02-15-2006, 08:01 PM
Since the arrival of the Code of Corporate governance for the listed companies in 2002, a healthy debate has started on how to improve the corporate governance in the country. Good corporate governance means that companies are run in the best interest of the shareholders and the other stakeholders. The principles underlying good corporate governance practices are transparency, accountability, and control systems. One key conclusion that has come out of the discussions on corporate governance is that there is a need for a Centre of Corporate Governance in the country, which can inculcate the principles in the practitioners. This centre or institute would be an agent of change in raising the governance standards and keeping alive the debate on the subject.
The objective of the Centre would be to determine the best practices of corporate governance and educate the various stakeholders in companies about these practices. It would be the forum where practitioners, regulators, and academics would meet to openly debate the governance issues. The result of this interaction would be that the governance standards in the country's companies would be raised to the betterment of all stakeholders.
There are a number of institutes of corporate governance internationally.
In Europe, there is European Corporate Governance Institute (ECGI), which has its registered office in Belgium. It is an international research oriented non-profit association. According to ECGI, its primary role is 'to undertake and disseminate impartial and objective research on corporate governance and undertake any other activity that will improve understanding and exercise of the highest standards in corporate governance.'
In USA, universities have set up their own institute of corporate governance focusing on providing quality research on the subject. The International Institute of Corporate Governance (IICG) was established at the Yale School of Management, USA in 2001. Its objective is 'to be the leading research, teaching, and policy centre focused on the institutional framework for corporate governance and the principle and practices of effective corporate governance.' A Centre for Corporate Governance is also working at the Tuck School of Business at Dartmouth, Hanover. Similarly, there are other institutes with similar objectives.
In Russia, an Institute of Corporate Law and Corporate Governance was set up in 2000. The mission of this institute is to 'facilitate private initiatives to improve corporate governance and protect investor rights.' It has a much broader scope than most of the other institutes and carries out activities such as expert evaluation of corporate governance arrangements of major Russian companies, continuous rating of businesses for the quality of their corporate governance and consultation with various market stakeholders on aspects of corporate governance including corporate restructuring.
In some countries, instead of an institute of corporate governance, a more focused institute of directors has been established.
The well-known Institute of Directors (IOD) is based in London since 1903. Its philosophy is to 'to serve, support, represent and set standards for directors'. Currently it has around 55,000 members. In Canada, an institute of Corporate Director is working since 1982, in Thailand, since 1997, and in Singapore since 1998. These institutes are not a luxury of the relatively developed countries. Countries like Nigeria and Malta also have their IODs.
The international models show that such a centre can be established in a number of different ways. It can be research oriented, work on overall corporate governance or focus on the board of directors.
We propose that the Centre in Pakistan should be established as a non-profit association focusing more on practical aspects of corporate governance rather than academic research. Its particular focus should be on the regulators - the stock exchanges, SBP, and SECP - because the regulators can convert a practice into law and then implement it. The Centre can also help the regulators raise their own standards of governance, which would bring more force to their efforts.
To meaningfully contribute to corporate governance on an ongoing basis and to really make its presence felt, the Centre should rate companies on corporate governance. These ratings would communicate to all the stakeholders how good or bad a company is being governed. A not-for-profit entity, its ratings would be subject to lesser conflicts of interest than those of a credit rating company. These ratings would also provide the centre with on-going income.
On the basis of its ratings, market forces would reward well-governed companies and penalise poorly governed companies. These ratings would be particularly helpful to those who do not possess the knowledge or resources to gauge the quality of governance in a company.
The Centre would also play a key role in educating directors of their responsibilities. The board of directors is a key element in the governance structure. Often directors, particularly, non-executive directors have little idea of best governance practices. By arranging short courses for directors, the Centre can make a substantial contribution to the betterment of corporate governance within a short time.
An area on which the Centre can contribute tremendously is the public sector enterprises. The government owned and controlled enterprises are not known for virtues like competence, transparency, and accountability. Their directors and the senior management are quite likely to be lacking the knowledge and skills required for good governance. Ideally, there should be a selected set of mandatory courses for educating the directors and senior managers of public sector companies.
The Centre should target creditors, particularly bankers, to educate them on their role in corporate governance. Banks are the largest lenders to most of the companies and they can use their bargaining power to implement best practices in their debtor companies, to their own advantage and to the advantage of other stakeholders.
This Centre should be the main channel through which the best international practices would flow to our corporate sectors. Through an active exchange of information, this Centre would learn from the corporate experience the world over and bring the best practices to Pakistan, customised for the local needs.
The Centre would need to maintain a strong presence in the media, particularly the Internet, television, and newspapers. Considering the interest of the regulators and the companies in the on-going debate on corporate governance, such presence would not be difficult to establish. The centre would also need to be mobile. It should not stand still like a university that waits for its students to come to it but reach out to its customers. It can use the premises of different business schools to carry out its activities. There would be a need for office space but there should not be any need for g*****ose buildings.
A Centre is only as good as those who are running it. It would be critical to select a diverse group of the very best for running it. It would be worth taking some extra time and effort to select a small team of outstanding individuals. Mediocrity must stay away or it would ruin the Centre before it takes off.
We think that the listed companies, regulators, foreign donors such as Asian Development Bank (ADB), United Nations Development Program (UNDP), the International Finance Corporation (IFC), different existing institutes such as Institute of Charted Accountants of Pakistan (ICAP), Institute of Cost & Management Accountants of Pakistan (ICMAP) and leading business schools should all make monetary and resource contributions to set up the institution and help make it a success. The donors and the regulators should take the initiative and later, others would come on board. The establishment of this Centre would institutionalise the debate on corporate governance and take the good governance initiative forward.
The objective of the Centre would be to determine the best practices of corporate governance and educate the various stakeholders in companies about these practices. It would be the forum where practitioners, regulators, and academics would meet to openly debate the governance issues. The result of this interaction would be that the governance standards in the country's companies would be raised to the betterment of all stakeholders.
There are a number of institutes of corporate governance internationally.
In Europe, there is European Corporate Governance Institute (ECGI), which has its registered office in Belgium. It is an international research oriented non-profit association. According to ECGI, its primary role is 'to undertake and disseminate impartial and objective research on corporate governance and undertake any other activity that will improve understanding and exercise of the highest standards in corporate governance.'
In USA, universities have set up their own institute of corporate governance focusing on providing quality research on the subject. The International Institute of Corporate Governance (IICG) was established at the Yale School of Management, USA in 2001. Its objective is 'to be the leading research, teaching, and policy centre focused on the institutional framework for corporate governance and the principle and practices of effective corporate governance.' A Centre for Corporate Governance is also working at the Tuck School of Business at Dartmouth, Hanover. Similarly, there are other institutes with similar objectives.
In Russia, an Institute of Corporate Law and Corporate Governance was set up in 2000. The mission of this institute is to 'facilitate private initiatives to improve corporate governance and protect investor rights.' It has a much broader scope than most of the other institutes and carries out activities such as expert evaluation of corporate governance arrangements of major Russian companies, continuous rating of businesses for the quality of their corporate governance and consultation with various market stakeholders on aspects of corporate governance including corporate restructuring.
In some countries, instead of an institute of corporate governance, a more focused institute of directors has been established.
The well-known Institute of Directors (IOD) is based in London since 1903. Its philosophy is to 'to serve, support, represent and set standards for directors'. Currently it has around 55,000 members. In Canada, an institute of Corporate Director is working since 1982, in Thailand, since 1997, and in Singapore since 1998. These institutes are not a luxury of the relatively developed countries. Countries like Nigeria and Malta also have their IODs.
The international models show that such a centre can be established in a number of different ways. It can be research oriented, work on overall corporate governance or focus on the board of directors.
We propose that the Centre in Pakistan should be established as a non-profit association focusing more on practical aspects of corporate governance rather than academic research. Its particular focus should be on the regulators - the stock exchanges, SBP, and SECP - because the regulators can convert a practice into law and then implement it. The Centre can also help the regulators raise their own standards of governance, which would bring more force to their efforts.
To meaningfully contribute to corporate governance on an ongoing basis and to really make its presence felt, the Centre should rate companies on corporate governance. These ratings would communicate to all the stakeholders how good or bad a company is being governed. A not-for-profit entity, its ratings would be subject to lesser conflicts of interest than those of a credit rating company. These ratings would also provide the centre with on-going income.
On the basis of its ratings, market forces would reward well-governed companies and penalise poorly governed companies. These ratings would be particularly helpful to those who do not possess the knowledge or resources to gauge the quality of governance in a company.
The Centre would also play a key role in educating directors of their responsibilities. The board of directors is a key element in the governance structure. Often directors, particularly, non-executive directors have little idea of best governance practices. By arranging short courses for directors, the Centre can make a substantial contribution to the betterment of corporate governance within a short time.
An area on which the Centre can contribute tremendously is the public sector enterprises. The government owned and controlled enterprises are not known for virtues like competence, transparency, and accountability. Their directors and the senior management are quite likely to be lacking the knowledge and skills required for good governance. Ideally, there should be a selected set of mandatory courses for educating the directors and senior managers of public sector companies.
The Centre should target creditors, particularly bankers, to educate them on their role in corporate governance. Banks are the largest lenders to most of the companies and they can use their bargaining power to implement best practices in their debtor companies, to their own advantage and to the advantage of other stakeholders.
This Centre should be the main channel through which the best international practices would flow to our corporate sectors. Through an active exchange of information, this Centre would learn from the corporate experience the world over and bring the best practices to Pakistan, customised for the local needs.
The Centre would need to maintain a strong presence in the media, particularly the Internet, television, and newspapers. Considering the interest of the regulators and the companies in the on-going debate on corporate governance, such presence would not be difficult to establish. The centre would also need to be mobile. It should not stand still like a university that waits for its students to come to it but reach out to its customers. It can use the premises of different business schools to carry out its activities. There would be a need for office space but there should not be any need for g*****ose buildings.
A Centre is only as good as those who are running it. It would be critical to select a diverse group of the very best for running it. It would be worth taking some extra time and effort to select a small team of outstanding individuals. Mediocrity must stay away or it would ruin the Centre before it takes off.
We think that the listed companies, regulators, foreign donors such as Asian Development Bank (ADB), United Nations Development Program (UNDP), the International Finance Corporation (IFC), different existing institutes such as Institute of Charted Accountants of Pakistan (ICAP), Institute of Cost & Management Accountants of Pakistan (ICMAP) and leading business schools should all make monetary and resource contributions to set up the institution and help make it a success. The donors and the regulators should take the initiative and later, others would come on board. The establishment of this Centre would institutionalise the debate on corporate governance and take the good governance initiative forward.