expected to give any straightforward answers. This thesis was expected to explore
the factors that may potentially impede an effective implementation of good
governance in Pakistan.
Based on the findings of this study we postulate that before abstract notions of
corporate governance are imposed by the regulatory forces in Pakistan, it is
imperative that the policy makers understand the dynamics of decision-making, loci
of power, the various market inefficiencies and their costs, the social embeddedness
of existing governance mechanisms, and above all the role played by various
organizational forms and boards in the country's development are understood. If the
SECP and stock exchanges try to adopt good governance practices by forcing them on
the corporate sector of Pakistan, it is our premise that, such a move would be
extremely counter productive to the economy as a whole. We, therefore, strongly
recommend that the Code of Corporate Governance by implemented through an
iterative process that is phased out over a long-term period. One of the essential
29
features of this phased implementation should be the focus on developing other
support institutions simultaneously. Any amount of corporate governance reform
cannot work in isolation due to the very nature of ‘good governance’. Creating a snug
‘fit’ between the on-paper policies and de facto implementation can ensure effective
governance of the corporations. To achieve this fit, policy-makers need to be
appreciative of the uniqueness of the corporate culture of Pakistan and incorporate it
in any structural or market reforms that entail good governance.
There is a dire need for further research in Pakistan on not only corporate governance,
but also in the peripheral areas of ownership structures, and key market forces that
impact the dynamics of companies and institutions. These forces need to be identified
and understood before they can be used to benefit the economy. This warrants
empirical time-series based research on the performance of firms to study increases in
productivity, if any, which may have resulted from the introduction of the Code of
Corporate Governance. It would also be interesting to see the role of institutional
investors, both national and international, in bringing about good governance
practices in Pakistan. Exploring these further research areas is extremely important for
making sensible policy recommendations. For the time being though, it is safe to
conclude by saying that adopting an international code of corporate governance
without adapting it to local needs and requirements, will not have the positive impact
that is hoped to be brought to the corporate sector through this Code.
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Corporate Governance in Pakistan
Appendix A
A.1 Shareholding patterns of smallest five categories of shareholders
COMPANIES TOTAL SHAREHOLDING % NO.OF SHAREHOLDERS
Jubilee Spinning and Weaving Mills Ltd. 12.4 1147
Aventis Limited 3.9 834
Fauji Fertilizer Company Limited 2.5 3571
Unilever Pakistan Limited 9.9 4491
Bawany Air Products Limited 46.1 550
Pakistan Synthetics Limited 20.0 18
Pak Leather Crafts Limited 7.8 509
Taga Pakistan Limited 7.3 337
Genertech Pakistan Limited 1.0 3215
National Bank of Pakistan 2.5 9484
Engro Chemical (Pakistan) Limited 9.4 8579
Fauji Fertilizer Bin Qasim Limited 2.0 12114
Pakistan PTA Limited 1.2 16522
Burewala Mills Limited 13.6 1771
Polypropylene Products Ltd. 16.7 1501
Pakistan Oilfields Limited 0.1 1
Sui Nothern Gas Pipelines Limited 3.4 17856
Nadeem Textile Mills Limited 13.6 115
Blessed Textiles Limited 7.4 670
Bhanero Textile Mills Limited 2.9 216
Sapphire Textile Mills Limited 0.7 7
Gammon Pakistan Limited 27.5 2737
HajraTextile Mills 7.4 642
RafhanMaize Products Co. Ltd. 2.9 1079
Shezan International Limited 1.8 8
Gandhara Nissan Limited 12.9 2948
Kohinoor Genertek Limited 12.1 1623
Maple Leaf Cement Factory Limited 6.0 9145
Sui Southern Gas Company Limited 1.8 10507
Muslim Commercial Bank Limited 6.2 48379
STANRDARD DEVIATION OF SAMPLE 9.6
SAMPLE MEAN 8.8 5352.5
Z-TEST SI -3.6 (critical value -1.64)
checked against 15%
Percentage of Smallest Five (or less) Shareholdings
A.2 Shareholding patterns of largest five categories of shareholders
COMPANIES TOTAL SHAREHOLDING % NO.OF SHAREHOLDERS
Jubilee Spinning and Weaving Mills Ltd. 24.2 5
Aventis Limited 81.4 5
Fauji Fertilizer Company Limited 65.3 5
Unilever Pakistan Limited 80.7 5
Bawany Air Products Limited 64.0 5
Pakistan Synthetics Limited 31.6 5
Pak Leather Crafts Limited 57.3 6
Taga Pakistan Limited 92.7 10
Genertech Pakistan Limited 29.8 5
National Bank of Pakistan 81.1 5
Engro Chemical (Pakistan) Limited 39.2 5
Fauji Fertilizer Bin Qasim Limited 83.0 5
Pakistan PTA Limited 95.0 5
Burewala Mills Limited 54.7 5
Polypropylene Products Ltd. 40.0 6
Pakistan Oilfields Limited 99.9 3
Sui Nothern Gas Pipelines Limited 70.4 5
Nadeem Textile Mills Limited 78.0 5
Blessed Textiles Limited 50.2 5
Bhanero Textile Mills Limited 50.6 5
Sapphire Textile Mills Limited 99.3 1
Gammon Pakistan Limited 22.8 8
HajraTextile Mills 30.7 5
RafhanMaize Products Co. Ltd. 86.3 6
Shezan International Limited 99.8 1
Gandhara Nissan Limited 79.5 5
Kohinoor Genertek Limited 64.5 5
Maple Leaf Cement Factory Limited 68.5 5
Sui Southern Gas Company Limited 87.1 5
Muslim Commercial Bank Limited 30.3 5
STANRDARD DEVIATION OF SAMPLE 24.8
SAMPLE MEAN 64.6 5.0
Z-TEST SIGNIFICANCE LEVEL 3.2
checked against 50%
Percentage of Largest Five (or less) Shareholdings
Corporate Governance in Pakistan
A.3 Turnover and capital account details of recently listed firms (example set)*
S. No Name of Company
Year of
listing Year ending
Paid up Capital
2003 (Million of
Rupees)
Par value of
Shares
No of
Outstanding
Shares
Turnover of
Shares 2003
% Turonver of
Shares 2003
A B (B/A)*100
1 D.G. Khan Cement (R.C Perf.) 10% 2003 September 353508000 10 35350800 9205500 26.04
2 Mashreq Bank Pakistan 2003 December 1475613000 10 147561300 82028000 55.59
3 Nagina Cotton Mills (R.C.Pref) 13% 2003 September 241860000 10 24186000 1140500 4.72
4 Security Leasing Corp. (Pref) 9.1% 2003 June 150000000 10 15000000 NT -
5 TRG Pakistan "A" 2003 June 600000000 10 60000000 505203000 842.01
6 TRG Pakistan "B" 2003 June 120000000 - - NT -
7 Attock Cement Pakistan Limited 2002 June 721629000 10 72162900 196826500 272.75
8 Bosicor Pakistan Limited 2002 June 1750466000 10 175046600 1503450000 858.89
9 National Bank of Pakistan 2002 December 4103422000 10 410342200 1567153500 381.91
10 Natover Lease & Refinance (Pref) l5% 2002 June 150000000 10 15000000 11903500 79.36
11 WorldCALL Multimedia Limited 2002 June 530000000 10 53000000 105500 0.20
12 Arif Habib Securities Limited 2001 June 79998000 10 7999800 425500 5.32
13 Bestway Cement Limited 2001 June 1934696000 10 193469600 1295500 0.67
14 Fayzan Manufacturing Modaraba 2001 December 900000000 10 90000000 4116000 4.57
15 Pakistan PTA Limited 2001 December 15142072000 10 1514207200 1492391500 98.56
16 Dewan Farooque Motors Limited 2000 June 734031000 10 73403100 921239500 1255.04
17 Meezan Bank Limited 2000 December 993212000 10 99321200 11001500 11.08
18 WorldCALL Communications Ltd. 2000 June 1592643000 10 159264300 694635500 436.15
19 Altern Energy Limited 1998 June 221000000 10 22100000 451500 2.04
20 Rafhan Bestfoods Limited 1998 December 61576000 10 6157600 800 0.01
21 Refrigerators Manufacturing Co. 1998 December 50023000 10 5002300 4693100 93.82
22 Clairant Pakistan Limited 1997 December 155969000 10 15596900 423200 2.71
23 Grays Leasing Company 1997 June 180000000 10 18000000 206000 1.14
24 Nina Industries Limited 1997 June 242000000 10 24200000 692500 2.86
25 Saadi Cement Limited 1997 June 1850000000 10 185000000 34902000 18.87
26 Sigma Leasing Corporation Limited 1997 June 200000000 10 20000000 NT -
27 Al Khair Gadoon Limited 1996 June 100000000 10 10000000 2697500 26.98
28 Al Meezan Mutual Fund Limited 1996 June 775000000 10 77500000 12714000 16.41
29 Askari General Insurance Co. Ltd. 1996 December 81747000 10 8174700 16897000 206.70
30 BSJS Balance Fund Limited 1996 June 374000000 10 37400000 15470000 41.36
*Note: The above table is an abridged version of dataset used (comprising of 709 firms) and is for
illustration purposes only.

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