At the Forefront of the New Corporate Game
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Putting Corporate Governance at the Heart of Business Success
Ali Syed was a director and minority shareholder in a private limited company that was founded by his father, with his uncle as a minority shareholder. Syed and his cousin later joined the family business and his understanding was that his father was the major shareholder of the company.Then, in 2020, Syed’s uncle moved to the UK and in 2021, his father passed away. His cousin then informed Syed that he (his cousin) was the majority shareholder because, in 2020, Syed’s father had transferred his shares to his brother, turning Syed into a minority shareholder with limited decision-making powers.
When Syed met his corporate lawyer to discuss the matter, it turned out that he did not have copies of the returns filed with the Securities and Exchange Commission of Pakistan (SECP) nor of the internal board resolutions, making it difficult to dispute the official record that showed the transfer of the shareholding.
The reality was that the founder shareholders had not relied on record-keeping or formal processes because they believed that a loose arrangement would protect them from government interference and enable them to maximise profit. This was the mantra that Syed had grown up with, and he had no idea when board resolutions were passed, whether these were valid and consented to by his father and consequently, whether the SECP record was based on genuine consent between the shareholders.
The fact is that many business people take the view that the innovation, entrepreneurship and freedom of action required to set up and run businesses do not align with regulator-driven corporate governance rules. Yet, had Syed’s father ensured that the company law requirements were followed, then Syed, as a director and shareholder, would have taken notice of the significant decisions being taken within the company, including the transfer of the shares in question.
Yet, corporate governance rules do protect entitlements both within the corporate environment and in the larger economy.
The evolved corporate governance approach has expanded the definition of stakeholders beyond shareholders to include employees, customers, vendors, the community and even regulators. For example, the World Bank defines corporate governance as “the commitment of businesses to behave ethically and to contribute to sustainable economic development by working with all relevant stakeholders.”
The impact of following the principles of corporate governance would therefore be to bridge the gap between the majority and the minority shareholders and ensure that the company honours its legal commitments and forms value-creating relationships with stakeholders, as well as reduce the cost of capital to the business. All this, ultimately, translates into tangible returns for businesses.Trust is an essential prerequisite for creating sustainable relationships. Trust is seen as the subjective belief attributed by citizens to the possibility of being cheated (Sapienza: Kellogg School of Management). According to a survey published by Deloitte Insights Magazine in February 2023, ‘trustworthy’ companies outperform their peers in market value by up to four times and 88% of customers will return to buy from a brand they trust. Thus, the creation and management of trust are inextricably linked to corporate governance as they create a framework to manage different stakeholder relationships.
Under Pakistani law, some of the building blocks of good corporate governance are as follows:
• Having a board of directors with diversity and the skills and experience to provide leadership to the company. The Listed Companies Code of Corporate Governance Regulations 2019 (Code 2019) mandates the election of one female director on the board of a publicly listed company.
• The election of independent directors and the separation of the offices of the chairman and CEO of the company would promote critical thinking and foster better boardroom debate.
• Creating Board Committees to provide focus and in-depth analysis. Code 2019 refers to the Audit Committee, which will focus on internal control, fraud prevention, related party transactions, financial planning and the integrity of financial statements. The Human Resource and Remuneration Committee will review organisational structure, manpower planning and benchmarking, succession planning and the creation of a policy framework that would support the hiring and retention of good-quality staff. The Risk Management Committee is not mandatory for non-financial sector companies; however, all boards need to map risk and its mitigation, including risk tolerance. The regulators have also issued industry-specific codes. For example, the Code of Corporate Governance for Insurers 2016 mandates an Investment Committee and the Public Sector Companies Corporate Governance Rules 2013 require a Procurement Committee for banks. The Corporate Governance Regulatory Framework issued in consolidated form in November 2021 makes the IT Committee a mandatory committee.
• Ensuring that the company has a vision, mission statement and core values.Code 2019 emphasises the need to have a Code of Business Conduct and a well-defined policy framework. Businesses will find that by discussing and defining these matters, they will be creating a game plan that speaks to who they are and how they want to behave. Cascading these matters within the organisation creates clarity, fosters greater employee engagement and ensures that the organisation moves from becoming person-dependent to process-dependent.
• Defining a corporate plan, a longer-term strategy and a business continuity plan.In essence, this translates into simple but significant concepts. What are the industry trends and what are the goals of the business? Where is it headed and how does it want to get there? A business continuity plan will make the business more responsive in case of a disaster or an impairment of operations.
In Pakistan, the backbone of trade and commerce is family-owned businesses. Many operate either as partnerships or private limited companies. Recognising their importance, the SECP has issued non-binding Principles of Corporate Governance for Non-Listed Companies (2016), in which it emphasises that governance plays a key role in ensuring success for all companies.
The message is that good corporate governance supports the bottom line. An international example is extremely inspiring in this regard. Natura in Brazil was a successful family-owned business. Its decision to do an IPO was based on a need to perpetuate the existence of the company. Over a few years, Natura created an independent board, set up board committees, defined its values and became more transparent in the information it sent into the public domain through its annual report. The rewards of improving corporate governance were tangible in that the company managed a successful listing and growth in share price in the market, and although already successful, increased customer sales and business collaborations and, most importantly, created an internal management structure that went beyond the founder generation.
The opportunities for growth for smaller companies are enormous. The Pakistan Stock Exchange has recently launched the Gem Board, which is a listing platform aimed at facilitating growth-oriented businesses to raise capital to fund their growth and expansion plans. Although access to a Gem listing would require corporate compliance, it brings tangible rewards, not just in terms of access to cheaper capital; it also protects the future of the business. Luckily for businesses in Pakistan, the law creates an enabling framework for action and does not take a cookie-cutter approach. Businesses, therefore, can and should define what works for them to create larger, more profitable and more sustainable companies.
Nausheen Ahmad is a Barrister at Law with over 30 years of legal experience. She specialises in corporate governance and compliance and is lead counsel of the Legal and Governance Advisory. nausheen.ahmad@lga.com.pk
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The evolved corporate governance approach has expanded the definition of stakeholders beyond shareholders to include employees, customers, vendors, the community and even regulators. For example, the World Bank defines corporate governance as “the commitment of businesses to behave ethically and to contribute to sustainable economic development by working with all relevant stakeholders.”
The impact of following the principles of corporate governance would therefore be to bridge the gap between the majority and the minority shareholders and ensure that the company honours its legal commitments and forms value-creating relationships with stakeholders, as well as reduce the cost of capital to the business. All this, ultimately, translates into tangible returns for businesses.Trust is an essential prerequisite for creating sustainable relationships. Trust is seen as the subjective belief attributed by citizens to the possibility of being cheated (Sapienza: Kellogg School of Management). According to a survey published by Deloitte Insights Magazine in February 2023, ‘trustworthy’ companies outperform their peers in market value by up to four times and 88% of customers will return to buy from a brand they trust. Thus, the creation and management of trust are inextricably linked to corporate governance as they create a framework to manage different stakeholder relationships.
Under Pakistani law, some of the building blocks of good corporate governance are as follows:
• Having a board of directors with diversity and the skills and experience to provide leadership to the company. The Listed Companies Code of Corporate Governance Regulations 2019 (Code 2019) mandates the election of one female director on the board of a publicly listed company.
• The election of independent directors and the separation of the offices of the chairman and CEO of the company would promote critical thinking and foster better boardroom debate.
• Creating Board Committees to provide focus and in-depth analysis. Code 2019 refers to the Audit Committee, which will focus on internal control, fraud prevention, related party transactions, financial planning and the integrity of financial statements. The Human Resource and Remuneration Committee will review organisational structure, manpower planning and benchmarking, succession planning and the creation of a policy framework that would support the hiring and retention of good-quality staff. The Risk Management Committee is not mandatory for non-financial sector companies; however, all boards need to map risk and its mitigation, including risk tolerance. The regulators have also issued industry-specific codes. For example, the Code of Corporate Governance for Insurers 2016 mandates an Investment Committee and the Public Sector Companies Corporate Governance Rules 2013 require a Procurement Committee for banks. The Corporate Governance Regulatory Framework issued in consolidated form in November 2021 makes the IT Committee a mandatory committee.
• Ensuring that the company has a vision, mission statement and core values.Code 2019 emphasises the need to have a Code of Business Conduct and a well-defined policy framework. Businesses will find that by discussing and defining these matters, they will be creating a game plan that speaks to who they are and how they want to behave. Cascading these matters within the organisation creates clarity, fosters greater employee engagement and ensures that the organisation moves from becoming person-dependent to process-dependent.
• Defining a corporate plan, a longer-term strategy and a business continuity plan.In essence, this translates into simple but significant concepts. What are the industry trends and what are the goals of the business? Where is it headed and how does it want to get there? A business continuity plan will make the business more responsive in case of a disaster or an impairment of operations.
In Pakistan, the backbone of trade and commerce is family-owned businesses. Many operate either as partnerships or private limited companies. Recognising their importance, the SECP has issued non-binding Principles of Corporate Governance for Non-Listed Companies (2016), in which it emphasises that governance plays a key role in ensuring success for all companies.
The message is that good corporate governance supports the bottom line. An international example is extremely inspiring in this regard. Natura in Brazil was a successful family-owned business. Its decision to do an IPO was based on a need to perpetuate the existence of the company. Over a few years, Natura created an independent board, set up board committees, defined its values and became more transparent in the information it sent into the public domain through its annual report. The rewards of improving corporate governance were tangible in that the company managed a successful listing and growth in share price in the market, and although already successful, increased customer sales and business collaborations and, most importantly, created an internal management structure that went beyond the founder generation.
The opportunities for growth for smaller companies are enormous. The Pakistan Stock Exchange has recently launched the Gem Board, which is a listing platform aimed at facilitating growth-oriented businesses to raise capital to fund their growth and expansion plans. Although access to a Gem listing would require corporate compliance, it brings tangible rewards, not just in terms of access to cheaper capital; it also protects the future of the business. Luckily for businesses in Pakistan, the law creates an enabling framework for action and does not take a cookie-cutter approach. Businesses, therefore, can and should define what works for them to create larger, more profitable and more sustainable companies.
Nausheen Ahmad is a Barrister at Law with over 30 years of legal experience. She specialises in corporate governance and compliance and is lead counsel of the Legal and Governance Advisory. nausheen.ahmad@lga.com.pk