INTRODUCTION

Governance is the focal point of todays efforts to improve life entirety, quality of output, efficiency in delivery of products of an organization, and ensuring the best value for money. To govern means run, rule and dominate with authority in policies and procedures of an organization. It is synonymous to influencing and shaping the course of action, while specifying the method of controlling the events and actions so that outputs are optimized in terms of quantity, quality and timeliness. Both the theory and practice tell us that there is multiplicity of factors shaping governance of a business organization. Therefore, businesses need to be governed by a set of rules, which reflect interests of all stakeholders. These rules of the game for businesses are an important dimension of reform processes in both developed and developing economies alike. Countries that ignore or lag behind in corporate governance reform will rapidly find themselves at a competitive disadvantage in attracting long-term capital for growth. Corporate governance, on one hand, is about setting up a system of entrusting the directors and managers with responsibilities in relation to running corporate affairs and, on the other hand, it is concerned with the accountability of those directors and managers. The whole scope of corporate governance lies in concepts like transparency, accountability, merit, ethics, fairness and responsibility in following terms: Transparency: Through checks and balances like; Auditing Committees, External and Internal audit systems, which are free of interference by decision makers. Accountability: All who have enjoyed power through a strong set of rules are answerable to sponsors as well as society. Mapping Responsibility: Both vertical and horizontal, so that responsibility is taken by those who make the decisions. Disclosure: In a company nothing should be hidden for long and without reason. Once a decision has been made, it should be known to all.

DEFINING CORPORATE GOVERNANCE

There are multiple definitions of corporate governance. Some popular definitions are as following: It is a system by which companies are directed and controlled. (Cadbury Committee) Corporate governance includes every force that bears on the decision-making of the firm that would encompass not only the control rights of stockholders, but also the contractual covenants and insolvency powers of the debt holders, the commitments towards employees, customers and suppliers, the regulations and the statutes. In addition, the firms decisions are powerfully affected by competitive conditions in the various markets in which it operates. (Prof. Kenneth Scott of Stanford Law School) The mechanism used to control and direct the affairs of a corporate body in order to serve and protect the individual and collective interest of all its stakeholders (Dr. Safdar Ali Butt) Hence, corporate governance may be taken as a mother-term dealing with issues arising out of the interaction among stakeholders. In any organization Board of Directors and Management are the main decisions making bodies occupying the center of decision making process. Ideally, they appreciate to serve the interests of all stakeholders. Here, the idea of stakeholders means sponsors, employees, customers, suppliers, regulators, government and the society an organization works for and lives within.

IMPORTANCE OF CORPORATE GOVERNANCE

Corporate governance has never been more central an issue than now. It belongs to all individual firms and the industry as a whole. Now the survival of organizations depends on complete adherence to Good Corporate Governance only. Many forums and organizations have issued governance codes and guidelines to help governments, organizations and individuals in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries, and to provide guidance and

suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance. Corporate governance is responsible to create fairness, transparency, accuracy, accountability of financial reports, sustained and managed growth, shareholders confidence and fair treatment with all stakeholders as well as maintaining the companys reputation in the market. All companies of the world are following the corporate governance but its level of excellence differs from country to country and company to company. The Securities and Exchange Commission of Pakistan (SECP) thus endeavors to raise the corporate governance standards in the country. The first major effort was made in March 2002, when the Code of Corporate Governance was issued by SECP. It was subsequently made part of the listing regulations of the three stock exchanges and became applicable to all public listed companies. SECP has reinforced the Code with other publications designed to enhance the quality of corporate governance within Pakistan and latest amendment in Code in made in 2012.

DEFINING INDEPENDENT NON-EXECUTIVE DIRECTORS

According to the definition of the Security and Exchange Commission of Pakistan (SECP) the independent directors is a director who is not connected with the listed company or its promoters or directors on the basis of family relationship and who does not have any other relationship, whether financial or otherwise, with the listed company, its associated companies, directors, executives or related parties. So a director will be independent non-executive director if:1. He does not have any management responsibilities in a company. 2. He has no direct relations with the management or associated company. 3. He does not have any monetary interest with company. General consideration about independent non-executive directors in Pakistan is that a nonexecutive director who does not work full time in the company and can be distant relatives and friends. Another reason for having such thinking is that they cannot afford of having

independent non-executive directors from outside. "Independence" of independent nonexecutive directors actuality has apparent meaning only. An independent non-executive director doesnt have any direct interests in a company; INEDs should be independent in thinking and independent views. INEDs not just take care of the interest of specific shareholders they work for all shareholders. Independent non-executive director must be sincere and fair toward the company that appointed them. Independent non-executive director member can add extensively to the decision-making process of the board. They can bring purpose to the assessment of the performance of the companys board. In addition, they can participates significant role in areas where the interests of management, the company and its shareholders stray, such as executive remuneration, succession planning, changes of corporate control, large acquisitions and the audit function. To play this key role in an organization board have to decide who is independent for this. INEDs basically have the same responsibilities as executive director but there are different issues that add ineffectiveness to its role.

REASONS OF INEFFECTIVENESS OF THE INDEPENDENT NONEXECUTIVE DIRECTORS (INEDS) IN PAKISTAN

Directors are the care takers of the interests of the stakeholders thats why they are elected by the shareholders to govern their rights and monitor the utilization of their resources by the management. Shareholders help in constructing the board for this purpose. So the directors are representatives of the shareholders rights. The board may comprise of both executive and non-executive directors to better care the needs of the shareholders. One of the efforts to have quality in the board governing function of the board is to place the independent non-executive directors in the board. These are expected to improve the quality of the decision making. Unfortunately in Pakistan, the governing functions of the board are not being performed well because of the concentrated ownership structure and the influence of the controlling shareholders on the composition of the board. Having independent non executive directors in the board, but in Pakistan, these independent non executive directors are not performing or being able to perform the role what is expected from them.

Some of the main reasons of ineffectiveness of the independent non executive directors are as follows: Different from discrete ownership structure as it is in USA and Europe, almost 80 percent listed companies in Pakistan are having concentrated ownership structure, where controlling shareholders nominate the directors in the board. It hinders in the basic functioning of the board by snatching the freedom or independence of the directors to make independent decisions. All decision of the board is to make the controlling shareholders happy. So in the composition of the board, independent non-executive directors are not given well considerations to be in the board. As independent non-executive directors are professional and have the expertise to make decisions which are rational and professional in nature, but as the controlling shareholders interfere in their decision making, their decisions are directed to the will of controlling shareholders. In Pakistan, most companies are having chairman of the board who are CEO of the management as well which make their decision biased. So, independent non-executive directors are influenced by the dual status having chairman. It is aiding in ineffectiveness of the independent non-executive directors. One of the reasons that independent directors are ineffective in Pakistan is that they are paid just the attending the meeting fee. They are not given high salaries to make them prepared professionally and serve the board with their full professional efforts. It is causing lack of motivation in the INEDs that is why they are not performing well. Independent non-executive directors are on the board by the votes of the controlling shareholders but not institutional investors which hamper the independent working of INEDs. The process of selection of the board is poor in Pakistan, because many persons who are themselves controlling shareholders in a company agree to act as INED on the boards of other companies and invite the main directors of such other company to serve as INED on their own company, this reciprocity kills the very idea of independence of INEDs. Another element that causes the poor performance of the working of INEDs is the common composition of the board which includes, non-executive and

executive directors, due to this, various situations of conflict among the directors arise. If the board is staggered, making layers of executive and nonexecutive, independent working may improve, which is not present in Pakistan case. Willingness of companies to provide independence to directors is important factor that contributes the better performance of the INEDs. In Pakistan, as the companies are family owned, this element is missing. Most of time independent non-executive directors dont have professional skills to give their recommendations to companies on matters that require professional input. Independent non-executive directors may cause big danger due to their ineffective practices. As public information has become more transparent and reliable, investors especially institutional investors now clearly prefer companies with better governance standards and practices, over those whose corporate governance practices may still be doubtful.

CHANGES NEEDED IN THE CURRENT CODE

Though the code of Corporate Governance in Pakistan is quiet young in comparison to other countries in the region, its quiet enough for the Pakistani system of listed companies. However, critics may argue that there are many changes that can be incorporated in the code. In our opinion, we believe that the following changes can bring a positive impact in corporate governance in Pakistan. 1. First of all the trend should be eliminate that most companies are owned by families, and they are the biggest obstacle in independence of directors and their selection. 2. As the Directors are paid only a meeting fee, the need is to pay them proper salary, so that they become more focused. 3. The need is to have proper training programs for the directors to enhance their skills and abilities, may be a certification program or other by SECP. 4. Introduce the concept of proper annual evaluation on the board. 5. Separation of the offices of the Chairman and CEO with the Chairman being a non- executive director of the listed company.

6. Nomination committees and remuneration committees should be made mandatory by the law. 7. Audit Committee should have a majority of independent directors and that its chairman should be from among the independent directors. 8. A director can be on the board of 7 listed companies at the most at any one time. However, the limit does not include directorship in listed subsidiaries of a listed holding company. 9. The companies should be strictly required to ensure compliance with their Statement of Ethics and Business Practices. In this regard, SECP should provide a general specimen setting out the minimum contents for Statement of Ethics and Business Practices and, additionally, require the companies to expand their own Statement on the basis thereof. 10. The code requires the directors to carry out their fiduciary duties with a sense of objective judgment and independence in the best interests of the company. However, the expression fiduciary duties is not defined in the Code. SECP may consider listing out the fiduciary duties to make this provision more certain and, thus, effectively enforceable. In this regard, SECP may include the list of fiduciary duties from the Manual of Corporate Governance, which SECP does not consider to be a legal document. 11. Applying stated law of the company. 12. Introducing and implementing the concept of two tier of board in which the upper level is composed of non- executive directors and the lower level composed of executive directors. 13. Practices of cumulative voting concept should be introduced, because it gives chances to minority shareholders to select a board member in a board.

OTHER STEPS MAY BE TAKEN TO IMPROVE THE STANDARD OF CORPORATE GOVERNANCE IN THE COUNTRY.
The importance of corporate governance cannot be ignored because a large number of stake holders have interest in a company but only a few of them have an opportunity to protect their interest. In Pakistan the situation is very sever due to ownership structure. People who own more than 50% of the share usually belongs to same family in this regard they often tend to protect their own interest. As for as corporate governance is concerned there are

certain key issues like financial reporting, directors remuneration, risk management, effective communication and corporate social responsibility. We must keep these issues in mind when we are in an intention to improve the standard of corporate governance in the county. Appelbaum et al. (2009) argued that the match between the employees and the ethical environment which a company purposely grows up is always in the best interest of the company. 1. Effectiveness of board The Combine code of corporate governance required the effective duties from the directors. Such as they should receive the timely information, attempt to enhance their knowledge by the time, and the chairman should have meeting only with non-executive directors also ensure the communication of the shareholders towards board is in practice, being a developing country we can strive to make our practices good. 2. Board Meetings It should be ensured that the papers are distributed timely, all the directors must attend the meeting, they should come with complete preparation, and they should contribute well. Focus of meeting should be on the principle issues and all decisions should be taken after complete debate. 3. Evaluation of board The board should have to be evaluated what objective it have? Are the committee composition is appropriate? Is board consisting of all talents which are required? How board response to the problems? What is their attitude towards risk management as well as corporate social responsibility? How INEDs are willing to give their time? If they attend the meetings, what is the quality and contribution of their presence? 4. Board Committees In Pakistan the Law does not have any requirement about committees except the audit committee on which the periodical return companies have to submit to SECP. But for the effectiveness of board these all committees like remuneration committee, nomination committee and Executives committee should be formed because the committees are very

useful tool but problem in developing economies is that the used of these committees is not proper. The members of audit committee should be audit experts and have the spirit of corporate governance. The remuneration of directors should be attached with their performance. 5. Disclosure Disclosures should be in such a way so that a new shareholder can easily understand the company. For example, how the board operates? How many meetings are and what is the process of evaluation? The directors remuneration is also very important to be disclosed. 6. Risk Management In Pakistan the risk management is alarming issue for directors. It is to be ensured to have a sufficient knowledge about this aspect. Directors can obtain this knowledge from various sources. On the basis of this information, the risk profile should be maintained. The policies should be formulated according to the risks; company is expected to be exposed. The risk management requires the continuous attention because the risk may change its nature or extent. Another important thing is a risk must be communicated to the management as well as shareholders even it has a very small chance to occur or no chance to occur in near future. The turnbull committee has a strong impact on risk management and impact of Combine code cannot be significant without the effective implementations of turnbull recommendations. The areas in which a company can face the risk are usually Strategic, Marketplace, Ethical, supplier, outsourcer, Financial and Legal. The Non executive directors are very role playing people in risk management. 7. Share Holder activism Shareholders activism plays an important role in corporate governance. In Pakistan the mostly family owned business structured exists who are the owners of usually more than 50% of share, The cumulative voting is in practice here even then all members of the board are by and large selected by the majority shareholders. This is due to lack of shareholders activism. The awareness about this fruitful purpose is at very small level. Here two things can create this activism, first the awareness campaigns by the business media, second are

the institutional investors. Tam (2000) reported that Institutional investors can play role in the shareholders activism. 8. Communication with the Shareholders Company should formulate an effective investor relation program. In Pakistan, it is necessary to take care of small shareholders and encourage their involvement in company. It is necessary to encourage them to vote for various issues regardless of how small number of votes they have. They should be treated equally important for the board to provide information. This approach will leads to a good conduct of the company and it will increase the reputation of the company. 9. Internal control Internal control of a company is the reason for its strength, strong the internal control strong the company assets accountability. Ararat (2003) argued that in an arrangement of weak corporate governance, it is easy for management to steal from the shareholders as well as public. Procedure should be formulated in such a way that the information generated by the procedure is very understandable and the Directors can have easily access to the information. 10. Ethics in the Business The corporate governance and business ethics should be strengthened as these are responsible for the honest and ethical doings of the people. The conduct of the ethics should be audited and published in the annual reports. Company ordinance should include the certain clauses if someone is proved to be unethical. 11. Corporate Social responsibility Institutional investors can play a very importing role of monitoring and demanding the changes in the governance issues. They should disclose how the conflict of interests involving investors is managed. 12. Central Depository Company (CDC)

It can help in protection of the rights of share holders and transparency. Those countries that have good central registries have less illegal insider trading and hiding of ownership. SECP can help in phasing out the central registry. 13. Distance Voting The idea of distance voting should be introduced to have proper representations in the board. Voting should be allowed by post or through electronic media.

H O W O T HE R DE VE L O P I NG C O U N T R I E S H AV E H ANDL E D SIM I L AR P R O B LE M S ?
One thing is for sure that the concept of corporate governance is not a very old one. Most developing countries have started to implement their codes of corporate governance starting from late 90s. If we take examples of Bangladesh, Sri Lanka or Singapore they have adopted comprehensive codes where the duties of management (and board) as well as the shareholders have been defined in length. Their legal mechanism is also supportive to the codes provisions and thats how we can say that their codes are more advanced than our code in Pakistan. Another important element in other developing countries code is the implementation through participation of companies. Most donor agencies, development banks and NGOs consider the standard of corporate governance as an important determinant of their participation in countrys / companies development. Developing countries have adopted the good corporate governance policies to formalize all codes of corporate governance followed by proper implementation. Various problems in the listed companies have solved through proper segregation of duties, independence of Non Executive Directors, proper disclosure of information, top management and control by the shareholders through voting right to make strong new policies. The coordination between government authorities and duplicate or triplicate of reports of the companies also ensures control. Companies in public also properly disclose the

financial reports. They appoint directors both executive and non executive on the basis of their skill, expertise and level of commitment and no personal relation with the

management. The developing countries are adopting the policies which guide and support the corporate sector. Administrative Regulations: Countries take Reforms of the public services by introducing more precise and intelligible statutory and administrative regulations together for more efficient flow of information. Also they encourage accountability of everyone holding an official position and effective, speedy and justly enforced disciplinary measures against corrupt officials and employees. Pay Structure: When England and Holland was in the process of development, they firming up their moral standards among their civil servants, also reform the pay structures. Over-Regulation: Countries have taken apart over-regulation to reduce the opportunity to exercise officials authority, like Peru reduced documentation formalities to reduce the corruption level. Internal and external auditing: They adopted the practice to encourage the internal and external auditing controls by higher authority, applicable to both official and the business sector. Media: Developing countries are creating free and independent media as they brought to light big cases of poor governance, e.g. Hong Kong follows protection and freedom of the press. Some of the developing Countries made high legislation that makes bribery a punishable offence. Tax: Developing countries eliminated the unnecessary taxation and double taxation on corporate sector for the betterment of companies and reduce the governance problems Strict laws: Countries have strengthened their public institutions by stricter laws and stepped-up institutional controls and an improved political framework. Punishments: In emerging countries of South Korea and Mexico, top officials are arrested in connection with corruption. In Italy 1,300 top managers were arrested in the case of corruption. Corporate Social Responsibility: Corporate Social Responsibility is demanded throughout the business operations and by all stakeholders in environment.

Improve Communication with Shareholders: The Good Corporate Governance in the developing countries through improving shareholder relationships and communication and also to systemizing wealth distribution mechanisms is helping good corporate governance.

WHY SOLUTIONS ADOPTED BY THE DEVELOPED COUNTRIES ARE NOT LIKELY TO BE EFFECTIVE IN THE PAKISTAN
As one cannot generalize the results of research done in Pakistan on the rest of the world, likewise solutions adopted for better CG practices by developed countries are not likely to be effective in Pakistan. There can be so many reasons of this but the most important, prime reason is that the corporate structure of our country is quite different from developed countries. Difference of Directors perspectives In developed countries, directors have very little shares. Their main work is to make their shareholders happy so that they could elect them next time. For this, they are ready to adapt all those laws, recommendations, solutions which lead to better performance of the company. Compared to this, in Pakistan Seth culture prevails. This Seth culture is a major obstacle in Pakistan for effective functioning of CG practices and codes. The main aim of these Seths is just to earn profit by any means. Their majority of directors are their own family friends or workers who are always on their right side and work purely for protecting their interests. Because of this, despite of the fact that Pakistan laws are rooted from the British it was seen that solutions adopted by developed countries are not likely to be effective in Pakistani milieu. Different legal Systems The second reason for the ineffectiveness of CG practices of developed countries in Pakistan is that the adaptation of any corporate code required being compatible with the legal and institutional authorities of the country. The legal developments of one country vary with the legal requirement of the other country and so is the code of corporate governance. In developed countries these codes are made to enhance the monitoring and control for publicly held corporations in order to ensure the achievement of the objectives

set by the owners of the company. But in developing nations the implementations of laws are restricted to only books, they are not followed practically. Transitional Stages of the Companies Another reason of ineffectiveness of CG practices in Pakistan is that external environment is not playing its due role in influencing companies to adopt better CG practices. Referred to Ethics, Corporate Social Responsibility, companies do not feel worry if they do some unethical, irresponsible act because they have no fear of media, NGOs, Pressure groups etc. whereas, in developed countries, external influence is one of the reason of good CG practices. Cultural Aspects Cultural dimensions mostly utter the models and moves of the different sectors of the economy towards the corporate governance. In Asia, people base are reflected more by the diverse culture. So, it is difficult to adopt or generalize the developed countries codes in the Pakistani culture to have effectiveness. Exemptions: Here the exemptions are given to any particular sector (industry, company or person) at any time which motivates other companies to tax evasion. Sometimes government offers exemptions to promote specific industry but mostly it is done for personal benefits. Political Pressure: In Pakistan there is lack of political stability and consistency in policies. Government cannot make any law or enforce that against the will of specific class due to fear of loosing vote bank. Committees/ Commissions: Unlike developed countries, committees in Pakistan do not perform their due role. They are not effective, efficient and independent. They are incompetent; do not have enough authority to perform their duty. While in the developing countries they are very efficient for their role in corporate governance.

Poor Wages by Government: In Pakistan, salary structure is not very good, especially in government sector organizations. This will lead to corruption and use of unlawful means of earning and getting benefits. This also de-motivates employees to perform their corporate responsibility and take any initiative for the betterment of organization and society. Finally, by simply adopting the CG practices of developed countries will never provide a solution. Positive change requires that the adopted solutions should be mold according to our own country requirements----according to Pakistani culture, Social norms, economical differences etc. If SECP and other governing authorities try to adopt the same solutions in the corporate sector of Pakistan, it will become counter productive with the economy of the country.

References: Code of Corporate Governance 2012, by Security exchange commission of Pakistan. Appelbaum, S., Vigneault, L.,Walk er, E., Shapiro, B, (2009). (Good) corporate governance and the strategic integration of ethics, Social Responsibility Journal. Corporate Governance in China An Investor Perspective.
Kit Tam,O. (2000). Ethical Issues in the Evolution of Corporate Governance in China.

Journal of Business Ethics, 303 to 320 Ararat, M., Ugur,M. (2003) Corporate of governance in Turkey: an overview and some policy recommendation. Corporate governance,3(1), 58 Corporate Governance Dr.Safdar A Butt.