Corporate Governance Challenges in Pakistan: Perceptions and Potential Routes Forward 9783110772999, 9783110772869

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Nadeem Zia, Bruce Burton Corporate Governance Challenges in Pakistan

De Gruyter Studies in Corporate Governance

Series Editor Jill Atkins Cardiff Business School, Cardiff University, UK School of Accountancy, University of the Witwatersrand, South Africa

Volume 5

Nadeem Zia, Bruce Burton

Corporate Governance Challenges in Pakistan

Perceptions and Potential Routes Forward

ISBN 978-3-11-077286-9 e-ISBN (PDF) 978-3-11-077299-9 e-ISBN (EPUB) 978-3-11-077306-4 ISSN 2570-1673 e-ISSN 2570-1681 Library of Congress Control Number: 2023942774 Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available on the Internet at http://dnb.dnb.de. © 2023 Walter de Gruyter GmbH, Berlin/Boston Typesetting: Integra Software Services Pvt. Ltd. Printing and Binding: CPI books GmbH, Leck www.degruyter.com

Contents List of Figures List of Tables

IX XI

Chapter 1 Introduction 1 1.1 Introduction

1

Chapter 2 Pakistani Context 5 2.1 Introduction 5 2.2 Historical Background 5 2.2.1 Pakistan’s Independence 7 2.2.2 Pakistan’s Political History 10 2.2.3 Geography and Population 13 2.2.4 Administrative Set-up 14 2.3 Pakistan’s Economic Situation 14 2.3.1 The Agriculture Sector 16 2.3.2 The Service Sector 16 2.3.3 The Industrial Sector 18 2.3.4 China-Pakistan Economic Corridor (CPEC) 18 2.4 Legal and Regulatory System in Pakistan 19 2.4.1 The State Bank of Pakistan and Capital Law Authority 2.4.2 The Securities and Exchange of Pakistan (SECP) 20 2.4.3 The Pakistan Institute of Corporate Governance (PICG) 2.4.4 The Pakistan Stock Market 22 2.4.5 Ownership Structure 25 Chapter 3 Corporate Governance in Pakistan 27 3.1 Introduction 27 3.2 Corporate Governance in Pakistan 27 3.2.1 The Board of Directors 29 3.2.2 Board Committees 29 3.2.3 The Audit Committee in Pakistan 30 3.2.4 The Remuneration and Human Resource Committee 3.2.5 Compliance with the Code of Corporate Governance 3.2.6 Shareholder Rights in Pakistan 31 3.3 Corporate Governance Failures in Pakistan 33 3.3.1 Mehran Bank Scandal 33

20 21

30 31

VI

3.3.2 3.4

Contents

Privatisation of Pakistan Telecommunication Company Limited (PTCL) 34 Previous Research on Corporate Governance in Pakistan

36

Chapter 4 Corporate Governance in Emerging Markets 38 4.1 Introduction 38 4.2 The Corporate Governance Notion 38 4.3 Models of Corporate Governance 41 4.3.1 Ownership Structure 41 4.3.2 Legal Framework 42 4.4 Mandatory Versus Voluntary Compliance of Corporate Governance 43 4.5 Corporate Governance in Emerging Markets 44 4.5.1 Drivers of Corporate Governance in Emerging Markets 45 4.5.2 The Legal Framework and Ownership Structure in Emerging Markets 46 4.5.3 Corporate Governance Reforms in Emerging Markets 48 4.5.4 Corporate Governance Compliance in Emerging Markets 49 4.5.5 Challenges to Corporate Governance Development in Emerging Markets 49 4.5.6 Political and Legal Influences on Corporate Governance in Emerging Markets 50 4.5.7 Social and Cultural Influences on Corporate Governance in Emerging Markets 51 4.5.8 Corruption and Governance Weaknesses in Emerging Markets 52 4.6 Shareholder Activism and Whistle Blowing in Emerging Markets 54 Chapter 5 Theoretical Framework 56 5.1 Introduction 56 5.2 Institutional Theory 56 5.3 Institutional Theory Development 56 5.3.1 New Institutional Sociology 57 5.3.2 Institutional Isomorphism 58 5.4 Corporate Governance from an Institutional Theory Perspective 5.4.1 Governance and Institutions 60 5.4.2 Political Institutions 61 5.4.3 Legal Institutions 62 5.4.4 Religious Institutions 62 5.4.5 Family Institutions 63

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Contents

Chapter 6 Research Methods and Methodology 64 6.1 Introduction 64 6.1.1 Assumptions about the Nature of Social Science Research 6.1.2 “Order” and “Conflict” Theories about the Nature of Society 6.2 Research Paradigms 67 6.3 Research Methods 70 6.3.1 Questionnaires 70

64 67

Chapter 7 Empirical Findings and Discussions 73 7.1 Introduction 73 7.2 Questionnaire Administration 73 7.2.1 Questionnaire Response Analysis 74 7.2.2 Significance Testing 75 7.2.3 Reliability and Validity of Questionnaire Responses 75 7.3 Results 76 7.3.1 Analysis of Demographic Information 76 7.3.2 The Concept of Corporate Governance 79 7.3.3 Defining Corporate Governance 82 7.3.4 Suitability of Western Corporate Governance Codes in a Pakistani Context 84 7.4 Drivers of Corporate Governance in Pakistan 86 7.5 Perceptions Regarding Corporate Governance Compliance and the Implications of Improved Practices 88 7.5.1 Mandatory Compliance with Corporate Governance in Pakistan 91 7.5.2 Role of Improved Corporate Governance Practices in Addressing Corporate Failures and Practices in Pakistan 91 7.5.3 Foreign Direct Investment and Corporate Governance 92 7.5.4 Board Evaluation and Corporate Governance 93 7.6 Institutional Factors Driving Corporate Governance Failures and Scandals in Pakistan 94 7.6.1 Political Factors 94 7.6.2 Legal and Regulatory Factors 96 7.6.3 Corruption and Bribery 97 7.6.4 Family Ownership 97 7.6.5 Competence, Education and Experience 98 7.6.6 Institutional Investors and Corporate Governance 99 7.6.7 Social, Cultural and Ethical Factors 99 7.6.8 Other Factors 100 7.7 Corporate Governance Benefits 100

VII

VIII

Contents

7.8

Possible Actions and Suggestions to Improve Corporate Governance Moving Forward 104 Summary 111

7.9

Chapter 8 Conclusion, Recommendations, Limitations and Future Research 113 8.1 Introduction 113 8.2 Summary of the Book 113 8.3 Main Findings 114 8.3.1 Isomorphic Forces and Corporate Failures and Scandals in Pakistan 114 8.3.2 Learning from the Failures and Moving on with Institutional Changes 117 8.3.3 Recommendations and Policy Implications 117 8.4 Contributions to Knowledge 120 8.5 Limitations and Avenues for Further Research 122 Reference List Appendices Index

167

125 139

List of Figures Figure 2.1 Figure 2.2 Figure 2.3 Figure 4.1 Figure 6.1 Figure 6.2 Figure 6.3 Figure 7.1 Figure 7.2 Figure 7.3 Figure 7.4 Figure 7.5 Figure 8.1

Pakistan GDP Growth Rate (1951–2008) 15 Pakistan GDP Growth Rate (2009–2021) 15 Top 10 Sectors on Pakistan Stock Exchange 24 Pakistan: Corruption Rank for 2012–2021 53 The Subjective–Objective Dimension in Social Science Research 64 Burrell and Morgan’s Social Research Paradigm 68 Radical Developments in Accounting 68 Participants’ Sector and Company Type for Board Member and Employee Respondents 77 Participants’ Job Roles 77 Participants’ Qualifications 78 Most Appropriate Definition of Corporate Governance in a Pakistani Context Suitability of Western Codes of Corporate Governance in Pakistani Context Contribution and Impact 121

https://doi.org/10.1515/9783110772999-203

84 85

List of Tables Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 3.1 Table 4.1 Table 7.1 Table 7.2 Table 7.3 Table 7.4 Table 7.5

Timeline of Historical Events in Pakistan 8 GDP Share of Key Sectors in Pakistan 17 Pakistan Stock Exchange at a Glance 2016–2020 23 Ownership Structure of Pakistan’s Top 40 Listed Companies 26 Major Corporate Failures and Scandals in Pakistan 35 Comparison of Emerging Countries Legal Systems 47 Questionnaire Response Classifications 74 Reliability Test Statistics 76 Survey Participants’ Job Role and Experience in their Current Firm 78 Familiarity with Corporate Governance 80 Familiarities with Domestic and International Codes and Principles of Corporate Governance 81 Table 7.6 Defining Corporate Governance 83 Table 7.7 Suitability of Western Corporate Governance Codes in a Pakistani Context 86 Table 7.8 Corporate Governance Drivers in Pakistan 89 Table 7.9 Perceptions Regarding Corporate Governance Compliance and the Implications of Improved Practices 90 Table 7.10 Institutional Factors Driving Corporate Governance Failures and Scandals in Pakistan 95 Table 7.11 Potential Benefits of Improved Corporate Governance in Pakistan 102 Table 7.12 Actions to Improve Corporate Governance in Pakistan 106

https://doi.org/10.1515/9783110772999-204

Chapter 1 Introduction 1.1 Introduction The level of attention paid to corporate governance failures has risen greatly in recent years as the effects of many large-scale institutional problems continue to reverberate around the globe (Agrawal & Chadha, 2005; Solomon, 2013; Jermias & Gani, 2014; Soltani, 2014; Chanda et al., 2017). Whilst most of this increased focus has been on problems (e.g. Enron1 and Worldcom2) in the world’s richest nations (Agrawal & Chadha, 2005; Wanyama et al., 2009; Solomon, 2013; Clarke, 2017), major difficulties in emerging countries have led to renewed consideration of the issue in this alternative context. In particular, corporate governance-led failures in the developing world have shown how “poor” governance practices can affect a wide range of stakeholders in such communities. For example, Chanda et al. (2017) argue that the collapse of several major Zambian banks can be attributed to governance inadequacies that more robust regulatory attention might have prevented. Similarly, a series of failures3 and market crashes in Pakistan have raised serious concerns about corporate practices (Yasser, 2011; Siddiqui & Fahim, 2013; Butt, 2015) leading Hameed et al. (2013) to argue that deficiencies relating to the nation’s governance structures and internal control mechanisms require urgent attention. Academics and practitioners (e.g. Aguilera et al., 2008; Filatotchev et al., 2013; Aguilera et al., 2015) note that as different countries are embedded in their own business environment, the nature of corporate governance mechanisms (and weaknesses therein) is influenced by formal and informal institutions at national level. The nature, role and effectiveness of corporate governance codes vary widely from country-to-country (Yasser, 2011; Mallin, 2013; OECD, 2017). However, whilst the term “corporate governance” does not yet have a universally accepted meaning, the generalised concept of a system that helps to control and direct a company via a set of regulated policies and rules, originally advanced in the UK’s Cadbury Report of 1992,4 is  In 2001, Enron Corporation, the seventh largest energy company in the world, filed for bankruptcy in the US leaving 20,000 employees without jobs and retirees without $2 billion in pension funds (Mallin, 2013). Senior management wrongdoing, in particular, accounting manipulation, was shown to have led directly to collapse (Solomon, 2013).  At WorldCom, an internal audit uncovered $3.3 billion in profit improperly recorded on its books between 1999 and the first quarter of 2002. This irregularity was the result of deliberate manipulation of reserves which Arthur Andersen failed to highlight at the time (Lyke & Jickling, 2002).  Recent corporate governance failures in Pakistan include those relating to Mehrangate, Taj Company, PTCL Privatization, Khanani and Kalia Exchange Company plus Engro Food (Fahim & Siddiqui, 2013). The implications of these and other corporate failures are explored in detail in Chapter 3.  Formally “The Report of the Committee on the Financial Aspects of Corporate Governance”. https://doi.org/10.1515/9783110772999-001

2

Chapter 1 Introduction

widely recognised, albeit in an evolving and dynamic context (Solomon, 2013). Initially, the Cadbury Code was presented as a response to multiple corporate failures such as BCCI, Polly Peck and Maxwell5 and a lack of confidence in financial reporting (Yasser, 2011; Mallin, 2013; Clarke, 2017) with the development of the Sarbanes-Oxley Act of 2002 in the US following similar events at Enron, Worldcom and others (Tricker, 2019). Whilst developed nations initially led in terms of code drafting and implementation, emerging nations have now seen widespread adoption of internationally focused regulations such as the OECD and King reports (Solomon, 2013; Shikaputo, 2013). However, despite this trend developing countries have tended to see very little improvement in governance standards in the corporate sector; the ongoing problems have often hampered efforts to attract and retain significant international and domestic investment (Yasser, 2011; Hameed et al., 2013; Afzal & Sehrish, 2014). In Pakistan, widespread corporate failures have abounded since the country’s creation seven decades ago (Salman & Siddiqui, 2013) with severe impacts on employees, investors, local communities and others (Mangi & Siddiqui, 2013). This pattern suggests that governance standards in the nation have consistently failed to underpin sustainable growth. In this context, a CIPE (2007) survey revealed that 82 per cent of companies in Pakistan are unaware of potential corporate governance-related benefits such as transparency, accountability, access to foreign capital and shareholder rights protection, a pattern confirmed in a more recent survey by Deloitte (2014) which suggests that there is still no meaningful discharge of board accountability in the nation. The latter survey highlights that 75 per cent of KSE-100 index companies and 80 per cent of other companies had resisted initiating a board performance evaluation process, a potentially significant failure given boards’ responsibility for making decisions that shape future economic prospects (Tricker, 2019). The survey further disclosed that more than three-quarters of Pakistani firms had no female directors despite evidence that such diversity increases financial performance as well as improving customer satisfaction and enhancing knowledge and reputation (Deloitte, 2014; Tricker, 2019). Worryingly, evidence in the Deloitte report indicates that the relatively high levels of pro-forma code compliance among Pakistan’s listed companies mask major weaknesses in effectiveness, with the adherence levels reflecting little more than boxticking. For example, independent non-executive directors’ presence on the board is often characterised as being evident for no more than appearances’ sake, with these individuals having no effective decision-making role.

 Although the committee was set up prior to the collapse of the Maxwell empire, the latter became public knowledge several months prior to the issue of the report. Maxwell was found to have stolen £727 million from the pension funds of his two public companies and shareholders lost an estimated £1 billion. Many parties who might have played a role in spotting the fraud earlier, including lenders, auditors and pension funds trustees were subsequently criticised in the context of governance failures (Clarke, 1993).

1.1 Introduction

3

Whilst a rapidly growing literature examining the link between governance weaknesses and corporate demise in the developing world now exists (Wanyama et al., 2009, 2013; Falgi, 2009; Alamri, 2014; Bukhari, 2014; Chanda et al., 2017) these studies are primarily focussed on Africa and the Middle East. Very little work of this nature has examined the situation in Asia despite the scale of economic activity across the continent. By focusing on corporate collapses in Pakistan, this book contributes to understanding about the key institutional problems that facilitate and enable governance failures and scandals in the country and – in so doing – suggest effective ways of addressing the main issues going forward. This book is intended to provide an in-depth understanding of the existing corporate governance environment in Pakistan, including the socio-economic implications of malign practices, as well as the ways in which improved and effective governance mechanisms can reduce the extent and size of such behaviour. To do this, perceptions are investigated regarding a wide range of issues relating to systems and potentiality – including shortcomings in legal and regulatory frameworks – with conclusions drawn that should help guide regulators’ and policymakers’ attempts to bring about the type of meaningful structural reforms that will benefit the nation as a whole. The book is divided into eight chapters. Chapter 2 provides an overview of Pakistan’s social history, geographical characteristics, economic/political structures and legal/regulatory frameworks before Chapter 3 discusses the most germane aspects of the nation’s corporate governance systems, rules and development. Extensive discussion of corporate failures and scandals in Pakistan is presented as part of the discussion. Chapter 4 contains an overview of the extant literature relating to corporate governance in general and in emerging markets in particular. Given the empirical focus and theoretical underpinning of this book, significant attention is devoted to institutional factors such as social, cultural, legal and political mores that have been suggested as major influences on corporate governance practices. Chapter 5 sets out and explains the study’s theoretical underpinnings, which draw on institutional theory, in particular intuitional isomorphism. Chapter 6 sets out the methodology and methods employed and reflected in this book. The discussion centres on the main methodological issues relevant to work of this nature, including a detailed outline of Burrell and Morgan’s (1979) framework. As the chapter indicates, the empirical strand adopts an interpretive paradigm, whereby social reality is created and sustained through the subjective experience of those involved. The chapter also sets out and explains the choice of questionnaires as the empirical data collection method. The empirical findings from the questionnaire survey are reported and discussed in Chapter 7. This chapter highlights the perceptions of a wider sample of corporate board members, regulatory body representatives, employees of listed companies, business students and academic researchers within Pakistan. The chapter begins by outlining the process used to administrate the questionnaire before proceeding to report on and interpret the findings. Perceptions were gathered regarding the range of

4

Chapter 1 Introduction

issues dominating the relevant extant literature, including: corporate governance definitions; awareness and understanding of key principles and regulatory codes; the suitability of Western governance for Pakistani firms; the potential significance of improved corporate governance, including its role in attracting foreign direct investment; the institutional factors that drive corporate failures and scandals in Pakistan; and the possible legal/regulatory actions that are needed to address the scale of corporate failures and bring about societal betterment. Finally, Chapter 8 concludes the book by providing a summary of the main empirical findings to establish recurrent themes and provide policy recommendations based thereon. The chapter also acknowledges the book’s main limitations and offers some suggestions for future research in the area.

Chapter 2 Pakistani Context 2.1 Introduction This chapter provides an overview of Pakistan’s history, physical characteristics, economic structure, legal framework and political system, emphasising the nation’s corporate sector as the focus of the empirical work presented later. From an epistemological point of view, Ardalan (2003) argues that knowledge is unlikely to be generated without consideration of relevant social frameworks, while Cornelius (2005) further suggests that politics, culture and historical roots all play an important role in the quality of corporate governance. The discussion is therefore designed to set the research in its proper context and to this end the chapter begins with a general historical overview of the nation.

2.2 Historical Background Pakistan is the second largest Muslim country in the world with an estimated population at the beginning of 2022 with 231.4 million (UN, 2023). Although the nation was under British colonial administration before gaining independence in 1947, the history of modern Pakistan can be traced back to the Indus Valley civilisation,6 with the subsequent arrival of the Aryans7 – which brought meaningful tribal and religious systems to the region for the first time – generally recognised as initiating social organisation (Blood, 1995). Aryans introduced the core themes of Sanskrit that later formed the basis of Pakistan’s national language Urdu as well as Sindhi, Punjabi, Balochi and Pashtu (Khan, 2009). Of particular relevance to the current study is that the continuing existence of these different languages is reflected in variable understanding of key terms relating to business and corporate activities in Pakistan (Khalid, 2010). Islam spread into India following the death of Prophet Muhammad (Peace Be Upon Him) in the first century. In the early seventeenth century, an Arab general (Muhammad bin Qasim) conquered most of the Indus region for the Umayyad Caliph in Damascus (the capital city of Syria). Under Qasim’s leadership, Umayyad took control of Sindh and southern Punjab, but failed to achieve the stability necessary to retain control of southern Punjab (Khan, 2009). During this period a large number of native

 A Bronze age civilisation (3300–1300 BCE) that represents one of the three early civilisations of the old world (Khan, 2009).  A migrating tribe that introduced Hinduism (Khan, 2009). https://doi.org/10.1515/9783110772999-002

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Chapter 2 Pakistani Context

Buddhists and Hindus converted to Islam in the south, but in the north several religions remained popular (Blood, 1995; Khan, 2009; Khalid, 2010). In modern-day Pakistan, Muslims are in the majority although various groupings such as “Sunni”, “Shia”, and “Wahhabi” exist, as does a significant Hindu population, reflecting the complex series of agreements reached with India that culminated in the 2016 doctrine.8 The demographic mix in Pakistan has continued to prove volatile; between 1989 and 2016, 3049 sectarian violence incidents took place resulting in 5358 deaths and more than 10,000 injuries (South Asia Terrorism Portal, 2017). Given the ubiquitous nature of the unrest, the present empirical inquiry will seek to determine through interviewing regulators, academics and companies the extent to which conflicts have impacted on governance practices via effects on the often-fragile rule of law in certain parts of the country. Modern Pakistan was first occupied by the British state in the early nineteenth century. The colonialists initially entered the sub-continent as merchants, but soon took control from the Muslim authorities who had ruled in the region for more than 600 years (Khalid, 2010). The East India Company assumed power over various administrative units in existence at the time. Although the UK’s physical presence was limited, they successfully employed a “divide and rule” political strategy that enabled them to consolidate and embed their authority (Khan, 2009). In 1857, a failed armed revolution seeking independence from British rule resulted in the dismissal of the Mughal emperor, Bahadur Shah Zafar. The British Crown seized the full sub-continent in 1858 and sent the emperor to exile to Burma (Khan, 2009). The long and deep nature of British domination over the Indian sub-continent is reflected in the nature of the legal, administrative and judicial systems operating in modern Pakistan (Khan, 2009). Thus, an investigation of the extent to which a Westernised view still prevails within companies and governance will be another area of enquiry here. For many decades, the majority of the population in the Indian sub-continent as a whole was Hindu;9 Muslims were in the minority, but had a distinctive religious identity. The followers of these religions lived in geographic proximity for more than a thousand years, but their lifestyles remained completely different (Khan, 2009). In particular, the cultural values, traditions, religious practices, language, music habits and even dressing styles were very distinct. Thus, the desire for independent identities was not only reflected in the struggle for political supremacy but also in the battle to retain distinctive social values. Against this backdrop, the following section highlights the key players in Pakistan’s independence struggle.

 5–20% Shia, 75–95% Sunni, 0.22–2.2% Ahmadi, 1.6% Christians and 2.1% Hindus (PBS, 2011).  Before partition India was home to 304 million Hindus and 35.4 million Muslims and (1951 census). There were 8.3 million Christians in 1951 (Khan, 2009; Jamil, 2011)

2.2 Historical Background

7

2.2.1 Pakistan’s Independence Four individuals are generally seen as having played the key roles in Pakistan achieving independence from the United Kingdom (UK). They are Sir Syed Ahmed Khan (1817–1898); Muhammad Ali Johar (1878–1931); Muhammad Ali Jinnah10 (1876–1948) and Allama Muhammad Iqbal (1877–1938). Sir Syed Ahmed Khan held that the followers of Islam and Hinduism are in effect two nations, given their cultural and religious values, with no practical possibility of them living together in the long run. This perspective was later adopted by Muhammad Ali Jinnah as the basis for the “twonation theory” (Khalid, 2010). These individuals offered their intelligence and political leadership to Muslims in the Indian sub-continent during the period of British rule (1857–1947) and on 30 December 1906 they founded the All-India Muslim League (AIML). The basic vision of the AIML was to protect the rights of Muslims while promoting harmony between Muslims and other communities in the Indian sub-continent and discouraging sectarian violence. In this context, Sir Syed Ahmed Khan encouraged and motivated Muslims to seek Western education so as to understand the rule of law imposed by the British and the need to stand up for basic human rights. In 1875, Khan founded the Anglo-Oriental College at Aligarh to educate Muslims and enhance their chances of meaningful employment. In 1916, Jinnah became president of the AIML, which then became the leading representative party of Indian Muslims. In 1930, during an AIML convention, Allama Iqbal presented the idea of an independent and separate Islamic state, with Chaudhary Rehmat Ali (1897–1951) suggesting the name “Pakistan” in 1933 (Khan, 2009). The AIML struggle grew in popularity in the late 1930s and it was at this time that Jinnah’s two-nation theory developed momentum (Khan, 2009). Jinnah stated that: It has always been taken for granted ‘mistakenly’ that the Muslims are a minority. The Muslims are not a minority. The Muslims are a nation by any definition. The Hindus and Muslims are two different civilizations that are based mainly on conflicting ideas and conceptions. To yoke together two such nations under a single state, one as a numerical minority and the other as a majority must lead to growing discontent and final destruction of any fabric that may be so built up for the government of such a state. (Jinnah, 1933)

This rationale led to the Lahore Resolution (of 23 March 1940) being forwarded to the Chief Minister of Bengal for consideration. The Lahore Resolution set out Muslims’ demand for the formation of independent states in the East and West of the Indian subcontinent occupied by the British. The British Prime Minister Clement Attlee introduced the Bill into the House of Commons on 3 June 1947 and the Indian Independence Act was passed on 14 July 1947. Two independent states “Pakistan” and “India” were thereby created in the Indian sub-continent. The “Islamic Republic of Pakistan” was the  The founder of Pakistan (Quaid e Azam Ali Jinnah) hereafter.

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Chapter 2 Pakistani Context

official name given to the independent Muslim state, with Karachi replaced by Islamabad in 1960 as the capital (Khan, 2010; Khalid, 2014). The subsequent independence and creation of Pakistan as a sovereign Islamic state on 14 August 1947 represented the culmination of a struggle that had started in 1857. However, more than 100,000 people died during this period as a result of communal violence, with over 2 million people migrating according to their religious faith (Siddiqui, 2013). The above discussion illustrates Pakistan’s historical links to the UK; these are of particular relevance here given La Porta et al. (1998)’s evidence of long-lasting colonial legacy in corporate regulation. Notably, corporate governance codes in Pakistan (as detailed later) have largely been derived from the UK’s Cadbury report of 1992 (Yasser, 2011). Table 2.1 sets out a timeline of the major historical events in the history of Pakistan since the Lahore resolution. The discussion now turns to the most significant of these in so far as they explain Pakistan’s modern economic and political circumstances. Table 2.1: Timeline of Historical Events in Pakistan. Years

Events

March 

Lahore resolution (known as Pakistan’s resolution) endorsed by Muslim League.

 August 

Pakistan gains independence and Muslims migrate to modern Pakistan.

September 

Pakistan joins the UN.

 October 

First war over Kashmir (the disputed Himalayan region).

September 

Founder of Pakistan, Muhammad Ali Jinnah, dies.

March 

Liaquat Ali Khan (the successor to Mr Jinnah) assassinated during a political campaign.

January 

Urdu and Bengali declared as official languages in the Constituent assembly.

March 

First Constitution presented and the name “Islamic Republic of Pakistan” adopted. Final executive authority given to the President.

October 

All political parties banned. General Ayyub Khan, as Chief Law administrator, enforces Martial law.

October 

Ayyub Khan becomes prime minister; later (Feb ) becoming the first elected president of Pakistan.

June 

Second Constitution presented.

September 

Full scale war breaks out between Pakistan and India but ends after a United Nations call for ceasefire.

March 

General Yahya Khan dissolves national and provincial assemblies and enforces martial law.

2.2 Historical Background

9

Table 2.1 (continued) Years

Events

December 

Pakistan and India fight over East Pakistan, resulting in the separation of East Pakistan and the creation of Bangladesh as an independent state.

 December 

Yahya Khan transfers power to Zulfikar Ali Bhutto (founder of Pakistan People’s Party).

April 

Martial law ends and an interim constitution is implemented.

August 

Constitution of  approved by parliament, giving final executive authority to the Prime Minister instead of the President. This constitution remains in force today.

July 

General Zia-ul-Haq dissolves assembly and arrests Bhutto, declaring martial law in the country.

October 

Companies Ordinance  promulgated on  October , repealing Companies Act .

February 

General Zia holds elections and in  Martial law ends; Zia dies in plane crash.

December 

Ghulam Ishaq Khan becomes Pakistan’s president.

August 

Bhutto’s Government sacked by Ishaq Khan and Mustafa Jatoi becomes the caretaker Prime Minister.

November 

Nawaz Sharif elected as prime minister of Pakistan in the general election.

April 

Ishaq Khan sacks Sharif’s government imposing martial law in the country.

October 

General election held and Benazir Bhutto becomes Pakistan’s Prime Minister for the second time.

November 

Farooq Leghari elected president and dismisses Bhutto’s government, dissolves assemblies and announces general election to be held on  February .

February 

Nawaz Sharif becomes prime minister for the second time.

December 

A Security and Exchange Commission of Pakistan Act was passed by Parliament and promulgated in . The Act is given autonomous status and becomes operational from  January .

May 

Pakistan conducts five nuclear tests in response to India’s nuclear test, the first Muslim country to do so.

April 

Sharif family sent to exile in Saudi Arabia by General Musharraf

March 

SECP presents codes of corporate governance for the first time.

May 

Pakistan re-enters the Commonwealth group of nations.

March 

Musharraf dismisses Chief Justice Iftikhar Mohammed Chaudhry, resulting in heated protests across Pakistan.

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Chapter 2 Pakistani Context

Table 2.1 (continued) Years

Events

July 

The Supreme Court restores the powers of the Chief Justice.

March 

In the general election, the Pakistan People’s Party (PPP) wins and elects Yusuf Raza Gillani as prime minister with Asif Ali Zardari becoming president.

August 

 people are killed and more than  million people affected by the worst floods in  years.

January 

PM Gilani sacked by the Supreme Court for contempt of court.

April 

Second draft of corporate governance code issued.

June 

Nawaz Sharif becomes Prime Minister after his party PMLN wins in the general election.

April 

To address the energy crisis and increase economic activity, Pakistan and China sign an agreement worth billions of dollars.

August 

Prime Minister Nawaz Sharif disqualified by the Supreme Court over corruption charges and given a jail sentence.

May 

Companies Ordinance  replaced and repealed by the issuance of Companies Act, .

December 

Third revision of corporate governance codes issued by SECP.

August –April  Former cricketer Imran Khan becomes prime minister with a pledge to end corruption and dynastic politics. His premiership ends in April  when opposition parties led by Shehbaz Sharif ousted him in a parliamentary vote citing Khan’s handling of the economic situation in the country. Sources: Khan (2010) and Khalid (2014). Note: The table lists the key historical events in Pakistan since the Lahore Resolution of 1940 and April 2022.

2.2.2 Pakistan’s Political History The word “Governance” comes from the Greek word “kybernan”, meaning to “steer”, “guide” or “govern” (Yasser et al., 2011). In the broadest sense, it refers to the relationship between the governors and the governed such as that between the government and the people in a democratic system (Yasser et al., 2011). Rule of law and democracy are considered as essential driving forces in developed and emerging nations, promoting and strengthening governance and institutional frameworks (Butt, 2015). In addition, political stability, government effectiveness and accountability are regularly purported to be reliable indicators of “good governance” across the world (Azmat & Coghill, 2005). This section of the chapter outlines developments in Pakistan in these regards since independence, emphasising their relevance for the study.

2.2 Historical Background

11

As noted above, Pakistan became an independent state as a result of the partition of India on 14 August 1947 with Muhammed Ali Jinnah taking charge as the first head of state. His death just one year later (Khan, 2010) was seen by most Pakistanis as a great loss for the nation as Jinnah was widely revered as a national leader and founder (Khalid, 2014). Following independence, Pakistan became a member of the United Nations (on 30 September 1949), before joining several other multi-national organisations including: the Economic Cooperation Organisation (ECO); the Association of South East Asian Nations (ASEAN); the South Asia Free Trade Area (SAFTA); the World Intellectual Property Organisation (WIPO) and the World Trade Organisation (WTO) (Khan, 2011). In the wake of Jinnah’s death, Pakistan and India went to war over the Kashmir territory11 and the unrest between two countries relating to the region is ongoing (Khan, 2010). In 1951, Liaquat Ali Khan, the successor to Mr. Jinnah, was assassinated during a political campaign with General Ayyub Khan declaring martial law in 1958, two years prior to his becoming president (Khan, 2009). In 1965, Pakistan and India again went to war over the Kashmir territory but a ceasefire was declared following UN intervention that limited the fighting to 17 days. In the 1970 general election, the Awami League12 won in West Pakistan and the people of the region increased their demand for a separate state (Khan, 2009; Khalid, 2014). India took advantage of the situation to exercise power and intervened to help the Awami League; as a result, Pakistan was separated into two nations: modern-day “Pakistan” in the West and modern-day “Bangladesh” in the East (Khan, 2010). The first two decades of Pakistani independence were thus defined by widespread unrest, perhaps providing a clue as to the lack of any productive focus on corporate behaviour in the nation’s early years. From Independence until 1988 Pakistan was ruled by a series of military dictatorships until following the death of General Zia in an air crash, a general election saw Benazir Bhutto become prime minister. However, in 1990 she was dismissed as prime minister on charges of incompetence and corruption, resulting in an early election in 1991 that resulted in Nawaz Sharif becoming a Prime Minister. A programme of economic liberalisation began, although Islamic Sharia law was incorporated into the legal framework (Khan, 2010). Conflict between the military and Mr. Sharif led to his resignation and a general election in 1993. Benazir Bhutto then assumed power for a second time, but her rule was again challenged by mismanagement and corruption allegations and in 1996 a further general election was called with Nawaz Sharif re-elected as Prime Minister. Under the Sharif government, Pakistan became a nuclear power, with the first nuclear test taking place in 1998 and medium-range missile tests following in 2002

 Kashmir is a disputed territory situated between India and Pakistan, with a majority Muslim population. The status of Kashmir was left unresolved by the colonial British rulers, and Kashmir has been occupied by Indian forces ever since.  The Awami League represented West Pakistan (modern-day Bangladesh) and was headed by Sheikh Mujeeb ur Rehman.

12

Chapter 2 Pakistani Context

(Khan, 2010). This was seen as a remarkable step forward for a developing nation but was intended to allow Pakistan to protect its sovereignty, limit unrest with India and prioritise discussions of differences rather than as act as a forerunner to war (Ziring, 2006; Khalid, 2014). In April 1999, Benazir Bhutto and her husband were convicted and imprisoned while in October of that year General Musharraf seized power in a military coup, giving himself presidential powers in 2001. Nawaz Sharif went into exile in Saudi Arabia after being pardoned by military authorities (Khan, 2009). In 2004, encouraged by the US, Pakistan began airstrikes against militants in tribal areas, whilst the US itself undertook drone attacks targeting Al-Qaeda leaders in North Waziristan and Afghanistan (Ziring, 2006; Khalid, 2014). As a result, more than 2.7 million Afghan refugees (equivalent to 1.5% of Pakistan’s population) fled to Pakistan (The Express Tribune, 2013). In October 2007, Benazir Bhutto returned from exile, followed in November by former PM Nawaz. Bhutto was then killed in a suicide attack (Khan, 2010) but her Pakistan People’s Party (PPP), headed by Benazir’s husband Asif Ali Zardari as president, came into power with Yousaf Raza Gilani as Prime Minister. After taking power, the new government received billions of dollars from the IMF to tackle a debt crisis that was growing rapidly, with terrorism and suicide bombing damaging the country’s economic and social infrastructure, and over 2 million more Afghan refugees entering the country. In 2012 PM Gilani was disqualified by the Supreme Court of Pakistan as his government refused to open corruption cases against President Zardari and other party members (Khalid, 2014). Parliament approved Raja Pervez Ashraf as the new PM of Pakistan, but he was alleged to have been involved in large corruption cases. The PPP managed to complete its 5-year term in government but, as a result of the 2013 general election, the PMLN came into power for the third time with the Pakistan Tehreek-e-Insaaf (PTI) emerging as the second-largest political party (Khan, 2014). Nawaz Sharif became prime minister of Pakistan for the third time, but from his first day as prime minister he was put under immense pressure by the opposition PTI and its leader, the former cricket star Imran Khan (Dawn, 2016). PTI made allegations against Nawaz Sharif and his party for their involvement in rigging 2013’s general election (Dawn, 2016). Although Nawaz Sharif (and his family) faced further charges in the Supreme Court following their financial affairs being reported on in the “Panama papers” scandal of 2015 (Dawn, 2016) they made no comments regarding the exposure of their business interests and dealings. The opposition alleged that Nawaz Sharif and his family had been involved in money laundering and in 2018 the Supreme Court of Pakistan disqualified Nawaz Sharif over corruption charges while a later judgment from the National Accountability Court (NAB) sent him to jail for 10 years. As a result of the general election in May 2018 the PTI came into power on a pledge to end corruption and dynastic politics. However, after struggling for three years with major economic challenges, widespread political uncertainty and the Covid-19 pandemic, the Pakistan Democratic Movement ousted Imran Khan and his government from power in April 2022 via a parliamentary vote. This series of inci-

2.2 Historical Background

13

dents raise several governance-related concerns that are pertinent to this study, in particular uncertainty regarding the political factors influencing the enforcement of governance rules and the lack of individual and institutional accountability. This book therefore explores and interrogates the opinions of regulators, board members of listed companies and academic researchers – as well as a wide range of other stakeholders – in an attempt to establish the way in which extant failures and weaknesses manifest themselves, as well as the potential for more robust governance processes to provide related improvements in day-to-day lives in Pakistan.

2.2.3 Geography and Population Geography plays an important role in determining many lifestyle factors in Pakistan and is reflected in many of its socio-political norms. Pakistan is situated in the northwest of South Asia, occupying an area of 796,096 square kilometres (Pakistan Bureau of Statistics, 2016). Geographically, three countries and a body of water surround the nation. India is located to the east, Afghanistan to the west, China to the north and the Arabian Sea to the south. Pakistan is thus situated in close proximity to two of the world’s great powers as Russia is also a near neighbour and it is often asserted that any alliance among world powers would enhance Pakistan’s global significance, not least because of its potential role as a gateway to central Asia and the oil-rich Middle East (Khan, 2008). There are two major seaports in Pakistan: Karachi and Gwadar. However, the most significant recent development in Pakistan’s geo-political positioning has been its decision to work with the US in the “war on terror”; whilst this may have benefitted Pakistan financially, estimates put the death toll in the first few years of this strategic shift at around 80,000 (The Express Tribune, 2015). Modern-day Pakistan is divided into four provinces: Punjab, Sindh, Baluchistan and Khyber Pakhtunkhwa (KPK; previously known as NWFP), two territories: Gilgit Baltistan and FATA,13 and One State – Azad Jammu and Kashmir.14 Pakistan’s physical boundary is made up of mountains and grasslands; K-2, the world’s second-highest mountain, is also located in Pakistan (Khan, 2008; Khan, 2010). The official national language of Pakistan is Urdu although Punjabi, Sindhi, Pashtu and Balochi are also spoken in large parts of the country (Khan, 2010). Pakistan’s modern population is 51.35 per cent male and 48.65 per cent female (Pakistan Bureau of Statistics, 2017) with

 On 24 May 2018 the FATA-KPK merger was approved by the upper and the lower house of Pakistan and it is now a part of the KPK province.  Punjab currently has 9 divisions, 36 districts and 127 tehsils; Sindh has 6 divisions, 23 districts and 103 tehsils; KPK has 7 divisions, 24 districts and 43 tehsils; Baluchistan has 6 divisions, 3 districts and 130 tehsils; Gilgit-Baltistan has 6 districts; FATA has 7 districts and 42 tehsils and Azaad Jammu and Kashmir have 8 districts and 24 tehsils (Khan, 2010; Khalid, 2010).

14

Chapter 2 Pakistani Context

an estimated median age of just 22, indicating that Pakistan is a young nation. Most of its people (61.44 per cent) live in rural areas.

2.2.4 Administrative Set-up Democracy and the rule of law play an important role in the development of institutional and governance frameworks (Yasser, 2011; Kaufmann et al., 2018) but a functioning and reliable administrative system is also important. In this context, Pakistan has a parliamentary system of government composed of two houses: the Senate (the upper house) and the National Assembly (the lower house). There are 104 members in the Senate representing all four provinces of the country as well as the FATA. The Senate is considered the ultimate jurisdiction body for Pakistan, reflecting its role in the upper legislative chamber. The President is elected by the Senate and is the head of state, with the Prime Minister acting as the head of a government that is itself elected by the lower house (Khan, 2010). All Pakistani provinces elect Chief Ministers who then perform duties as acting heads of each province (Khan, 2010). National and Provincial assemblies are elected for a period of five years. The four provinces are further divided into Divisions, Districts and Tehsil, sub-blocks of an administrative set-up that gives authority to locally elected members to resolve governance issues at ground level (Khalid, 2014). There is an ongoing debate as to whether heavily populated provinces such as Punjab and Sindh should split further to improve governance among administrative units (Khan, 2008). The issue of governance and its impacts on economic outcomes remain a key political question and the discussion now turns to this matter.

2.3 Pakistan’s Economic Situation The critical nature of “good governance” in economic development is widely recognised, primarily as it supports an efficient utilisation of available resources (Yasser et al., 2011; Khan, 2014; Mukhtar & Inam, 2014). Butt (2015) suggests that a country’s economic situation improves with the help of good corporate governance because the mechanisms provide protection to a wide range of stakeholders, improve transparency and attract foreign investors. Pakistan’s economic situation therefore provides important context for a study of corporate governance and corporate failures. The latter have been particularly harmful as they have occurred alongside a number of major political and natural calamities and significantly limited development potential. Figure 2.1 summarises Pakistan’s economic growth between 1951 and 2008. In the first four decades after independence, the nation’s economy grew at an average rate of 6 per cent. Despite rapid population growth over this period, inflation remained low,

15

2.3 Pakistan’s Economic Situation

12 10

GDP

8 6 4

2008

2005

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

1957

1954

0

1951

2

Figure 2.1: Pakistan GDP Growth Rate (1951–2008). Source: Pakistan Bureau of Statistics (2016). Note: The figure shows Pakistan’s GDP growth from 1951 to 2009, compiled by the authors based on data from the Pakistan Bureau of Statistics.

per capita incomes doubled and by the late 1980s the poverty index was reduced from 46 per cent to 18 per cent (Khan, 2008; Khan, 2010). Since 2005, Pakistan’s GDP has been growing an average 5 per cent per year, well below national population growth (Ahmed & Ahsan, 2011). Figure 2.2 illustrates GDP growth from 2009 to 2021. Inspection of the diagram reveals the impact of the global financial crisis, an effect worsened by the turmoil experienced domestically (Yasser, 2011) including an energy crisis lasting from 2007 until 2012 that led to wide7 6

5.37 4.56

5

GDP

5.97

5.7

4

3.62

3.84

2011

2012

3.68

4.05

4.06 3.3

3.2

2019

2020

2.58

3 2 1

0.36

0 2009

2010

2013

2014

2015

2016

2017

2018

2021

Figure 2.2: Pakistan GDP Growth Rate (2009–2021). Source: Pakistan Bureau of Statistics, 2021. Note: The figure shows Pakistan’s GDP growth from 2009 to 2021, compiled by the authors based on data from the Pakistan Bureau of Statistics.

16

Chapter 2 Pakistani Context

spread power outages. These infrastructure weaknesses have further slowed the pace of economic development in the country (The Diplomat, 2013). The diagram also reflects the impact of the Covid-19 pandemic on Pakistan’s GDP growth, including some evidence of post-2021 recovery. Pakistan’s economy began on an agricultural basis, but had become primarily industrial by 1960 (Khan, 2010). The modern-day Pakistan economy is mixed, although dominated by the agriculture, service and industries. However, weaknesses in corporate governance have led to serious problems across most sectors, as set out in the next section.

2.3.1 The Agriculture Sector The agriculture sector contributes around one-fifth of Pakistan’s GDP with most of the population in Pakistan directly or indirectly relying on it for income (Ahmed & Ahsan, 2011). The sector is also the nation’s largest source of foreign exchange earnings (Pakistan Bureau of Statistics, 2016), reflecting Pakistan’s fertile land and high-quality irrigation system that facilitates the export of large quantities of its agricultural products around the world (Khan, 2008; Zaheer, 2013). These outputs account for around 60 per cent of the nation’s total export earnings, whilst simultaneously providing extensive supplies of raw materials for local industrial production (Pakissan, 2016). However, recent years have seen Pakistani farmers see incomes fall, for reasons including: instability in market prices; the lack of credit available to farmers; an inadequate supply of agricultural inputs; land reforms and ageing of irrigation facilities (Khan, 2006, 2008; Zaheer, 2013; Pakissan, 2016). The World Bank assessed that even a decade ago, 5 per cent of Pakistan’s GDP and 30 per cent of its agricultural products were being wasted due to poor and inadequate transportation infrastructure. As inspection of Table 2.2 reveals, agriculture had been surpassed by the service sector as the dominant contributor to national income by the 1970s, reflecting not just these operational issues but also the types of governance failure motivating the present study’s enquiry.

2.3.2 The Service Sector At the global level, the service sector now dominates global economic activity and continues to grow (Rath & Rajesh, 2006), now accounting for the largest share of total output and employment in most countries (73 per cent of GDP in high-income countries, 53 per cent in middle-income countries and – a rising – 47 per cent in lowincome countries) (Ahmed & Ahsan, 2011). The service sector is a growing contributor to foreign direct investment (FDI) and cross-border trade in many developing countries as it reduces the cost of services imported and provides more export opportuni-

2.3 Pakistan’s Economic Situation

17

Table 2.2: GDP Share of Key Sectors in Pakistan. Year s s s s s s s

Agriculture Sector

Service Sector

Industrial Sector

. . . . . . .

. . . . . . .

. . . . . . .

Source: Federal Bureau of Statistics (2018); Pakistan Economic Survey (1997–1998); Jaleel (2011); Ministry of Finance, Pakistan (Pakistan Economic Survey, 1975–1976 to 2009–2010, 2018–2019, 2020–2021). Note: This table details the GDP shares of the three largest sectors in Pakistan’s economy from 1950 until the end of 2019.

ties to service suppliers across the globe, with the employment rate and the tax base both benefiting (Rath & Rajesh, 2006). Kuznuts (1957) and Fuchs (1980) observed a structural shift from agriculture to manufacturing and from manufacturing to services in the course of economic development in developing countries, but as, discussion later in this book reveals, the sector in Pakistan has not been immune to the type of corporate governance failure witnessed in the nation’s more traditional industrial sectors. As inspection of Table 2.2 shows, Pakistan’s service sector grew in terms of share from just over a third in the 1950s to more than 50 per cent in the 2010s. The modern service sector in Pakistan is dominated by four sub-sectors: Social Services, Personal Services, Distributive Services and Producer Services. These areas of activity now account for more than one-third of overall employment in Pakistan, but they remain strongly connected to the agriculture and industrial sectors via the provision of specialised skills in marketing and administration that enhance value-added in these key areas (Ahmed & Ahsan, 2011; Jaleel, 2011). Each sub-sector facilitates everyday consumer activity, with producer services also incorporating the provision of capital to the business community. Firms in the personal services arena provide citizens with shelter and access to public goods while the transport sub-sector also offers effective and economically viable transport facilities within and beyond Pakistan’s borders (Ahmed & Ahsan, 2011; Jaleel, 2011). However, all the nation’s transport-related institutions, including the National Highway Authority (NHA), the Pakistan International Airlines Corporation (PIAC) and the Pakistan National Shipping Corporations (PNSC), have been declaring losses for many years (Jaleel, 2011) with firms in this area suffering the effects of governance-led failures in a particularly acute manner. Notwithstanding the latter, one successful part of the service sector in Pakistan is telecommunications, where the adoption of next generation technology has helped generate a dynamic and versatile business model (World Bank, 2018). The Pakistan

18

Chapter 2 Pakistani Context

Telecommunications Authority has set in train a number of programmes aimed at improving infrastructure and protecting consumer rights. According to the Pakistan Economic Survey (2013–2014), Pakistan’s telecommunication firms invested an average of £719 million per year between 2008 and 2013. Ahmed and Ahsan (2011) note that employment growth in the service sector as a whole has continued to generate new jobs and the authors argue that this will help Pakistan to achieve significant economic growth going forward.

2.3.3 The Industrial Sector The industrial sector is highly influential on Pakistan’s economic outcomes, with developing countries in general seeing living standard changes and social progress linked to growth in this area (Khan, 2008). As shown in Table 2.2, the industrial sector is the third largest in Pakistan, contributing around 21 per cent of GDP and achieving annual growth of between 12.95 and 20.88 per cent in the period of 1950–2017. The industrial sector in Pakistan is composed of several industries, including textile, cement, sugar, fertiliser, sport, automobile, defence, steel, paper, oil and gas, surgical instruments and chemicals. Of these, the textile and fertiliser industries play the largest role in economic development. Pakistan is one of the largest exporters of textile and garment goods in the world (primarily to China, the USA, the UAE and the UK) with more than $10 billion per year now being achieved, more than 50 per cent of the nation’s total, but corporate governance weaknesses again appear to have had a negative act on overall sectoral outcomes (Khan, 2008; Khalid, 2010; Pakistan Bureau of Statistics, 2010). Fertilisers are key inputs to produce the cotton crop that underpins this data. However, Pakistan’s recent energy crisis has affected this industry very badly, with significant activity moving offshore; according to Dawn (2011), more than 500,000 people have lost their jobs and more than 800 textile units were shut down in Punjab alone since 2006. Haque (2015) argues that a lack of political will, an inadequate administrative setup and – critically in the context of the current study – poor governance practices, have combined to drag this sector into decline. This trend has in turn led to increasing reliance on imports from China, the USA, India, Kuwait and Malaysia (Dogar & Dogar, 2014).

2.3.4 China-Pakistan Economic Corridor (CPEC) The role of Chinese investment in developing nations is now often analysed from a governance (failure) perspective (Shikaputo, 2013). The China-Pakistan Economic Corridor (CPEC) is a massive-scale project between China and Pakistan that will involve China investing $46 billion in Pakistan. Pakistan-China bilateral relations have been strong since Pakistan’s independence and CPEC is only the latest in a series of joint

2.4 Legal and Regulatory System in Pakistan

19

large-scale investments (Haq, 2014). The project, based around a network of roads, railways and pipelines that will connect port Gwadar in Pakistan’s southern province of Baluchistan to Kashghar in China’s western province of Xinjiang, will be around 3000 kilometres in length (CPEC, 2016). CPEC is of enormous significance, as it passes through important geostrategic zones in South Asia, potentially giving China expanded economic access to Southeast Asia (CPEC, 2016). A key element in the project relates to investment in Pakistan’s renewable energy sector where China will give the technological and financial support necessary to build 3960 MW capacity renewable energy projects (Haq, 2014; CPEC, 2016). It is also reported that under the CPEC agreement Chinese companies will construct the world’s largest solar power complex, with 900 MW capacity, in Bahawalpur (Shaikh et al., 2016). The project as a whole has been designed such that if Chinese companies invest as independent power producers, they should be able to achieve returns of 17–27 per cent per year, whilst simultaneously helping Pakistan to tackle its electricity crisis and improve related infrastructure (Haq, 2014). As Shikaputo (2013) notes, this type of endeavour might not naturally be associated with high levels of transparency, a major concern given his evidence of governance failures potentially defining strategic transnational projects on this scale. Political parties and media outlets in Pakistan have raised serious concerns in this regard, alleging that the government have given contracts to Chinese companies who are blacklisted (Abid & Ashfaq, 2016). Thus, the benefit to Pakistan might be limited depending on the quality of associated institutional governance.

2.4 Legal and Regulatory System in Pakistan Pakistan is an Islamic republic with a constitution that requires all law and regulatory systems to be consistent with Islamic ideology (Khan, 2008). The main implications of this principle are that the legal system must be based on equity and justice, while the judicial system must treat every individual equally. However, as the previous discussion highlighted, prior to independence Pakistan was under British rule and to this day the country’s legal system reflects English Law in many substantive ways (Khan, 2008; Yasser, 2011). A country’s legal system, especially the manner of implementation of laws and regulations, is fundamental to corporate governance practices and sustainable economic growth, with historical origin a key factor (La Porta et al., 1997, 2002). This section of the chapter therefore provides an overview of the legal and regulatory environment in modern-day Pakistan as it pertains to the operations of listed companies.

20

Chapter 2 Pakistani Context

2.4.1 The State Bank of Pakistan and Capital Law Authority The banking sector in Pakistan, the source of several major recent corporate, collapses that have, at least in part, been attributed to governance failures is regulated by the Banking Company Ordinance of 1962 and prudential regulations issued by the SBP in 1956. The SBP was established in 1992 as an autonomous regulator and monitor of all financial activities in Pakistan with responsibility for controlling the nation’s banks and financial institutions so as to ensure smooth money and exchange control operations. The new exchange control regulations issued in 1997 allowed Pakistani individuals and businesses to hold foreign currency accounts domestically as well as open accounts overseas (Butt, 2015). Importantly, given the focus of this research, the SBP also provides guidance to banks on risk management and internal controls (World Bank, 2005). The Corporate Law Authority (CLA) was established in 1981 under The Ministry of Finance. The CLA issued the Companies Ordinance in 1984 and this has come to be recognised as Pakistan’s first attempt to regulate corporate governance (Yasser, 2011; Shamsi et al., 2014). The CLA imposed controls and regulations via the Companies Ordinance of 198415 that were designed to ensure that private businesses (including importers, stock exchanges, credit vehicles, and investment firms) were working in the best interest of Pakistan’s national priorities. However, irrespective of the stated goals, the regulations were never implemented in practice and corruption continued to spread and deepen across the nation (Yasser, 2011; Zaman et al, 2011).

2.4.2 The Securities and Exchange of Pakistan (SECP) The Securities and Exchange Commission of Pakistan was established in 1997 under the SECP Act, 1997, becoming operational in 1999 (Javid & Iqbal, 2010; Shamsi et al., 2014). In 1999 the SECP took control of the CLA and made a number of modifications and amendments to company law. The SECP is responsible for regulating Pakistan’s

 This 33-year-old Ordinance was replaced by the Companies Act 2017 on 31 May 2017. Some of the significant reforms introduced in this act are: Section 153(h) stating that no person will be appointed as a director of a company unless he/she holds a National Tax Number (NTN); Section 452, whereby every shareholder/officer of a Pakistani company must report to their company any shareholding in a foreign company or corporate body, with the company having to report such information to the registrar along with the annual returns. Section 453 mandates officials of all companies to check for commission of fraud and money laundering including predicated offences under the Anti-Money Laundering Act 2010. Under Section 465 all companies have to inform the SECP about any change of more than 25% in their shareholding; Section 459 imposes a requirement to reserve a 2% special quota of employment for disabled persons; the Act also encourages companies to have female representation on their board. Finally, under Section 479 three levels of daily penalties for default, noncompliance or non-filing are imposed: Rs. 500, Rs. 1000 and Rs. 500,000. The role of a special High Court bench to deal with Companies Act matters in an efficient manner is also set out.

2.4 Legal and Regulatory System in Pakistan

21

capital market, as well as regulating and supervising insurance companies, nonbanking finance companies and private pension schemes. Before the SECP emerged, the Companies Ordinance 1984 had set out rules governing and regulating companies, largely reflecting English common law (World Bank, 2018). The SECP is also responsible for overseeing the activities of external providers of services to the corporate and financial sectors including chartered accountants, credit-rating agencies, corporate secretaries, brokers and surveyors. The SECP board consists of nine members, all directly appointed by the Federal Government of Pakistan, and holds both investigative and enforcement powers (SECP, 2012). In 2002, the SECP issued the nation’s first dedicated code of corporate governance, aimed at restoring investor and business confidence by bringing governance standards in line with best practices in developed nations (Yasser, 2011; Shamsi et al., 2014). In 2012, the SECP issued revised corporate governance regulations designed to keep pace with globally set benchmarks (SECP, 2012; Zaman et al., 2011). The latest version of the code was issued in 2017; both this and the 2012 draft made compliance mandatory, despite the UK’s Cadbury report of 1992, cited as the basis of many of the rules, recommending voluntary compliance. The reasoning behind the SECP’s decision to make Pakistan’s code binding – and the effectiveness of this – is an issue explored in the empirical analysis presented later.

2.4.3 The Pakistan Institute of Corporate Governance (PICG) The PICG16 is a public–private partnership with founding shareholders that include the SECP, the SBP, the Pakistan stock exchange (PSX), major banking and insurance associations, apex bodies17 of the corporate sector, non-bank financial institutions (NBFI) and leading business educational institutions in the country. The PICG offers a forum for national debates on corporate governance, but its main remit is in training and education, undertaking research and publishing guidelines in order to create awareness of the need for strong governance in Pakistan’s corporate sector (Yasser, 2011; Butt, 2015). The PICG has built up affiliations with a number of international organisations, including: the International Finance Corporation (IFC), the International Corporate Governance Network (ICGN) and the Global Network of Director Institutes (GNDI), with these bodies providing technical assistance to PICG in its efforts to promote effective standards of corporate governance in Pakistan.

 The Pakistan Institute of Corporate Governance (PICG) was established in 2004 as a not-for-profit company, limited by guarantee and without share capital, under Section 42 of Companies Ordinance 1984 (PICG, 2008; Yasser, 2011). There are 15 members of its PICG’s board of directors.  Apex bodies in Pakistan take the form of committees in each sector designed to resolve any conflicts among institutions and other stakeholders.

22

Chapter 2 Pakistani Context

2.4.4 The Pakistan Stock Market Stock markets are significant sources of the capital needed by developing countries to generate significant levels of economic growth (Iqbal & Javid, 2010; Yasser, 2011). Until recently Pakistan had three independent stock markets in the three major cities: Lahore, Islamabad and Karachi.18 However, on 11 January 2016, the Ministry of Finance announced the launch of the PSX, integrating all three markets as part of a broader strategy of financial institution demutualisation and integration (KSE, 2016).19 The stated aim of the merger was to reduce market fragmentation and build a platform strong enough to attract a significant number of foreign investors as well as the strategic partners necessary for technological expertise and assistance (Dawn, 2016). However, much of the new infrastructure (e.g. indices and website) reflects what was in place for the Karachi exchange and so some background about this market will help the reader to understand the key features of PSX. An important issue here is whether this integration is likely to improve governance standards in the nation by consolidating rules of corporate behaviours. The Karachi Stock Exchange (KSE) was founded and incorporated in March 1949, quickly becoming Pakistan’s prime and most liquid market (Khan, 2008; Yasser et al., 2011; KSE, 2016). Although the KSE started out with only five companies listed (with a total market capitalisation of Rs. 37 million (Pkrs)), between 1991 and 2017 the exchange achieved steady growth with the KSE-100 index reaching a high of 49,499.86 points in April 2017. Although the KSE-100 remains the most widely reported index, since 1995 the KSE has also issued KSE-30 and KMI-30 index figures as the number of listed companies had grown significantly and the KSE-100 was not thought to provide a comprehensive picture of stock market health (Khan, 2008). As inspection of Table 2.3 reveals, more than 500 firms are now listed on the PSX, with total market capitalisation approaching Rs. 7.9 trillion (Pkrs) in February 2020. Figure 2.3 details the top 10 industrial sectors in PSX by proportion of trading volume. Whilst no single sector dominates, the key role of heavy industry in the nation’s economy is evident. Whilst the PSX has, since establishment, generated steady growth the vast majority of investors are local so an obvious governance-related question in this context is whether a lack of disclosure and broader transparency is an issue? As regards these and other corporate governance related issues, PSX’s legal framework is aligned with the SECP’s code of corporate governance. All listed firms must comply with mandatory codes; the SECP and PSX oversee this compliance and take action against any non-compliance. The Corporate Supervision Department (CSD) of the

 All three stock exchanges were linked via a central depository system (CDS) and all three were fully automated (Yasser, 2011).  Ownership of the exchange now includes strategic investors (including three Chinese stock exchanges with a total of 30% of the shares) as well as the public (who acquired shares through an IPO in June 2017).







,.

.

,.

,.

.

,.





,.

.

,.



,.

,,.

,,.



,.

.

,.



,.

,,.

,,.





,.

.

.



,.

,,.

,,.

Source: Pakistan Stock Exchange, formerly KSE, 2020. Note: The table details the number of listed companies, market capitalisation, number of shares traded, as well as other key indicators for the Pakistan Stock Exchange between 2016 and 23 January 2020.

Average Value of Daily Turnover – Regular Market (Rs in Million) (YTD)

Average Daily Turnover – Regular Market (Shares in Million) (YTD)

Listed Capital of New Companies – Rs in Million

New Companies Listed during the Year

,.

,,.

,,.



,.

,,.

Total Market Capitalisation – Rs. In Million

 ,,.

KSE – TM Index



Upto Upto Upto Upto Upto  December   December   December   December   January 



Total Listed Capital – Rs. in Million

Total No. of Listed Companies

Table 2.3: Pakistan Stock Exchange at a Glance 2016–2020.

2.4 Legal and Regulatory System in Pakistan

23

Chapter 2 Pakistani Context

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5,00,00,000 4,50,00,000 4,00,00,000 3,50,00,000 3,00,00,000 2,50,00,000 2,00,00,000 1,50,00,000 1,00,00,000 50,00,000 0

en t

Trading Volume

24

Figure 2.3: Top 10 Sectors on Pakistan Stock Exchange. Source: Pakistan Stock Exchange, 2020. Note: The above figure shows the top 10 sectors by trading volume listed on the PSX on 7 February 2020.

SECP has particular responsibility for the oversight of listed companies. According to the World Bank (2018) assessment report, the CSD employs close to 30 staff members with a mix of accountancy and commercial experience in a range of industries. Despite staff adequacy, World Bank (2018) noted compliance with good corporate governance provisions in Pakistan remains sporadic. In 2014, a Deloitte survey of annual reports also found relatively low compliance with codes of ethics among listed companies. The PSX is interconnected with other Asian stock markets including those in Abu Dhabi, Dubai and Shanghai, reflecting its status as an affiliated member of the International Organisation of Securities Commissions (IOSCO) (PSX, 2016). This global presence has also been made possible by the PSX’s embracing of modern technology, including the Karachi Automated Trading Systems (KATS), which allows an infinite number of users to undertake up to 1 million trades every day.20 Despite success in terms of expansion and modernisation, in 2008 the PSX was downgraded from emerging market to frontier21 status by MSCI after the KSE resorted to an emergency index floor to stop a plunge in equity values (Bloomberg, 2016).22 In

 Fund managers and investors are also allowed to access information through display terminals, whilst brokers can connect to the PSX over VPNs.  The Frontier index is compiled of share prices for firms listed on the riskiest stock markets in the world based on transparency, regulation and transaction fees.  The PSX rose 17 per cent during 2015 compared to a 1.6 per cent advance in the MSCI emerging market index. The PSX was reclassified as an emerging market index constituent after MSCI’s semi-

2.4 Legal and Regulatory System in Pakistan

25

response to this and other crises, Prime Minister Nawaz Sharif’s government claimed to have re-focused the economy on stability, including entering an IMF loan program to settle external debt problems in 2013. Possibly as a result of this, along with the PSX achieving the highest levels of growth across Asia, the MSCI reclassified the PSX as “emerging” in 2016. However, inconsistency in status based on a measure that includes transparency and regulation reiterates the need for the present inquiry. In 2014 the Managing Director of the PSX, Nadeem Naqvi, argued that its investor base needed to be increased to encourage and enable major expansion. By expanding the investor base, Naqvi argued that the PSX would be able to increase liquidity and reduce volatility, encouraging companies that wanted to list to feel confident about sustained investor interest. As part of its ongoing development plan, the KSE also initiated new fixed income instruments, partly in response to growing demands for Islamic banking products, one of the fastest growing segments of the global financial services market (Naqvi, 2014). By 2014, the KSE had launched a government debt secondary market trading platform with the help of the Central Depository Company although they continue to seek support from the banking, insurance and pension industries in building a national distribution system that will be accessible by every investor. The political instability in Pakistan noted above has been blamed for many of the nation’s corporate collapses that motivate this book, but it has also severely impacted the function of the nation’s stock markets (Dawn, 2015). The potential link between political agendas, governance and the functioning of the PSX is also apparent in Prime Minister Sharif’s invitation to German investors designed to provide reassurances regarding transparency and best practices in corporate governance measurement (BBC, 2014). These initiatives reflect the government’s desire to increase private capital flows in Pakistan, but with apparent concern regarding the impacts of governance weaknesses. The study therefore includes explorations of issues relating to FDI as part of its field of enquiry.

2.4.5 Ownership Structure A firm’s ownership structure plays an important role in determining a firm’s governance practices (Mustansir, 2013). The impact of ownership structure on internal and external corporate governance mechanisms is now widely recognised (La Porta et al., 2000), but its impact on business performance in developing nations is now also becoming understood (Aziz & Saeed, 2016). Corporate governance in Pakistan reflects the “In-

annual index review, with a 0.14 per cent weighting (Bloomberg, 2016). Finance Minister Ishaq Dar claimed that this achievement reflected macroeconomic development and stability, good governance and economic reforms initiated by the government.

26

Chapter 2 Pakistani Context

sider model” with most of the listed companies on the PSX being majority-owned by families and government shareholders (Yasser, 2011; Aziz & Saeed, 2016). Table 2.4 provides details regarding the top 40 listed companies in terms of number and market capitalisation. The table shows that in 52.5 per cent of companies, private families constitute the largest ownership group, with Government, Semi-Government and MNC’s holding the highest stake in the others. In terms of overall ownership, families and government dominate with overall holding of 30.22 per cent and 36.5 per cent, respectively, of total market value. This pattern in holdings means that Pakistan has a greater degree of controlled ownership than most of East Asia, with the use of “pyramid” stakes and cross shareholding also more common (World Bank, 2005; OECD, 2017). Table 2.4: Ownership Structure of Pakistan’s Top 40 Listed Companies. % of Top  Listed Companies

Ownership

All

Family-owned Government Semi-government MNC’s

. . . .

Non-financial . . . .

% of Market Capitalisation of top  Listed companies All

Non-financial

. . . .

. . . .

Source: Adapted from Yasser (2011). Note: The table details the proportion of market capitalisation in Pakistan’s top 40 listed companies held by particular ownership groups.

Of particular relevance to an investigation of corporate governance failure in Pakistan, privately owned family businesses and the state remain the largest providers of capital within the nation. However, whilst more than 32 per cent of board members in the Pakistan textile sector are “close relatives”, the family bond is much higher in non-textile sectors with more than 53 per cent of board members being close relatives of other appointees (Yasser, 2011). Two of the cases reported in the next chapter: ZARCO exchange and KKI illustrate apparently very poor governance among familyowned businesses in Pakistan, and the empirical work reported later in the book attempts to establish the extent to which underlying (concentrated) ownership structures contributed to these and similar events.

Chapter 3 Corporate Governance in Pakistan 3.1 Introduction Chapter 2 provided a holistic view of Pakistan’s socio-economic settings and discussed the regulatory bodies in the country that govern the nation’s corporate environment. The present chapter highlights Pakistan’s journey in terms of corporate governance regulation, processes and outcomes. The chapter begins by detailing the development of national codes of corporate governance since their first appearance in Pakistan two decades ago, including discussion of the main provisions relating to the roles and responsibilities of board directors and committees. This is followed by exploration of the nature of compliance by listed companies before the focus turns to shareholders’ rights protection. The discussion then turns to the nature and extent of some of the high-profile corporate failures in Pakistan that initially motivated the present study before some of the key insights from previous studies of corporate governance in Pakistan are set out.

3.2 Corporate Governance in Pakistan The concept of corporate governance, although relatively new in Pakistan’s business environment, is the focus of growing interest in the nation’s corporate sector (Shamsi et al., 2014). While Arslan et al. (2014) note that the academic literature on corporate governance in Pakistan is very limited, the SECP has been taking account of changes in global business practices since the powers of the Corporate Law Authority were transferred in 1999 (Yasser et al., 2011). The SECP actively monitored developments in corporate governance practices that were aimed at restoring investors’ confidence following global financial failures (Yasser, 2011; Ameer, 2013; Butt, 2015). This endeavour was intended to improve accountability and transparency in Pakistan’s corporate sector and to help protect shareholder and stakeholder rights in the long run (Iqbal & Javid, 2010; Ameer, 2013). As noted in the previous chapter, the SECP issued Pakistan’s first code of corporate governance in March 2002 which, although late by Western standards, was considered ground-breaking in the region as an effort to promote practices on ground (Iqbal & Javid, 2010; Yasser et al., 2011). However, the code was essentially just a compilation of best practices adopted in developed nations, in particular the UK, intended to provide a framework for “better” corporate control and direction (Sheikh & Wang,

https://doi.org/10.1515/9783110772999-003

28

Chapter 3 Corporate Governance in Pakistan

2011; Yasser, 2011). The SECP’s definition of corporate governance was therefore aligned with Cadbury’s original (1992) definition of corporate governance.23 The evolution of corporate governance codes in Pakistan has seen three distinct phases, starting with the structural formation and a first draft in 1999 that was published in final form in March 2002. The participants at this stage were the ICMA and the ICAP as well as representatives from listed companies and the public sector. During the first phase of this initiative, the SECP was established and Section 34 of the KSE listing regulations – containing various governance related provisions – made mandatory (World Bank, 2005). This change resulted in a number of firms choosing to delist and the question of whether such moves might be instigated to permit the continuation of poor governance practices is addressed in the empirical work presented later. During the second phase (2002–2006) the SECP, along with other regulatory bodies, established the Pakistan Institute of Corporate Governance (PICG).24 Underpinning the development of the codes was a stated desire to improve transparency, accountability and governance practices as well as to protect shareholder and investor interests by improving the quality of financial reporting disclosures (Iqbal & Javid, 2010). To this end, the Pakistani government sought assistance from the Asian Development Bank to improve the technical aspects of the new regulatory scheme. These efforts were reflected in phase 3 (2006–2010), where the codes of corporate governance were re-drafted (with voluntary status) for non-listed companies. Unfortunately, as of 2017, the aims of phase 3 had yet to be fully realised, with the codes of corporate governance still not enforced because of loopholes in the system and political instability in the country (Salman & Siddique, 2013; OECD, 2017); there is little evidence that the situation had improved by the time of writing in 2023. In 2012 and 2017 the SECP issued revised codes of corporate governance for listed firms, noting the need for governance standards to be dynamic and subject to constantly review in order to keep frameworks relevant and effective (SECP, 2017). The sections in the extant 2017 code are: board composition and responsibilities; director training; director remunerations; transparency and disclosure; and composition of board committees, with a strong emphasis on board meetings. Unlike in the UK and the US, the SECP has not explicitly contextualised its series of regulations via domestic governance failures and Shamsi et al. (2014) suggest that the SECP has failed to introduce any proper mechanism to examine companies’ compliance with the non-financial as-

 Corporate governance is the system by which companies are directed and controlled, and corporate governance provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance. Corporate governance encapsulates the relationship between a company and its shareholders (as well as society) to promote fairness, transparency and accountability (SECP, 2012, p. 1).  The PICG’s main objective is to raise awareness of the benefits of corporate governance and help businesses to implement related codes in an effective manner (Dawn, 2005). The World Bank (2018) noted that the PICG provides a variety of services including director training programs, director’s orientation programs and board evaluations.

3.2 Corporate Governance in Pakistan

29

pects of the codes. The authors therefore conclude that the rules have had no direct effect on company performance. Issues relating to regulatory impact and enforcement are therefore addressed in the present study.

3.2.1 The Board of Directors The 2012 and 2017 codes emphasise the importance of having a “balanced” board of directors, with a mixture of executive and non-executive (including those meeting the criteria for independence) directors and those who represent minority shareholders’ interests. Specifically, the code of 2017 recommends that each listed company should have at least two and preferably one-third of its board members that qualify as independent25 with at least one female director serving at all times. The 2017 code outlines seven primary roles that the board is expected to fulfil: (i) oversight of general corporate strategy and major decisions – the code requires the board to formulate a mission statement and formulate an overall corporate strategy consistent with this; (ii) ensuring that professional standards and corporate values in the form of a code of conduct are in place in order to promote integrity amongst directors, senior management and other staff; (iii) monitoring the effectiveness of company governance practices – directors must confirm in the annual report that there has been no departure from the governance codes; (iv) establishing a comprehensive internal control system with effective implementation and maintenance at all levels of the company; (v) responsibility for selecting, compensating, monitoring and replacing key executives; (vi) ensuring that the board has a mechanism in place to evaluate its own performance and (vii) overseeing a transparent board nomination and election process. Most listed companies in Pakistan have a single-tier board structure (Yasser, 2011; OECD, 2017); however a study by Tahir et al. (2012) argues that a two-tiered structure could be effective for Pakistani-listed companies due to the nation’s diverse social, cultural and economic conditions. The 2017 code requires the board of Pakistani listed companies to have a minimum of five members, but there is no restriction on the maximum number. Each board member is appointed for a maximum of three-year term.

3.2.2 Board Committees Board committees are typically given specific responsibilities (Solomon, 2013) via delegation of particular roles in each case. Board committees are considered to be an im-

 The term “independent director” in the context of the 2017 code means a director who does not have any connection or relationship, whether pecuniary or otherwise, with the listed companies, its associated companies, subsidiaries, holding companies or directors.

30

Chapter 3 Corporate Governance in Pakistan

portant complementary device within such corporate governance systems with their structure usually requiring minimum non-executive independent membership levels. The audit committee was the only board committee operating within Pakistani-listed companies before the SECP issued its first code in 2002, but these were rare (Code of Corporate Governance, 2002; Yasser, 2011; Arslan et al., 2014). The 2002 code formalised the need for an audit committee, with revised code of 2012 requiring that the board also set up human resource and remuneration committees and the 2017 code recommending – but not mandating – that boards constitute nomination and risk management committees – although it does not specify any specific requirements (such as composition structure, meeting and terms of references).

3.2.3 The Audit Committee in Pakistan The original SECP code of 2002 (and the later revised versions) requires listed companies in Pakistan to establish an audit committee. However, the number of such firms that set these up prior to the revised code being issued in 2012 was very low (Yasser, 2011; Tahir et al., 2012) and there is no published evidence as of yet regarding the impact of the latter in 2012. The recent codes state that the audit committee should comprise at least three non-executives with at least one of these meeting the criteria for independence; all three versions require listed companies to disclose the name of committee members and hold a meeting every quarter (at least) of the financial year. The 2017 code recommends that at least one member of the audit committee has relevant financial skills, knowledge and experience, although all three versions of the code recommend that the chairman of the audit committee be independent and not act as chairman of the board.26 All the codes also require listed companies to have an internal audit function in place, with the individual holding the lead role charged with reporting to the audit committee and (administratively) to the CEO. In the case of external auditors, the audit committee has a duty to make recommendations to the board regarding their appointment on an annual basis.

3.2.4 The Remuneration and Human Resource Committee The 2002 version of the corporate governance code made no mention of and provided no guidance regarding remuneration committees. However, the revised codes of 2012 and 2017 required listed companies to establish a remuneration and human resource committee with at least three members, the majority of whom are non-executive and

 The board of director of each listed company is required to specify the terms of reference of the audit committee and to provide adequate resources to committee members to perform their functions in an effective manner.

3.2 Corporate Governance in Pakistan

31

preferably, similar to the audit committee rules, with an independent director presence.27 The 2012 and 2017 codes set out a number of responsibilities in this context, for example, the committee must recommend: (i) human resource management policies to the board; (ii) CEO selection, evaluation, compensation and succession plans; and (iii) selection, evaluation and compensation plan for the CFO, Company Secretary and Head of internal audit.28

3.2.5 Compliance with the Code of Corporate Governance The 2002 version of the code mandated that listed companies in Pakistan must report on their compliance via a statement attached to their annual reports; this requirement was reiterated in the 2012 and 2017 documents. All three versions of the codes also require compliance statements to be reviewed and certified by the statutory auditors before being published. A World Bank report in 2005, when assessing the effectiveness of the 2002 code, suggested that corporate governance disclosure and compliance were very poor among Pakistani-listed companies, possibly because the SECP choose not to issue any guidance to companies regarding compliance. However, the revised codes issued by SECP in 2012 and 2017 provide an indicative format that companies can use.29

3.2.6 Shareholder Rights in Pakistan One of the roles of a robust corporate governance system is ensuring that investors receive a return on their investment that reflects the risk they actually face (La Porta et al., 1997). Of particular importance in this context is the extent of protection afforded to shareholders by the legal system, with La Porta et al. (2000) arguing that investor protection is critical in developing countries such as Pakistan because expropriation of minority shareholders’ and creditors’ resources by controlling shareholders is widespread. In Pakistan, shareholders’ rights are explicitly protected in all three versions of the corporate governance codes as well as in Company Act 2017. For example, shareholders in Pakistani-listed companies can demand certain information from investee firms and have the right to attend and participate at annual general meetings,30 receive dividends,

 The codes allow listed company CEOs to serve on remuneration and human resource committees, but not as the chair. However, CEOs cannot participate in committee proceedings relating to CEO performance and compensation.  The codes also require listed companies to disclose the names of committee members in their annual reports.  Appendix 3.1 provides a copy (in English) of the 2017 code. Appendix 3.2 provides a copy (in English) of the template provided by the SECP for statements of compliance.  Companies Act 2017 Section 132. The SECP can extend the meeting deadline.

32

Chapter 3 Corporate Governance in Pakistan

make changes to key company documents, increase capital and approve extraordinary transactions.31,32 Postal and electronic voting were introduced in the new Companies Act 2017 and directors can now be appointed by cumulative voting and dismissed by shareholder resolutions (World Bank, 2005; SECP, 2016; OECD, 2017). However, several authorities have argued that shareholder rights in Pakistan are still not protected in any meaningful sense because of high levels of ownership concentration (Yassir, 2011; Shamsi et al., 2014; OECD, 2017). Butt (2015) highlighted that many companies in Pakistan fail to hold AGMs or hold them in locations that are very difficult for most shareholders to reach although in many state-owned and multinational companies in Pakistan the key decisions are not made during AGMs as there are often direct links between owners and managers that bypass the board of directors (Iqbal & Javid, 2010). The World Bank (2018) assessment report highlighted international investors’ concerns regarding the lack of relevant financial information in Pakistan, arguing that meeting notices are often uploaded too late to be of use to foreign analysts and shareholders. Clearly, the enforcement of rules is an issue in Pakistan and this propensity is reflected in the empirical analysis that follows later in this book. Ameer (2013) argues that family dominance of shareholdings represents a major impediment to improvements in director accountability in Pakistan.33 Family-owned companies throughout the country are usually managed and controlled by the owners, with boards dominated by an executive and non-executive member of the controlling family – inter-locking directorships are also common (Yasser, 2011). As La Porta et al. (1998) point out, family-dominated boards of directors are unlikely to prioritise minority shareholder’s rights. In this context, the requirement for independent non-executives on the boards in the codes may represent a significant step forward in corporate governance practices, helping to reduce self-serving managerial behaviour and neglecting of the rights and interests of minority shareholders (Shamsi et al., 2014). However, theory and practice again appear to be divergent in Pakistan, with the Deloitte survey of 2014 highlighting that many of the independent non-executive directors present on boards are there purely for cosmetic purposes, with no effective decision-making roles attached. Similarly, while disclosure can play a substantive role in corporate governance by helping stakeholders make more informed decisions (Zaheer, 2013), the OECD (2017) noted that law and regulation in Pakistan had yet to require firms to disclose the results of member votes. Clearly, the adequacy and implementation of minority shareholder rights is an issue, and this is again reflected in the empirical content of the study.

 Companies Act 2017 Section 183(3).  See Chapter II of the Corporate Governance Code 2017 in Appendix 3.1.  On the PSX, company registrations are secured via the Central Depository Company (CDC) but inefficiencies still exist as some firms do not pay dividends on time while it often takes a long time to reregister shares (Iqbal & Javid, 2010).

3.3 Corporate Governance Failures in Pakistan

33

3.3 Corporate Governance Failures in Pakistan The primary motivation for this book is the recurrence of large-scale governance-led corporate scandals and failures in Pakistan. This section of the chapter explores a number of the most prominent recent examples.

3.3.1 Mehran Bank Scandal The Mehran bank was established in 1992 as a public limited company, operating six branches in Pakistan’s major cities (Salman & Siddiqui, 2013). Whilst the founder and CEO of the bank, Younis Habib, was reportedly involved in unethical business practices (resulting in dismissal) from his previous job at a private bank (Dawn, 2006) his political affiliations ensured that he was able to establish a new entity into which significant government accounts were transferred (Rashid, 1994; Dawn, 2006).34 However, Habib was later involved in misappropriating Rs. 5 billion and transferring Rs. 500 billion into various accounts without depositors’ consent (Salman & Siddiqui, 2013) selling land below market price without board consultation (using fake accounts to make this payment) and paying millions of rupees to politicians and army officials to cover up the malfeasance (Dawn, 2006; Salman & Siddiqui, 2013). Habib was finally arrested following a compliant by the State Bank of Pakistan (SBP) regarding $36.7 million of fraudulent accounting in the sale of Dollar Bearer Certificates,35 but this happened too late to prevent the collapse of the bank and its defaulting on major loan payments. As of July 2019, thousands of depositors and minority shareholders had received little compensation for the loss of their entire life savings. This case remains under investigation, although the National Accountability Court (NAB) has recovered Rs. 1.6 billion by selling a “Bemani” (undeclared) property owned by the CEO. This case raises a number of significant governance issues relating to accountability and vested interests; the empirical analysis presented later in this book therefore takes account of this type of misdemeanour and its propensity for causing widespread harm.

 Taylor (1992) argues that if regulators had taken proper account of Robert Maxwell’s behaviour in his previous role at Pergamon Press, his ability to establish a new business empire (one which ultimately collapsed in scandal) would have been reduced.  A federal government paper that the State Bank sells through commercial banks (Dawn, 2019). According to SBP rules, proceeds from the sale had to be deposited within 72 h of the sale. However, Habib never deposited the money to SBP (Dawn, 2019).

34

Chapter 3 Corporate Governance in Pakistan

3.3.2 Privatisation of Pakistan Telecommunication Company Limited (PTCL) Mangi and Siddiqui (2013) argue that public-sector organisations are often privatised in order to improve the performance of failing companies. However, in Pakistan the privatisation of PTCL in 2006 appeared to be somewhat different as it was Asia’s best performing telecommunication company; as Josiah et al. (2016) argue, in the developing world the process is often highly politicised, with societal welfare rarely a major condition. In the PTCL case, the bidding process raised serious concerns regarding transparency, with the two highest bidders (SingTel and China Mobile) dropped with no explicit justification and the sales awarded (reducing share price from Rs. 70 to Rs. 23) to Middle Eastern telecom giant “Etisalat”, despite their having pulled out of the initial bidding process for “technical” reasons (Dawn, 2014; Saeed & Khan, 2017).36 Six years after privatisation, not only had the government failed to recover the full price from Etisalat ($800 million remained unpaid), but it had also provided Etisalat with almost all the money it had received by that point (The Express Tribune, 2012; Mangi & Siddiqui, 2013; Ansari et al., 2017). Mangi and Siddiqui (2013) maintain that both parties in this process failed to comply with basic standards and norms of corporate governance, with the role of auditors and those charged with asset appraisal proving to be ambiguous and contrary to international best practices (Mangi & Siddiqui, 2013). After privatisation, the financial performance of PTCL weakened considerably, with operating profit dropping to Rs. 4.5 billion in 2008 from Rs. 43 billion in 2004; the tax paid fell accordingly as did earnings per share (EPS) which dropped to below Rs. 10.00 from a high of Rs. 19.75. As well as suffering a loss of tax revenue, the Pakistani government saw its dividend decline to zero in 2008 from Rs. 31 billion in 2005 (Mangi & Siddiqui, 2013; Saeed & Khan, 2017). The attendant fall in share price meant losses for the state and minority shareholders of close to Rs. 200 billion. More than 36,000 employees were forced to take voluntary leave, resulting in the government having to make a $256 million payment to employees (The Express Tribune, 2012; Mangi & Siddiqui, 2013; Saeed & Khan, 2017). Further difficulties were encountered by a clause attached to the privatisation deal banning foreign investment new licenses, affecting the country’s ability to establish a reliable 3G network.37 The Mehran bank and PTCL cases are by no means the only recent examples of apparent corporate governance-driven collapses in Pakistan. Table 3.1 outlines six instances where academic and media scrutiny has suggested that governance mechanisms were central

 Etisalat bought 26% of PTCL’s shares for $2.59 billion with management and control rights attached (Mangi & Siddiqui, 2013; Dawn, 2014; Saeed & Khan, 2017)  The Government of Pakistan prevented its national telecom organisations from opening a new gateway exchange and instead forced state-owned institutions to use PTCL for inland and international communication. In addition, an exemption from purview of the Public Procurement Regulatory Authority Ordinance 2002 in the federal budget allowed the acquirer to sell and purchase assets freely (Mangi & Siddiqui, 2013).

3.3 Corporate Governance Failures in Pakistan

35

to the appalling outcomes. These include ongoing problems at the PIA and the collapse of the country’s leading steel mill. Table 3.1: Major Corporate Failures and Scandals in Pakistan. Corporate Failures and Scandals

Sources

Underlying Issues

Pakistan International Airline (PIA) – Ongoing governance issues – cumulative loss of Rs.  billion

The Economic Times () Nawaz et al. () Daily Times () The Nation ()

Political appointments and interference Over and fake staffing Lack of experience across top management relating to aviation industry Corruption Lack of accountability

Pakistan Steel Mill (PSM) – the only steel Siddiqui () mill in the country with capacity to produce Hasnain () . million tonnes of steel per year. Shut down since , losses over Rs.  billion

Unqualified board members-politically appointed Arbitrary increase in board compensation Regulatory body (engineering development board-EDB) members involved in corruption and malpractice Over  lost their jobs

Zarco Exchange, 

Rs.  million embezzlement $. million money laundering Violation of State Bank and Securities Exchange Commission rules  employees lost their jobs  branches closed No regulatory checks and balances

Hussain and Siddiqui () The Express Tribune ()

Khanani and Kalia International (KKI),  Fahim and Siddiqui () The Express Tribune (, ) Dawn () The News () Ansari et al. ()

Rs.  billion money laundering during the  financial crisis $ million per day illegal money transfers Fake website used to transfer over Rs.  billion between  and  resulting in foreign exchange reserve depletion from $ billion to $ billion KSE- index declined over % Fake identity of employees

 The recipient of the first ISO 9001 (an international standard for establishing a business management system) in Pakistan’s financial sector.

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Chapter 3 Corporate Governance in Pakistan

Table 3.1 (continued) Corporate Failures and Scandals

Sources

Underlying Issues Terrorism financing Negligence on the part of internal and external auditors Lack of monitoring and enforcement by regulatory bodies

KASB Bank and Bank Islami merger Merged at a token price of Rs.  Accumulated loss Rs. . billion from

Auditor General Pakistan (–) The Express Tribune ()

Self-serving practices of the board Embezzlement of Rs. . billion by management Undue favour from SBP to Bank Islami caused Rs. . billion losses No consideration of the market value of KASB bank assets and its shares Lack of transparency during amalgamation Over , depositors suffered

fake account scandal , fake bank accounts  fake account holders £ million laundered

Geo News ()

Involvement of board members of private banks Black money gathered from various kickbacks, commissions and bribes Identity fraud Ignorance and negligence on the part of enforcement and regulatory bodies No whistle-blower No shareholder activism

Note: The table outlines a number of recent high profile corporate scandals and failures in Pakistan with reported causes and sources set out in each case.

3.4 Previous Research on Corporate Governance in Pakistan As regards recent studies of corporate governance developments in Pakistan, some of the earliest findings are provided by Hussan and Butt (2009) who explore the relationship between corporate governance and capital structure for 58 non-financial listed firms over the period 2000–2005. The reported findings indicate that board size and managerial shareholding levels are negatively linked with debt to equity ratios, whereas no significance was found regarding the impact of CEO duality and non-executive director presence on financial performance or asset structure. Javid and Iqbal (2010) examine the effect of concentrated ownership on Pakistani-listed companies’ performance using a

 There are more than 300 money exchange companies currently operating in Pakistan, many of which are unlicensed (Fahim & Siddiqui, 2013).

3.4 Previous Research on Corporate Governance in Pakistan

37

sample of manufacturing firms over the period of 2003–2008. The findings indicate that firm performance and profitability are positively associated with the size of the family, as well as foreign and government ownership stakes, but these ownership patterns have a negative impact on governance practices, including disclosure and transparency quality. The authors argue that the concentration leads to difficulties in accessing foreign capital and attracting international investors. Of particular relevance to the empirical inquiry in this book, the significant block ownership reported by the authors is attributed to weaknesses in the legal system. Yasser et al. (2011) study the relationship between four major corporate governance variables (board size, board composition, CEO duality and audit committee) and two firm performance measures (return on equity and profit margin) via a sample of 30 companies listed on the main Pakistan exchanges between 2008 and 2009. The evidence indicates a significant positive relationship between performance and board size, board composition and presence of audit committee but no relationship existed between CEO duality and the performance measures adopted. A more recent study by Nasir et al. (2013) examines the role of insider ownership and individual ownership in determining dividend pay-out policies amongst a sample of 100 non-financial listed firms between 2007 and 2011. The results show that both insider and individual ownership have negative impacts on dividend payments. The other significant influences on dividends documented in the study are profitability (positive relation) and size and leverage (negative relation). A similar study by Afzal and Sehrish (2014) investigates the impact of ownership structure and board composition on dividend policy using a sample of non-financial Pakistani-listed firms for the period 2005–2009. The results indicate a positive association between board size, firm size, individual ownership and dividend paid, but a negative association between institutional ownership, insider ownership, firm profitability and the dividend paid. Finally, a study by Aziz and Saeed (2016) examines the relationship between ownership structure and bank performance using data for 26 listed Pakistani banks over the period 2000–2014. The findings show that government ownership of banks in Pakistan has a negative impact on bank performance, whereas family and institutional ownership have a significant positive impact on bank performance. Thus, while the prior quantitative studies suggest that governance-related variables have an impact on firms, evidence regarding other influences is ambiguous suggesting the importance of the type of qualitative approach adopted here. Although the SECP has issued three versions of the corporate governance code for Pakistan, research in this area remains restricted to generic analysis of the impact of corporate governance characteristics on firm performance. As noted above, the findings from this body of work are far from clear-cut. This is perhaps not surprising given that most of the previous research uses data from annual reports which in Pakistan may lack reliability; the lack of qualitative work thus represents a significant gap in the literature, not least because of the lack of explicit focus on the numerous largescale corporate collapses in Pakistan in the prior studies.

Chapter 4 Corporate Governance in Emerging Markets 4.1 Introduction The previous chapter highlighted the key features of and outcomes associated with Pakistan’s corporate governance system. The prominence of the debate regarding these issues (originally restricted to the world’s largest economies but now involving most of the world’s emerging nations as well) is regularly attributed to the impact of a number of high profile failures and scandals occurring across the world (Solomon, 2013; Mallin, 2013; Clarke, 2017; Tricker, 2019). The development and enforcement of governance codes has therefore been motivated by a desire to improve transparency and accountability and thereby re-establish investor confidence in global stock markets (Yasser et al., 2011; Solomon, 2013; Tricker, 2019). In this context, this chapter provides an overview of the literature on international corporate governance that is most relevant to this book with a particular focus on emerging markets. Section 4.2 of the chapter outlines the alternative conceptualisations of corporate governance set out in prior analyses, before Section 4.3 outlines various proposed governance models. Section 4.4 then discusses the contrast between mandatory and voluntary corporate governance compliance while Section 4.5 explores corporate governance in an emerging market context by highlighting various driving factors, including legal framework, ownership structure, regulatory reforms and code compliance, as well as challenges and institutional influences such as those of a political, legal, social and cultural nature. Section 4.6 illustrates the impact of privatisation in many emerging nations with the potential role of shareholder activism then being outlined in Section 4.7. Section 4.8 highlights the concept of “whistle blowing” and how this might help combat corrupt practices in emerging markets such as Pakistan while Section 4.9 highlights corporate failures around the world, including in Asia more broadly, before conclusion in Section 4.10.

4.2 The Corporate Governance Notion Although the use of the term corporate governance is often said to have originated with Tricker (1984), it was not until 1990 that the level of explicit attention amongst academic researchers, regulatory authorities and policy makers became significant (Solomon, 2013, Tricker, 2019). The rapid rise in interest levels partly reflected the impact of major governance failures and market crashes (Yasser, 2011; Sheikh & Wang, 2012; Solomon, 2013). However, no universally accepted definition of corporate governance has yet emerged in the literature, partly because it has been studied in the context of a number of disciplines including management, law, economics, finance, culture and sociology (Claessens & Yurtoglu, 2013; Thurasamy et al., 2014). Each area addresses issues relating https://doi.org/10.1515/9783110772999-004

4.2 The Corporate Governance Notion

39

to corporate governance – including its definition – via a particular lens but understanding the term “corporate governance” also differs across cultures, reflecting differences in legal background and societal tradition (Wanyama et al., 2009, 2013; Alamri, 2014; Chanda et al., 2017). The UK’s Cadbury Report (1992),40 the world’s first detailed set of best practice guidelines, defined corporate governance as The system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. (p. 13)

The UK’s Financial Regulatory Council suggests that this definition “remains true today” and used it to underpin its most recent (2018) code. However, alternative formulations focus on the relationship amongst parties rather than responsibilities; for example, the International Financial Corporation (IFC) defines corporate governance as The structure and processes for the direction and control of companies. Corporate governance concerns the relationships among the management, the board of directors, the controlling shareholders, minority shareholders and other stakeholders. (IFC, 2017)

Some authors have attempted to focus on the rights of shareholders. Parkinson (1994) views corporate governance as a system of supervision and control that aims to ensure agents work in the best interest of company shareholders, while MacAvoy and Millstein (2003) define corporate governance as the set of structured relationships that determines “authority” and responsibility for the conduct of the company and its management. Notwithstanding these contentions, many of the recent formulations emphasise broad sets of stakeholders, including Letza et al. (2004) who argue that Corporate governance is about the understanding and institutional arrangements for relationships among various economic actors and corporate participants who may have a direct or indirect stake in a company, such as company shareholders, directors, managers (agents), consumers, employees, suppliers, creditors, government, local communities and the general public. (p. 242)

Earlier expositions of the concept reflect the underlying issue addressed by authors including Tricker (1984) who, arguing from an accountability perspective, suggested that Corporate governance is not all about running the business per se, but also giving a complete direction to the business, with complete supervision and control over the executive actions of the management and with satisfying legitimate expectations of accountability and regulations by interest beyond the corporate boundaries. (p. 8)41

 Formally “The Committee on the Financial Aspects of Corporate Governance”.  Blair (1995) also encourages a broad view of corporate governance, stating that: “Corporate governance is a whole set of legal, cultural, and institutional arrangements that determine what publicly traded companies can do, who controls them, how that control is exercised and how the risk and returns from the actions they take are allocated” (p. 3).

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Chapter 4 Corporate Governance in Emerging Markets

Shleifer and Vishny (1997), in the first broad empirical survey of global corporate governance practices, propose a definition based on a financial perspective, with a focus on protecting outside investors from insider expropriation; their suggestion is of a notion that deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. (p. 737)

However, the OECD (1999 and 2004) Principles of Corporate Governance, adopted widely in emerging economies (Solomon, 2013; Tricker, 2019), emphasise the broader, more stakeholder-oriented, definition of corporate governance thus: a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which company objectives are set, and the means of attaining those objectives and monitoring performance are determined. [To] provide proper incentives for the board and management to pursue objectives that are in the best interest of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. (p. 11)

The academic literature on corporate governance has tended to support these formulations. For example, Cornelius (2005) defines corporate governance in a broad sense whereby it can be seen as an inter-connected set of rules by which companies, shareholders and managers govern their behaviour. Similarly, Solomon (2013) emphasises a holistic view, arguing that a stakeholder-oriented approach to corporate governance is essential in the current global business environment. Solomon further suggests that the concept implies a system of checks and balance, both at internal and external level, whereby companies discharge their accountability to all associated stakeholders and perform their business activities in a socially responsible way.42 Similarly, Mallin (2013) asserts that the importance of the corporate governance concept lies in ensuring effective internal and external control over business activities and that no individual has the power to overrule the decisions of a board. Whilst the set of aforementioned definitions illustrate and reflect different paradigms and perspectives on corporate governance issues, Solomon’s and Mallin’s emphasis on risk mitigation and the tempering of excessive power is of particular relevance to this book, where failures in a broader context of corruption and secrecy provide the context for the empirical analysis. Mallin (2013) argues that the modern focus of corporate governance directly reflects a desire to mitigate and prevent corporate failures. Indeed, attention on corporate governance grew rapidly when a number of high profile scandals in developed nations (e.g. Maxwell, Parmalat, Enron and WorldCom) shook the pillars of regulatory compla-

 Iqbal and Javed (2010) maintain that in a sound corporate governance system, the relationship between the company and a wide range of stakeholders should determine accountability relations, in line with Solomon’s view.

4.3 Models of Corporate Governance

41

cence by pointing to systematic loopholes and structural failures in governance frameworks that had not previously been highlighted (Mallin, 2013). The Enron and Maxwell scandals both drew attention to internal control and supervision failures, with a lack of action from non-executives apparent in each case (Solomon, 2013). According to Mallin (2013), the lack of independence amongst board members on a board is a major corporate governance weakness; Parmalat had 13 company directors but only three of these were regarded as independent (Tricker, 2019). As Claessens and Yurtoglu (2013) note, corporate governance is not only important for minimising the likelihood of scandals but can also help with access to external finance, reducing the cost of capital while promoting growth and sustainability more generally. Therefore, good governance is particularly important for developing countries as they heavily rely on foreign capital.

4.3 Models of Corporate Governance Although debate regarding a formal definition of “corporate governance” continues, it is now widely acknowledged that a country’s legal system is a key influence on practices in this regard (La Porta et al., 1997; Shleifer & Vishny, 1997; Aguilera et al., 2008; Solomon, 2013), in particular the rules relating to ownership structure. This issue is now explored.

4.3.1 Ownership Structure La Porta et al. (1999) identify four different forms of company ownership, each of which has particular implications for governance practices: family/individual; state; financial institutions and widely held corporation – although others exist such as cooperative, voting trusts or groups with no single controlling investor (Butt, 2015). More generally, two different classes (“outsider” and “insider”) of corporate governance systems have been identified (Solomon, 2013). “Outsider models” of corporate governance – also known as “Anglo-American” models due to their prevalence in the English-speaking world (Mallin, 2013; Solomon, 2013; Tricker, 2019) – are based on free market economy theory, with shareholder-orientation the central principle (Tricker, 2019). The term “outsider” is applied to systems of corporate governance where large companies are controlled by the managers (agents) but owned by well-diversified institutional or individual shareholders, that is, the type of separation between management and control outlined originally by Berle and Means (1932). In the outsider model shareholders appoint the directors, who then appoint managers to run the company in shareholders’ interests (Solomon, 2013; Tricker, 2019). The outsider model emphasises shareholders’ legal protection (La Porta et al., 1997) with boards of directors typically operating in a single (“unitary”) set-up comprising both executive and non-executive directors in varying proportions. The other

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Chapter 4 Corporate Governance in Emerging Markets

main features of the system include ownership of companies that is more or less equally divided between individual shareholders and institutional shareholders as well as directors who are rarely truly independent of management. The model relies on effective communication between management, shareholders and the board with important decisions taken after shareholder approval, where institutional investors such as mutual funds and banks play a key role (Solomon, 2013; Clarke, 2017; Tricker, 2019). In the US, corporate governance is regulated by legal statute and mandatory rules, with directors facing penalties for non-compliance, contrary to the UK where corporate governance is “principles-based” (Solomon, 2013; Clarke, 2017). Codes of corporate governance and not the rule of law determine board responsibilities with companies required to report on how they have followed the principles and applied provisions or to explain why they have not; this approach is therefore often known as the “comply or explain” approach (Tricker, 2019). Solomon (2020) describes the “insider model” of corporate governance as one in which public listed companies are owned and controlled by a small number of major shareholders, with the latter having a close relationship with management. Whilst this model is often found in developing countries, it predominates in continental Europe, including the Netherlands, Germany, France and Italy as well as in many East Asian countries (Claessens et al., 2000; Claessens & Yurtoglu, 2013; Tricker, 2019). As mentioned in Chapter 2, Pakistan’s corporate governance system is insider in nature, with concentrated ownership structure, poor disclosure, weak legal protection of minority shareholders’ rights and a major role for influential stakeholders in management and control (Yasser, 2011).43 However, insider systems more generally are criticised for the lack of separation of ownership and control found in the outsider model, with the possibility arising that controlling families and shareholders will abuse their power at the expense of minority shareholders (Young et al., 2008).

4.3.2 Legal Framework A nation’s legal system is an important influence on ownership and control structures which in turn impact on the likelihood of sustainable economic development (La Porta et al., 1997). In developed countries such as the UK and USA where ownership is relatively dispersed, common law strongly influences the legal system on investor protection, in particular regarding minority shareholders’ rights, whereas the civil law systems found in countries including France, Germany and Russia have concentrated ownership and weaker legal protection for minority owners (La Porta et al., 1999; Clarke, 2017; Tricker, 2019, Solomon, 2020). Absence of meaningful protection for

 Debt levels are often relatively high with lenders often also owning large tranches of shares (Rosser, 2003).

4.4 Mandatory Versus Voluntary Compliance of Corporate Governance

43

shareholder rights discourages the development of a wide shareholder constituency, whereas in many English-law-based systems there are few companies that are familyowned or family-controlled (La Porta et al., 1997; Butt, 2015). In many nations in Europe, Asia (including Pakistan) and South America minority shareholder rights are not fully protected, allowing controlling families to marginalise outside investors. La Porta et al. (1999) in fact suggest that there is a direct relationship between a company’s legal framework and the level of investor protection provided. In line with these contentions, a study by Surial (2004) argues that French civil law is the weakest in terms of investor protection, with common law systems the strongest and German and Scandinavian countries falling in the middle. Pakistan has a common law-based system, reflecting its colonial past, but investor protection is weak in practice (Yasser, 2011). Of particular relevance to this book, evidence suggests that countries with common law-based legal frameworks are more likely to have detailed codes of corporate governance than those with civil law foundations (Zattoni & Cuoma, 2008; Aguilera & Cuervo-Cazurra, 2009, 2016). Additionally, common law countries’ codes of corporate governance (such as those in the UK and the US) emphasise board performance and evaluation whereas in civil law contexts, where codes do exist, they typically focus on protecting shareholder rights and minimising conflicts of interest (Tricker, 2019).

4.4 Mandatory Versus Voluntary Compliance of Corporate Governance The method of implementation used to apply to corporate governance codes varies often reflecting custom and practice in each jurisdiction. For example, corporate governance reforms in the US in response to financial scandals such as Enron were based on mandatory enforcement of the new rules set out in the Sarbanes-Oxley Act of 2002 (Clarke, 2017; Tricker, 2019). In contrast, in line with tradition, the UK employs a voluntary (comply or explain) approach (Solomon, 2013). The “comply or explain” approach is argued to be effective as it allows companies to adopt governance mechanisms most appropriate to their needs, while financial markets are able to assess the adequacy of corporate governance practices and the appropriateness of the regulatory agenda (MacNeil & Li, 2006; Luo & Salterio, 2014). In a Pakistani context, Tahir et al. (2012) argue that nominally mandatory implementation of corporate governance has failed to impact on the country’s corporate environment. The factors underpinning this situation, in particular, its impact on corporate scandals and failures, is one of the central issues explored in this book.

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Chapter 4 Corporate Governance in Emerging Markets

4.5 Corporate Governance in Emerging Markets The term “Emerging Market44” is defined in many ways, but typically is used to refer to developing economies in Africa, Asia, South America and Eastern Europe that have grown recently, but still not achieved the profile of developed economies as regards accountability, corruption, technological advancement, economic development and rule of law. Emerging markets such as India, China, Bangladesh and Pakistan play a significant role in the global economy, reflecting these nations’ improving economic growth prospects and regulatory infrastructures (Dallas & Ararat, 2011). Clarke (2017) argues that although emerging economies have become an attractive destination for leading multinationals seeking new markets and resources, corporate governance has major implications for developing nations’ long-term social well-being, as it provides the accountability and transparency required to encourage further internal and external investment. Whilst the first code of corporate governance was developed in the UK, closely followed by other developed countries, they have now been adopted in most of the developing world (Wright et al., 2005; Aguilera & Cuervo-Cazurra, 2009; Solomon, 2013; Clarke, 2017; Tricker, 2019). However, research in corporate governance in emerging markets remains limited, reflecting an initial lack of interest and a dearth of reliable empirical data (Dallas & Ararat, 2011; Chanda et al., 2017; Aguilera & Haxhi, 2018). Likewise, Arslan et al. (2014) note that due to a lack of research culture there has been limited investigation of corporate governance practices in Pakistan. Although Dallas and Ararat (2011) find that less than 1 per cent of published academic studies in the governance area focus on emerging markets there is some evidence of a more recent shift with studies such as Shikaputo (2013) and Chanda et al. (2017) recognising the implications of poor governance standards for economic development programmes on the ground. Many of the recent studies suggest that investors tend to be wary of emerging market investment because of poor governance structures (e.g., Claessens & Yurtoglu, 2013; Boubaker & Nguyen, 2014; Ricka, 2018) although earlier studies by McGee (2008) and Siddiqui et al. (2010) make the same point. The argument is based on the fact that emerging markets have been relatively slow to establish the institutions and infrastructure needed to facilitate meaningful governance systems (Wanyama et al., 2009; Chanda et al., 2017; Ricka, 2018). Although most emerging markets – including Pakistan – have made significant efforts in this regard, Wanyama et al. (2009) argue that understanding of the concept is still at an embryonic stage in developing nations. In this context, Pascal (2002) and Babic (2003) argue that conceptualisation of the governance notion is inevitably complicated because of many of the structural challenges that characterise these markets.

 Chan and Cheung (2008) state that emerging markets are those that with a short operating history, small capital market and relatively low trading volume.

4.5 Corporate Governance in Emerging Markets

45

Corporate governance debates in developed countries revolve in most cases around agency theory (Gilson, 1996; Vinten, 2002; Kim et al., 2017) whereas in emerging markets – where ownership and control are typically much more concentrated (La Porta et al., 1997; Claessens & Yurtoglu, 2013) – policy discussions are often embedded in an array of overlapping issues. For example, Siddiqui (2010) reports a number of major challenges to corporate governance reforms in Bangladesh including ownership concentration, corporate sector reluctance to raise finance through capital markets, a lack of shareholder activism and poor regulatory enforcement by institutions. These characteristics make it difficult for such nations to embrace the theories that have influenced the debate in developed nations (Babic, 2003). Shleifer and Vishny (1997) argue that the absence of governance enforcement mechanisms in emerging markets may be responsible for much of the lack of development that continues to impact citizens in these nations. In this context the World Bank and the OECD have established institutionalised programmes that acknowledge and identify challenges posed by economic, social, legal and cultural circumstances that fail to foster positive corporate governance outcomes. According to Black et al. (2006) “good” governance practices play a vital role in attracting and retaining foreign investors and emerging economies should always prioritise the development of sound corporate governance systems when attempting to increase their investor base. From an investor point of view, Aguilera and Haxhi (2018) argue that corporate governance in emerging markets is particularly important because robust standards can make up for a country’s weaknesses in national governance systems. In a similar context, Khanna and Zyla (2010) find that investors value wellgoverned firms in emerging markets to the extent that they may be willing to pay a premium for “better” run investee companies. Miller et al. (2005) suggest that even though the Asian financial crisis ultimately contributed to market liberalization in the region, weak regulatory systems limited the benefits achieved. In this regard, Singh and Zammit (2006) contend that poor governance and close relationships amongst government, banks and businesses leading to “crony capitalism” are key issues in Asian financial markets and – as awareness of these tendencies spread – developing countries moved rapidly to develop governance codes of their own (Aquilera, 2005; Mallin, 2013; Young et al., 2008; Solomon, 2013).45

4.5.1 Drivers of Corporate Governance in Emerging Markets Corporate governance in emerging markets has not been studied as intensively as in developed countries, but a growing literature recognises its importance in determining economic outcomes. For example, Wu (2005) suggests that concern regarding corporate

 For example, Malaysia issued its first code in 2000, Indonesia and China in 2001 and Bangladesh in 2004 (Maassen et al., 2004, Sheikh & Wang, 2012).

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Chapter 4 Corporate Governance in Emerging Markets

governance first emerged as a key policy concern for emerging markets following the financial crisis of 1998, while Gibson (2003) notes that the Asian financial crisis 1997–1998 was widely blamed on poor corporate governance. Indeed, emerging economies including Pakistan established their first codes of corporate governance following market crashes in order to protect economic development and to attract foreign funding that might have been compromised by post-crisis investor concern and subsequent corporate failures (Claessens & Fan, 2002; Aquilera & Cuervo-Cazurra, 2009; Claessens & Yurtoglu, 2013). Tsamenyi and Uddin (2008) argue that several factors drive corporate governance reforms in emerging markets including pressures from international funding bodies such as the World Bank and the IMF as well as a desire for prosperity and integration with global markets. For several decades emerging markets have been seen as potentially attractive for foreign investors; as Butt (2015) report, even by the end of the twentieth century there were almost 30 developing countries where foreign investment was growing more rapidly than in developed countries. However, weak corporate governance in these markets has emerged as a possible barrier to further growth, particularly following the global financial crisis and the increased concern about transparency, accountability and disclosure standards it brought with it (Siddiqui & Fahim, 2013; Alamri, 2014; Butt, 2015). Although some corporate governance reforms in emerging markets took place in the wake of the Asian financial crisis of 1997–1998, the global nature of the events in 2007–2008 led to widespread calls for systemic improvements (Gibson, 2003; Solomon et al., 2003, Tricker, 2019).

4.5.2 The Legal Framework and Ownership Structure in Emerging Markets A nation’s legal system and ownership structure can have a major impact on corporate governance practices (Solomon, 2013; Alamri, 2014; Clarke, 2017; Tricker, 2019). La Porta et al.’s (1999) study of ownership structure in 27 different countries, including 14 emerging nations, reveals that most of the latter have concentrated ownership structures with families, banks or the state dominating. Claessens et al. (2000, 2013) report that in most East Asian countries a family pyramidal structure exists; for example, in Indonesia and the Philippines single families own close to 17 per cent of all shares in listed companies. However, these analyses indicate significant variation in family ownership across emerging markets, with firms in Indonesia and Thailand often controlled by families, whereas in Korea, Malaysia, China and Singapore state ownership dominates. The corporate governance framework in the Middle East and North Africa continues to reflect high levels of concentrated ownership and family dominance in board decision-making processes (Song et al., 2014) while a more recent survey by Deloitte (2013) reveals that more than 85 per cent of businesses in India are under effective family control – Ghani and Ashraf (2005) report a similar pattern in Pakistan. Notwithstanding the latter evidence, of most direct relevance to the present study is an OECD (2017) survey of corporate governance frameworks in Asia which shows that

4.5 Corporate Governance in Emerging Markets

47

the average holding by the five largest shareholders of Pakistani-listed firms is 65.8% and average managerial ownership is approximately 25%. The impact of such concentrated shareholdings may not be straight-forward in developing nations. For example, Suto’s (2003) study of Malaysian corporate finance and governance indicates that limited dispersion can help alleviate conflicts between managers and owners. Similarly, Black et al. (2006) report a positive relationship between family ownership concentration and firm-level productivity in Korea. More generally, Douma et al. (2006) argue that the impact of ownership in developing counties is likely to vary as external governance mechanisms differ markedly in terms of sophistication and robustness. Despite this apparent evidence that it can be beneficial in certain circumstances, many authors see the concentration of ownership in many developing nations as a serious concern because of the likelihood of weak minority shareholder protection (La Porta et al., 1997; Solomon et al., 2003; Klapper & Love, 2004). In this context, Peng and Jiang (2010) investigated the impact of concentration on shareholder protection in family-controlled business across seven Asian countries. The findings reveal that the institutional framework of emerging nations in Asia does indeed offer weak legal protection for minority shareholders, in line with the earlier discussion of this issue. Once again, however, emerging countries that provide relatively robust regulatory frameworks perform better in several areas (Peng & Jiang, 2010). As inspection of Table 4.1 reveals, in general terms emerging markets with a common law legal origin provide stronger legal and creditor rights as well as better protection of minority shareholders than do those operating in civil law-based systems. Table 4.1: Comparison of Emerging Countries Legal Systems. Legal Origin

Civil Law Common Law

Number of Legal Rights Emerging Strength Index Countries (Average)  

. .

Creditor Rights Legal Protection Index of Minority (Average) Shareholders Index (Average) . .

. .

Source: Claessens and Yurtoglu (2013, 1b) – Emerging Markets Review. Note: This table compares emerging markets with civil and common-law legal origins in terms of legal rights, creditor rights and legal protection of minority shareholders.

Pakistan, despite its common law legal origin, ranks below the average for each of the three criteria in the table (Claessens & Yurtoglu, 2013; OECD, 2017). Klapper and Love (2004) argue that businesses in emerging markets such as Pakistan therefore have significant scope to enhance shareholder protection by, for example, improving disclosure standards, accountability and board independence via implementation of disciplinary mechanisms that target mismanagement. A recent study by Huang and Zhu (2015) sug-

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gests that foreign institutional investors can play an important role in restricting minority shareholder expropriation without additional regulation being required.

4.5.3 Corporate Governance Reforms in Emerging Markets Corporate governance reform around the world has been motivated by a need for efficiency and/or institutional legitimacy (Aguilera & Cuervo-Cazurra, 2004; Zattoni & Cuomo, 2008). The efficiency logic emphasises the potential of strong corporate governance to attract external capital, reduce the cost of capital, enhance operational performance and protect the rights of a wide range of stakeholders (Claessens & Yurtoglu, 2013; IFC, 2013). However, Siddiqui (2010) argues that reforms of corporate governance in most AngloAmerican systems – including in emerging markets with colonial histories – point to the dominance of legitimacy reasoning for code adoption. Some of these pressures include direct and indirect interventions from international investor and funding bodies such as the IMF, ADB and World Bank (Siddiqui, 2010; Claessens & Yutoglu, 2013). Of particular relevance to the present study, Javid and Iqbal (2010) suggest that corporate governance reforms in Pakistan were motivated primarily by a desire to attain legitimacy in the perspectives of global investors. However, irrespective of original stimuli, Mishra and Mohanty (2014) and Clarke (2017) argue that in modern emerging markets “good” corporate governance is essential if public policy objectives including economic progress and capital market development are to be realised. Whilst some convergence in governance rules has been witnessed across Asia, significant rule-practice gaps undermine the integrity of several of the reform programmes (Yasser, 2011; Bukhari, 2014; Butt, 2015; Clarke, 2017; Solomon, 2020). The Confederation of Indian Industry (CII) issued its “Code-A” of corporate governance as early as 1998 but, despite its encouragement of reform and wider dispersion, the insider-dominated structure persists (Solomon, 2013). In Pakistan, despite more than 500 companies now being listed, ownership remains concentrated. Nonetheless, as former colonies of Britain, both Pakistan and India have a UK-style legal system that offers more minority shareholder protection than is found in many other East Asian countries (OECD, 2017).46 In Bangladesh, research by Siddiqui (2010) indicates that although the Anglo-American framework influences corporate governance systems, the nation’s current institutional context does not reflect these underpinnings; in fact, Siddiqui suggests that a stakeholder model would be more descriptive of the current system. Many of the common features of the East Asian model are found in Indonesia where concentrated family ownership continues despite the impact of the Asian Finance crisis being worsened by minority shareholder wealth expropriation. Elsewhere in Asia, a mixed picture is evident. Choi et al. (2007) examine board struc-

 In practice this may have been undermined to some extent by market forces (Yasser, 2011).

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ture in South Korea with the results suggesting that independent outsider directors play a key role whereas in Turkey, Kaymak and Bektas (2015) report that inside executive director presence positively impacts board performance.

4.5.4 Corporate Governance Compliance in Emerging Markets With economies becoming increasingly global, listed companies in emerging markets have come under significant pressure to improve corporate governance compliance in order to compete for foreign capital in the international equity market (Saad, 2010). Against this backdrop, Okpara (2011) explores the barriers, issues and challenges hindering effective development and enforcement of corporate governance in Nigeria. The findings expose a range of factors impacting on governance standards, including weak (or non-existent) law enforcement mechanisms; abuse of minority shareholders’ rights; lack of enforcement and adherence to the regulatory framework; poor compliance and monitoring mechanisms; and a lack of transparency and disclosures. A number of studies have argued that despite the emergence of corporate governance codes in many emerging markets, companies consider compliance to be both costly and difficult to execute (Armitage et al., 2017; Yasser, 2011). Sarhan and Ntim (2018) note that most listed firms in the Middle East and North Arica have relatively low levels of voluntary disclosure regarding code compliance while Samaha et al. (2012) provide similar evidence for Egypt and Saudi Arabia. Enriques (2002) suggests that enforcement of laws and other regulation is imperative in a time of globalisation and in the wake of the Asian financial crisis of 1997–1998, the Malaysian Institute of Corporate Governance brought in a series of enforcement measures designed to enforce the nation’s code of best practice. Evidence suggests that this approach has proved effective; for example, Ibrahim et al. (2004) conducted a survey of 556 public listed companies on the Malaysian stock exchange and report a high level of compliance with corporate governance rules, a finding confirmed more recently by Saad (2010). Saad argues that good corporate governance helps companies to attract foreign investors by providing assurances regarding probity and transparency. The empirical work presented later in this study explores views regarding the potential for stronger rule enforcement to bring about similarly positive outcomes in Pakistan.

4.5.5 Challenges to Corporate Governance Development in Emerging Markets Corporate governance reform has become a major policy issue not only in company operations but also in the management of national economies around the world (Chanda et al., 2017). Sound corporate governance requires the existence of functioning and accountable institutions, but most emerging markets – including Pakistan – do not yet possess these (Wanyama et al., 2009; Rafiee & Sarabdeen, 2012). Emerging markets such as

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Pakistan also suffer from the “crony capitalism” issue where government officials, board members and inside management provide lucrative opportunities for their family and friends. Wanyama et al.’s (2009) investigation of the corporate governance environment in Uganda reveals that whilst the country mechanisms such as non-executive directors and board committees in place, the practical effectiveness of these is very limited, with institutions effecting very sparce implementation. Miller et al. (2005) and Okpara (2011) argue that the cost and risk of investment is increased in countries with low levels of transparency, whilst a number of studies report that high concentration of corporate ownership and control in the hands of family members and close relatives is another widespread problem in emerging markets (Sheikh & Wang, 2012; Solomon, 2013; Clarke, 2017). In particular, dominant family members at board level typically make important decisions in their own interests, creating an obvious conflict of interest between managers and minority shareholders, one that can be exacerbated in the context of restricted competition (Rafiee & Sarabdeen, 2012). Claessens (2004) and Clarke (2017) argue that systematic weaknesses are more apparent in Asian modes of governance, where ownership and control is still in the hands of dominating family members. Chanda et al. (2017) argue that this wide range of issues both reflects and embeds governance frailties, and so without improving understanding of the potential of improved corporate governance to produce tangible benefits, rather than simply imposing costs, it will be challenging for the regulatory authorities to convince firms or the public of the need for reform.

4.5.6 Political and Legal Influences on Corporate Governance in Emerging Markets Political stability is considered to be one of the key requirements for “good” governance along with voice and accountability, government effectiveness, regulatory quality, rule of law and powers to prevent corrupt practices (Kaufman, 2003). However, very few studies have explicitly discussed the influence of political and legal institutions on corporate governance practices in emerging markets, with most research of this nature conducted instead in the world’s richest nations (Bukhari, 2014). This appears to represent a significant gap in understanding as Gilson (1996) and Wanyama et al. (2009) argue that non-economic factors, such as political and legal frameworks, have a major influence on governance outcomes in developing countries, with institutional differences a critical issue in this regard. Relatedly, a number of studies highlight that political interference with company operations is normal in developing nations, as political forces try to control and monitor markets and economic outcomes. In these situations, political forces often shape corporate governance practices so as to achieve political rather than social goals (Abdumavlonov, 2011). Shleifer and Vishny (1997) observe that legal institutions in developed nations play a significant role in protecting investors and shareholders’ rights. For example, US courts regularly attempt to increase the protection of firms’ assets through controlling managerial propensity to serve their own interests. However, as Dharwadkar et al. (2002) and

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Chanda et al. (2017) note, emerging markets often lack effective legal frameworks, making resolution of the agency problem very challenging. These authors also suggest that bankruptcy laws in emerging markets tend to be interpreted in favour of managers, exacerbating the agency problem, while political influence is now widely recognised as having significant implications for governance practices in these settings (Wanayma et al., 2009). In this context, Roe (2003) and Fifield et al. (2005) argue that threats to investors’ rights arise not just from the separation of ownership and control but also from political instability and public governance crises. In Pakistan, where politics are characterised by recurring dictatorships and illegitimate governments, these influences are worth serious consideration in any broader analysis of corporate behaviour (Roe, 2003). Yasser (2011) define political stability as a reflection of a sound governance environment. This is a pertinent issue in the present study as there have been numerous attempted military coups in Pakistan since its independence, with other periods seeing rule by two parties who claim to be supported by military dictators (Khan, 2014). A high degree of political turmoil and instability in any country reduces the incentives for investment; an evident governance implication of this is that the regulatory and enforcement institutions upon which robust corporate governance stand are likely to be absent or weak (Wanyama et al., 2009; Chanda et al., 2017). The empirical chapter of this book explores these issues (including the impact of the general election in 2018) and the manner in which they have influenced corporate governance practices in modern-day Pakistan.

4.5.7 Social and Cultural Influences on Corporate Governance in Emerging Markets It is well established that the way in which firms treat stakeholder groups reflects their ethical standards (Chryssides & Kaler, 1996), but cultural and social set-ups are known to play an important role in national ethical norms which in turn influence the way in which modern corporate entities operate (Wanyama et al., 2009; Claessens & Yurtoglu, 2013). While Rafiee and Sarabdeen (2012) find that national cultural influences impact the effectiveness of corporate governance reforms, Cheung and Chan (2008) suggest that part of the impact reflects the extent of nations’ engagement with each other in terms of business activities. While Licht et al. (2004) argue that culture influences organisational practices and policies most directly through the traits and norms of board members, they also acknowledge that “ordinary” people are typically afraid to disagree with managers and that, as a result, a few influential members of society have substantial power. Top-down cultural value imposition can therefore shape the behaviour of all stakeholders and – of particular relevance here – play an important role in the relationship between governance standards and investment levels (Rafiee & Sarabdeen, 2012).

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4.5.8 Corruption and Governance Weaknesses in Emerging Markets Political sensitivities and legal inconsistencies mean that the definition of corruption has become controversial (Nahamya, 1995). However, the formulations offered by the World Bank (1997), who view corruption as the “abuse of public office for private gain” and Transparency International (2017) where corruption is seen as the “abuse of entrusted power for private gain (involving) activities such as fraud, money laundering, bribery, extortion as well as favouritism” encapsulate the key features of most. Thus, from a theoretical viewpoint corruption can be regarded as a governance issue as it is centred around the issue of undocumented transactions. Kaymak and Bektas (2015) argue that corrupt activities have been a curse on civilisation throughout history and should remain a key concern for regulators, while Wu (2005) states that such tendencies highlight the particular importance of corporate governance for policy makers in emerging markets. Pervasive corruption has been cited as one of the main constraints on trade and economic development in developing markets (Asieda & Freeman, 2009; Banerjee et al., 2012; Bashin, 2016; Khawaja & Mian, 2005; Kaymak & Bektas, 2015). A recent study by Chanda et al. (2017) in Zambia argues that pervasive corruption needs to be addressed if any meaningful changes in corporate governance are to occur, although pervasive institutional weaknesses make this very difficult to achieve. Wu (2005) suggest that emerging markets’ tendency to have more embedded corruption than developed markets leads stock prices in emerging markets to trade at discounted values.47 More generally, corrupt practices have been noted as an impediment to social development and a driver of low economic growth, weak law enforcement and lack of public services (Lederman et al., 2011) while Heukamp and Arino (2011) argue that corruption leads to a reduction in levels of well-being as the social fabric evaporates and frustration grows. Domadenik et al. (2016) explore the impact of political corruption on corporate governance and productive efficiency, arguing that underdeveloped democratic institutions rarely take the measures needed to curb corrupt practices, leading to widespread political connectedness among firms that in turn has a negative effect on performance. The authors also suggest that when corruption is not punished – as is almost always the case in such environments – levels of the malfeasance increase. One particular corporate failure in Pakistan, the “Mehrangate Scandal” (detailed earlier) provides an example of how political connections helped facilitate a major banking scandal; the implications of this type of outcome for governance processes are examined in the empirical part of this study. Ugar and Dasgupta (2011) study the influence of corruption on economic growth and identify four main impact channels. First, corruption influences investment risk and, indirectly, the cost of production, thereby creating an uncertain environment for external investors. Second, corruption affects public investment as projects may be

 See also Lee and Ng (2004).

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chosen for political reasons rather than on the basis of economic and social returns. Third, corruption impacts on investment in human capital, as individuals will not seek to enhance their educational knowledge or job skills to the extent that they would if rewards were distributed on merit, again impacting on economic growth outcomes. Finally, corruption impacts on national wealth, damaging the quality of a country’s governance institutions and resulting in a weak, dysfunctional and inefficient public sector, where regulation and policies that strengthen government accountability are often entirely lacking. 145 140

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Figure 4.1: Pakistan: Corruption Rank for 2012–2021. Source: www.tradingeconomics.com, Transparency International (TI) Note: The above chart indicates Pakistan’s corruption ranking since 2012 as measured by Transparency International.

Inspection of Figure 4.1 reveals that Pakistan was ranked at number 140 in Transparency International’s corruption index in 2021, having fallen as low of 144 in 2005 out of 175. These results suggest large and persistent corruption is a characteristic of the nation and, given the evidence outlined above, the likelihood of poor corporate governance is high. Yasser (2011) argues that effectively functioning institutions and improved practices have the potential to eliminate opportunities for corrupt practices; exploring this potential in the context of Pakistan’s apparent struggles to date is one of the primary motivations for this book. Yasser argues that Pakistan’s political system, one with barely any checks and balance on public accountability and a longstanding web of political connectedness, makes the country fertile for embedding of corrupt practices, although Wu (2005) argues that corporate governance improvements can be of particular significance as an anti-corruption tool in this type of scenario, in line with Wanyama et al. (2009)’s earlier contention for Uganda. Emerging markets have seen significant economic liberalisation and reform since the late 1990s, providing opportunities and challenges for global investors (Jiang et al.,

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2015). Many emerging nations, including Pakistan, have launched ambitious privatisation programmes in infrastructure industries in a bid to encourage major investment by foreign investors and multinational corporations (Josiah et al., 2010; Khan, 2010). The conventional rationale for privatisation focuses on improving firm performance (Boubakri et al., 2005; Josiah et al., 2010), reducing the burden of failed entities on the government’s part, improving service delivery through competition (Ugaz, 2003; Zubair, 2015), optimising resource allocation and, as a result, increasing economic growth (Barnett, 2000). However, Ahmed and Siddiqui (2013) and Josiah et al. (2010) criticise the conventional privatisation narrative arguing that it focuses only on profitability while ignoring other factors such as jobs, skills, pensions, income distribution and social welfare; these authors suggest re-examination of the argument to embrace the full impact of such a change in resource allocation and provision in emerging countries. In Pakistan, the recent large-scale privatisations of Pakistan Telecommunication Limited noted earlier and others, including the Muslim Commercial Bank, suggest that weak governance and a lack of transparency and fairness characterise privatisation deals in emerging nations. Wu (2005) argues that these outcomes facilitate regular misuse of resources during such liberalisations – and that robust institutional governance practices are therefore essential. In the absence of such developments, Boubakri et al. (2005) argue that new companies may struggle in a global economy dominated by well-governed firms.

4.6 Shareholder Activism and Whistle Blowing in Emerging Markets Rayan and Schneider (2002) define shareholder activism as: the use of power by an investor either to influence the process or outcome of a given portfolio firm or to evoke large scale change in processes or outcomes across multiple firms through the symbolic targeting of one or more portfolio firms. (p. 555).

In this context, ownership structure represents a de facto corporate governance mechanism (Connelly et al., 2010) with institutional investors such as insurance companies, investment trusts, pension funds and unit trusts playing a significant proactive role in improving governance standards in their investee companies (Connelly et al., 2010; Solomon, 2020). However, whilst shareholder activism has been demonstrated to have a positive influence on corporate governance in developed countries (Solomon, 2013, 2020; Tricker, 2019) this potential has yet to be empirically explored to any meaningful extent in emerging markets such as Pakistan. Huang and Zhu (2015) argue that much more research is needed in these environments regarding the link between a failure to attract foreign and domestic institutional investment and the lack of institutional investor influence on governance standards. The potential for active institutional

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shareholders, particularly foreign institutional investors, to play a more active role in Pakistan is therefore explored empirically here. The accounting scandals at WorldCom, Enron, Parmalat and elsewhere led to unprecedented levels of interest in accounting fraud (Solomon, 2013; Clarke, 2017). Dyck et al. (2010) argue that in these and other cases, employee tips proved to be one of the most effective methods of detecting fraud and wrongdoing; this is likely to be the case more generally in emerging markets where formal communication channels can be compromised (Ahmadani, 2018). Despite growing interest in whistle blowing as a weapon in the fight against corrupt and unethical business practices, the findings in most studies in the world’s richest nations have not been confirmed in emerging nations such as Pakistan (Bashir et al., 2010) despite several studies arguing that cultural norms and the extent of local legal protection can have a significant influence on individual attitudes (Trongmateerut & Sweeney, 2013; Gao & Brink, 2017). In Asia as a whole, a PWC (2011) survey revealed the complete absence of legal protection for whistle blowers, although in Pakistan the PTI48 government introduced “the Whistle Blower Protection and Vigilance Commission Bill 2018”, designed to enable whistle blowers to provide information regarding any suspected corrupt practices to an independent commission (Ahmadani, 2018).49 Saifert et al. (2010) argue that when companies introduce clear policies relating to whistle blowing activity, more employees are likely to report potential ethical misconduct. Trongmateerut and Sweeny (2013) suggest that regulations in a non-Western culture should be contextualised according to social norms and attitudes but, of obvious bearing on the present study, Bashir et al. (2011) suggest that cultural and organisational factors in Pakistan actively discourage whistle-blowing activities. This issue is potentially concerning, given the Transparency International evidence cited earlier. The empirical analysis in this book therefore explicitly considers this issue in the context of Pakistan’s propensity to experience major failures in governance.

 Pakistan Tehreek-e-Insaaf led by former cricketer Imran Khan (see Chapter 2).  The commission will become the complainant and pursue such cases with relevant authorities while keeping the identity of the whistle blower confidential. The whistle-blower will be protected from dismissal or removal from office, disciplinary proceedings, threat and intimidation (Ahmad, 2018).

Chapter 5 Theoretical Framework 5.1 Introduction In social science research, theoretical frameworks are used to provide organisational insights, develop and improve knowledge and understanding, and provide a coherent and systematic frame of reference for analysis and evaluation (May, 2011). The theoretical framework set out later in this chapter is used here to underpin the methodological choices set out in Chapter 6 and the empirical analysis is presented in Chapter 7. The next section describes and discusses developments in the chosen theoretical frame – institutional theory – in particular, the elements of institutional isomorphism mobilised in the study.

5.2 Institutional Theory Institutional theory has a long history in social science discourse, with links to the “old” narratives of Veblen and Hamilton (see Moll et al., 2006) that reflect its accommodation of a wide spectrum of views and perspectives. In the modern organisational context, institutional theory provides a point of reference designed to explain the link between organisational structure and external influences (Ahyaruddin & Akbar, 2017). Scott (1995) maintains that institutional theory is a social theory that seeks to describe organisational structure, with its continuous development and refinement suggesting its usefulness in a study such as this that explores organisational behaviour in a contemporary setting. Scott (1995) defines institutionalisation as The social processes by which individuals come to accept a shared definition of social reality – a conception whose validity is seen as independent of the actor’s own views or actions but is taken for granted as defining the way things are and/or the way things are done. (p. 596)

The generality of this commonly cited definition reflects the existence of the various streams of institutional theory that have been adopted by researchers across academic disciplines, notably sociology, politics, accounting and economics (Scott, 1987, 1990, 1997, 2008, 2014; DiMaggio & Powell, 1991; Aguilera & Jackson, 2003; Moll et al., 2006) when attempting to understand organisational behaviour.

5.3 Institutional Theory Development Institutional theory has developed rapidly over time to become one of the dominant frameworks in organisational thought (Dillard et al., 2004). Much of the work regardhttps://doi.org/10.1515/9783110772999-005

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ing “old institutionalism” was undertaken in the 1940s by Selznick (1948, 1949, 1957) who provided a general definition of formal organisations as “a system of consciously coordinated activities or forces of two or more persons” (p. 25). In this context, an organisation can be viewed as an expression of a social structure chosen by logical actions for a specific goal. Selznick (1949) argued that when organisations as social systems aim to achieve goals, they become institutionalised. In 1957, he further suggested that institutionalisation is a variable, consistent with Scott’s (2014) later argument that organisations vary in this aspect. For example, Selznick (1957) posited that organisations with set goals and advanced technologies are subject to less institutionalisation than are those with elusive goals and a lack of technological advancements. New institutionalism emerged in 1970 from the work of Meyer and Rowan (1977), Zucker (1977) and others exploring the role of culture and cognition in institutional analysis. Meyer and Rowan adopted a macro-perspective and emphasised the role of modernisation in rationalising taken-for-granted rules. The authors note that rational concepts of institutions are the main drivers that force organisations to adopt practices and procedures to increase their legitimacy and survival. In contrast, Zucker embraced a micro outlook and highlighted the taken-for-granted nature of institutions as well as the role of cultural persistence as a measure of institutionalisation. She focussed on three aspects of cultural persistence (generational uniformity, maintenance and resistance to change) and suggested that The greater the degree of institutionalisation, the greater the maintenance without direct social control, and the greater the resistance to change through personal influence. (p. 742)

The new institutional framework gave rise to the notion of isomorphism in response to external pressures. DiMaggio and Powell (1983, 1991) extended the work of Meyer and Rowan (1977) from the societal level to the organisational field in this manner by arguing that as most organisations operate within the same environment they will tend to exhibit homogeneity over time – within given domains – and conform to expectations of the wider institutional environment.

5.3.1 New Institutional Sociology New Institutional Sociology (NIS) is now perceived as the dominant theory in sociology and social science research (Field, 2001). The NIS perspective has been associated most strongly with the work of Meyer and Rowan and DiMaggio and Powell noted above, which itself builds on elements of old institutional economic thinking (Field, 2001). NIS focusses on the relationship between an organisation and its environment, emphasising the importance of power and culture in transforming organisational structures (DiMaggio & Powell, 1983). Ribeiro and Scapens (2006) argue that this lens emerges because the NIS narrative generally takes place at the macro level, in line with DiMaggio and Powell’s (1991) definition of NIS as

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a rejection of rational-actor models, an interest in institutions as independent variables, a turn toward cognitive and cultural explanations, an interest in properties of supra-individual units of analysis that cannot be reduced to aggregate of direct consequences of individuals attributes or motives. (p. 8)

Thus, organisations tend to achieve legitimacy by their compliance with cultural rules and social norms based on societal expectations and the institutions within them – the cohesion in these types of external pressures leads to commonality (or “isomorphism”) in the manner in which institutions change as they adapt to these forces (Scapens, 2006).

5.3.2 Institutional Isomorphism These later contributions support Meyer and Rowan (1977)’s contention that in order to seek legitimacy and ensure their survival, institutions change and develop in a similar isomorphic manner. Following on from this original line of reasoning, DiMaggio and Powell (1983) define institutional isomorphism as A constraining process that forces one unit in a population to resemble other units that face the same set of environmental conditions. (p. 149)

Institutional isomorphism splits into three categories: (i) coercive; (ii) mimetic and (iii) normative, via which institutions tend towards similarity (DiMaggio & Powell, 1983). Coercive isomorphism stems from formal50 and informal51 pressures exerted by external factors such as the political, family, cultural and regulatory pillars upon which organisational existence is built (DiMaggio & Powell, 1983; Souitaris et al., 2012). Coercive isomorphism is thus closely related to “power” dynamics (DiMaggio & Powell, 1983) leading Mizruchi and Fein (1999) to argue that Coercive isomorphism is driven by two forces: pressures from other organisations on which a focal organisation is dependent and an organisation’s pressure to conform to the cultural expectations of the larger society. (p. 657)

This form of isomorphism leads organisations to adopt certain sets of rules and policies via changes in, for example, company ordinances or codes of corporate governance. These are subject to scrutiny by influential institutions (including governments, regulatory bodies and agencies such as the IMF or the World Bank) with sanctions or rewards used to influence future activities (Scott, 1995, 2008, 2014). DiMaggio and Powell (1983, 1991) note that direct imposition of regulations may also come from outside govern Formal sources of institution pressure include constitutions, contracts and government (e.g., North, 1990, 1991; Farrell and Heritier, 2023).  Informal sources include traditions, customs, moral values, religious beliefs, behaviours, political ideology and other cultural norms (Kaufman et al., 2018).

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ment, for example, via professional body pronouncements. In the context of emerging markets such as Pakistan, international organisations including the IMF, the World Bank and the Asian Development Bank play a major role because of many of these countries’ financial dependency thereon. Mimetic isomorphism relates to situations where organisations attempt to adjust their internal structures and practices to imitate the internal structures and procedures adopted by other organisations (DiMaggio & Powell, 1983; Mizruchi & Fein, 1999; Levy, 2006; Moll et al., 2006; Souitarus et al., 2012). This propensity involves organisations seeking to benchmark, or improve upon, the institutional practices of other organisations, often for reasons linked to legitimacy concerns (Qu et al., 2012). Mimetic isomorphism can also develop when there is no clear course of action available, forcing leaders of organisations to copy others that they perceive to be successful (Mizruchi & Fein, 1999; Buchko, 2011). DiMaggio and Powell (1983) describe the impulses driving mimetic isomorphism in the following way: Uncertainty is a powerful force that encourages imitation. When organisational technologies are poorly understood, when goals are ambiguous, or when the environment creates symbolic uncertainty, organisations may model themselves on other organisations. (p. 151)

Greenwood et al. (2002) agree that the desire to mimic other organisations is often motivated by uncertainty but can also reflect a lack of vision, making the copying of successful organisational structures the easiest way to gain legitimacy. Buchko (2011) suggest that organisations are likely to adopt the structures that they believe to be legitimate irrespective of whether this adds to effectiveness, with each organisation attempting to access the perceptions of key stakeholders regarding current legitimacy. As Scott (1995) notes, when an organisation fails to adopt the innovative structures, practices and procedures embraced by other entities in the same sector they fear legitimacy being compromised and access to stakeholder opinions provides one of the strongest indicators of problems in this regard. Ultimately, this type of propensity for mimetic isomorphism leads organisational structures to become analogous both within and across sectors, as the institutionalisation involved pervades and consolidates. Normative isomorphism arises mainly from professional bodies’ attempts to develop culture and practice norms that are consistent with their objectives and beliefs (Scott, 1987; Moll et al., 2006; Buchko, 2011; Souitaris et al., 2012). Deegan and Unerman (2011) emphasise the cultural pressure to adopt certain institutional practices within the normative isomorphism notion, with professional bodies (and consultants) playing a major role in reshaping practices (Moll et al., 2006; Souitaris et al., 2016). DiMaggio and Powell (1983) describe normative isomorphism as a process of formal education and professional networking that leads to actions that accord with societal values and norms. They suggest two characteristics of normative isomorphism: (i) legitimacy in the professional knowledge base shaped by particular institutions and (ii) growth and progress of professional networks that span organisations and add to the diffusion of new structures and practices. Greenwood et al. (2002) develop this premise by arguing that

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educational and professional institutes play prominent roles in encouraging the type of normative values that develops expertise. The three types of isomorphic processes often operate simultaneously, although individual pressures can dominate in particular circumstances (Lepoutre & Valente, 2012; Souitaris et al, 2012). Townley (1997) argues that in practice an identifiable directional pattern in the relationship between the three types is possible, viz.: Coercive isomorphism may then be succeeded by mimetic variety as organisations copy established patterns in order to obtain similar rewards. Normative isomorphism may follow as methods of organising become sanctioned by professionals from ‘successful’ organisations. (p. 261–262)

Given the potential for overlap, in the present study we pay close attention to the specific forces at work in Pakistan’s corporate sector and attempt to distinguish between the three types of influence where a clear evidential basis for such separation exists.

5.4 Corporate Governance from an Institutional Theory Perspective 5.4.1 Governance and Institutions Debates about corporate governance frameworks have intensified over the last two decades with scholars from various disciplines – including accounting and finance, law, economics, management and organisational behaviour – interpreting observed processes and outcomes through a range of lenses (Solomon, 2013; Tricker, 2015; Clarke, 2017). Agency theory has typically been used to frame these conversations (Jensen & Meckling, 1976; Coffee, 1984; Brudney, 1985) and continues to represent the dominant paradigm in much of the literature of governance. This includes prior research in Pakistan (Javid & Iqbal, 2010; Aziz & Saeed, 2016). However, this trend has led to the overlooking the role of a range of institutional forces (e.g. social, cultural, political and legal) that recent studies have suggested are strong influences on governance practices in emerging market contexts (e.g., Wanyama et al., 2009; Almari, 2014; Bukhari, 2014). Yasser (2011) maintain that emerging market economies are particularly prone to abuse by managers, politicians and institutions, to the extent that the assumptions of agency theory regarding competitive markets are not valid in nations such as Pakistan where government and other agencies dominate economic activity. More generally, Bukhari (2014) argue that corporate governance systems in virtually all contexts are embedded in wider institutional and legal frameworks, and consistent with this reasoning, NIS has been chosen as the framework for several studies in the area (e.g. Peng et al., 2008; Young et al., 2008). Filatotchev et al. (2013) suggest that use of this type of institutional theory is particularly apt for studies of corporate governance in the developing nations of Asia.

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Enrione et al. (2006) explore the institutionalisation of corporate governance codes using NIS theory. The study maintains that institutionalising procedures generally lead to convergence, although other studies report that such processes have not impacted on the Japanese system of corporate governance, with continuing resistance to Anglo-American mechanisms such as board committees, one of its defining features. Peng et al. (2008) and Young et al. (2008) compare the influence of formal and informal institutions and find that formal institutions (i.e. legal and state) in emerging markets such as Pakistan are often weak, inefficient or absent and do not promote “mutually beneficial impersonal exchange” across social actors. In contrast, informal institutions such as culture tend to be prevalent and play a significant role in corporate governance development. Thus, in this book we explicitly include the role of informal institutions in the scope of the investigation. Groth (1979) argues that institutional governance structures reflect cultural characteristics (i.e. social norms, values and procedures) that are in turn influenced by the relationship between people and both socio-economic and political systems. DiMaggio and Powell (1983) build on this notion when exploring the relationship between an organisation and its environment, suggesting that as firms face similar external pressures, they will tend to develop similar characteristics in response. In particular, external forces of a cultural, legal, political and religious nature tend to drive commonality in institutional practices especially so when supported by public opinion or coerced by law – irrespective of the impact on organisational effectiveness. A number of recent studies have set governance and control practices in the context of these NIS-based insights. For example, Zhou (2012) explores the role of external auditors in detecting and reporting corporate fraud in China and describes significant normative auditor influence that reflects their professionalism in motivating management to be transparent. However, the role of such external actors (including outside auditors) in many recent governance scandals has been criticised, suggesting that normative influence can play a negative role in certain organisational environments. For example, social and cultural norms can lead to corruption and inequality, leading to a lack of transparency and accountability (Bhukari, 2014). This type of outcome suggests the appropriateness of institutional theory for a study such as the present one, where influences on governance practices and failures in a developing country are the focus. The following sub-sections outline the potential significance of a number of key institutions in this context.

5.4.2 Political Institutions The role and influence of political institutions on governance practices have gained only limited attention in recent literature (Bukhari, 2014). Gilson (1996) suggests that non-economic factors, such as politics, influence the formation and adoption of corporate governance systems with differences in institutional systems having a significant impact on governance outcomes. Roe (2005) suggests that as regards corporate gover-

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nance arrangements “politics can ban some arrangements, raise the costs of others, and subsidize yet others” (p. 374), suggesting that political institutions have a vital role to play in the governance of listed companies. Most studies of this nature (including all the above) were conducted in developed countries, but a notable exception is provided by Wanyama et al. (2009) who suggest that in Uganda, pernicious political behaviour is perceived to be a major challenge. Thus, political institutions appear to have a particularly strong impact on corporate governance practices in emerging markets and the empirical work in this book addresses this issue when exploring the actions and behaviour of social actors in Pakistan.

5.4.3 Legal Institutions As Bukhari (2014) notes, while a number of researchers have discussed the importance of legal institutions in a corporate governance context, most of this work has been conducted in developed markets. With the proliferation of corporate scandals around the world, the importance of the role of law in minimising the likelihood and extent of such failures have been widely recognised (La Porta et al., 1997; Butt, 2015). In developed markets, legal institutions have been shown to play a major role in protecting shareholders’ rights and ensuring investor confidence in the market (Shleifer & Vishny, 1997; Claessens & Yutoglu, 2013). More generally, Millhaupt (1996) argues that legally binding laws and rules shape the basic structure of corporate governance by establishing rights and responsibilities. Young et al. (2008) note that in emerging market contexts, unpredictable and ineffective enforcement is typical, with Wanyama et al. (2013) going as far as to suggest that legal uncertainty is the main cause of governance problems in Africa. In this regard, Dharwadker et al. (2000) contend that emerging markets as a whole can be characterised as lacking the effective legal frameworks that are essential for regulating corporate governance. Again, it is evident that the exploration of this issue is required in a study of governance failures in Pakistan, particularly given the weakness in the nation’s legal system identified in Chapter 2.

5.4.4 Religious Institutions The relationship between religion and corporate governance practices has been explored by a number of authors, including Lewis (2005) who argues that religious tenets and “good” corporate governance share common values such as honesty, equal justice and public interest. Abu-Tapanjeh (2009) contends that ethical standards in society play an important role in motivating protection of shareholders’ interests but not at the expense of other stakeholders. Building on these suggestions, Bhatti and Bhatti (2010) maintain that corporate governance systems “inspired” by religion foster

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capital formation, robust markets and the promotion of equality and transparency in legal systems; any system that lacks an appropriate ethical-moral basis is thus unlikely to have a strong system of governance. Given these contentions regarding the positive institutional impact of religion, our empirical work incorporates analysis of this potential in reducing the scale and impact of corporate failures in Pakistan, with emphasis on the moral and ethical principles of the nation’s main religion of Islam.

5.4.5 Family Institutions The impact of family institutions on corporate behaviour has been widely discussed in a range of social science fields. Agency theory has been used extensively to explore the role of family institutions within the corporate governance domain, with the relationship between the principal (family owners) and the agents (managers) central to the analysis (Shleifer & Vishny, 1997; Yasser, 2011; Solomon, 2010, 2013). However, agency theory’s main tenets do not necessarily fit well with established institutional tendencies in the developing world (Bukhari, 2014) and research in these situations has increasingly incorporated culture and other contextualising factors (e.g. Aguilera & Jackson, 2003; Young et al., 2008). In Pakistan and other emerging markets in the region such as India and Bangladesh, family ownership continues to dominate, even amongst listed companies (OECD, 2017). Whilst Claessens et al. (2000) find that concentration in family control negatively impacts firm performance in emerging markets, Ben-Amar and Andre (2006) do not observe any meaningful impact on financial outcomes in developed nations. This conflict in findings raises the question of why family institutions might have different impacts on firm performance across markets. Some researchers (e.g. Morck & Yeung, 2004; Carney, 2005) believe that in emerging markets family shareholders influence the board’s decision-making process and exploit the rights of minority owners. This issue is clearly relevant to a study of governance failures in developing nations and is therefore reflected in the empirical analysis presented later. Having explored the theoretical underpinnings for the study, the next chapter sets out the methodological choices and research methods employed to build on these.

Chapter 6 Research Methods and Methodology 6.1 Introduction 6.1.1 Assumptions about the Nature of Social Science Research Creswell (2014) suggests that once researchers establish a philosophical viewpoint, the theoretical framework, methodology and data collection methods can be developed. According to Burrell and Morgan (1979)’s framework, social science research can be subjective or objective in nature, depending on the researcher’s chosen philosophical assumptions. Burrell and Morgan argue that social science research requires four sets of the latter, relating to: ontology; epistemology; human nature and methodology. As Figure 6.1 indicates, each of these has two extremes – “subjectivism” and “objectivism” – with positions on this continuum reflecting the positions taken regarding the four classes of assumption. In basic terms, the subjectivist position argues that reality is constructed by people’s perception and views, whereas objectivism regards that reality exists external to individuals and can therefore be measured by the “scientific method”. The Objectivist approach to social science

The Subjective approach to social science

Nominalism

ontology

Realism

Anti-positivism

epistemology

Positivism

Voluntarism

human nature

Determinism

Ideographic

methodology

Nomothetic

Figure 6.1: The Subjective–Objective Dimension in Social Science Research. Source: Burrell and Morgan (1979, p. 3).

6.1.1.1 Ontological Assumptions Ontological assumptions relate to the notion of what constitutes reality (Crotty, 2007). In this context, researchers are required to take a stand regarding their view of how “things” really are and how they really work (Mouton & Marais, 1988; Blaikie, 1993). Burrell and Morgan (1979) and Morgan and Smircich (1980) contend that the researcher’s ontological position provides a framework for incorporating assumptions that are inherent to humankind’s perception of the world, that is, whether the world is external to individuals (positivism) or, instead, individuals control the environment (antipositivism). Burrell and Morgan (1979) characterise the two extreme ontological posihttps://doi.org/10.1515/9783110772999-006

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tions as “nominalist” (at the subjectivist end of the continuum) and “realist” (associated with positivism). The realist position regards the social world as being external to individual understanding, consisting of rigid, tangible objects that are external and autonomous to humans born into a pre-existing socially organised world. For the realist, the social world exists independently and is as concrete as the natural world. Nominalism, on the other hand, postulates that the social world is external to individual understanding and is made up of nothing more than the names and labels used to structure reality (Burrell & Morgan, 1979). Reality is seen as a subjective creation of one’s mind, thus rejecting any claims that a “real” social world structure exists (Husserl, 1970; Burrell & Morgan, 1979; Siau & Rossi, 2011). 6.1.1.2 Epistemological Assumptions Epistemological assumptions relate to the nature of knowledge itself, including how it is obtained and communicated with fellow human beings (Burrell & Morgan, 1979; Krauss, 2005). According to Burrell and Morgan (1979) epistemological assumptions are concerned with the manner in researchers gather knowledge and differentiate “what is to be regarded as ‘true’ from what is to be regarded as ‘false’” (p. 1). Burrell and Morgan (1979) state that epistemological assumptions, like those relating to ontology, range between subjective and objective extremes in this case from positivism at one end and anti-positivism at the other. Saunders et al. (2016) suggest that positivism assumes that the researcher acquires knowledge about an issue by observing social reality. Positivist researchers perceive knowledge to be hard and tangible, discovered by searching for associations between different observed elements (Guba & Lincoln, 1994). The positivist approach is based on forecasting and interpreting causal links among key variables. In this regard, Krauss (2005) argues that positivists tend to separate themselves from the world they study. Thus, researchers employing a positivist approach use hypothesis and conduct experimental studies to explore reality. On the other hand, anti-positivists discard the idea that knowledge exists independently from individuals and argue that knowledge can only be gathered by direct involvement with the phenomena concerned through personal experience (Guba & Lincoln, 2004). In contrast with the positivist approach, Burrell and Morgan (1979) suggest that the anti-positivist approach is likely to employ methods such as observation, questionnaires and interviews. There is a strong link between ontology and epistemology; while ontology focuses on what really exists, the nature of the world and reality, epistemological concerns focus on how what exists may be known (Usher, 1996). The present study adopts an anti-positivist approach whilst endeavouring to gather meaningful information about relevant stakeholder groups’ perceptions regarding corporate governance failures in Pakistan. As detailed below, the study employs a structured questionnaire survey with board members of listed companies, regulatory bodies, employees of listed companies, academic researchers and business students to ascertain their views.

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6.1.1.3 Human Nature The ontological and epistemological assumptions chosen by a researcher influence the view of human nature and together they shape the methodology of the researcher’s investigation into social reality. As regards assumptions about human nature, Burrell and Morgan characterise these as relating to the links between human beings and the environment in which they live. The authors again identify two opposing assumptions that can be made: (i) humans are either determined or controlled by the environment and are a product of the “deterministic” view – that is, the objectivist extreme; (ii) or humans – as the creator of the environment – control the environment, reflecting the notion that “man is completely autonomous and free-willed” (Burrell & Morgan, 1979, p. 6); this “voluntarist” view represents the subjectivist extreme. Burrell and Morgan suggest that assumptions about human behaviour do not necessarily need to be located at either of these extreme points, with an intermediate position involving a hybridisation of both situational and voluntary assumptions about the activities of human beings being favoured. The two contrary philosophical viewpoints (together with ontological and epistemological positioning) guide the methodological aspects of research. 6.1.1.4 Methodology There is a common viewpoint that ontology, epistemology and methodology are intimately associated with each other (Burrell & Morgan, 1979; Ryan et al., 2002; Krauss, 2005). Methodological assumptions focus on the theoretical analysis of techniques and methods used to obtain knowledge in a particular study. Guba and Lincoln (2004) define methodology as the manner in which the researcher goes about finding out what can be known. These authors (see Guba & Lincoln, 1998, 2004) plus Krauss (2005) argue that all methodologies may not be appropriate to all research activities, with the appropriate setting depending on the enquirer’s beliefs about ontology and epistemology. Researchers’ assumptions about ontology, epistemology and human nature lead them to embrace either ideographic or nomothetic approaches to methodological choice. An ideographic methodological approach assumes that researchers can only understand the social world by “obtaining first-hand knowledge of the subject under research” (Burrell & Morgan, 1979, p. 6). The ideographic methodological approach is associated with subjective phenomena and seeks to analyse situations by exploring individuals’ perceptions about the issues to hand – in line with the approach adopted here. In contrast, the nomothetic methodological approach to social science is objective in nature and emphasises conventional research, where scientific techniques can be used to gather knowledge from a distance. Researchers adopting a nomothetic approach therefore typically employ quantitative techniques as their main investigative tool. Burrell and Morgan (1979) recognise the impact that the apparent dichotomous nature of subjective-objective dimensions may have on the researcher; for example, a subjective approach to social science may be characterised by assumptions that are

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nominalist, anti-positivist, voluntaristic and ideographical. Likewise, an objective approach can be characterised by assumptions that are realistic, positivistic, deterministic and nomothetic. Figure 6.1 outlines the subjective and objective dimensions of Burrell and Morgan (1979) based on these four assumptions. While Burrell and Morgan argue that the interaction between two extreme opposing approaches results in the emergence of intermediate positions, Deetz (1996) argues that this framework leaves many questions unanswered and represents the most problematic legacy of Burrell and Morgan’s work.

6.1.2 “Order” and “Conflict” Theories about the Nature of Society Burrell and Morgan (1979) propose two sets of assumptions about the nature of the society: the nature of social order, that is “order” theory and the problems of change and conflict, that is, “conflict” theory. While Dahrendorf (1959) argues that the orderconflict social structure model provides useful insights about divergence in researchers’ approaches, Burrell and Morgan (1979) suggest that this social structure model is oversimplified and could lead to misunderstandings, building on arguments made by Cohen (1968) and Silverman (1970) whereby the distinction between order and conflict is not detailed well and is open to misinterpretation. In order to address these limitations, Burrell and Morgan (1979) revisited the order-conflict debate and proposed the use of different terminologies in an attempt to approach the debate more straightforwardly – replacing the term “order” with “regulation” and “conflict” with “radical change”. The sociology of regulation views society as developing in an organised manner and is concerned with day-to-day operations and the establishment of cohesion within society. In contrast, researchers embracing the sociology of radical change adopt a more critical perspective, emphasising justifications for radical change, deepseated structural conflict and contradiction – as well as modes of domination – instead of seeking fundamental changes within existing societal structures (Burrell & Morgan, 1979).

6.2 Research Paradigms According to Ardalan (2008)’s view, all research must be underpinned by assumptions that underwrite the enquirer’s worldview; one consequence of this reasoning is that alternative paradigms motivate researchers to view phenomena from different angles (Hatch & Cunliffe, 2006). Bringing the discussion above together, Burrell and Morgan (1979) identify four paradigms: Functionalist, Interpretive, Radical Humanist and Radical Structuralist (see Figure 6.2) that reflect researchers’ assumptions about social science and the nature of society and thus represent different views of the social world. Consolidating the opposing sets of assumptions about the nature of the social world

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(i.e. the subjective-objective dimension) and the assumptions about the nature of society (i.e. regulation-radical change) Burrell and Morgan (1979) develop the two-by-two matrix framework (shown in Figure 6.2) with borders that do not overlap. The authors argue that the two sets of assumptions embraced by researchers ultimately determine the paradigm in which they operate. Sociology of Radical Change Radical Humanist

Radical Structuralist

Interpretive

Functionalist

Subjective

Objective

Sociology of Regulations Figure 6.2: Burrell and Morgan’s Social Research Paradigm. Source: Burrell and Morgan (1979, p. 22).

Burrell and Morgan (1979) argue that researchers can only be located in one paradigm at one point in time. However, Chua (1986) opposes this interpretation and argues that this mutually exclusive position is not valid, as it does not take into account theoretical perspectives that view society as being situated on a continuum of human interaction. Furthermore, questions have been raised by other researchers as to whether one can be isolated in a single discrete paradigm without being influenced by neighbouring ones (e.g. Alvesson & Willmott, 1996). Notwithstanding this debate, Burrell and Morgan (1979) acknowledge that the researcher does not have to take an absolute position, as there is an allowance for some diversification at the extremes. For example, they argue that the Interpretive and Functionalist paradigms share a similar concern as both para-

Subjectivist approach to Social Science

Core ontological stance

epistemological stance

Reality as a project of human imagination

To obtain phenomological insight, revelation

Reality as a social construction

To understand how social reality is created

Objectivist approach to Social Science

Reality as a realm of symbolic discourse

To understand patterns of symbolic discourse

Figure 6.3: Radical Developments in Accounting. Source: Chua (1986)

Reality as a contextual field of information

To map context

Reality as a concrete process

To study systems process, change

Reality as a concrete structure

To study systems process, change

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69

digms focus on the sociology of regulation; the researcher does not seek to alter the status quo. Researchers employing the radical structuralist paradigm take an objective view of the social world and share concerns regarding emancipation and change underpinned by realist, positivist, determinist and nomothetic standpoints. The research involved often embraces the ideology of Marxism, which considers that society is made up of a structure whose participants often have opposing interests that inevitably conflict but can be measured scientifically. In contrast, the functionalist approach to social science involves the sociology of regulation and seeks to describe phenomena in an objective manner; a combination of objectivist and regulation dimensions therefore drives this paradigm. Researchers following this approach typically attempt to explain the status quo and the social order from realist, positivist, determinist and nomothetic standpoints. Much of the work examining financial markets operates from this point, employing extensive hypothesis testing based on large data sets, market-based research techniques and conventional statistical tests (Dunne, 2003; Ardalan, 2008). Contrary to the functionalist approach, the bottom left corner of the matrix represents the interpretive paradigm, which takes a subjective view of social science research but otherwise shares characteristics with the former via embracing of the “sociology of regulation” position. The primary aim of research undertaken using this lens is to provide better understanding of individuals’ conscious perspectives by engaging directly with the subjects that they are investigating (Dhillion & Be, 2001; Saunders et al., 2016). Research operating from here – including the present study – emphasise evolving social processes, created by those concerned and unobservable by external observation (Burrell & Morgan, 1979; Siau & Rossi, 2011). Researchers within this paradigm are therefore anti-positivist, believing knowledge to be acquired through personal experience and social reality being based on individual interpretation (Burrell & Morgan, 1979). The paradigm also reflects voluntarism and the favouring of an ideographic approach to methodology; to seek in-depth knowledge and comprehension of the phenomena being investigated, interpretive researchers have no choice but to get “inside” their subjects’ lives. The radical humanist paradigm, located in the left-hand corner of Burrell and Morgan’s two-by-two matrix, is framed on the sociology of radical change and a subjective position. Therefore, it is concerned with attempts to change society from a subjectivist standpoint. Researchers undertaking research on this basis believe that existing social arrangements put constraints on human development and they therefore explore ways of releasing individuals from these constraints (Burrell & Morgan, 1979). This type of work views the social world in a similar way to the interpretivist approach, with reality being socially created in the context of a nominalist ontology, anti-positivist epistemology, ideographic methodology and an underpinning assumption that individuals have free will. However, contrary to the interpretive paradigm, radical humanist researchers criticise and are concerned with changing the status

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quo which is seen as a barrier to human development; modes of domination, emancipation, deprivation and potentiality are therefore critical in this type of enquiry (Saunders et al., 2016). As the present study focusses primarily on extant corporate governance issues such as regulatory bases and shortcomings within, it does not claim to be operating from this type of radical position but is placed more appropriately within an interpretive frame. All four paradigms outlined above have distinctive views about the social world that reflect the (numerous) assumptions required regarding the nature of society. By accepting Burrell and Morgan’s proposal that a researcher can only operate in one paradigm at one point of time – although this has been challenged by Chua (1986) and others – and the nature and context of the issues investigated (as set out in the previous chapters of the book) we characterise our approach to the present study as interpretive, embracing normative ontological assumptions, an anti-positivist epistemology, human nature that is primarily voluntarist and an ideographic methodology. This positioning drives the choice of research methods.

6.3 Research Methods An interpretive investigation of the institutional problems that influence corporate governance practices in Pakistan requires data collection from relevant stakeholders. This section of the chapter is not designed to give a detailed explanation of each method in terms of its merits and demerits, but rather to explain how they fit well with this study’s theoretical and methodological positioning as data collection tools in gathering relevant knowledge. As Guba and Lincoln (1997) argue, “questions of methods are secondary to questions of paradigm” and so, given this study’s interpretive theoretical approach, a qualitative approach was employed involving a questionnaire survey which included open-ended questions that allowed respondents to express their views freely.

6.3.1 Questionnaires Oppenheim (1992) defines questionnaires as a method of data collection designed to seek participants’ responses to a similar set of questions. Questionnaire surveys thereby help researchers gather responses and uncover perceptions from a large sample in a timely and cost-effective manner (Creswell, 2014). In addition, the anonymity and confidentiality nature of the questionnaire survey encourages the respondent to express freely (Beiske, 2002), potentially an important issue in the present study given the subject matter. There are a number of limitations with the method, including misinterpretation of the questions, low response rate and danger of completion by someone other than the targeted individual (Bryman & Bell, 2012). However, Sekaran and Bougie (2013) argue that careful design of questions, plain and clear layout, pilot-

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testing and clear purpose will ensure that the benefits outweigh the limitations. Here we employ both self-administered “internet-mediated” (i.e. email/google doc) and “delivery and collection” questionnaire methods but in each case play careful regard to the points above. 6.3.1.1 Questionnaire Design The questionnaire used in this study was designed to explore the perceptions of a wide group of relevant participants about the corporate governance environment in Pakistan, with a focus on underlying governance issues and the role of isomorphic forces in driving corporate failures and scandals. Two versions of the questionnaire survey were used, one targeted to a corporate audience comprising board members of listed firms as well as board members of regulatory and legislative bodies plus senior employees of listed firms. The second set of questionnaires targeted academic researchers and business students studying for professional qualifications and likely to have undertaken a corporate governance course during their academic years. Questionnaire participants were divided into four groups: board members of listed firms and regulatory bodies in Pakistan (BOD); employees of listed firms (EMP); academic researchers (AR) and business students (ST). The BOD group also includes members of regulatory bodies, external auditors and financial consultants with experience of serving on corporate boards, board members of public sector organisations and/ members of parliamentary committees. The first set of questions in both documents was designed to extract background information about the participants and their overall understanding of corporate governance. This was followed by a set of questions eliciting information on participants’ experiences and beliefs about corporate governance failures and the institutional factors that influence corporate governance practices and drive corporate scandals in Pakistan. The final set of questions related to corporate governance benefits and the role that improved corporate governance practices can play in reducing the extent of corporate failures and scandals in Pakistan going forward. According to Gillham (2000) and Proctor (2005), although it is not possible to eliminate all misunderstandings in a questionnaire, pre-testing is a useful means of detecting faults, ambiguity and misleading questions before the survey document is actually administered and so the document was piloted with a number of academics. As Gillham (2000) notes, questionnaires can contain open-ended or closed-ended questions. A closed-ended question is one that is accompanied by pre-determined answers, with a participant having a choice of selecting one response from a range or ranking specified factors whereas an open-ended questionnaire requires participants to write down their responses as they see fit. Closed-ended questionnaires are generally easier to code and analyse as well as easier to administer because they do not require the researcher to be present at the time of completion (Collis & Hussey, 2009) but they do not facilitate the capture of other potentially subtle and complex viewpoints. To

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achieve a balance between pragmatic and methodological concerns we adopted a close-ended approach but included “other (please specify)” as an option where applicable to allow detailed opinions to be expressed. Most of the listed questions used a five-point Likert Scale giving participants a choice of potential responses. The process of questionnaire distribution was started in February 2018 when one of the authors made a visit to Pakistan. Despite some practical issues relating to the impact of the forthcoming general election a total of 308 questionnaires were distributed via email and personally delivered to participants. The information regarding board members of listed firms was accessed via the Pakistan Stock Exchange website. Regulatory members’ information was obtained from institutional websites (e.g. SECP and SBP) and academic researchers were contacted after browsing their academic profiles at their respective universities and their affiliations with professional bodies in Pakistan. Business students were approached through academic researchers from the most renowned business schools in Pakistan. Participant confidentiality and anonymity is recognised as a crucial element in any research (Frankfort-Nachmias & Nachmias, 1992) and this was assured through an accompanying introductory letter. More details regarding questionnaire administration, response rate analysis, coding, significance testing, and reliability and validity are discussed in the next chapter, Chapter 7, where the findings are presented and analysed.

Chapter 7 Empirical Findings and Discussions 7.1 Introduction This chapter presents and interrogates the evidence obtained from the questionnaire survey. The remainder of the chapter is divided into six sections. Section 7.2 documents the questionnaire administration process, the methods employed to test the reliability and validity of the research instrument as well as the statistical tools used to analyse the data. Section 7.3 then provides background information about respondent groups, including their understanding and familiarity with the corporate governance concept and their views about the suitability of Western governance systems in the Pakistani context. Section 7.4 outlines the findings about the key drivers of corporate governance reforms in Pakistan, while Section 7.5 discusses views about compliance approaches and the socio-economic implications of good governance. Section 7.6 analyses and discusses the institutional factors influencing corporate governance practices in Pakistan before. Section 7.7 focuses on the potential role of weaknesses in the latter in driving corporate failures. Section 7.8 outlines the findings related to the importance of corporate governance in a Pakistani context and Section 7.9 sets out the implications of the evidence in terms of possible actions to improve governance standards and reduce the extent of failures and scandals moving forward. Section 7.10 concludes the chapter with a brief summary.

7.2 Questionnaire Administration As noted in Chapter 6, the questionnaire survey was developed in the context of the extensive literature on corporate governance, particularly those studies relating to emerging markets in Asia and elsewhere. Two versions of the document were developed, one for business students and academic researchers and a second for board members and senior management employees of listed companies, plus board members of regulatory bodies. A total of 308 potential participants were identified across these groups and the appropriate version of the survey distributed. Table 7.1 reports the number of questionnaires distributed to each group, the number of responses and the response rate in each case. A total of 135 responses were received, comprising 24 from board members (BOD), 33 from employees of listed companies (EMP), 21 from academic researchers (AR) and 57 from business students (ST). While there is no universally accepted definition of an “acceptable” questionnaire response rate, Baruch (1999) argues that a “good” response rate is desirable for successful research, and the response rate here of 43.83% is high in comparison with similar surveys that examine the perceptions of a range of stakeholder groups on governance https://doi.org/10.1515/9783110772999-007

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Table 7.1: Questionnaire Response Classifications. Participant Groups

Questionnaire Distributed

Questionnaire Received

Response Rate





.%

Board members of regulatory bodies





%

Employee (EMP)

Employees of listed companies





.%

Researcher (AR)

Academic Researchers





%

Students (ST)

Business Students





.%





.%

Board Members (BOD)

Board members of listed companies

Total

Note: This table reports the number of questionnaires distributed and received as well as percentage response rates across all participant groups.

matters (Burton et al., 2004; Wanyama et al., 2009). One of the possible reasons for the rate in the present study may be the confidentiality and anonymity set out in the survey’s design, that is, assurances given about the exclusion of any identifying information such as names, addresses and organisational details.

7.2.1 Questionnaire Response Analysis The questionnaire responses were analysed on the basis of the themes in the extant literature. The process began by examining the respondents’ demographic information, followed by a first inspection of the patterns evident in the Likert scale responses. To expedite the statistical analysis of questionnaire surveys, it is common for questionnaire data to be coded into meaningful classifications using appropriate analytical software (see, e.g. Williams, 2003; Saunders et al., 2016; Brace, 2018). The questionnaire data was then categorised into groups with questions coded according to themes, question number and sub-questions or statements. The data reported in the tables later in this chapter show participants’ classification (BOD, EMP, AR, ST) followed by, where relevant, the mean score for a particular question. As the range of possible options were provided in a closed-ended format, the subsequent analysis focused on average responses and response ordering before patterns across and within questions and respondent groups were explored.

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7.2.2 Significance Testing Responses to Likert scale-based questions are rarely normally distributed (Fayers, 2011), rendering parametric tests inappropriate (Agresti, 2010). Therefore, KruskalWallis and Mann-Whitney tests were employed to establish the extent of any statistical significance. Oppenheim (1992) argues that these tests are vital prerequisites for highquality analysis. The Kruskal-Wallis test is used to determine whether a difference exists between three or more groups, while the Mann-Whitney test is a test of the null hypothesis used to determine whether a difference exists between the average of two independent samples. However, before running these non-parametric tests, the data was checked for reliability and validity.

7.2.3 Reliability and Validity of Questionnaire Responses Sekaran and Bougie (2015) note that statistical testing for reliability has become common practice in social science research, with the notion of reliability referring to consistency (Gillham, 2000; William, 2003; Saunders et al., 2016) and the extent to which any research tool produces accordant outcomes when used repeatedly. As Cohen et al. (2007) point out, the notion of reliability is different from validity and reliability does not imply validity. The authors note that while most reliability measures assess consistency, this does not necessarily mean that the variable concerned reflects what it is supposed to. Instead, the latter notion is assessed by the measure of validity testing. As the empirical investigation in this book lies in the interpretive paradigm, not all forms of validity and reliability assumptions are pertinent. According to Williams (2003), a questionnaire can be considered “valid” if it examines the underlying research questions in a balanced way, with each item measuring what it aims to measure. Cohen et al. (2007) note that reliability and validity can both be improved by methods such as “thoughtful” sampling, appropriate measure identification and the adoption of mindfulness throughout the research process. Mitchell (1996) suggests three alternative methods of assessing and measuring reliability in questionnaire data: the test–re-test method; internal consistency testing and the alternative form method. Internal consistency is most frequently employed in this context, with Cronbach’s alpha often used in practice (Field, 2013); we therefore use this measure as the basis of testing here. The test statistic is intended to capture how well responses complement each other in measuring different aspects of the same variable, on the basis of covariance analysis (Field, 2013; Creswell, 2014). The alpha test takes a value between zero and one; the higher the value, the more reliable the results. Field (2013) and others argue that a rate of 70% or higher is generally acceptable in terms of internal consistency and reliability. The results here, shown in Table 7.2, reveal an alpha coefficient of 85% (0.853), suggesting that the responses are internally consistent. In addition to computing an alpha value for the whole sample,

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an individual alpha test was applied to the data pertaining to each of the four groups of respondents, resulting in coefficients of 84% (0.841), 82% (0.815), 73% (0.731) and 88% (0.875) for board members (BOD), employees of listed firms (EMP), academic researchers (AR) and business students (ST), respectively. Table 7.2: Reliability Test Statistics. Cronbach’s Alpha

Cronbach’s Alpha Based on Standardised Items

No. of Items

.



.

Note: This table reports the results of the Cronbach alpha test for reliability. N = number of items. The second column reports the standardised item version which is based on correlations rather than covariances.

The validity of a questionnaire relates to whether or not the instrument used actually measures what it is supposed to (Williams, 2003; Cohen et al., 2004; Brace, 2018). Whilst various forms of validity test exist, the version employed most commonly in modern social sciences research is pilot-testing (Wanyama, 2009; Shikaputo, 2013). This process helps minimise the risk of participants having significant problems understanding questions and following instructions correctly. In this case, a group of academic researchers were asked to review the survey before it was distributed externally with the feedback incorporated into the final version.

7.3 Results 7.3.1 Analysis of Demographic Information The first section of the survey asked for information regarding job title, company type, work experience, qualification, ownership structure and the sector in which the individual’s firm operates.52 Figure 7.1 provides a graphical representation of participants’ sector and company type amongst the BOD and EMP groups. Inspection of Figure 7.1 reveals that the largest number of participants in these groups were from the financial sector (22 respondents), followed by textiles (11), telecoms (7), petrochemicals (6), agriculture and food (6), construction (4) and pharmaceuticals (1) suggesting that a wide range of experiential backgrounds was represented. Figure 7.2 summarises data relating to participants’ job roles for the board members and employee groups, whilst Figure 7.3 provides a summary of qualifications data for the full sample.

 Although some of the background information (e.g. job title, company type and ownership structure) were excluded from the version of the survey document used for students and academic researchers.

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12 10 8 6

Government

4

Multinational Corporation

2

Private Firm

0

Figure 7.1: Participants’ Sector and Company Type for Board Member and Employee Respondents. Note: The figure illustrates data relating to relevant participants’ sector and company type.

33

35 30 25 20 15 10 5

3

4

4

6 2

2

1

2

IN

ED

0

Figure 7.2: Participants’ Job Roles. Note: The figure demonstrates relevant participants’ job roles.

Inspection of Figure 7.2 highlights the wide range of positions held by participants in the BOD and EMP groups, including CEO (3), CFO (4), Chairman (4), Executive Director (2), INED (1), Regulator (2), Financial Consultant (6) and External Auditor (6). Inspection of Figure 7.3 indicates that across the sample as a whole participants were well educated; 31 had a Bachelor’s degree; 53 held a Master’s degree; 21 a research degree (PhD or Post.Doc); and the remaining 30 had other professional qualifications (e.g. ACCA, CA, CIMA and CFA). This evidence suggests that all participants were educated and qualified to the extent that they would understand and respond to questions regarding corporate governance issues in Pakistan. Table 7.3 summarises the role experience data for the non-student participant groups. Again, a wide range of experience is evident across the sample frame: 17 participants had been in their

78

Chapter 7 Empirical Findings and Discussions

Number of Respondents

60

53

50 40 31

30 30

21 20 10 0

ACCA,CA, CIMA, CFA

BBA, BSC, B.Com

M.Phil, PhD, Post.doc

MBA, MSc, MRes, M.Com

Figure 7.3: Participants’ Qualifications. Note: The figure summaries the participants’ qualifications.

current role between 0 and 5 years; 11 between 6 and 10 years; 20 between 11 and 15 years; 15 between 16 and 20 years; 11 between 21 and 25 years; and 2 had been working for more than 25 years in their current position. Table 7.3: Survey Participants’ Job Role and Experience in their Current Firm. Position

Experience

Academician

– years



– years



– years



– years



– years



– years



– years



– years



– years



Over  years



CEO

Chairman

Employee

Number

– years



– years



– years



7.3 Results

79

Table 7.3 (continued) Position

Experience

Number

– years



– years



– years



– years



– years



– years



– years



– years



– years



INED

– years



Regulator

– years



– years



Executive Director

External Auditor

Financial Consultant

Note: The table illustrates relevant participants’ job roles and years of experience in their current firm.

7.3.2 The Concept of Corporate Governance 7.3.2.1 Familiarity with Corporate Governance One of the first questions in the survey was designed to seek out participants’ familiarity with the concept of corporate governance. Participants’ level of understanding regarding the governance notion has been shown to have significant implications for their responses to questions on a range of related matters (Falgi, 2009; Wanyama et al., 2009; Chanda et al., 2017). A large proportion of participants across all four groups claimed to be familiar or very familiar with the corporate governance notion, including 100% of academic researchers and 95.8% of board members. The mean response from academic researchers (1.333) suggested that they possessed the strongest degree of acquaintance, but the figures more generally suggest that the survey data as a whole is likely to reflect relatively informed views regarding the issues at hand. The high level of familiarity with the corporate governance concept among the sample can to some extent be attributed to the method of participant selection used in the questionnaire administration. This method involved carefully targeting participants who were likely to have some level of knowledge and understanding of the corporate governance concept and to have some level of interest in the research.

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Chapter 7 Empirical Findings and Discussions

Table 7.4: Familiarity with Corporate Governance. Participant Role

Board Members (BOD) Employees (EMP) Academic Researcher (AR) Business Student (ST) Overall Sample

N

    

Mean Response

. . . . .

Very Familiar with CG

Familiar with CG

Some Familiarity with CG

%

%

%

. . . . .

. . . . .

. . . . .

Note: This table reports participants’ familiarity with the corporate governance concept. Responses were based on a 5-point Likert scale where 1 = very familiar, 2 = familiar, 3 = some familiarity, 4 = not familiar and 5 = Very unfamiliar. N = number of responses.

7.3.2.2 Familiarity with Domestic and International Corporate Governance Codes As outlined in Chapter 3, three codes of corporate governance have been issued by the Securities Exchange Commission of Pakistan (SECP) while the Pakistan Stock Exchange (PSX) retains its own (closely aligned) codified framework. However, as this discussion noted, regulatory approaches in emerging markets have been strongly influenced by Western versions, often from the UK and the US (Siddiqui, 2010; Yasser, 2011; Sobhan, 2014). Therefore, a question designed to gather information regarding participants’ familiarity with domestic and international codes such as those drawn up by the UK, US and OECD was included in the survey, with the results summarised in Table 7.5. Panel A in the table groups responses according to percentages. Inspection of this data reveals that in all groups the majority of respondents were familiar with domestic codes of corporate governance. However, very limited familiarity was evident with the international codes of corporate governance other than amongst the academic researcher (AR) group. Panel B reports mean responses to this question along with disaggregated group data and Kruskal-Wallis and Mann-Whitney significance test results. Inspection of this data confirms that participants have widespread familiarity with domestic codes (with mean scores for the SECP code 1.756 and the PSX code of 1.874) but again this was not the case with international codes, particularly OECD principles (mean score 3.563). The Mann-Whitney test of paired differences indicates that the significant variation across responses was mainly reflective of the academic researcher group (AR) claiming substantive familiarity with all the governance codes, both domestic and international. This result may reflect the fact that the typical business academic’s educational background in Pakistan now includes explicit study of governance principles (Khan, 2010). The commonality in academic responses suggests an element of mimetic isomorphism in the syllabi across business schools, given the highly competitive nature of third-level education in modern-day Pakistan. These findings suggest that academic expertise should be consulted when formulating and implementing codes of

PSX Codes

OECD Principles

UK Codes

US Codes

%

. . . .

%

. . . .

. . . . .

    

. . . . .

BOD

. . . .

%

. . . . .

EMP . . . . .

AR

Group Mean

. . . .

%

. . . . .

ST

. . . .

%

.✶✶ ✶ . ✶✶ . ✶✶ . ✶✶ .

K-W P-Value

. . . .

%

. . . ✶✶ . ✶✶ .

BOD/>/>EMP

. . . .

%  . . .

%

✶

. ✶ . ✶✶ . ✶ . .

BOD/>/>AR

. . . .

%

. . . ✶✶ . ✶✶ .

BOD/>/>ST

% . . . .

✶✶

. ✶✶ . ✶✶ . ✶✶ . ✶✶ .

EMP/>/>AR

M-W P-Value

. . . .

%

. . . .

%

. . . . .

EMP/>/>ST

. . . .

%

%

✶✶

. ✶✶ . ✶✶ . ✶✶ . ✶✶ .

AR/>/>ST

. . . .

Note: Panel A of this table presents the levels of familiarity in percentage terms across each participant group. Panel B of this table shows the number of responses for each question, mean ranks, p-values for the Kruskal-Wallis test (which indicates significant differences amongst all participant groups) and p-values for Mann✶ ✶✶ indicates a Whitney tests (which indicate particular pairs of significant inter-group differences). An indicates a significant difference at the 5% level. An significant difference at the 1% level. Responses were based on a five-point Likert Scale, where 1 = very familiar, 2 = familiar, 3 = some familiarity, 4 = not familiar and 5 = very unfamiliar.

SECP Code PSX Code OECD Principles UK Code US Code

Overall Mean Score

No

. . . .

%

Not Not Familiar Some Not Familiar Some Not Familiar Some Not Familiar Some Familiar Some and Very Familiarity Familiar and Very Familiarity Familiar and Very Familiarity Familiar and Very Familiarity Familiar and Very Familiarity Familiar Familiar Familiar Familiar Familiar Familiar

SECP Code

Panel B: Mean Responses

BOD EMP AR ST

Participant Groups

Panel A: Levels of Familiarity

Table 7.5: Familiarities with Domestic and International Codes and Principles of Corporate Governance.

7.3 Results

81

82

Chapter 7 Empirical Findings and Discussions

corporate governance if an informed and effective framework that addresses the pervasive pattern of corporate scandals in the country is to emerge.

7.3.3 Defining Corporate Governance As discussed in Chapter 4, a wide range of corporate governance definitions exist in the literature with no universally accepted formulation having yet emerged (Solomon, 2013; Tricker, 2015; Clarke, 2017). Therefore, before exploring detailed opinions regarding specific governance measures and failures, participants were asked to express the extent of their agreement or disagreement with four possible definitions and identify which they felt to be most appropriate in the Pakistani context. The proposed set of definitions emerged via the literature review process documented earlier, with a wide span of perspectives ranging from the traditional shareholder-centric definition to a broader stakeholder-based formulation therefore included. Table 7.6 presents the results. The mean response for the definition: “a system of checks and balances, both internal and external to companies, which ensures that companies must discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activities” (Solomon, 2013, p. 7, para 1) secured the strongest average level of agreement (1.422) amongst all participant groups. This holistic definition of corporate governance, one that emphasises transparency and accountability appears to be seen as particularly appropriate in a Pakistani context. The Cadbury Committee (1992) definition of corporate governance “corporate governance is the system by which companies are directed and controlled” secured the second-highest level of support and mean 1.682. Closer inspection of the table indicates that although respondents as a whole were most supportive of the two statements mentioned above, all four mean figures were less than the mid-point of 2.5 and thus suggestive of overall agreement; employees of listed companies recorded particularly strong agreement for each of the definitions. Inspection of the disaggregated data and Kruskal-Wallis/Mann-Whitney significance test results reveals that, except for the statement employing the Cadbury definition, all the Kruskal-Wallis statistics were significant, suggesting substantial disagreement among the participant groups. However, the Mann-Whitney test of paired differences indicated that the significant variation across responses was mainly reflective of the employee group (EMP) generating strong levels of agreement with all the proposed definitions. Given the relative lack of awareness of international codes amongst this group indicated in Table 7.5, this finding suggests that employees engage with the broad governance notion in a meaningful way and see the relevance of a pervasive set of conceptualisations despite a lack of detailed knowledge of global rules. In any case, the commonality in employee responses suggests an element of mimetic isomorphism among employees across Pakistan. As DiMaggio and Powell (1983) note, institutional isomorphism motivates members of a population to resemble others that face the

   

D A C B

. . . .

Overall Mean Score . . . .

BOD . . . .

EMP . . . .

AR

Group Mean

. . . .

ST .✶✶ . .✶✶ .✶✶

K-W p-Value

.✶✶ . .✶✶ .✶✶

BOD/EMP . . . .

BOD/AR . . . .

BOD/ST .✶✶ .✶ .✶✶ .✶

EMP/AR

M-W p-Value

.✶ . .✶ .✶✶

EMP/ST

. . . .

AR/ST

Note: The table reports the overall mean score for all the participants regarding definitions of corporate governance. It also provides the mean of each group and p-values for the Kruskal-Wallis (K-W) and the Mann-Whitney (M-W) tests. An ✶ indicates significant at the 5% level and an ✶✶ indicates a significant difference at the 1% level. “No.” is the total number of respondents for each question. The Likert scale used ranged from 1 = strongly agree to 5 = strongly disagree. BOD = board members of regulatory bodies and listed companies, EMP = employees of listed companies, AR = academic researchers and ST = business students. Statement A = The System by which companies are directed and controlled; Statement B = A set of relationships between a company’s management, its board of directors, its shareholders and other stakeholders; Statement C = A set of mechanisms through which outside investors are protected against expropriation by controlling shareholders; Statement D = A system of checks and balances, both internal and external to companies, which ensures that companies must discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity. N = number of responses.

N

Statement

Table 7.6: Defining Corporate Governance.

7.3 Results

83

84

Chapter 7 Empirical Findings and Discussions

same set of environmental circumstances, and this propensity is consistent with the employees perceiving all the proposed definitions to have relevance – elements of each are consistent with Pakistan’s many institutional and cultural norms set out in Chapter 2. At the end of this question, participants were asked to suggest one of the proposed definitions of corporate governance as the one they felt to be most appropriate in a Pakistani context. Out of 135 survey participants, 95 responded to this question and the results are presented in Figure 7.4.

Number of Respondents

60

50

50 40 30 20

20 14

11

10 0 A

B

C

D

Figure 7.4: Most Appropriate Definition of Corporate Governance in a Pakistani Context. Note: This figure illustrates the respondents’ choice of most appropriate definition of corporate governance in a Pakistani context.

Figure 7.4 indicates that the most popular (50 out of 93 responses) definition of corporate governance was the formulation “a system of checks and balances, both internal and external to companies, which ensure that companies must discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity” (Solomon, 2013, p. 7). It is clear that an inclusive stakeholder-oriented context for debate regarding corporate governance is seen as most appropriate in a Pakistan.

7.3.4 Suitability of Western Corporate Governance Codes in a Pakistani Context One of the recurring themes in the prior literature on governance outlined in Chapter 3 related to the influence of Western codes and principles on rule-setting in emerging markets (e.g. Aguilera & Jackson, 2004; Wanyama et al., 2009; Siddiqui, 2010; Yasser, 2011; Classens & Yurtoglu, 2013; Shikaputo, 2013). These and other authors argue that this has had negative implications for emerging nations because of socio-cultural differences, with developments in domestic governance frameworks based on Western codes unlikely to improve the situation. However in the next section of the survey, where views about the suitability of Western corporate gover-

7.3 Results

85

nance codes in a Pakistani context were explored, many participants seemed to believe that Western codes and norms are suitable. Inspection of the data in Figure 7.5 reveals that 9.60% of participants believed that Western codes are “very suitable” with 49.6% perceiving them to be “suitable”, and only 32.6% suggesting that this was not the case. The results in this context thus contradict one of the main contentions in prior studies on emerging markets, suggesting a degree of variation across the developing world as a whole and the need for caution in any generalisations. 60 50

Percent

40 30 49.6% 20 32.6% 10 9.6%

8.1 %

0

Figure 7.5: Suitability of Western Codes of Corporate Governance in Pakistani Context. Note: This figure summarises participants’ rating of the suitability of Western corporate governance codes in the Pakistani context.

Interestingly, the data in Panel B of Table 7.7 revealed that whilst the majority of board members (87.5%) and academic researchers (90.5%) perceived Western codes to be suitable in a Pakistani context, this was not the case for business students or employees of listed companies. The significance test results in Panel A of the table suggest that these differences are non-trivial. The explanation for the BOD and AR groups responses may lie in their familiarity with regulatory pronouncements, as reflected in Table 7.5. Thus, the difference in perspectives may reflect different levels of understanding with Western codes among participant groups; this novel result suggests that prior dismissal on cultural grounds of the latter in emerging countries may require revisiting as it fails to reflect manifestly different degrees of familiarity with extant rules and systems.

86

Chapter 7 Empirical Findings and Discussions

Table 7.7: Suitability of Western Corporate Governance Codes in a Pakistani Context. Panel A: Suitability of Western Codes in a Pakistani Context Cumulative Suitability Score

K-W p-Value

.%

.✶✶

Suitability of Western Codes

Mann-Whitney p-Values BOD/EMP

BOD/AR

BOD/ST

EMP/AR

EMP/ST

.✶✶

.

.✶✶

.✶✶

.

AR/ST .✶✶

Panel B: Group Classification – Suitability of Western Corporate Governance Codes Participant Group

BOD EMP AR ST

No of Participants

   

Very Suitable

Suitable

Not Suitable

Not Very Suitable

%

%

%

%

 . . .

. . . .

. . . .

. . . .

Note: Panel A of the table shows the cumulative suitability score (i.e. average of “very suitable” and “suitable” responses across all respondent groups), the p-value for the Kruskal-Wallis test, which shows whether there are any differences amongst participant groups, and p-values for Mann-Whitney tests relating to paired differences. An ✶✶ indicates that there are significant differences between groups at the 1% level. BOD = board members of regulatory bodies and listed companies, EMP = employees of listed companies, AR = academic researchers, ST = business students.

7.4 Drivers of Corporate Governance in Pakistan As discussed in Chapter 3, a range of factors have been suggested as influences of corporate governance reforms in emerging markets. However, several of the earlier studies suggest that while some cross-border corporate governance drivers exist, many differ in practice according to regional circumstances (Claessens & Fan, 2002; Tsamenyi & Uddin, 2008; Siddiqui, 2010; Chanda et al., 2017). Given this context, a section of the questionnaire survey was devoted to obtain Pakistani perspectives on a range of specific issues. These were: the 1998 Asian market crisis; international pressures; corporate scandals caused by corruption in Pakistan; corporate scandals and failures in developed countries; the need to attract foreign and domestic investors for economic growth; Pakistan’s integration with global markets; economic development and the emergence of governance codes around the globe. Inspection of Table 7.8 reveals that “corporate scandals caused by corruption in Pakistan” and “Pakistan’s integration with global markets” were strongly perceived as drivers of corporate governance by all the respondent groups, with overall means of 1.511 and 1.541, respectively. These were closely followed by “the need to attract for-

7.4 Drivers of Corporate Governance in Pakistan

87

eign and domestic investors for economic growth” and “economic development” (mean values of 1.609 and 1.639). Thus, while external influences are seen as important, the nation’s own history of scandals in the corporate sector was seen as most important of all in terms of pushing an agenda for improvements. What these factors have in common is the potential to drive isomorphic change, as they all have obvious pervasive implications for Pakistan’s corporate sector. This is particularly evident in the importance attached to two further factors with means of less than 2, “the emergence of governance codes around the globe” and “international pressures”. These findings support the views of Siddique (2010) who documents a pattern (in a smaller sample) which suggests that global trends towards corporate governance reforms after major corporate collapses and the influence of international bodies (particularly the IMF, World Bank and ADB) pressure emerging nations to adopt certain governance practices to meet international standards. The results here point more generally to the existence of a form of coercive isomorphism in Pakistan (as suggested by DiMaggio & Powell, 1983; Mizruchi & Fein, 1996; Souitaris et al., 2012) with legislative bodies regulating the corporate sector by issuing governance codes in response to institutional demands. The questionnaire findings differ in certain aspects from those reported in some earlier studies (e.g. Gibson, 2003; Shikaputo, 2013) where “corporate scandals and failures in developed countries” and “the 1998 Asian financial crisis” are cited as key drivers of corporate governance change around the globe. In the empirical investigation in the present study, these two factors achieved the lowest levels of agreement among the respondent groups, with mean values of 2.256 and 2.549. Therefore, the evidence points to influences amongst drivers of corporate governance that reflect Pakistan’s specific socio-economic environment, with a large number of collapses and scandals playing a major role in shaping opinion. Similarly, the evidence in Table 7.8 indicates a clear trend whereby participants acknowledge all the suggested drivers of corporate governance development in Pakistan (with means of below 2.5 in each case) except for “the 1998 Asian financial crisis”, which received the lowest of support across all respondent groups. An explanation for this exception may lie in the relatively minimal economic impact on Pakistan of the East Asian financial crisis in the 1990s; this again points to the dangers in overgeneralisation even within a single continent in the emerging world. The KruskalWallis test was again used to detect significant differences across respondent groups. The results, as shown in the table, indicate that significant differences of opinion existed for only two proposed corporate governance drivers: “corporate scandals caused by corruption in Pakistan” and “economic development”. While these two factors generated significant disagreement amongst the groups as a whole, closer inspection of the Mann-Whitney results reveals that the difference was dominated by strong support amongst the employee group for “corporate scandals caused by corruption in Pakistan” and by strong support from the employee and academic researcher groups for the statement relating to “economic development”. Employees appeared to feel strongly that corporate scandals caused by corruption in Pakistan and economic development concerns

88

Chapter 7 Empirical Findings and Discussions

are major motivators of corporate governance reforms in Pakistan. Concerns of this nature amongst the nation’s workforce suggests that attempts to develop more robust governance systems will require significant effort to assure many of those affected that broader systemic change in corporate practices is possible. A significant level of disagreement was evident between the EMP and ST groups (with the EMP group generating stronger support) regarding the importance of “Pakistan’s integration with global markets” as a potential driver of corporate governance. Moreover, further inspection of the Mann-Whitney p-values revealed significant differences at the 5% level for the factors “the need to attract foreign and domestic investors for economic growth” and “the emergence of governance codes around the globe” between groups AR and ST and BOD and AR, respectively. In the latter cases, the results were dominated by the academic researcher group (AR), generating particularly strong support. According to Scott (2014) and DiMaggio and Powell (1983, 1991) coercive pressures can influence organisations to adopt rules that are followed up by institutional monitoring that results in either sanctions or rewards designed to influence future activities. These contentions are in line with the findings in this section that indicate a perception of strong pressures from informal (e.g. social pressures reflecting widespread corruption-led governance failures) and formal (such as international funding bodies, that is, IMF, ADB, World Bank and other donor countries) institutions. This pattern in respondent viewpoints is significant given Pakistan’s ongoing reliance on developed countries such as the UK and US plus foreign funding bodies for the capital required to boost economic growth and achieve development aims (Khan, 2009; Yasser, 2011).

7.5 Perceptions Regarding Corporate Governance Compliance and the Implications of Improved Practices The questionnaire survey also investigated perceptions regarding the potential role of improved corporate governance standards and compliance in Pakistan. Data was gathered on stakeholders’ perceptions about mandatory compliance with corporate governance codes as well as the implications of improved behaviour for socio-economic outcomes including the impact on failure and scandals. There were eight statements in this section and participants were asked to indicate their level of agreement with each one. The statements were: mandatory compliance with CG codes is essential in Pakistan; Improved governance standards will lead to a reduction in the extent of corporate scandals in Pakistan; Improved governance standards will lead to a reduction in the extent of corporate failures in Pakistan; transparency, accountability and sound CG practices underpin economic growth; sound corporate governance contributes to social well-being; better corporate governance practices will improve FDI flow in Pakistan; and Transparent and effective board evaluation will lead to the sustainable economic growth of companies in Pakistan.

. . .

. . . .

















Corporate scandals caused by corruption in Pakistan

Pakistan’s integration with global market

The need to attract foreign and domestic investors for economic growth

Economic Development

The emergence of governance codes around the globe

International Pressure

Corporate scandal and failures in developed countries

The  Asian financial crisis

.

.

.

.

.

.

.

.

BOD

.

.

.

.

.

.

.

.

EMP

.

.

.

.

.

.

.

.

AR

Group Mean

.

.

.

.

.

.

.

.

ST

.

.

.

.

.

.

.

.✶✶

.✶✶ .

.

.

.✶✶

BOD/EMP

.

.

.✶✶

K-W p-Value

.

.

.

.

.

.

.✶ .

.

.

.

.

BOD/ST

.✶✶

.

.

.

BOD/AR

.

.

.

.

.

.

.

.✶✶

EMP/AR

M-W p-Value

.

.

.

.

.✶✶

.

.

.

.

.✶✶

.✶

.

.✶ .

.

AR/ST

.✶✶

EMP/ST

Note: The table reports the overall mean score for all the participants regarding drivers of corporate governance in Pakistan; it also provides the mean of each group and p-values for the Kruskal-Wallis (K-W) and the Mann-Whitney (M-W) tests. An ✶ indicates significant difference amongst stakeholder groups at the 5% level and an ✶✶ indicates a significant difference amongst stakeholder groups at the 1% level. The Likert scale used ranged from 1 = strongly agree to 5 = strongly disagree. BOD = board members of regulatory bodies and listed companies, EMP = employees of listed companies, AR = academic researchers, ST = business students. N = number of responses.

.

Mean

N

Drivers of Corporate Governance in Pakistan

Table 7.8: Corporate Governance Drivers in Pakistan.

7.5 Perceptions Regarding Corporate Governance Compliance

89

. .

. . .

.

 .  .

 .  .  .

 .

Transparency, accountability and sound CG practices underpin economic growth

Improved corporate governance standards will lead to a reduction in the extent of corporate failures in Pakistan

Sound corporate governance contributes to social well-being

Better corporate governance practices will improve FDI flow in Pakistan

Transparent and effective board evaluation will lead to sustainable economic growth of companies in Pakistan

Mandatory compliance with CG codes is essential in Pakistan

AR

ST

K-W p-Value

.

.

.

. . . . .✶

.

.

.✶ . .✶ .

.

. . . . .✶

.

.

.

.

.

.

.

.

.

AR/ ST

.✶✶ .

.✶✶ .

.✶✶ .

.

.

.

EMP/ ST

.✶ .✶ .

.

EMP/ AR

.

.

.

BOD/ ST

M-W p-Value

.

.

.

BOD/ AR

. . . . .

.

.

.

.

BOD/ EMP

. . . . .

. . . . .

. . . . .

. . . . .

EMP

Group Mean

Note: The table shows the overall mean score and standard deviation (St.Dev) for all respondents regarding questions about corporate governance compliance and the implications of improved practices. The table also provides the mean for each group and p-values for the Kruskal-Wallis (K-W) and the Mann-Whitney (M-W) tests. A ✶ indicates the significance at the 5% level, and ✶✶ indicates significance difference at the 1% level. BOD = Board members of listed companies and regulatory bodies. EMP = Managerial employees of listed companies. AR = Academic researcher. ST = Business School Students. Responses were based on a five-point Likert Scale where 1 = strongly agree, 2 = agree, 3 = neutral, 4 = disagree and 5 = strongly disagree. N = number of responses.

.

 .

Overall St. Dev Mean BOD Score

Improved governance standards will lead to a reduction in the extent of corporate scandals in Pakistan

N

Table 7.9: Perceptions Regarding Corporate Governance Compliance and the Implications of Improved Practices.

90 Chapter 7 Empirical Findings and Discussions

7.5 Perceptions Regarding Corporate Governance Compliance

91

7.5.1 Mandatory Compliance with Corporate Governance in Pakistan Inspection of the results in Table 7.9 relating to the statement “mandatory compliance with corporate governance codes is essential in Pakistan” reveals an overall mean score of 1.556. Although this is the highest mean reported in the table it still suggests that the participants believe mandatory compliance with relevant regulation to be essential in Pakistani context. This evidence supports the notion that in developing nations self-regulation and voluntary compliance is impossible given extant culture (Tahir et al., 2012), but it challenges these authors’ argument that mandatory corporate governance codes are unlikely to make an impact in such settings. Whilst there might be issues in terms of how compliance is enforced in emerging economies (see, e.g. Wanyama et al., 2009) the findings suggest that mandatory compliance is seen as beneficial and worth the effort involved in pursuing. Thus, whilst concerns were evident in the study regarding isomorphic tendencies around malfeasance in corporate behaviour, this belief in the potential role of regulations indicates that normative forces may have a role to play in enabling meaningful change. In terms of the enforcement issues, major responsibilities would lie with regulatory bodies such as the SECP and the PSX in terms of engaging with listed companies in an effective manner, addressing concerns and providing them with adequate training. Logically, these institutions might usefully employ some of the coercive pressures seen in a malevolent context in Pakistan elsewhere in this book in a positive manner in order to improve compliance standards. The detailed statistical tests presented in Table 7.9 reveal significant inter-group disagreement, with a Kruskal-Wallis p-value of 0.046. The Mann-Whitney tests reveal that this result is primarily driven by employees of listed companies (the EMP group) being much more supportive of mandatory corporate governance compliance than are business students (ST). This result may reflect differences in the level of understanding between each group, with employees of listed companies having inside experience of their corporations that generates a perceived need for mandating corporate governance codes. The importance of this issue, in contrast, appears not to have filtered through to classroom settings, an issue of concern given the contention in many of the studies cited earlier that education is key to fostering stronger governance practices in emerging nation settings going forward.

7.5.2 Role of Improved Corporate Governance Practices in Addressing Corporate Failures and Practices in Pakistan This part of the survey targeted participants’ views about the extent to which they perceive a link between improved corporate governance and a reduced extent of corporate scandals and failures in Pakistan. Inspection of the overall mean scores (1.267

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Chapter 7 Empirical Findings and Discussions

and 1.370, respectively, for the relevant statements53) in Table 7.9 suggests that all respondent groups strongly believe in such a relationship, with no statistically significant difference in opinion across the four respondent groups. The Mann-Whitney tests of pairwise differences amongst groups indicate two cases of significant differences in average responses: (BOD v. AR and BOD v. ST), driven by particularly strong agreement from the BOD group. Those closest to the firms therefore appear, encouragingly, to be optimistic, suggesting that normative pressures could play an important role in reducing the extent of corporate scandals and failures witnessed in Pakistan. Table 7.9 also reveals that the statements “transparency, accountability and sound corporate governance practices underpin economic growth” and “sound corporate governance contribute to social wellbeing” yielded overall mean scores of 1.340 and 1.371, respectively, suggesting a strong level of agreement among the respondents in each case. It is evident that the three attributes (transparency, accountability and good governance) often purported to be vital for sustainable economic growth (Solomon, 2013) are seen in such a manner on the ground in Pakistan, as is the role of corporate governance in ensuring that these goals are linked to more equitable distribution of wealth across society.

7.5.3 Foreign Direct Investment and Corporate Governance A further statement in this section of the survey sought perceptions regarding the notion that “better governance practices will improve foreign direct investment (FDI) flows in Pakistan”. The results again indicate a strong level of support among the respondents, in this case with an overall mean score of 1.379. This suggests that respondents were in agreement that better governance practices at the national level in Pakistan will attract and retain the foreign capital needed to improve investment levels in the country. The findings in this section are consistent with the views of earlier researchers including Butt (2015) who argue that the quality of governance at the national level has a major impact on FDI practices, suggesting that strengthening systems and processes at all institutional levels is important. Inspection of the disaggregated results in Table 7.9 reveals significant disagreement across respondent groups, with a Kruskal-Wallis p-value 0.051 generated. A closer look at the results from the Mann-Whitney test reveals that this difference is driven by the BOD and EMP groups expressing stronger support for this statement than did the AR group. Once again, those closest to the firms appear to be particularly optimistic regarding the future, in this case in terms of the potential for improved governance practices

 “Improved governance standards will lead to a reduction in the extent of corporate scandals in Pakistan” and “Improved corporate governance standards will lead to a reduction in the extent of corporate failures in Pakistan”, respectively.

7.5 Perceptions Regarding Corporate Governance Compliance

93

to generate capital flows into Pakistan. The widespread agreement regarding this statement is encouraging in terms of indicating an understanding of the importance of strong governance and in so doing it suggests that in a Pakistani context improved governance standards may have a dual impact, helping companies to not only fulfil their capital requirements but also in terms of encouraging supervision and monitoring by foreign investors, forcing firms to strengthen their governance practices in line with international standards. Given the role of possible coercive and normative forces in this scenario, it is evident that isomorphic pressures of this type may be required to address the harmful mimetic behaviour apparently causing the problems in the first place. The complex, interactive impact of the various forces is clear, suggesting that attempts to improve practices require contextualising via careful study of the primary influences on observable outcomes.

7.5.4 Board Evaluation and Corporate Governance The effectiveness of any corporate governance framework is strongly related to board structure (Solomon, 2013) but in emerging markets – partly as a result of concentrated ownership traditions – corporate boards are often dysfunctional (Mallin, 2013). Prior literature on emerging markets has noted concern regarding family shareholders’ propensity to exploit minority shareholders by driving board decisions in their (the family’s) favour, behaviour that ultimately harms firms’ abilities to contribute to national economic development. Given this possibility, the statement “transparent and effective board evaluation will lead to sustainable economic growth of companies in Pakistan” was included in the survey, and the overall mean score of 1.511 reported in Table 7.9 suggests that respondents believe that effective evaluation of board practices has an important role to play in shaping Pakistan’s economic trajectory. There is an evident perception that with the pervasion of corporate failures in Pakistan over several decades, companies and regulatory bodies must prioritise the implementation of meaningful board evaluation processes – but in an effective and transparent manner. This would allow Pakistani companies to hold their board members more accountable for their conduct at an internal level than is currently the case, with a review of both positive and negative actions and discussion of strategic priorities. The Kruskal-Wallis test found no evidence of significant disagreement regarding the statement among the four respondent groups. However, the Mann-Whitney tests highlighted some significant pairwise differences across BOD, EMP and ST groups. In particular, the EMP group was much more supportive of the statement than were the BOD and ST groups. This pattern might reflect employees of listed companies’ concerns about a lack of board evaluation in their own institutions and understanding of the consequences of this problem for the broader economy.

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Chapter 7 Empirical Findings and Discussions

7.6 Institutional Factors Driving Corporate Governance Failures and Scandals in Pakistan The role of formal and informal institutions in corporate governance is widely recognised (e.g. Aguilera et al., 2008; Filatotchev et al., 2013; Aguilera et al., 2015) but many of the earlier studies focus exclusively on developed markets [as noted by Bukhari (2014) and others]. The next part of the questionnaire survey was therefore designed to explore the institutional practices that are seen as driving corporate failures and scandals in Pakistan. Respondents were asked to consider the importance of 15 factors in this context: political instability; political interference; a lack of social, cultural and ethical values; religious belief; a lack of laws and regulation; enforcement of laws and regulation; corruption and bribery; a slow and weak judicial system; family ownership; government and regulator incompetence; favouritism; social status; firm size and firm sector; lack of experience; and education and lack of institutional ownership. The choice of factors was designed to reflect those included most often in prior work in the area (e.g. Wanyama et al., 2013). Table 7.10 summarises the responses. The overall mean scores shown in the table indicate that most of the proposed factors are seen as underpinning corporate governance failures in Pakistan. These are now discussed in turn.

7.6.1 Political Factors Gilson (1996) argues that political factors strongly influence the formation and adoption of corporate governance systems, with institutional differences having a significant impact on governance outcomes. Inspection of the results here indicates that the strongest level of agreement among the questionnaire respondents was for “political interference” (mean score 1.215) and “political influence” (1.229). This evidence suggests that governance practices are highly dependent on the political environment and, perhaps not surprisingly given the systemic issues in Pakistan outlined elsewhere in this book, the influence is clearly injurious. However, if these pervasive political forces were to be harnessed so that they no longer intervene in regulatory affairs using their current aspersive models, but instead play an effective role in terms of monitoring and advocating ethical business practices, their evident power could lead to a much-improved governance culture. A consistent theme through all the evidence presented in this chapter is that strong isomorphic tendencies are an established feature of Pakistan’s corporate life. Therefore, it would not require the introduction of the various types of force identified by DiMaggio and Powell, but merely their refocussing and redirecting. Whilst this of course represents a major challenge given the extent of apparent embeddedness, it does provide potential grounds for some hope of meaningful change in the future and we return to this theme throughout the remainder of this study.

. . . . . . . . . . . . . . .

              

Political interference Political instability Slow and weak judicial system Poor enforcement of laws and regulations Lack of laws and regulations Corruption, bribery Family ownership Government and regulator incompetence Lack of experience and education of board members Lack of institutional ownership Favouritism Lack of social, cultural and ethical values Social status Firm size and firm sector Religious belief . . . . . .

. . . . . .

. . . . . . . . .

N:

N: . . . . . . . . .

EMP

BOD

. . . . . .

. . . . . . . . .

N:

AR

Group Means

. . . . . .

. . . . . . . . .

N:

ST

. . .✶✶ . . .

. . . . . . .✶ . .

K-W p-Value

. . . . . .

. . . . . . . . .

BOD/ Emp . . . . . . .✶ . . . . .✶✶ . . .

.✶ . . . . .

. . . . . .

. . . . . . .✶ . .

. . . . . .

. . . . . . . . .

.✶✶ . .✶✶ . . .

. . .✶ . . . .✶✶ . .

BOD/ST EMP/ EMP/ AR/ST AR ST

. . . . .✶✶ . . . .

BOD/ AR

M-W p-Value

Note: The table shows the overall mean score and standard deviation (St.Dev) for all respondents regarding questions about the institutional factors that drive corporate governance scandals and failures in Pakistan. The table also provides the mean for each group, and p-values for the Kruskal-Wallis (K-W) and the MannWhitney (M-W) tests. A ✶ indicates significance at the 5% level and a ✶✶ indicates significance at the 1% level. BOD = Board members of listed companies and regulatory bodies. EMP = Managerial employees of listed companies. AR = Academic researcher. ST = Business School Students. Responses were based on a five-point Likert Scale where 1 = strongly agree, 2 = agree, 3 = neutral, 4 = disagree and 5 = strongly disagree. N is the number of respondents in each group. N = number of responses.

. . . . . .

. . . . . . . . .

Overall St. Mean Dev Score

N

Questions

Table 7.10: Institutional Factors Driving Corporate Governance Failures and Scandals in Pakistan. 7.6 Institutional Factors Driving Corporate Governance Failures and Scandals in Pakistan

95

96

Chapter 7 Empirical Findings and Discussions

Inspection of the Kruskal-Wallis and Mann-Whitney test results indicates that there were no significant differences in opinion across the four respondent groups – political instability and political interferences appear to be widely perceived as malign institutional factors in Pakistan. These views do, however, suggest an element of mimetic isomorphism (as suggested by DiMaggio & Powell, 1983) with political forces violating governance practices through their influence over regulatory bodies and interference with board decision-making; as a result, the state lacks the legitimacy to influence other corporate entities to adopt ethical governance practices. These views are broadly consistent with Wu (2005)’s earlier contention that: tightening standards for listed firms prematurely can even backfire as firms contemplating equity finances may give up this option altogether if they were convinced it is impossible to meet these standards in the prevailing political environment. (p. 34)

This argument is line with the views of Roe (2005), who argues that, with regards to corporate governance arrangements, “politics can ban some arrangements, raise the costs of others, and subsidize yet others”. It is clear that in the Pakistani context coercive pressure from political institutions is widespread (although currently deleterious in impact) but, were its motivations to be captured and recast, it could use this durable power to play a positive role in reducing the appalling extent of corporate failures and scandals witnessed in the nation.

7.6.2 Legal and Regulatory Factors Earlier researchers (e.g. La Porta et al., 1997; Claessens & Yurtoglu, 2013) suggest that a country’s legal and regulatory system can influence corporate governance frameworks in a substantive manner and so exploration of this issue was also incorporated into the analysis. The related results, presented in Table 7.10, indicate agreement among the questionnaire respondents that a range of legal and regulatory factors have a strong impact in Pakistan, namely: a “slow and weak judicial system” (mean score 1.267); “poor enforcement of laws and regulations” (1.319) and a “lack of laws and regulations” (1.511). The Kruskal-Wallis tests revealed no significant differences among all the respondent groups, again suggesting the wide acknowledgement of the harmful impact of identifiable factors on corporate practices. However, a closer look at the Mann-Whitney test p-values showed a significant difference of opinion between academic researchers and business students regarding the importance of the “slow and weak judicial system” with the students generating stronger agreement. The Mann-Whitney test also indicates significantly stronger support for the role of “lack of laws and regulations” among boards of directors than the academics. These results are driven primarily by less strident support amongst academics than other groups. This trend is clearly concerning, given this group’s potentially important role in changing entrenched attitudes in emerging countries (Wanyama et al., 2009). Whilst

7.6 Institutional Factors Driving Corporate Governance Failures and Scandals in Pakistan

97

students themselves appear to take a less sanguine position regarding the behaviour, the gap in perceptions between those delivering learning and both those receiving the latter and those in senior board positions reflects the likely complexity in shifting mainstream thinking and, ultimately, corporate practices in Pakistan. More generally, the findings appear to support the results of earlier studies (e.g. Alamri, 2014; Bukhari, 2014; Chanda et al., 2017) where legal and regulatory institutions were found to hamper corporate governance practices in developing nations. As argued by Kaufman et al. (2018), effective enforcement of rules and regulation is essential in emerging economies to ensure that government policies achieve their targeted objectives. Given the widespread, multi-faceted concern evidenced here, efforts by Pakistan’s local and national governments – as core pillars of the state (Khan, 2010) – are likely to have a substantial measure of support amongst the citizenry as a whole in any attempts to improve governance outcomes. Whether this will be enough to counter the equally evident malign forces that buttress the status quo and thereby restore public confidence in the nation’s largest corporate entities is another question.

7.6.3 Corruption and Bribery The perception of deeply rooted malevolent tendencies was most clearly evidenced in the section of the survey that dealt with corruption and bribery. Such issues have been found to influence governance practices elsewhere in the developing world, primarily in Africa (e.g. Wanyama et al., 2013 in Uganda; Chanda et al., 2017 in Zambia) but not to any significant degree in Asia; their potential role in driving corporate governance failures in Pakistan was therefore explored here. One of the statements in this regard therefore sought out participants’ perceptions regarding the straightforward impact of corruption and bribery; widespread acknowledgement of this issue was reflected in an overall mean score of 1.615 with no significant differences of opinion across respondent groups. The evidence thus implies pervasive belief in corruption and bribery as major drivers of corporate failures and scandals in Pakistan. The relevant literature discussed in Chapter 4 (e.g. Khawaja & Mian, 2005; Kaymak & Besktas, 2015; Kaufman et al., 2018; World Bank, 2018) reflects widespread contention that these concerns have significant adverse implications for trade and economic development in emerging markets; it is clear from the evidence presented here that this view is shared on the ground in Pakistan and that without addressing issues of corruption and bribery, meaningful change in governance practices is thought to be unlikely.

7.6.4 Family Ownership The influence of family institutions on corporate governance practices is prevalent in both developed and emerging markets, but its potentially negative impact on the for-

98

Chapter 7 Empirical Findings and Discussions

mer is usefully restricted by the enforcement of stringent laws and regulations (Young et al., 2008). As discussed in Chapters 2 and 3, significant family ownership is common among Pakistani-listed companies and so examination of this informal institutional feature was included in the questionnaire survey. The results, presented in Table 7.10, suggest that respondents perceived family ownership as being strongly linked to corporate malfeasance in Pakistan, with an overall mean value of 1.756 generated for the related statement. This finding suggests a consensus that family ownership in Pakistan contributes to poor governance culture and, by implication, represents a potential impediment to any attempts to develop higher standards in the future. However, the Kruskal-Wallis test indicates a significant difference of opinion among respondent groups at the 1% level. Inspection of the Mann-Whitney results suggest that the main pairwise disagreement driving this variation reflected the stronger level of support provided by EMP and ST groups. This pattern again suggests a potentially worrying disconnect in perceptions, with board members and academic researchers, that is, those responsible for knowledge leadership in their own settings, perceiving this particular issue to be less important than did managerial employees and students. Notwithstanding this inconsistency in the evidence, the findings overall support the views of some earlier studies (e.g. Morck et al., 2004; Carney, 2005; Uddin & Chowdhury, 2008; Siddiqui, 2010; Yasser, 2011; Sobhan, 2016) who suggested that in emerging markets, family shareholders adversely influence the board’s decisionmaking process and exploit the rights of minority owners. The results here suggest that this malign impact on corporate behaviour is seen as a facilitator of the ongoing trend for firms’ malfeasance and collapse.

7.6.5 Competence, Education and Experience Two related statements in this section sought perceptions about the qualities and abilities of regulators and board members of listed companies as drivers of governance problems. Inspection of the results in Table 7.10 suggests a strong level of agreement among the questionnaire respondents for the statements concerned: “government and regulator incompetence” (mean score 1.763) and “lack of experience and education of board members” (1.889). The perceptions suggest a belief that governance practices in Pakistan suffer significantly from a lack of professionalism. This finding is particularly concerning given the contention in earlier studies that corporate governance in developing countries requires a high level of unbiased, experiential oversight to overcome the poor quality of practices at national level. Moreover, Wanyama et al. (2009) suggest that “political” appointments of individuals who lack knowledge and experience is the norm in key governmental offices in many developing nations. The widespread perception that a lack of education and experience has contributed to poor governance practices in Pakistan is therefore not entirely surprising, but it is concerning as it represents

7.6 Institutional Factors Driving Corporate Governance Failures and Scandals in Pakistan

99

the most extensive evidence to date of viewpoints on the ground. The Kruskal-Wallis and Mann-Whitney tests suggested that there were no significant disagreements in these cases, indicating that the concerns expressed in this regard were held irrespective of position and role. In terms of institutional pressures, the findings suggest that any coercive and normative pressure from institutions (i.e. government) that might in this case lead to strengthening of governance standards (via the mandating of minimum standards of competence) is absent or seen as having a negative impact.

7.6.6 Institutional Investors and Corporate Governance The primary responsibility for ensuring effective corporate governance lies with the board of directors. However, Atkins (2021) suggests that shareholders, particularly institutional investors, have an important role to play in terms of monitoring management and aligning managerial interests with those of the owners. Views were therefore sought regarding the impact of a “lack of institutional ownership” on governance problems in Pakistan with the overall mean score of 1.919 reported in Table 7.10 suggesting that the absence of powerful blockholder monitoring is widely seen as contributing to the prevalence of corporate scandals and failures across the nation. There were two cases of significant pairwise differences in average response: between BOD and AR, and AR and ST groups, with the Mann-Whitney test results indicating that the differences were driven by particularly strong agreement from the AR group. Whilst this pattern may reflect a fuller degree of understanding among the academic researcher group of the potential of institutional investor activism to improve governance standards, this further case of divergence in the opinions of senior educators and other groups is concerning if meaningful, co-ordinated attempts to improve practices are to emerge in Pakistan. From a theoretical point of view, DiMaggio and Powell (1983) argue that coercive pressures can influence organisations to adopt a particular set of rules and regulations which are followed up by institutions, in this context institutional investors, via monitoring that results in accountability or the withdrawal from investee companies. However, the evidence here suggests that this type of potentiality remains largely unexploited in Pakistan, certainty as regards the perceptions of the nation’s academics.

7.6.7 Social, Cultural and Ethical Factors Kaufman et al. (2018) argue that cultural and social values represent important, but informal, institutions, influencing human behaviour by providing the public with schematic mental models regarding the nature of “good” and “bad”, “legitimate”, “illegitimate”, etc., with individuals incorporating these modes into cognitive processes in their early years. A number of studies (including Chryssides & Kaler, 1996; Rafiee & Sarabdeen, 2012; Claessens & Yurtoglu, 2013) emphasise the significant role played by socio-cultural and ethical

100

Chapter 7 Empirical Findings and Discussions

norms on corporate governance practices. Given this background, two statements: one asking for views regarding relating “favouritism” and second relating to a “lack of social, cultural, and ethical values” were included in this part of the survey. The overall mean scores (1.926 and 1.933, respectively) suggest a strong level of agreement among the respondents as a whole with both statements. There were no statistically significant differences in opinions across the groups with respect to the impact on governance outcomes of “favouring” certain individuals or interests. In contrast, inspection of the evidence regarding the second statement indicates a significant difference of opinion among respondent groups at the 1% level. The Mann-Whitney results indicate that the main pairwise disagreement driving the inconsistency involved the BOD and ST groups, and the AR and ST groups, driven by particularly strong support among the BOD and AR respondents. Whilst this evidence suggests that, as with the family ownership issues, directors and academics hold identifiably different views to the other groups, the overall findings suggest that informal institutional (i.e. social, cultural and ethical) traits will militate against any more structured attempts to change practices. Given earlier evidence regarding cultural pervasion in the developing world, for example, Wanyama et al. (2009), there is almost certainly a strong mimetic element in this case. Notwithstanding the current state of affairs, the fact that an identifiable role for informal institutional pressures is evident in Pakistan suggests that if appropriate harnessing and redirecting of these pressures could be achieved, such that they might instead foster positive outcomes, a different future can be envisaged. This could take place, for example, through embedding the notion via early education that personal ethics need to be applied in a corporate environment as well as in broader societal interactions. This contention has been made in an African context in Wanyama et al. (2009) and the evidence here suggests that the potentiality extends to the developing world more broadly.

7.6.8 Other Factors The other issues (social status, firm size and firm sector, and religious beliefs) that were explored in this section of the survey suggested more equivocal views, with overall mean scores (2.304, 2.563 and 3.393, respectively) indicating broadly neutral viewpoints. None of the statistical tests proved significant and it was therefore apparent that these categories of potential institutional influence are not seen as having the same degree of impact on governance practices, as those discussed earlier.

7.7 Corporate Governance Benefits Prior literature (e.g. Uddin & Choudhury, 2008; Claessens & Yurtoglu, 2013; Butt, 2015; Clarke, 2017; Chanda et al., 2017) suggests that “good” corporate governance practices have a wide range of benefits, particularly for emerging markets, including improved

7.7 Corporate Governance Benefits

101

transparency and accountability, reductions in the extent of corporate failures, improvements in investor confidence and easier access to the significant levels of capital needed for economic development (La Porta et al., 1997; Wanyama et al., 2009; Solomon, 2013; Tricker, 2015; 2019; Atkins, 2021). The next section of the questionnaire survey therefore asked respondents about the potential for governance improvements to drive specific positive outcomes in Pakistan. As described in Chapters 2 and 3, Pakistan – like many emerging nations – suffers from issues such as corruption, money laundering, low economic growth, widespread corporate failure and continuous reliance on foreign funding and loans from international bodies like the IMF and World Bank. Improvements in these areas have often been purported to be linked directly to improvements in governance standards in the developing world (Yasser, 2011) and so the next section of the survey explored perceptions around these issues. Respondents were asked to consider the following range of possible benefits of improved corporate governance outcomes in Pakistan: reduction in the extent of corporate scandals; reduction in the extent of corporate failures; reductions in embezzlement of public money; improvements in transparency and accountability; stronger protection of minority shareholder rights; improvements in Pakistan’s image to attract foreign investors; greater alleviation of poverty; more efficient allocation of resources; reduction in the cost of doing business; reduction in the extent of corrupt practices such as bribery; more effective and timely enforcement of laws and regulations; reduction in mismanagement of resources by strict monitoring and compliance; and improvement in national economic growth. Table 7.11 summarises the responses, with the results arranged according to mean scores. The overall mean scores shown in Table 7.11 are all below 2, suggesting a perception that each statement relates to an area where there are potential benefits from improved corporate governance practices. The strongest level of overall agreement occurred for the statements “improvements in transparency and accountability”, “reduction in embezzlement of public money” and “reduction in the extent of corporate scandals” with mean scores of 1.326, 1.333 and 1.356, respectively. The Kruskal-Wallis test results presented in Table 7.11 indicate that there were no significant differences in opinions across the four stakeholder groups as a whole in these cases. However, inspection of the MannWhitney test results reveals three cases of significant pairwise differences in average responses. These involved groups AR and ST for the statement relating to transparency and accountability and between groups EMP and AR for the statements relating to embezzlement and sandals. The first of these results was driven by particularly strong agreement from the ST group, with the EMP group playing a similar role for the other two statements. It is therefore evident again that opinions on certain matters vary according to respondents’ circumstances and experience. Whilst all the groups supported the view that improvements were possible in each of the three areas if governance standards did improve in Pakistan, the extent of this feeling varies; once again, the academic group generated somewhat idiosyncratic evidence, indicating again that those

. . . . . . . .

N

















Benefits of Corporate Governance

Improvements in transparency and accountability

Reductions in embezzlement of public money

Reduction in the extent of corporate scandals

Reduction in the extent of corrupt practices such as bribery

Improving Pakistan’s image to attract foreign investors

Stronger protection of minority shareholder rights

Increases in national economic growth and development

More effective and timely enforcement of laws and regulations

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.✶✶

.✶ .

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.✶

.

.

.

.

.

. .

.✶ . .✶ .

.

.

.

.

.✶ .

.

.

.

.

.

.

.✶ .

.

.✶ .

.

Overall St. Dev Group Mean K-W M-W p-Value Mean p-Value BOD EMP AR ST BOD/EMP BOD/AR BOD/ST EMP/AR EMP/ST AR/ST score N =  N =  N =  N = 

Table 7.11: Potential Benefits of Improved Corporate Governance in Pakistan.

102 Chapter 7 Empirical Findings and Discussions

. . . .









Reduction in the extent of corporate failures

Reduction in the cost of doing business

More efficient allocation of resources

Greater alleviation of poverty

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

. .✶

.✶ .

.

.

.

.✶ .

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.

.✶✶ .

.

.✶ .✶✶ .

.

.

.

.

Note: The table shows the overall mean score and standard deviation (St.Dev) for all respondent groups regarding questions about the potential benefits of improved corporate governance in Pakistan. The table reports the mean response for each group and p-values for the Kruskal-Wallis (K-W) and the Mann-Whitney (M-W) tests. A ✶ indicates significance at the 5% level, and a ✶✶ indicates significance at the 1% level. BOD = Board members of listed companies and regulatory bodies, EMP = Managerial employees of listed companies, AR = Academic researcher. ST = Business School Students. Responses were based on a five-point Likert Scale where 1 = strongly agree, 2 = agree, 3 = neutral, 4 = disagree and 5 = strongly disagree. N = number of responses.

.

Reduction in the  mismanagement of resources by strict monitoring and compliance

7.7 Corporate Governance Benefits

103

104

Chapter 7 Empirical Findings and Discussions

charged with knowledge leadership in Pakistan may not always be doing so on the basis of overlap between their perceptions and the nature of the problems on the ground. The next strongest levels of overall support were generated by the statements “reducing the extent of corporate practices such as bribery” and “improving Pakistan’s image to attract foreign investors”, respectively. The overall mean scores (1.407 and 1.429) reflected apparent agreement amongst all the respondent groups in each case with both statements. Only one Mann-Whitney test result suggested a significant difference, in this case relating to the bribery issues where significantly stronger support was found among the EMP group than – again – the AR group. Notwithstanding some variability regarding the extent of agreement, there was clear consensus among the questionnaire respondents regarding each of these five potential benefits of corporate governance improvements. However, the range of perceived potential benefits extended beyond these categories to encompass all 13 issues explored in this part of the survey. The mean scores ranged from 1.444 (for the statement relating to minority shareholder rights) to 1.889 (relating to alleviation of poverty). Table 7.11 indicates that there were only two significant Kruskal-Wallis statistics, but 12 for the Mann-Whitney tests. Of these, eight involved the managerial employee group (EMP) and six for the academic researchers (ARs). The former group were consistently more optimistic about the benefits of improved corporate governance, but the academics were consistently less so. These findings, at the very least, suggest that there are nuances and subtleties within the overall trend for optimism set out here and future attempts to embed improvements in the system should take this tendency seriously if meaningful change is to be forthcoming.

7.8 Possible Actions and Suggestions to Improve Corporate Governance Moving Forward Having explored the perceived role (and potential benefits) of formal and informal institutional pressures in driving corporate failures and scandals in Pakistan, the survey proceeded to examine the potential path towards meaningful governance change. Respondents were asked to consider the importance of 15 potential developments in this context, again based on scrutiny of the prior literature and the particular issues applying to Pakistan as noted earlier. These were: increased awareness of the need to vote and ensure that honest, trustworthy, educated and professional people enter parliament; selection of regulatory body members on merit; efforts to create awareness about good corporate governance practices; discouraging political interference at every level; development of transparent and efficient legal and regulatory systems; balanced board structure with a majority of independent non-executives; board member training that ensures professional and ethical behaviour; corporate governance awareness being mandated in Pakistan’s college system; shareholder activism and the

7.8 Possible Actions and Suggestions to Improve Corporate Governance Moving Forward

105

concept of “Whistle blowing” being encouraged and promoted; stronger legal protection of minority shareholder rights; regulator rating of companies’ code compliance; higher levels of institutional shareholding; regulatory bodies receiving enhanced human, financial, material and technical resources; meaningful addressing of behaviour such as bribery, corruption and conflicts of interest; and development of board members’ independent judgment capacity. Table 7.12 summarises the responses, with the results again arranged on the basis of mean scores. As the table notes, the overall mean scores ranged between 1.482 and 1.807, indicating a belief that wide variety of actions are seen as having a role to play in addressing the current propensity for governance issues and scandals in Pakistan’s corporate sector. The highest level of agreement was for the statement relating to “corporate governance awareness being mandated in Pakistan’s college system”. All respondent groups appeared to believe strongly that inclusion of this type of material in degree curriculums will have an impact on governance outcomes in Pakistan. This evidence provides further support for the impression arising from earlier parts of the study that improved education around the notion is critical if substantive improvements are to occur. There were no statistically significant differences in opinion across the four respondent groups or in the pairwise evidence pointing to a wide degree of consensus on this issue. The findings in this section are consistent with the views of researchers in other developing regions (e.g. Chanda et al., 2017) who contended that meaningful change in Africa requires the root causes of corporate failures to be explored in classroom settings. The next highest average level of support (mean = 1.519) was generated by the statement garnering perceptions about “discouraging political interference at every level”. Respondents took the view that efforts to reduce (the currently significant) level of widespread political interference and influence in Pakistan could make a significant difference in terms of addressing corporate governance failures. From an institutional theory perspective, Ribeiro and Scapens (2006) argue that organisational practices are highly influenced by external forces and this particular finding suggests that this perception is shared in Pakistan where – as noted earlier – the malign influence of political forces (at every level of government) on corporate behaviour is widely acknowledged. The Kruskal-Wallis test statistic suggested that there were significant differences of opinion across the four groups, with the Mann-Whitney evidence suggesting that this was driven by a lower level of agreement on the part of the academic (AR) group. As the ensuing discussion notes, this was not the only occasion in this part of the survey where a greater degree of circumspection was evident among the academics. Given the informed perspectives that this group is likely to hold (see, e.g. Wanyama et al., 2009; Chanda et al., 2017), it is concerning that they were less sanguine about the future than the other groups of respondents, suggesting that whilst improvements may be possible, the effort needed to enact these in practice will be substantial.

.

. . . .

. .

.



   

 



H Corporate governance awareness being mandated in Pakistan’s college system

D Discouraging political interference at every level

J Stronger legal protection of minority shareholder rights

A Increased awareness of the need to vote

I Shareholder activism and the concept of “whistle blowing” being encouraged and promoted

C Efforts to create awareness about good corporate governance practices

M Regulatory bodies receiving enhanced human, financial, material and technical resources

E Development of transparent and efficient legal and regulatory systems

EMP

AR

ST

.

.✶✶

. . . . . .✶

.

. . . . . .✶ . . . . . .

.

.

.

. . . . . .

. . . . . .

. . . . . .

.

BOD/ EMP

. . . . . .✶

K-W p-Value

.

N: N: N: N:

BOD

Group Mean

. . . . . .

Overall St. Mean Dev Score

N

Questions

Table 7.12: Actions to Improve Corporate Governance in Pakistan.

.✶

.

.

.

.

.

.✶

.

BOD/AR

.✶

.

.

.

.

.

.

.

BOD/ ST

EMP/ ST

.

.

. .✶

. .

.

.

.

.

.✶✶

.

AR/ST

. .✶

. .

. .

. .

. .

. .

EMP/ AR

M-W p-Value

106 Chapter 7 Empirical Findings and Discussions

. .

. . . . .



N Meaningful addressing of behaviour  such as bribery, corruption and conflicts of interest

B Selection of regulatory body members  on merit    

L Higher levels of institutional shareholding

K Regulator rating of companies’ code compliance

F Balanced board structure with majority independent non-executive

O Development of board members’ independent judgment capacity

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .

. . . . . .✶✶

.

.

.

.

.

.

.✶✶

.

.

.

.



.

.✶

.

.

.

.

.

.

.

. .

. .

. .

. .

. .

. .

.

.

.

.

.

.

. .✶✶ .✶✶

Note: The table shows the mean and standard deviation (St.Dev) for all respondents regarding possible actions to improve the governance situation in Pakistan in moving forward. The table reports the mean response for each group and p-values for the Kruskal-Wallis (K-W) and the Mann-Whitney (M-W) tests. A ✶ indicates significance at the 5% level and a ✶✶ indicates significance at the 1% level. BOD = Board members of listed companies and regulatory bodies. EMP = Managerial employees of listed companies, AR = Academic researcher, ST = Business School Students. Responses were based on a five-point Likert Scale where 1 = strongly agree, 2 = agree, 3 = neutral, 4 = disagree and 5 = strongly disagree. N = number of responses.

G Board member training that ensures professional and ethical behaviour

7.8 Possible Actions and Suggestions to Improve Corporate Governance Moving Forward

107

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Chapter 7 Empirical Findings and Discussions

The strongest levels of support for other statements in this part of the survey arose for: “legal protection of minority shareholder rights” (mean = 1.541); increased awareness of the need to vote (1.563) and “shareholder activism and the concept of ‘whistle blowing’ being encouraged and promoted” (1.563). Inspection of the detailed results in the table indicates that there were no statistically significant differences in opinions across the four participant groups. Similarly, the Mann-Whitney tests of pairwise differences amongst groups also suggest similarity in viewpoints. This evidence suggests that a range of practical and regulatory measures are seen as being required to address problems in the governance of Pakistani firms. In this context, the recent formation of a high court bench by the SECP under the Companies Act 2017 could play a meaningful role, certainly regarding the legal issues, although its effectiveness is yet to be seen. Whilst the importance of whistle-blowing and shareholder activism has been acknowledged in many nations, some of the views expressed by participants in the open section at the end of the questionnaire suggest that the dominant political elite in Pakistan is so heavily dependent on current systems and processes that they would fight hard to resist any efforts designed to encourage transparency and openness. Whilst prior contention by Schultz and Harutynyan (2015) and others suggests that whistle-blowing can play an important role, it is evident that, in Pakistan, the deleterious coercive and malign mimetic political pressures ranged against accountability would have to be countered, harnessed and shaped in a positive direction. Only such systemic changes are likely to shift political realities to the extent that meaningful change is likely and the appalling extent of corporate failures in Pakistan addressed. The statement relating to “efforts to create awareness about good corporate governance practices” generated the next highest mean score of 1.570. This result supports one of the major themes of this study, that is, that a lack of understanding about the potential benefits of robust governance practices has contributed to the ongoing prevalence of large-scale corporate malfeasance in emerging markets such as Pakistan. Inspection of the statistical test results presented in Table 7.12 reveals disagreement across the respondent groups, with a Kruskal-Wallis p-value of 0.024 suggesting that this was significant. A closer look at the results from the Mann-Whitney tests reveals that the difference was driven by the EMP group generating stronger support for this statement than did the ST group. This pattern is again potentially concerning as it suggests that business students – amongst those most likely to become corporate leaders in the future – are not being exposed to the type of education regarding governance practices that emphasises its benefits. Whilst the managerial employees appear to be strongly convinced about the possibilities, as Wanyama et al. (2009)’s study suggests, only early education regarding malign institutional practices is likely to make a difference in developing countries – by the time individuals have reached managerial level they may be aware of the issues, but no longer in a position where motivation for change is easily reconciled with their own career prospects.

7.8 Possible Actions and Suggestions to Improve Corporate Governance Moving Forward

109

A mean of 1.570 was generated for the statement supportive of: “regulatory bodies receiving enhanced human, financial, material and technical resources”. As argued by Kaufman et al. (2018), effective enforcement of regulation is essential in emerging economies, but limits placed on resources (often deliberately inhibiting) are common. In Pakistan, as noted earlier, a range of regulatory institutions exist, including the SECP, SBP, PSX, NAB and FIA, but the evidence suggests a concern regarding their ability to function in practice. The results again point to a widespread view that improvements in governance outcomes are possible, suggesting a basis for (some) optimism, but the complete lack of progress on the ground again indicates the sheer scale of the challenge involved in overturning the isomorphic, highly embedded, institutional propensity for stasis in Pakistan. The latter is clearly extremely powerful, reflecting vested interests that mitigate the likelihood of any change other than that of a purely cursory nature. The results presented in the table suggest that there was no statistically significant difference in opinion across the four respondent groups. However, there was, as in the previous case, a significant difference in responses between the EMP and ST groups with managerial level employees – that is, those already rising within the system in question – again reporting a more positive outlook than that held by those currently studying in the business field. Strong support was also generated for the statements relating to “development of transparent and efficient legal and regulatory systems” and “board member training that ensures professional and ethical behaviour” (mean scores 1.578 and 1.593, respectively). These results denote an acknowledgement that improvements in both regulatory effectiveness and board member culture could play a meaningful role in addressing the (at best) questionable state of governance practices in Pakistan. The statistical test results presented in the table reveal significant disagreements across respondent groups, with Kruskal-Wallis p-values of 0.033 and 0.002 generated. A closer look at the results from the Mann-Whitney tests reveals that for the statement relating to legal and regulatory issues, the disagreement was driven by the BOD group’s very strong support (with a mean of 1.250, the highest anywhere in the table). This striking result points to serious ongoing concerns on the part of board members regarding regulatory transparency and suggests, again, a major impediment for those charged with improving governance practices in Pakistan. A closer look at the results from the Mann-Whitney tests relating to the board member training statement reveals that the BOD and ST groups expressed particularly strong support for this statement. There is no obvious intuitive explanation of why the ST group was highly supportive but, when taken together with the previous result, the evidence regarding the BOD group becomes increasingly worrying. Those holding board member positions in Pakistan apparently believe that they need stronger training, buttressed by a more transparency and effective legal system, if improvements in governance standards are to be manifest. Given the isomorphic tendencies for malign corporate behaviour in the system, the extent to which this is likely to happen in practice may be slim. The issue is further complicated by the fact that board members in

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Chapter 7 Empirical Findings and Discussions

developing nations are often charged with misuse of resources by regulatory authorities, but in a situation where the latter are themselves part of the problem (Butt, 2015). The remaining six statements in the table related to: addressing bribery, corruption and conflicts of interest; selecting regulatory board members on merit; higher levels of institutional shareholding; regulatory rating of companies’ compliance with codes; balanced board structures with a majority of independent non-executives; and development of board members’ capacity for independent judgment. Although the overall mean scores in each case (1.627, 1.629, 1.629, 1.652, 1.667, and 1.807, respectively) were lower than for the previous statements, each still indicated a strong level of agreement among the respondents. As the details in Table 7.12 indicate, in none of these cases were the Kruskal-Wallis or Mann-Whitney test statistics significant. This section of the questionnaire allowed respondents to suggest any other actions that they thought might help address governance issues. One of the respondents from the regulatory bodies submitted that internal accountability of bureaucracy through strict implementation of corruption prevention Acts could lead to improvements in governance standards, while a director of a listed company stated that: for our betterment and to improve quality of Pakistan’s governance system we should welcome international pressure and act positively, particularly for the requirements from institutions such as the IMF, World Bank, OECD, and FATF and act in a sincere manner to address existing loopholes in our legal and regulatory systems

Here, the suggestion is in line with the notion that improved communication and engagement with international bodies might lead to the exertion of (in this case helpful) coercive pressures on domestic legal and regulatory bodies. In summary, the findings from this part of the survey imply that the roles of formal and informal institutions in Pakistan need to change and address their current tendency to consolidate and embedded malign coercive and normative forces in the nation’s corporate sector. The widespread support for each statement in the table (with each sub-group generating a mean of less than two for each question) among respondents suggest some hope for optimism, with potential remedies existing in terms of addressing governance weaknesses and corporate failures in modern-day Pakistan. However, the extent to which these can be adopted to ensure meaningful change in practice is heavily dependent on the extent to which the nation’s tendency for isomorphic behaviour (which has to date acted primarily to buttress the embedded inertia) can be employed in a constructive way to encourage positive change. To do so will require the strengthening and upholding of the letter and spirit of rules and regulations and, ultimately, institutional propensity for actions that address – rather than buttress – systemic failures and weaknesses in Pakistan’s corporate governance landscape.

7.9 Summary

111

7.9 Summary This chapter has documented some of the most detailed evidence to date regarding individual views about corporate governance in developing nations. The discussion and analysis of Pakistan’s (complex) political and economic analysis set out in the early chapters of the book provided the context for the presentation of the survey findings, with data collected from: board members of listed companies and regulatory bodies; employees of listed companies; academic researchers; and business students. As subjective viewpoints cannot be fully characterised by statistical analysis of numerical data, the evidence provided here is not intended to represent a comprehensive set of generalisable results but is instead intended to provide a summary of key themes and patterns in Pakistani perspectives regarding the many distressing failures of corporate governance that the nation has experienced in recent years. The questionnaire document focussed on corporate governance and its potential role in driving failures in Pakistan, including compliance issues and socio-economic implications, with the role of institutional forces emphasised throughout. The findings indicate that the majority of participant groups had a good understanding of the notion of “corporate governance” and sound knowledge of the domestic set of corporate governance codes issued by the SECP and PSX, suggesting that the responses to the questions posed reflect a reasonable understanding of key concepts and practices. In general, the participants favoured a more inclusive (Pakistan-tailored) stakeholder approach, in line with prior evidence in other developing regions such as Africa, where the agency-driven “Anglo-American” model has been found to lack the communitarian ethos of many emerging nations. The findings suggest that respondent groups strongly believe that transparency, accountability and sound corporate governance contribute in a positive manner to economic growth and social well-being. However – and most importantly given the aims of this book – the evidence also indicates a widespread view that underlying governance issues are to blame for the many large-scale corporate failures and scandals that have plagued Pakistan. The country’s formal and informal institutions are widely perceived to play malign and harmful roles, contributing to and enabling corporate malfeasance. Many concerns exist regarding the impact of institutional activities, with the most prominent including: political interference and influence; institutional corruption and bribery; a slow and weak judicial system resulting in very limited enforcement of laws and regulations; family influence/control; and a lack of social, cultural and ethical concerns in corporate settings. The wide range of matters raised in these (and other) areas suggest that isomorphic forces of each of the three types identified in the literature (normative, mimetic and coercive) are at work; this issue is explored further in the concluding chapter. However, the evidence outlined in the present chapter also suggests grounds for some optimism, with respondents convinced that a number of identifiable actions (perhaps most notably, an enhanced emphasis on the governance notion in Pakistan’s college system) can assist with efforts to support improved governance out-

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comes. The latter, if achieved, are seen as being important in terms of a wide range of future corporate and broader societal outcomes, with greater accountability and transparency most prominent in this context. Having completed the presentation of the empirical findings, the next chapter concludes the book by providing a summary of the key findings and implications thereof as well as acknowledging the book’s limitations and making recommendations for future research in the area.

Chapter 8 Conclusion, Recommendations, Limitations and Future Research 8.1 Introduction This study has explored the perceptions of key stakeholder groups regarding the failure of governance systems to prevent the numerous corporate failures and scandals experienced in Pakistan. A questionnaire survey constructed on the basis of issues identified in the related literature and an institutional theory framework was used to investigate the views of individuals who were likely to have a meaningful understanding of the governance notion and thus be able to provide informed responses. The individuals targeted therefore comprised board members of listed companies, members of regulatory bodies, academic researchers, management level employees of listed companies and business students from renowned business schools; 135 responses were received, and these formed the basis of the empirical analysis. Atkins (2021) suggests that corporate governance can be viewed from three theoretical perspectives – agency, transaction cost and stakeholder, while Mallin (2013) suggests the addition of stewardship theory to the list of possibilities. The empirical work documented in this book indicates that whilst elements of each theory may have some relevance in the Pakistani environment, it is equally evident that none of them fully explain the current situation, reflecting the highly institutionalised, idiosyncratic nature of Pakistan’s corporate sector. Current practices instead resonate most strongly with a complex set of interactions amongst the “coercive”, “mimetic” and “normative” elements of institutional isomorphism identified by DiMaggio and Powell (1983). In so doing, a range of institutional problems that allow the malfeasance to persist were identified, along with a set of actions that might usefully inform attempts to develop a more robust regulatory system.

8.2 Summary of the Book The book consists of eight chapters. Chapter 1 began with a general introduction outlining the motivation and rationale for the study as well as its main research questions. Chapter 2 then set out relevant background information about Pakistan, focussing on its historical roots and political progression, physical characteristics, economic, legal and regulatory environment, with an emphasis on issues impinging on the nation’s corporate sector. Chapter 3 outlined the corporate governance processes and rules Pakistan – including examples of the type of large scale corporate failures that motivated the present study – before Chapter 4 broadened the discussion to explore the literature https://doi.org/10.1515/9783110772999-008

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on modern governance corporate governance developments with a particular focus on emerging markets. Chapter 5 introduced and discussed the elements of institutional theory on which the empirical analysis was based, emphasising the highly institutionalised nature of influences (both formal and informal) on corporate behaviour in Pakistan and their purported role in many scandals and failures. Chapter 6 proceeded to outline the interpretive methodology underpinning the research, setting out its appropriateness for an attempt to identify and contextualise the complex, multi-layered influence of institutional factors on governance practices in Pakistan and their attendant impact on corporate malfeasance within the nation. The role of this methodological approach in influencing the selection of a questionnaire survey as the research tool was also set out. Chapter 7 then presented and discussed the findings of the questionnaire survey, with the present chapter providing a summary of the evidence, bringing together cognate elements within this and reflecting on the study as a whole.

8.3 Main Findings 8.3.1 Isomorphic Forces and Corporate Failures and Scandals in Pakistan Perhaps the most striking evidence that has been presented here relates to the unequivocal perception across the various groups of survey respondents that governance weaknesses at institutional level have been a major contributing factor to the many corporate failures and scandals experienced in Pakistan in recent years. The directional influence of many formal (i.e. political, governmental and bureaucratic, legal and judicial, regulatory, foreign investors and international organisations) and informal (i.e. family, social, cultural and ethical) institutions is such that, far from improving matters, it actually permits the continuance of governance standards at national level that are at best weak and at worst extremely harmful. The influence and indulgence of these dynamics appears to be prevalent not just in the private sector but also amongst the public-sector organisations that contribute a major part of Pakistan’s economic output. In particular, the appointment of relatives and friends who do not possess the expertise needed to run state-owned organisations, and instead serve the interests of their political associates, was seen as a significant contributory factor in terms of corporate collapse. There was a widespread view that appointed individuals often lack the requisite experience, qualification and vision to make adequate changes to the regulatory process in order to improve governance outcomes. From a theoretical point of view, the views expressed in the empirical work indicate a damaging form of mimetic influence on the part of political and governmental institutional. Organisations are viewed as copying each other in a race to the bottom in terms of the use of unconstitutional legal and regulatory practices, with the aim of providing cover for unethical business activities. A substantive level of dependence on state and other bureaucracy as

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consolidators of the behaviour therefore becomes a major contributing factor in enabling the many corporate failures and scandals that have beset Pakistan. Relatedly, the evidence also suggests that many of the nation’s most important bureaucratic institutions have become highly politicised. This also appears to reflect a degree of mimetic isomorphism where unethical behaviour pervades across politicians and political institutions, resulting in an ineffective administrative culture in a country where bureaucracy mitigates efforts to develop policies and regulations in an effective and transparent manner. Notably in this context, the findings indicate a widespread perception that corporate managers regularly bribe government officials, restricting competition and entry in sectors they dominate. One of the major problems in Pakistan that logically flows from this is the tendency for overseas (and some domestic) firms, lacking political connectedness, to struggle to raise capital from government banks and face intensive regulatory pressure. As a result, foreign direct investment into the country is heavily compromised. The empirical evidence suggests that a lack of transparency and accountability are viewed as major institutionalised drivers of corporate failures and scandals in Pakistan. These weaknesses were widely associated with political and governmental bodies, where exploitation of legal and judicial systems in order to take benefit (or revenge) from opponents, undermining the sanctity of the rule of law for personal gains by the powerful elite, was seen as standard. Such is the apparently high degree of malign influence on regulatory bodies it is hard to see how, in their present states, the latter are capable of playing any meaningful role in driving better practice. Not least because the lack of adequate laws and regulations in Pakistan is perceived as contributing directly to the institutional problems noted in the study, with current rules failing to hold powerful politicians and their associated business partners to account. Despite having de jure power and authority in the codified laws, the legal and regulatory bodies in Pakistan were seen as wholly ineffective and lacking in any practical autonomy. This issue, coupled with widespread political influence that further hampers their performance, was viewed as a major contributor to governance failures in Pakistan. Whilst many of the legal and regulatory structures required for a sound corporate governance system already exist (e.g. the National Accountability Bureau) underlying institutional issues severely hamper their functionality. In particular, the evidence suggests that the necessary human, financial and technical resources required for legal and regulatory bodies to perform their work adequately in Pakistan are wholly lacking; unsurprisingly, the bodies themselves are perceived to be unable to address cases of corruption and ethical misconduct, suggesting a major accountability vacuum. Other significant issues that were evident in participants’ responses included the lack of coercive pressures from foreign investors and international funding bodies such as the IMF, World Bank and Asian Development Bank. The findings in this book imply that limited engagement efforts on behalf of the authorities in Pakistan have impacted negatively on the nation’s governance outcomes. The related dearth of institutional and foreign investors is seen as both contributing to the problems as well as

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being affected by them, suggesting a vicious circle exists, one which is apparently proving very difficult for Pakistan to escape from. Despite acknowledgement of the potential role of foreign and institutional investors in improving governance standards, accessing of this potentiality remains subject to political stability and the willingness of national government to apply coercively reassuring pressures (a willingness evident in other areas of government activity within Pakistan) to strengthen governance practices by strict monitoring and supervision. The evidence suggests that widespread political turmoil, incompetence and corruption have led directly to the absence of the type of meaningful co-operation with international institutional bodies that could drive the change required in Pakistan. The findings also point to the impact of informal institutional pressures including those of a familial, religious, societal, cultural and ethical nature in underpinning practices and thereby helping to consolidate the malfeasant state of Pakistan’s corporate governance system. The perceptions of survey respondents revealed the significant impact of a range of problems in this context including family ownership, the lack of merit-based appointments or incentivisation, and the widespread effect of conflicts of interest. Despite relatively low failure rates among the nation’s family-owned companies, their widespread ownership in Pakistan appears to be seen as having a pervasive (negative) influence on public and private-sector organisations; in particular, political connectedness appears to play an adverse role where certain family groups receive undue privileges and benefits. It does not require an enormous hypothetical leap to assume that the dominance of family influence in Pakistani-listed firms deters foreign investors, not least regarding board issues and other governance functions. In this regard, the perception of widespread conflicts of interest was unequivocal. The evidence suggests that documented tendencies for powerful families in Pakistan to collaborate with political forces, an issue that has resulted in billions of dollars being lost to the public exchequer, are seen as having a particularly damaging effect. Any meaningful institutional analysis of corporate governance systems requires consideration of the cultural environment in which such practices are rooted and the evidence suggests that concerns about a number of specific social and cultural problems can be identified in Pakistan. These include: lack of education; lack of meritbased incentives; nepotism; religious intolerance; greed; fear of retribution and nonconfrontation of those in power. The evidenced perceptions imply a scenario whereby failures and collapses of large industrial entities are driven by a culture that permits key appointments to be filled (and career progress determined) on the basis of social status and political lineage rather than qualification and expertise. The findings as a whole are sufficiently unequivocal to permit a conclusion whereby institutional influences with identifiable isomorphic forms have a highly significant negative influence on governance practices in Pakistan, with the propensity for widespread failures and collapses at national level the (inevitable) result.

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8.3.2 Learning from the Failures and Moving on with Institutional Changes The evidence reviewed above plainly demonstrates that underlying governance issues in the country are seen as inexorably linked to Pakistan’s appalling record of corporate collapses and scandals. However, the evidence also suggests a widespread understanding that improved governance standards could result in marked improvements in levels of transparency, accountability, socio-economic welfare and – ultimately – address the prevalence of governance failures. Whilst this appears to be – at best – a challenging task given current institutional behaviour, the latter does indicate the pervasive nature of all three types of isomorphic forces in determining systemic processes and outcomes in Pakistan’s corporate sector. As suggested earlier, if these behavioural pressures could be re-moulded and directed from their extant (malign) states to (positive outcome-focussed) manifestations then the institutions could actually play a very different role. Notwithstanding the non-trivial nature of the effort such a change will require, the following section expands on this notion, making suggestions as to how such a shift might be supported by robust governance frameworks and appropriate institutional development.

8.3.3 Recommendations and Policy Implications Although isomorphic forces in Pakistan have generally had a negative impact on the nation’s corporate sector, both formal (e.g. governmental, regulatory bodies and foreign funding bodies) and informal (e.g. social pressures reflecting widespread governance failures) benefits are conceivable if the proclivity for such behaviour can be captured and redirected so as to support and enable positive outcomes. Most obviously, if the institutional forces driving the damaging governance outcomes witnessed in Pakistan for decades were to be harnessed in this manner, regulators and government would be able to influence meaningful, constructive change by mandating compliance with rigorous rules and principles. In so doing, the harmful pattern of corporate malfeasance and decay that plagues Pakistan might finally be addressed. As the empirical evidence in this book sets out, the role played by governmental and political forces is overwhelmingly destructive. However, the importance of these influences suggests that if these institutional powers could be harnessed such that instead of intervening in regulatory affairs to suit (hidden) individual interests, they instead take advantage of their coercive and normative abilities to advocate ethical business practices substantive constructive change might result. Given the perception that the malign directionality of these forces is heavily embedded, systemic upheaval will be required, almost certainly requiring transformative change at every educational level to foster a political environment in which individuals with high integrity choose to enter the Pakistani political system for the very best of reasons (including a desire to play a role in improving governance standards).

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In conjunction with the role of political forces, the evidence in this book suggests that legal, regulatory, governmental and bureaucratic forces also play a significant role in determining governance outcomes in Pakistan, albeit a highly unconstructive one. If these tendencies could be harnessed and redirected such that their coercive and normative influences address rather than consolidate underlying governance problems a potential for systemic improvements issues – although far from inevitable – is at least conceivable. The type of change needed would almost certainly require (effective) discouraging of political interference in legal and regulatory affairs with stringent (coercive) enforcement of regulations that ensures transparency and accountability at all levels. From the normative point of view, much greater respect for professional standards, including fiduciary duties, is likely to be important with the evidence suggesting that the formal institutions involved need to be autonomous, free from any governmental and political influence, and equipped with adequate human, financial and technological resources. If this is the case, the propensity for officers of legal and regulatory bodies to reject bribes and behave according to established notions of ethically sound practices may grow with, ultimately, a reduction in the extent of widespread corporate failures and scandals in Pakistan the outcome. In this context, the legitimacy and performance of the NAB watchdog in Pakistan is critical, but its legal basis must be revisited by the nation’s parliament in order to address existing loopholes such as arrest before investigation and political victimisation. Although these are not straight-forward tasks, the findings set out here indicate that efforts are urgently needed to restore public trust in Pakistan’s major legal and regulatory institutions and represent a prerequisite for meaningful improvement in governance frameworks and practices. The evidence is unequivocal in pointing to a perception that corruption has become the norm in Pakistani culture, including a role in “greasing the wheels” of business and economic practices. Recent constitutional steps to pass the Whistle-Blower Protection Act 2019 therefore becomes vital in this context as the Act has the potential – with robust enforcement – to spread awareness in the corporate sector and amongst the general public of the need and ability to report malfeasance on an anonymous basis. If the full de jure force of legal protection and law enforcement that the bill provides extends to a de facto basis then it might provide the confidence and trust the Pakistani public will require in order to encourage them to report corrupt and unethical business practices and begin the process of weeding out this type of behaviour. However, among the challenges evidenced here regarding moves to improve governance outcomes in Pakistan, the lack of institutional and societal understanding of major issues is concerning and suggests that urgent training and support is needed in order to encourage the development of stronger governance practices on anything more than a cursory basis. Regulatory bodies such as the SECP, PSX and SBP – and professional institutions such as ICAP – will need to work more closely with firms and regulators to provide them with adequate training, including awareness of the potential benefits of improved governance standards and its propensity to reduce the likelihood of corporate failures.

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Given the impression formed on exploring the empirical data in the study, it appears reasonable to argue that if improved accountability at the internal level is to manifest itself, listed companies and regulatory bodies in Pakistan must prioritise the implementation of meaningful board evaluation processes in a transparent manner. This would allow the nation’s firms to hold their board members accountable for their conduct to a much greater extent than appears to be the case at present. This type of development is likely to be most useful if the need for greater shareholder activism identified in the study is also addressed. Such pressure could play a meaningful (coercive) role and force reluctant companies to implement substantive internal control mechanisms and evaluation processes at all levels. One of the problems highlighted here in this regard relates to the lack of institutional investors’ “voice” and the inadequate role played by independent non-executive directors (INED) in Pakistan, thus enabling family and political influences to dominate decision-making. It is therefore evident that the number of INEDs must be increased, ideally to comprise at least half the board. Such a change will only be meaningful if the individuals concerned are able to freely exercise their judgment on issues including those related to the rights of minority shareholders. It may be that, in practice, INED remuneration must increase to ensure that this type of motivate takes hold, at least until education around ethics and morality are bedded into the system. The empirical evidence also points to a clear perception that the role of international funding bodies and foreign investors in driving corporate governance reforms in Pakistan could be much greater. However, as a result of a lack of political will, political instability and security issues, Pakistan as a country has developed a perception of mistrust on the part of international bodies. Therefore, the study’s findings regarding the need for improved engagement levels with these and other external bodies, driving transparency and accountability, assume critical status. If the current domestic pressures supporting inertia and stasis can be overcome, a further example emerges of potential (positive) isomorphic influence. In this case, it would involve the coercion that international funding bodies regularly apply to other investee countries to encourage foreign investor confidence via the additional checks and balances that their involvement brings. This process should in turn benefit Pakistan’s economy by helping firms fulfil their capital requirements – at lower costs – and to become more competitive in international markets. If this type of external pressure can be harnessed it has the potential to underpin real economic development provided that the power and control of large family groups over board functions within Pakistan is lessened significantly. The findings strongly imply that if governance issues are to be addressed and the extent of corporate failures and scandals in Pakistan reduced, informal institutions must play a much more meaningful role. The evidence presented points to a widely held perception that there needs to be a change of social and cultural behaviours, with informal institutions (i.e. religion and family) using their substantive influence to ensure consequential advances in governance outcomes where high standards of ethics and morality become the norm. The current level of (malign) family dominance

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and control needs to be reduced, with unethical practices such as nepotism and favouritism actively discouraged in favour of merit-based appointments. Again, the findings suggest that the most likely (and possibly only conceivable) route to an improved set of circumstances for Pakistan would involve current malign isomorphic energies being re-directed in such a way that Pakistan begins to address its entrenched tendency for corporate failure. However, a major challenge is likely to be faced in all the areas discussed above relating to the significant differences found in the survey responses across the five groups taking part. One of the most consistent patterns within these – and potentially the most concerning – relates to the many cases where academics, that is, those charged with developing and spreading knowledge, often held idiosyncratic views, with these typically indicating a lesser degree of optimism than was apparent amongst the other groups.

8.4 Contributions to Knowledge This empirical work in this book has made contributions in several areas. Although the level of attention paid to the notion of corporate governance has risen significantly in the recent years, most of this increased focus has been on governance problems in the world’s wealthiest nations. Therefore, the lack of research and shortage of relevant literature in the context of emerging countries, such as Pakistan, has created a vast knowledge gap, and it is in helping to address this gap that the current study plays its most important role. Figure 8.1 provides a summary of the main contributions in this regard and their primary implications. Inspection of the centre of Figure 8.1 indicates that, to the authors’ best knowledge, no prior studies have specifically targeted perceptions about the link between governance standards and corporate scandals and failures in developing nations. This issue is of obvious practical relevance now as Pakistan has the potential to become a major economic hub in Asia due to its geographic positioning and as a relatively young nation with more than 60 per cent of the population less than 30 years old. However, since the country’s inception numerous large-scale corporate collapses have taken place in dubious circumstances with no empirical investigations conducted to explore the underlying causes and the role played by the country’s formal and informal institutions. Given the potential for these problems to hamper Pakistan’s efforts to take advantage of its global economic potential, the present study not only examined current governance practices and the level of understanding at the national level but also explored the link between these and corporate failures and scandals. The left hand part of the diagram emphasises the novel theoretical approach we have taken, with institutional isomorphism employed as the underpinning framework. We have therefore been able to offer a contribution regarding the need to capture and redirect powerful extant isomorphic forces in such a way as to improve governance standards. In so doing, the likelihood of corporate malfeasance failures and scandals

– The findings therefore add to the extent literature on institutional markets in general, in particular the ongoing prevalence and impact of widespread corporate failures and crises.

– The contents of the book represent the most detailed empirical investigation to date of individual views regarding the role played by governance issues in enabling corporate malfeasance in the developing world.

– The study highlights perceptions about the importance of corporate governance in an emerging market context, using Pakistan as a case.

– The findings contribute to knowledge by providing the first detailed study of governance in developing countries that explicitly focuses on the role played by systematic weaknesses in enabling scandals and failures in the corporate sector.

KNOWLEDGE

– The latter enabled the researcher to seek first-hand knowledge from those on the ground about the nature of corporate governance in Pakistan, its influencers and influences, including its link to observed failures in the sector.

– The philosophical approach applied in this book, however, followed the interpretive perspective and employs a qualitative method for data collection.

– All the previous studies in a Pakistani context and virtually all wider Asian context have applied a quantitative approach using secondary data from annual reports.

METHODOLOGY AND METHODS

– The findings suggest a possible pathway forward if the current (malign) role of embedded institutional forces can be harnessed and redirected in a manner that reduces rather consolidates the current national tendency for scandal-driven corporate collapses. – Having explored the institutionalised nature of Pakistani corporate environment, the findings propose a constructive route way forward that could mould and nurture the existing role of formal and informal institutions such that their coercive influence lead to the betterment of governance practices and business ethics in general. – This book offers an array of recommendations for policy makers in Pakistan that might improve individual and institutional behaviours and, ultimately, reduces the scale and extent of scandal-driven corporate failures.

Figure 8.1: Contribution and Impact.

IMPACT

– By applying the institutional theory lens, the empirical work has identified isomorphic forces (in particular, those of formal and informal institutions) that influence corporate governance practices, with an emphasis on their role in corporate failures and scandals.

– There have been no empirical investigation of corporate governance employing institutional theory lens (in particular institutional isomorphism) in a Pakistani or Asian context.

APPLICATION OF THEORY

TO

EMPIRICAL CONTRIBUTION

IMPACT

8.4 Contributions to Knowledge

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in Pakistan will fall and the levels of external investment that will finally allow the nation to achieve its economic potential will be attained. In terms of the latter potentiality, the empirical findings set out the wide range of isomorphic influences that appear to be present and well-established in Pakistan, contributing significantly to the current state of corporate governance processes. The recommendations we have set out are designed to remind policymakers in Pakistan that this state of affairs need not be set in stone, but can instead be addressed if issues such as loopholes in legal and regulatory affairs and the failure to implement current regulations in a robust manner are tackled. In this context, we have argued that the long-standing presence of strong isomorphic forces in Pakistan might itself be helpful, in that if these propensities can be captured and redirected appropriately, institutional forces might in the future guide, motivate and encourage the changes in social and cultural settings needed to foster – by necessity coercively in many areas – ethical governance practices at national level. It is worth emphasising again here that this type of systemic change will require attention being paid to the root causes of the corporate governance failures and scandals. Without a concerted effort to strength the institutions that (nominally at present) promote checks and balances in the system the present state of affairs is more likely than not to continue. Finally, the right hand of Figure 8.1 sets out the methodological and method-based contributions of the book. To the authors’ best knowledge, all previous studies of corporate governance in a Pakistani context have employed quantitative approaches to explore statistical links between governance characteristics and firm performance, using secondary data from annual reports which in Pakistan (as in many developing nations) are often unreliable. In contrast, our empirical investigation employed analysis of the views held by a wide group of individuals in Pakistan, facilitating in-depth, robust and novel insights regarding the nature and causes of – plus potential remedies for – the highly deficient state of the nation’s corporate governance system.

8.5 Limitations and Avenues for Further Research Any empirical investigation is subject to limitations and some of the main ones relating to the present study are acknowledged here. The research presented in the book involved the analysis of 135 questionnaires. Whilst the selection of potential respondents was designed to be pervasive, involving all the major groups with a potential stake in the issues at hand, we cannot claim to have included representatives of all sections/sectors of modern Pakistan’s diverse community. Hence, caution must be applied in terms of attributing generalisability to the results presented and conclusions suggested both within and beyond Pakistan’s borders. Another limitation relates to the deliberate focus on conduct and behaviour in the nation’s corporate sector. We have argued that, given the extent to which current institutional forces are seen as having a damaging influence on organisational behaviour, change is required at such

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a fundamental level that even the ethics implanted in educational institutions may need to be revisited. However, a comprehensive justification for such a deep-rooted transformation would require an enquiry of the impact of behaviours across all types of organisations in Pakistan, including those in the public sector. Although this is clearly a significant research task, evidence based on this part of the nation’s economy would provide a useful complement to that reported on here and potentially reinforce our call for action. The contents of this book represent the first major empirical investigation of individual perceptions regarding the institutional factors that influence corporate governance practices and drive sectoral failures in developing countries. The evidence presented suggests a number of areas in which further work in the area might prove particularly insightful. Of particular relevance in this regard are recent political developments within Pakistan. As noted in the early part of the book, the 2018 general election in Pakistan brought new political leadership with Prime Minister Imran Khan taking office, ending 30 years of rule by the two main political parties. However, Khan was removed from office in April 2022 in controversial circumstances and replaced by Shehbaz Sherif. During his four-year period in office, Prime Minister Khan successfully reinvigorated the National Accountability Bureau to the extent that it raised Rs. 487 billion in his first three years in office, surpassing the amount raised over the entire previous decade (Dawn, 2021). Since losing office, Imran Khan has been subject to an assassination attempt, indicating the deep-rooted instability in Pakistan’s political system and adding to the complexity involved with any attempt to make systemic institutional reforms and strengthen governance frameworks. However, causes for optimism remain, not least that during the period over which this book has been researched and written, a number of important legal and regulatory steps have been taken in Pakistan that have the potential to make a difference, notably the replacement of the Companies Ordinance 1984 with the Companies Act 2017 and the updating of the Corporate Governance Code in 2017. Therefore, many of the tools required for stability and predictability in the corporate sector now exist and if the current political volatility dissipates sufficiently, well-intentioned political leaders and law makers have a framework available to them on which a more robust governance system could be built. The role of the high-powered High Court bench, established via the Companies Act 2017 and, theoretically, independent is likely to prove crucial in this context. Future research examining the extent to which these potentialities have been taken advantage of will clearly be important. This book has provided evidence from one emerging country regarding the nature of the institutional problems that drive corporate failures and scandals. As economic forces increasingly cross national boundaries, the interrelation between the Pakistani economy and those of neighbouring countries such as Bangladesh and India, nations that are relatively homogeneous in terms of social and historical settings, becomes ever more important. A cross-country study on similar governance issues and institutional factors could therefore be an interesting venue for detailed

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regional research. Relatedly, as highlighted earlier, the evidence in this book is also limited in scope that it concentrates on domestic perspectives within a single emerging market. Therefore, future empirical investigation could usefully address this limitation by, for example, seeking views of foreign investors and members of funding bodies. Nonetheless, we believe that the work presented here provides a clear and unambiguous indication of both the extent of the problems in Pakistan’s corporate sector and the potential, albeit nascent, for a brighter future.

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Appendices Appendix 3.1 Codes of Corporate Governance GOVERNMENT OF PAKISTAN SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN -.-.Islamabad, the 22nd November, 2017 NOTIFICATION SRO 1216 (I)/2017. In exercise of the powers conferred under Section 156 read with Section 512 of the Companies Act 2017 (XIX of 2017) thereof and having been previously published in the official Gazette vide Notification S.R.O. 254(I)/2017 dated 31st August, 2017, the Securities and Exchange Commission is pleased to notify the following Regulations, namely: CHAPTER I Preliminary 1. Short Title and Commencement: (1) These regulations shall be called Listed Companies (Code of Corporate Governance) Regulations, 2017. (2) These Regulations shall apply to listed companies and to all other entities, to the extent applicable, where the statutes and underlying licensing requirements requires such entities to comply with these Regulations. The term ‘company’ used hereunder shall imply listed company and all entities to whom these Regulations apply. (3) They shall come into force for the period starting after December 31, 2017. 2. Definitions: Unless otherwise specified, words and expressions used but not defined in these regulations shall have the same meaning as assigned to them in the Companies Act 2017 (‘the Act’) and the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997). CHAPTER II Number of Directorship and Composition of Board 3. Number of Directorship: No person shall be elected or nominated or hold office as a director of a listed company including as an alternate director of more than five listed companies simultaneously:

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Provided that while calculating this limit, the directorship in the listed subsidiaries of a listed holding company shall be excluded. Provided further that the said limit on directorship shall be effective when the board shall be reconstituted not later than expiry of its current term or one year of the effective date of these Regulations, whichever is earlier. 4. Diversity in Board: The board of directors shall comprise of members having the core competencies, diversity, requisite skills, knowledge, experience and fulfils any other criteria relevant in the context of the company’s operations. 5. Representation of Minority shareholders: The minority members as a class shall be facilitated to contest election of directors by proxy solicitation, for which purpose, the listed companies shall: a. annex to the notice issued under section 159 (4) of the Act, a statement by a candidate from among the minority shareholders who seeks to contest election to the board of directors, such statement shall include a profile of the candidate(s); b. provide information regarding members and shareholding structure to the candidate(s); and c. on a request by the candidate(s) and at the cost of the company, annex to the notice issued under section 159 (4) of the Act an additional copy of proxy form duly filled in by such candidate(s); 6. Independent Director: (1) The independent directors of each listed company shall not be less than two members or one third of the total members of the board, whichever is higher: Provided that for the purpose of electing independent directors, the board shall be reconstituted not later than expiry of its current term pursuant to effective date of these Regulations. (2) Every independent director shall submit along with his consent to act as director, a declaration to the company that he qualifies the criteria of independence notified under the Act. Every independent director shall give such declaration to chairman of board at first meeting in every financial year as well as on an event of any change affecting his independence. 7. Female Director: The board of directors shall have at least one female director when it is next reconstituted not later than expiry of its current term or within the next one years from the effective date of these Regulations, whichever is later. 8. Executive Director: The executive directors, including the chief executive officer, shall not be more than one third of its board of directors.

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Explanation: Executive director means a director who devotes the whole or substantially the whole of his time (whether paid or not) to the operations of the company. 9. Chairman of Board: The Chairman and the chief executive officer of a company, by whatever name called, shall not be the same person. The chairman shall be elected subject to such terms and conditions and responsibilities as provided under Section 192 of the Act and these Regulations. CHAPTER III Responsibilities of Board of Directors and its members 10: (1) In exercise of powers under Section 183 of the Act and in terms of Section 204 of the Act, the board of directors of a company shall carry out its fiduciary duties with a sense of objective judgment and in good faith in the best interests of the company and its stakeholders. (2) The board of directors is responsible for the governance of risk and for determining the company’s level of risk tolerance by establishing risk management policies. The board shall undertake at least annually, an overall review of business risks to ensure that the management maintains a sound system of risk identification, risk management and related systemic and internal controls to safeguard assets, resources, reputation and interest of the Company and shareholders. (3) The board of directors of a company shall ensure that: (i) a vision and/or mission statement and overall corporate strategy for the company is prepared, adopted and reviewed as and when deemed appropriate by the board. (ii) a formal code of conduct is in place that promotes ethical culture in the company and prevents conflict of interest in their capacity as member of the board, senior management and other employees. The board shall take appropriate steps to disseminate code of conduct throughout the company along with supporting policies and procedures and these shall be put on the company’s website; (iii) adequate systems and controls are in place for identification and redressal of grievances arising from unethical practices; (iv) a system of sound internal control is established, which is effectively implemented and maintained at all levels within the company; (v) a formal and effective mechanism is put in place for an annual evaluation of the board’s own performance, members of board and of its committees; (vi) the decisions on the following material transactions or significant matters are documented by a resolution passed at a meeting of the board:

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a.

(vii)

investment and disinvestment of funds where the maturity period of such investments is six months or more, except in the case of banking companies, non-banking finance companies and insurance companies b. determination of the nature of loans and advances made by the company and fixing a monetary limit thereof, except for banking companies. the board of directors shall define the level of materiality, keeping in view the specific circumstances of the company and the recommendations of any technical or executive sub-committee of the board that may be set up for the purpose;

(4) The board of directors shall maintain a complete record of particulars of the significant policies along with their date of approval or updating. The significant policies may include but are not limited to the following: a) governance of risks and internal control measures; b) human resource management including preparation of a succession plan; c) permissible fee for non-executive directors including independent directors d) procurement of goods and services e) communication policy and investors’/shareholders’ relations f) marketing g) determination of terms of credit and discount to customers h) write-off of bad/doubtful debts, advances and receivables i) sale and lease of assets, undertaking, capital expenditure, planning and control j) investments and disinvestment of funds k) debt coverage l) determination and delegation of financial powers m) transactions or contracts with associated companies and related parties n) environmental, social and governance (ESG) including health and safety aspects in business strategies that promote sustainability. This includes but is not limited to corporate social responsibility (CSR) initiatives and other philanthropic activities, donations / contributions to charities and other social causes; and o) whistle blowing policy, by establishing a mechanism to receive, handle complaints in a fair and transparent manner while providing protection to the complainant against victimisation. (5) The Chairman of the Board shall, at the beginning of term of each directors, issue letter to directors setting out their role, obligations, powers and responsibilities in accordance with the Act and company’s Articles of Association, their remuneration and entitlement. (6) All directors of a company shall attend its general meeting(s), (ordinary and extraordinary) unless precluded from doing so due to any reasonable cause.

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CHAPTER IV Meeting of Board 11. Agenda and discussion in meetings: The chairman shall set the agenda of the meeting of the board and ensure that reasonable time is available for discussion of the same. All written notices and relevant material, including the agenda, of meetings shall be circulated at least seven days prior to the meetings, except in the case of emergency meetings, where the notice period may be reduced or waived. 12. Minutes of meeting: The chairman shall ensure that the minutes of meetings of the board of directors are kept in accordance with the requirements of Section 178 and 179 of the Act. The company secretary shall be secretary to the board. Provided that where a director of a company is of the view that his dissenting note has not been satisfactorily recorded in the minutes of a meeting, the matter may be referred to the company secretary for appending such note to the minutes. If the company secretary fails to do so, the director may file an objection with the Commission in the form of a statement to that effect within 30 days of the date of confirmation of the minutes of the meeting. 13. Attendance at meeting: The chief financial officer and company secretary of a company or in their absence, the nominee, appointed by the board, shall attend all meetings of the board of directors. Provided that the chief financial officer and company secretary shall not attend such part of board meeting wherein agenda item relates to consideration of their performance or terms and conditions of their service or when, in the opinion of the board, their presence in the meeting on any agenda item is likely or may tend to impair the organisational discipline and harmony of the company. CHAPTER V Issues to be placed for decision of Board of Directors 14. Significant issues: The chief executive officer of the company shall place significant issues for the information, consideration and decision, as the case may be, of the board of directors or its committees that include but are not limited to the following: (i) As soon as chief executive officer foresees risk of default concerning obligations on any loans (including penalties and other dues to a creditor, bank or financial institution or default in payment of public deposit), TFCs, Sukuk or any other debt instrument, the same shall be brought to the attention of board; (ii) annual business plan, cash flow projections, forecasts and strategic plan; (iii) budgets including capital, manpower and overhead budgets, along with variance analysis;

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matters recommended and/or reported by the audit committee and other committees of the board; (v) quarterly operating results of the company as a whole and in terms of its operating divisions or business segments; (vi) internal audit reports, including cases of fraud, bribery, corruption, or irregularities of material nature; (vii) management letter issued by the external auditors; (viii) details of joint venture or collaboration agreements or agreements with distributors, agents etc.; (ix) promulgation of or amendment to a law, rule or regulation, applicability of financial reporting standard and such other matters as may affect the company and the status of compliance therewith; (x) status and implications of any lawsuit or proceedings (show cause notice, demand or prosecution notice) of material nature, filed by or against the company; (xi) failure to recover material amounts of loans, advances, and deposits made by the company, including trade debts and inter corporate finance; (xii) any significant accidents, fatalities, dangerous occurrences and instances of pollution and environmental problems involving the company; (xiii) significant public or product liability claims made or likely to be made against the company, including any adverse judgment or order made on the conduct of the company or of another company that may bear negatively on the company; (xiv) report on governance, risk management and compliance issues. Risks to be considered shall include reputational risk and shall address risk analysis, risk management and risk communication; (xv) disputes with labour and their proposed solutions, any agreement with the labour union or collective bargaining agent and any charter of demands on the company; (xvi) reports on /synopsis of issues and information pursued under the whistle blowing policy, clearly disclosing how such matters were dealt with and finally resolved or concluded; (xvii) implementation of environmental, social and governmental and health and safety business practices including report on corporate social responsibility activities and status of adoption/compliance of corporate social responsibility (Voluntary) Guidelines 2013 or any other regulatory framework as applicable; (xviii) payment for goodwill, brand equity or intellectual property; (xix) sale of assets, investments and interest in subsidiaries and undertakings, of material amount or significant nature, which is not in the ordinary course of business; and (xx) quarterly details of foreign exchange exposures and the safeguards taken by management against adverse exchange rate movement, if material.

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15. Related party transactions: (1) The details of all related party transactions shall be placed periodically before the Audit Committee of the company and upon recommendations of the audit committee the same shall be placed before the board for review and approval. Provided where majority of the directors are interested in such transactions, the matter shall be placed before the general meeting for approval. (2) The related party transactions, not executed at arm’s length price, shall also be placed separately at each board meeting along with necessary justification on recommendation of the Audit Committee of the company. The requirements of Section 208 of the Act shall be complied by the board for approval of such transactions. 16. Conflict of Interest: For the purpose of consideration and decision by the board of directors on any agenda item, or in respect of any other matter, if any director has a conflict of interest therein in terms of the Act, then in addition to the provisions of section 207 of the Act and notwithstanding anything contained in the articles of association of a company, the directors shall ensure that the quorum of the meeting of the board shall not be deemed to be present unless at least two independent directors are also present at such meeting in person or through video link when such matter comes up for the first time for consideration of the board. CHAPTER VI Remuneration of Directors 17. Formal Policy: The board of directors shall have in place a formal policy and transparent procedure for fixing the remuneration packages of individual directors for attending meetings of the board and its committees. 18. Determination of remuneration: (1) No director shall determine his own remuneration. Levels of remuneration shall be appropriate and commensurate with the level of responsibility and expertise, to attract and retain directors needed to govern the company successfully and to encourage value addition. However, it shall not be at a level that could be perceived to compromise their independence. (2) The process adopted for determination of director’s remuneration shall comply with the provisions of the Act and the Company’s articles of association: Provided that if the company’s articles of association authorizes the board to determine director’s remuneration, an independent consultant may be engaged to recommend an appropriate level of remuneration for consideration and approval of the board.

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Appendices

CHAPTER VII Directors’ Training Program 19. Directors’ Orientation Program: All companies shall make appropriate arrangements to carry out orientation courses for their directors to acquaint them with these Regulations, applicable laws, their duties and responsibilities to enable them to effectively govern the affairs of the listed company for and on behalf of shareholders. 20. Directors’ Training: (1) It shall be mandatory for all companies to ensure that: a) by June 30, 2019, at least half of the directors on their boards; b) by June 30, 2020 at least 75% of the directors on their boards; and c) by June 30, 2021 all the directors on their boards have acquired the prescribed certification under any director training program offered by institutions, local or foreign, that meet the criteria specified by the Commission and approved by it. (2) A newly appointed director on the board shall acquire, unless exempted or already in possession of the required certification, the directors training program certification within a period of one year from the date of appointment as a director on the board: Provided that director having a minimum of 14 years of education and 15 years of experience on the board of a listed company, local and/or foreign, shall be exempt from the directors training program. The Commission shall grant exemption to such directors keeping in view the relevancy of qualification and experience of directors. (3) It shall be mandatory for every company to arrange training for: a) at least one female executive every year under the Directors’ Training program from the year starting June 30, 2019 b) at least one head of department every year under the Directors’ Training program from the year starting June 30, 2021. CHAPTER VIII Chief Financial Officer, Company Secretary and Head of Internal Audit 21. Approval: The board of directors shall determine appointment, remuneration, terms and conditions of employment of chief financial officer, company secretary and head of internal audit of companies. 22. Removal: The removal of the chief financial officer, company secretary and head of internal audit of a company shall be made with the approval of the board of directors:

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Provided that the head of internal audit may be removed upon recommendation of the audit committee. Explanation: For this purpose, the term ‘removal’ shall include non-renewal of contract. 23. Qualification of chief financial officer: No person shall be appointed as the chief financial officer of a company unless: a) he/ she has at least three years of managerial experience in fields of audit or accounting or in managing financial or corporate affairs functions of a company and is a member of the Institute of Chartered Accountants of Pakistan or Institute of Cost and Management Accountants of Pakistan; or b) he/ she has at least five years of managerial experience in fields of audit or accounting or in managing financial or corporate affairs functions of a company and is either a member of professional body of accountants whose qualification is recognized as equivalent to post graduate degree by HEC or has a postgraduate degree in finance from a university in Pakistan or equivalent recognized and approved by the Higher Education Commission of Pakistan (HEC). c) he/ she has at least seven years of managerial experience in fields of audit or accounting or in managing financial or corporate affairs functions of a company and has a suitable degree from a university in Pakistan or abroad equivalent to graduate degree, recognized and approved by the Higher Education Commission of Pakistan (HEC). The Commission, on application from the company, shall determine the suitability of such candidate. 24. Qualification of Internal Auditor: No person shall be appointed as the head of internal audit unless: a) he/she has three years of relevant experience in audit or finance or compliance function and is a member of the Institute of Chartered Accountants of Pakistan or Institute of Cost and Management Accountants of Pakistan; or b) he/she has five years of relevant experience in audit or finance or compliance function and: i. is a Certified Internal Auditor; or ii. is a Certified Fraud Examiner; or iii. is a Certified Internal Control Auditor; or iv. has a post graduate degree in business, finance from a university or equivalent recognized and approved by the Higher Education Commission of Pakistan (HEC) and is a member of a professional body relevant to such qualification, if applicable. c) he/ she has at least seven years of managerial experience in fields of audit or accounting or in managing financial or corporate affairs functions of a company and has a suitable degree from a university in Pakistan or abroad equivalent to graduate degree, recognized and approved by the Higher Education Commission

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Appendices

of Pakistan (HEC). The Commission, on application from the company, shall determine the suitability of such candidate. Explanation: the expression, ‘body of professional accountants’ means a) established in Pakistan, governed under a special enactment of the Federal Government as a self-regulatory organisation managed by a representative National Council, and has a prescribed minimum criterion of examination and entitlement of membership of such body b) established outside Pakistan and established under a special enactment in the country of its origin and which is a member of the International Federation of Accountants (IFAC). 25. Qualification of Company Secretary: No person shall be appointed as the Company Secretary unless he holds the qualification as specified under the relevant Regulations by the Commission. CHAPTER IX Responsibility for Financial Reporting and Corporate Compliance 26. Financial statement endorsed by chief financial officer and chief executive officer: The chief executive officer and the chief financial officer shall duly endorse the quarterly, half-yearly and annual financial statements under their respective signatures prior to placing and circulating the same for consideration and approval of the board of directors. 27. External Auditor: Chief executive officer and chief financial officer shall have the annual and interim financial statement (both separate and consolidated where applicable) initialled by the external auditors before presenting it to the audit committee and the board of directors for approval. Chapter X Committees of Board 28. Audit Committee: (1) Composition: The audit committee shall be constituted by board of directors keeping in view the following requirements: a) The board of directors of every company shall establish an audit committee of at least of three members comprising of non-executive directors and at least one independent director. b) Chairman of the committee shall be an independent director, who shall not be the chairman of the board.

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c) The board shall satisfy itself such that at least one member of the audit committee qualifies as ‘financially literate’. Explanation: Expression ‘financial literate’ shall mean a person who is a member of a recognized body of professional accountants or has a post graduate degree in finance from a university or equivalent institution, either in Pakistan or abroad recognized by the Higher Education Commission of Pakistan. d) The Audit Committee of a company shall appoint a secretary of the committee who shall either be the company secretary or head of internal audit. (2) Meeting: The meeting of the audit committee shall be held as per the following requirements: a) The audit committee of a company shall meet at least once every quarter of the financial year. These meetings shall be held prior to the approval of interim results of the company by its board of directors and after completion of external audit. b) A meeting of the audit committee shall also be held, if requested by the external auditors or the head of internal audit. c) The head of internal audit and external auditors represented by engagement partner or in his absence any other partner designated by the audit firm shall attend meetings of the audit committee at which issues, if any, relating to accounts and audit are discussed. Provided that chief executive officer and the chief financial officer shall not attend any meeting of the audit committee except by invitation only. Provided further that at least once a year, the audit committee shall meet the external auditors without the chief financial officer and the head of internal audit being present. Provided further that at least once a year, the audit committee shall meet the head of internal audit and other members of the internal audit function without the chief financial officer and the external auditors being present. (3) Terms of Reference: The board of directors of every company shall determine the terms of reference of the audit committee. The board of directors shall provide adequate resources and authority to enable the audit committee to carry out its responsibilities effectively. The terms of reference of the audit committee shall be explicitly documented and shall also include the following: a) determination of appropriate measures to safeguard the company’s assets; b) review of annual and interim financial statements of the company, prior to their approval by the Board of Directors, focusing on: (i) major judgmental areas; (ii) significant adjustments resulting from the audit; (iii) going concern assumption;

150

Appendices

(iv) (v) (vi) (vii)

any changes in accounting policies and practices; compliance with applicable accounting standards; compliance with these regulations and other statutory and regulatory requirements; and all related party transactions.

c) review of preliminary announcements of results prior to external communication and publication; d) facilitating the external audit and discussion with external auditors of major observations arising from interim and final audits and any matter that the auditors may wish to highlight (in the absence of management, where necessary); e) review of management letter issued by external auditors and management’s response thereto; f) ensuring coordination between the internal and external auditors of the company; g) review of the scope and extent of internal audit, audit plan, reporting framework and procedures and ensuring that the internal audit function has adequate resources and is appropriately placed within the company; h) consideration of major findings of internal investigations of activities characterized by fraud, corruption and abuse of power and management's response thereto; i) ascertaining that the internal control systems including financial and operational controls, accounting systems for timely and appropriate recording of purchases and sales, receipts and payments, assets and liabilities and the reporting structure are adequate and effective j) review of the company’s statement on internal control systems prior to endorsement by the board of directors and internal audit reports; k) instituting special projects, value for money studies or other investigations on any matter specified by the board of directors, in consultation with the chief executive officer and to consider remittance of any matter to the external auditors or to any other external body; l) determination of compliance with relevant statutory requirements; m) monitoring compliance with these regulations and identification of significant violations thereof; n) review of arrangement for staff and management to report to audit committee in confidence, concerns, if any, about actual or potential improprieties in financial and other matters and recommend instituting remedial and mitigating measures; o) recommend to the board of directors the appointment of external auditors, their removal, audit fees, the provision of any service permissible to be rendered to the company by the external auditors in addition to audit of its financial statements. The board of directors shall give due consideration to the recommendations of the audit committee and where it acts otherwise it shall record the reasons thereof. p) consideration of any other issue or matter as may be assigned by the board of directors.

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(4) Reporting Procedure: The secretary of audit committee shall circulate minutes of meetings of the audit committee to all members, directors, head of internal audit and where required to chief financial officer prior to the next meeting of the board. Where this is not practicable, the chairman of the Audit Committee shall communicate a synopsis of the proceedings to the board and the minutes shall be circulated immediately after the meeting of the board. 29. Human Resource and Remuneration Committee: (1) Composition: There shall be a human resource and remuneration committee of at least of three members comprising a majority of non-executive directors of whom at least one member shall be an independent director. The chairman of the committee shall be an independent director. The chief executive officer may be included as a member of the committee. (2) Meeting: The committee shall meet at least once in a financial year and may meet more often if requested by a member of the board, or committee itself or the chief executive officer. The head of human resource or any other person appointed by the board of directors may act as the secretary of the committee. The chief executive officer (if not a member of the committee), head of human resource (if not the secretary to committee) or any other advisor or person may attend the meeting only by invitation. A member of committee shall not participate in the proceedings of the committee when an agenda item relating to his performance or review or renewal of the terms and conditions of his service comes up for consideration. (3) Terms of Reference: The Terms of reference of committee shall be determined by the board of directors which may include the following: i. recommends to the board for consideration and approval a policy framework for determining remuneration of directors (both executive and non-executive directors and members of senior management). The definition of senior management will be determined by the board which shall normally include the first layer of management below the chief executive officer level; ii. undertaking annually a formal process of evaluation of performance of the board as a whole and its committees either directly or by engaging external independent consultant and if so appointed, a statement to that effect shall be made in the directors’ report disclosing name, qualifications and major terms of appointment; iii. recommending human resource management policies to the board; iv. recommending to the board the selection, evaluation, development, compensation (including retirement benefits) of chief operating officer, chief financial officer, company secretary and head of internal audit; v. consideration and approval on recommendations of chief executive officer on such matters for key management positions who report directly to chief executive officer or chief operating officer; and

152

Appendices

vi.

where human resource and remuneration consultants are appointed, their credentials shall be known by the committee and a statement shall be made by them as to whether they have any other connection with the company.

30. Nomination Committee: The board may constitute a separate committee, designated as the nomination committee, of such number and class of directors, as it may deem appropriate in its circumstances. The nomination committee shall be responsible for considering and making recommendations to the Board in respect of the Board committees and the chairmanship of the Board committees. It is also responsible for keeping the structure, size and composition of the Board under regular review and for making recommendations to the Board with regard to any changes necessary. The terms of reference of nomination committee shall be determined by the board of directors ensuring there is no duplication or conflict with matters stipulated under terms of reference of HRandR committee. 31. Risk Management Committee: The board may constitute the risk management committee, of such number and class of directors, as it may deem appropriate in its circumstances, to carry out a review of effectiveness of risk management procedures and present a report to the Board. The terms of reference of the committee may include the following: a) Monitoring and review of all material controls (financial, operational, compliance); b) Risk mitigation measures are robust, and integrity of financial information is ensured; and c) Appropriate extent of disclosure of company’s risk framework and internal control system in Directors report. CHAPTER XI Internal Audit 32. (1) Composition: (a) There shall be an internal audit function in every company. The head of internal audit shall functionally report to the audit committee and administratively to the chief executive officer and his performance appraisal shall be done jointly by the Chairman of the audit committee and the chief executive officer. (b) A director cannot be appointed, in any capacity, in the internal audit function to ensure independence of the internal audit function. (c) The board shall ensure that the internal audit team comprises of experts of relevant disciplines in order to cover all major heads of accounts maintained by the company. (2) Functional profile: (a) The company shall ensure that head of internal audit is suitably qualified, experienced and conversant with the company's policies and procedures.

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(b) The internal audit function, wholly or partially, may be outsourced by the company to a professional services firm or be performed by the internal audit staff of holding company. In lieu of outsourcing, the company shall appoint or designate a fulltime employee other than chief financial officer, as head of internal audit holding equivalent qualification prescribed under these Regulations, to act as coordinator between firm providing internal audit services and the board. Provided that while outsourcing the function, the company shall not appoint its existing external auditors as internal auditors. (c) All companies shall ensure that internal audit reports are provided for the review of external auditors. The auditors shall discuss any major findings in relation to the reports with the audit committee, which shall report matters of significance to the board of directors. CHAPTER XII External Audit 33. Terms of Appointment: (1) No company shall appoint as external auditors, a firm of auditors, which has not been given a satisfactory rating under the Quality Control Review program of the Institute of Chartered Accountants of Pakistan and registered with Audit Oversight Board of Pakistan. (2) No company shall appoint as external auditors, a firm of auditors which or a partner of which is non- compliant with the International Federation of Accountants’ Guidelines on Code of Ethics, as adopted by the Institute of Chartered Accountants of Pakistan. (3) The Board of Directors of a company shall recommend appointment of external auditors for a year and his remuneration, as suggested by the audit committee. The recommendations of the audit committee for appointment of an auditor or otherwise shall be included in the Directors’ Report. In case of a recommendation for appointment of an auditor other than the retiring auditor, the reasons for the same shall be included in the Directors’ Report. (4) No company shall appoint its auditors to provide services in addition to audit except in accordance with these regulations and shall require the auditors to observe applicable International Federation of Accountants guidelines in this regard. The company shall ensure that the auditors do not perform management functions or make management decisions, responsibility for which remains with the board of directors and management of the company. (5) No company shall appoint a person as an external auditor or a person involved in the audit of a company who is a close relative (spouse, parents, dependents and non-dependent children) of the chief executive officer, the chief financial officer, the head of internal audit, the company secretary or a director of the company.

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(6) Every company shall require external auditors to furnish a management letter to its board of directors within 45 days of the date of audit report. Provided that any matter deemed significant by the external auditor shall be communicated in writing to the board of directors prior to the approval of the audited accounts by the board of directors. 34. Rotation of auditors: (1) All listed companies in the financial sector shall change their external auditors every five years. Provided further that all inter related companies/ institutions, engaged in business of providing financial services shall appoint the same firm of auditors to conduct the audit of their accounts. Explanation: Financial sector, for this purpose, means banks, non-banking financial companies (NBFC’s), modarabas and insurance/ takaful companies. (2) All listed companies other than those in the financial sector shall, at the minimum, rotate the engagement partner after every five years. CHAPTER XIII Reporting and Disclosure 35. Directors’ report: The quarterly unaudited financial statements of companies shall be published and circulated along with directors’ review on the affairs of the company. 36. Composition of Board: The board shall state in the Directors’ Report the following: Total number of Directors: (a) Male: (b) Female: Composition: (i) Independent Directors (ii) Other Non-executive Directors (iii) Executive Directors 37. Committees of the Board: The names of Members of board committees shall be disclosed in each Directors’ Report of the company. 38. Director’s remuneration: (1) The Directors in their report to members shall state the remuneration policy of non-executive directors including independent directors, as approved by the board of directors. This includes disclosing the significant features and elements

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thereof. Companies are also encouraged to post on the company’s web site the key elements of the directors’ remuneration policy. (2) The company's Annual Report shall contain details of aggregate amount of remuneration separately of executive and non-executive directors, including salary/ fee, perquisites, benefits and performance-linked incentives etc. 39. Disclosure of significant policies on website: Company may post the key elements of its significant policies on its website. 40. Compliance Statement and Auditor Review: (1) All companies shall publish and circulate a statement, as given under annexure A, along with their annual reports to set out the status of their compliance with the requirements of Regulations. The statement shall be specific and deemed to be supported by the necessary evidence held by the company making the said statement. (2) All companies shall ensure that the statement of compliance is reviewed and certified by statutory auditors as per relevant Regulations specified by Commission. Statutory auditors of company shall ensure that any non-compliance with these Regulations is highlighted in their review report. CHAPTER XIV Compliance with Regulations 41. Penalty for contravention of Regulations: Whoever fails or refused to comply with, or contravenes any requirements of the Regulations, knowingly or wilfully authorizes or permits such failure, refusal or contravention, in addition to any other liability under the Act, be punishable with penalty and in case of continuing failure, to a further penalty as provided under sub-section (2) of section 512 of the Act. 42. Relaxation from requirements of Regulations: Where the Commission is satisfied that it is not practicable to comply with any of the requirements of the Regulations, it may, for reasons to be recorded, on the application of the company along with prescribed fee, relax the same subject to such conditions as it may deem fit.

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Appendix 3.2 Statement of Compliance with Codes of Corporate Governance Statement of Compliance with Listed Companies (Code of Corporate Governance) Regulations, 2017 Name of company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The company has complied with the requirements of the Regulations in the following manner: 1. The total number of directors are ____ as per the following: a. Male: b. Female: 2. The composition of the board is as follows: a) Independent Directors b) Other Non-executive Director c) Executive Directors 3. The directors have confirmed that none of them is serving as a director on more than five listed companies, including this company (excluding the listed subsidiaries of listed holding companies where applicable). 4. The company has prepared a Code of Conduct and has ensured that appropriate steps have been taken to disseminate it throughout the company along with its supporting policies and procedures. 5. The board has developed a vision/mission statement, overall corporate strategy and significant policies of the company. A complete record of particulars of significant policies along with the dates on which they were approved or amended has been maintained. 6. All the powers of the board have been duly exercised and decisions on relevant matters have been taken by board/ shareholders as empowered by the relevant provisions of the Act and these Regulations. 7. The meetings of the board were presided over by the Chairman and, in his absence, by a director elected by the board for this purpose. The board has complied with the requirements of Act and the Regulations with respect to frequency, recording and circulating minutes of meeting of board. 8. The board of directors have a formal policy and transparent procedures for remuneration of directors in accordance with the Act and these Regulations. 9. The Board has arranged Directors’ Training program for the following: (Names and Designation (if executives))

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157

10. The board has approved appointment of CFO, Company Secretary and Head of Internal Audit including their remuneration and terms and conditions of employment and complied with relevant requirements of the Regulations. 11. CFO and CEO duly endorsed the financial statements before approval of the board. 12. The board has formed committees comprising of members given below: a) Audit Committee (Name of members and Chairman) b) HR and Remuneration Committee (Name of members and Chairman) c) Nomination Committee (if applicable) (Name of members and Chairman) d) Risk Management Committee (if applicable) (Name of members and Chairman) 13. The terms of reference of the aforesaid committees have been formed, documented and advised to the committee for compliance. 14. The frequency of meetings (quarterly/half yearly/ yearly) of the committees were as per following: a) Audit Committee b) HR and Remuneration Committee c) Nomination Committee (if applicable) d) Risk Management Committee (if applicable) 15. The board has set up an effective internal audit function/ or has outsourced the internal audit function to ………… who are considered suitably qualified and experienced for the purpose and are conversant with the policies and procedures of the company. 16. The statutory auditors of the company have confirmed that they have been given a satisfactory rating under the quality control review program of the ICAP and registered with Audit Oversight Board of Pakistan, that they or any of the partners of the firm, their spouses and minor children do not hold shares of the company and that the firm and all its partners are in compliance with International Federation of Accountants (IFAC) guidelines on code of ethics as adopted by the ICAP. 17. The statutory auditors or the persons associated with them have not been appointed to provide other services except in accordance with the Act, these regulations or any other regulatory requirement and the auditors have confirmed that they have observed IFAC guidelines in this regard. 18. We confirm that all other requirements of the Regulations have been complied with. __________________ Signature (s) (Name in block letters) Chairman

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Appendix 7.1 Questionnaire Survey Questionnaire Survey Corporate Governance Failures in Pakistan – Perceptions, Causes and Implications 1. Please identify the role/position that is most applicable to you by ticking the appropriate box: Job Title

Private Firm

1.

Chairman

2.

CEO

3.

Chairman and CEO

4.

CFO

5.

Executive Director

6.

Non-executive Director

7.

Independent Non-executive Director

8.

Audit Committee Member

9.

Nomination Committee Member

Government

Multinational corporation

Other (specify)

10. Remuneration Committee Member 11.

Employee

12.

External auditor

13.

Institutional Investor

14.

Individual Investor

15.

Regulator

16.

Stockbroker

17.

Financial Consultant

18. Other (Specify) .

................................

2. How long you have served in your current firm? –years

–years

–years

–years

–years

Over years

159

Appendix 7.1 Questionnaire Survey

3.

Which of the following degrees you have? Please tick the appropriate box:

BBA/BSc/ B. Com

MBA/MSc/ MRes/M.com

ACCA/FCA/ CIMA/CFA

M.Phil./PhD/ Post.Doc

Other specify ……

4.

Which of the following best describes your firm’s ownership structure? Please tick the appropriate box:

Family Ownership

Government Ownership

Semigovernment

Multinational Corporation

Dispersed Ownership

Other (please specify)

5. Please identify the sector that is most applicable to your firm by ticking the appropriate box: Financial

Textile

Petrochemicals

Construction

Telecom

Agriculture and Food

Pharmaceutical

Other (Please specify

6. How familiar you are with the term ‘corporate governance’? Very familiar

7.

Familiar

Some Familiarity

Not Familiar

Very Unfamiliar

How familiar you are with the following codes of Corporate Governance? Please tick the appropriate box:

Corporate Governance codes

A.

Securities Exchange Commission of Pakistan Code

B.

Pakistan Stock Exchange Code

C.

OECD Code

D.

UK Code

E.

US Code

Very Familiar

Familiar

Some familiarity

Not familiar

Very Unfamiliar

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8. To what extent do you agree that the following definitions of the term ‘Corporate Governance’ are appropriate in a Pakistani context? : Strongly Agree

: Agree

: Neutral

: Disagree

: Strongly Disagree 

A

The system by which companies are directed and controlled

B

A set of relationships between a company’s management, its board of directors, its shareholders and other stakeholders

C

Set of mechanisms through which outside investors are protected against expropriation by controlling shareholder

D

System of checks and balances, both internal and external to companies, which ensures that companies must discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity

E

Other (please specify) ................................................................... ................................................................... ................................................................... ................................................................... ...................................................................









Which one of the above definitions do you think is most appropriate in the Pakistani context? ............................................................................. 9. To what extent do you agree that the following are key drivers of corporate governance emergence in Pakistan? : Strongly Agree

: Agree

: Neutral

: Disagree 

A.

The 1998 Asian financial crisis

B.

International pressure

C.

Corporate scandals caused by corruption in Pakistan

D.

Corporate scandals caused by corruption in developed countries

E.

The need to attract foreign and domestic investors for economic growth

F.

Pakistan’s integration with global markets

G.

Economic development

H.

The emergence of governance codes around the globe

: Strongly Disagree 







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Appendix 7.1 Questionnaire Survey

Please detail any other driver of corporate governance in Pakistan which is not mentioned in the above table. ............................................................................. 10.

How suitable do you think Western (e.g. UK and US) corporate governance codes are in a Pakistani context?

Very suitable

Suitable

Not suitable

Not Very Suitable

11. Please select the appropriate (Yes or No) column regarding the existence of board committees in your firm, please also indicate whether you serve on any of board committee by ticking the relevant boxes in the final column. Board Committees

Yes

No

Serve on

Audit committee Human resource committee Nomination committee Remuneration committee Risk management committee

12.

To what extent do you agree with the following statements? (1: Strongly Agree – 5: Strongly Disagree)

: Strongly Agree

: Agree

: Neutral

: Disagree 

A.

Mandatory compliance with corporate governance codes is essential in Pakistan

B.

Improved governance standards will lead to a reduction in the extent of corporate scandals and failures in Pakistan

C.

Improved corporate governance standards will lead to a reduction in the extent of corporate failures in Pakistan

D.

Transparency, accountability and sound corporate governance practices underpin economic growth



: Strongly Disagree 





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Appendices

(continued) : Strongly Agree

: Agree

: Neutral

: Disagree 

E.

Sound corporate governance contribute to social wellbeing

F.

Better corporate governance practices will improve FDI flows in Pakistan

G.

Transparent and effective board evaluation will lead to sustainable economic growth of companies in Pakistan

13.



: Strongly Disagree 





To what extent do you think that the following institutional factors have influenced corporate governance practices and contributed to corporate collapses and failures in Pakistan? (1: Strongly Agree – 5: Strongly Disagree)

: Strongly Agree

: Agree

: Neutral

Institutional factors A.

Political instability

B.

Political interference

C.

Social, cultural and ethical values

D.

Religious belief

E.

A lack of laws and regulation

F.

Poor enforcement of laws and regulation

G.

Corruption, Bribery

H.

Slow and weak judicial system

I.

Family ownership

J.

Government and regulators

K.

Favouritism

L.

Social Status

M.

Firm size and firm sector

N.

Lack of experience and education of board members

O.

Lack of Institutional ownership

: Disagree 



: Strongly Disagree 





Please suggest any other that you think are most significant in the Pakistani context. ............................................................................. .............................................................................

Appendix 7.1 Questionnaire Survey

163

14. To what extent do you agree that the following represent potential benefits of improved corporate governance in Pakistan? (1: strongly agree – 5: strongly disagree) : Strongly Agree

: Agree

: Neutral

: Disagree 

A.

Reduction in the extent of corporate scandals

B.

Reduction in the extent of corporate failures

C.

Reduce the embezzlement of public money

D.

Improve transparency and accountability

E.

Protecting minority shareholder rights

F.

Improving Pakistan’s image to attract foreign investors

G.

Help to alleviate poverty in Pakistan

H.

Efficient allocation of resources in Pakistan

I.

Reducing the cost of doing business in Pakistan

J.

Reducing the extent corrupt practices such as bribery

K.

Effective and timely enforcement of laws and regulations

L.

Reducing mismanagement of resources by strict monitoring and compliance

M.

Increase national economic growth



: Strongly Disagree 





Please suggest any other that you think are most significant in the Pakistani context. ............................................................................. ............................................................................. 15.

To what extent do you agree that the following steps would lead to improved corporate governance practices in Pakistan? (1: strongly agree – 5: strongly disagree)

: Strongly Agree

: Agree

: Neutral

Statements A.

Increased public awareness of the need to use their votes, so more honest, trustworthy, educated and professional people enter into parliament

B.

More focus on ethics ensuring that members of Pakistani regulatory bodies are selected on merit.

: Disagree 



: Strongly Disagree 





164

Appendices

(continued) : Strongly Agree

: Agree

: Neutral

Statements C.

Listed companies and other businesses being encouraged to create awareness about good corporate governance practices and its benefits

D.

Discouraging political interference at every level

E.

Developments of legal and regulatory systems that are transparent and efficient

F.

Listed companies be required to have a balanced board structure with the majority of independent non-executive directors

G.

Board members being trained to ensure they have appropriate knowledge and expertise to perform their duties professionally and ethically

H.

Corporate governance and business ethics being mandated as a core subject at degree level across Pakistan’s educational institutions

I.

Shareholder activism and the concept of ‘Whistleblower’ being encouraged and promoted through legal binding

J.

Minority shareholder rights being clearly protected in practice by the law

K.

listed companies being given a rating by regulators on their compliance with codes

L.

Increased institutional shareholding/ownership

M.

Regulatory bodies being strengthened by the provision of adequate human, financial and technical resources to enable them to carry out their duties effectively

N.

Outline mechanisms to address undesirable and unethical behaviours such as bribery, corruption and conflict of interest

O.

Development of the board member’s ability to exercise independent judgment

: Disagree 



: Strongly Disagree 





Please suggest any other that you think are the most significant in the Pakistani context? ............................................................................. .............................................................................

Appendix 7.1 Questionnaire Survey

165

Please feel free to add any additional comments about corporate governance and its impact on scandals and failures in Pakistan and how you think improved corporate governance might reduce the likelihood of such events in the future? ............................................................................. ............................................................................. ............................................................................. ............................................................................. ............................................................................. ............................................................................. Thank you for taking part in this questionnaire. If you would like to obtain a summary of the research finding, please provide your email address. .........................

Index Anglo American Model 41 Anti-Positivist 65 Audit Committee 30

Kruskal-Wallis Test 75

Board Committees 29 Burrell and Morgan’s Social Research Paradigm 68

Mann-Whitney Test 75 Maxwell Scandal 2 Mehran Bank Scandal in Pakistan 33 Methodology 66 Mimetic Isomorphism 59 Models of Corporate Governance 41

Cadbury Report (1992) 39 China Pakistan Economic Corridor (CPEC) 18 Civil and Common Law in Emerging Countries 47 Civil Law 43 Coercive Isomorphism 58 Common Law 43 Companies Act 2017 20 Comply or Explain approach 42 Corporate Governance definitions 39 Corporate Governance in Pakistan 27 Corporate Governance Reforms 48 Corporate Law Authority 20 Corporate Scandals in Pakistan 35 Corruption 52 Cronbach’s Alpha Test 75 Deterministic View 66 Drivers of Corporate Governance 45 Emerging Market 44 Enron scandal 1 Epistemological assumptions 65 Etisalat 34 Family Institutions 63 Family pyramid 46 Firm Ownership Structure in Pakistan 25 Formal Institution 58 Functionalist Paradigm 69 Ideographic Approach 66 Independent Director 29 Informal Institution 58 Institutional Isomorphism 58 Institutionalisation 56 Interpretive Paradigm 69

https://doi.org/10.1515/9783110772999-011

Legal Institutions 62

New Institutional Sociology 57 New Institutionalism 57 Nominalist 65 Nomothetic Approach 66 Normative Isomorphism 59 Objectivism 64 Old Institutionalism 57 Ontological Assumptions 64 Order and Conflict Theories 67 Outsider and Insider model of Corporate Governance 41 Pakistan Institute of Corporate Governance (PICG) 21 Pakistan Stock Market (PSX) 22 Pakistan Telecommunication Company Ltd Privatisation 34 Pakistan’s Corruption Ranking Pakistan’s GDP Growth 15 Pakistan’s Political History 8 Political Institutions 61 Positivism 64 Radical Humanist Paradigm 68 Radical Structuralist Paradigm 69 Realist 65 Religious Institution 62 Securities Exchange Commission of Pakistan (SECP) 20 Shareholder Activism 54

168

Index

Shareholder Rights in Pakistan 31 Stakeholder View of Corporate Governance 40 Subjectivism 64 The State Bank of Pakistan 20 Theoretical Framework 56

Voluntaristic 67 Whistle Blower 55 WorldCom Scandal 1