34974019

Transparency and Disclosure in SOEs;
Equitable Treatment of (Minority)

Shareholders
Tariq Kirmani
Chairman & CEO
Pakistan International Airlines
Pakistan International Airlines May 19,

19 May 2005
2005 www.piac.com.pk
CONTENTS
CORPORATE GOVERNANCE IN PAKISTAN & STATE OF SOEs

PRIOR TO CG REGIME
CORPORATE GOVERNANCE CHALLENGES & REFORMS
MINORITY SHAREHOLDERS –ISSUES, TRANSPARENCY &

DISLOSURE
RECOMMENDATIONS

19 May 2005
CORPORATE GOVERNANCE
PHILOSOPHY IN PAKISTAN
• ‘….the distribution of rights & responsibilities

among different participants in the corporations
such as the board, managers, shareholders and
other stakeholders spells out rules and procedures
for making decisions on corporate affairs’
• Corporate Governance deals with the constraints

that managers put on themselves, or that investors
put on managers, to mitigate agency problems and,
thus, induce investors to provide more funds

19 May 2005
PUBLIC & PRIVATE SECTOR
CHARACTERISTICS
BASIC DISTINCTION
PUBLIC SECTOR PRIVATE SECTOR
• Operation in political • Operation in commercial

domain domain
• Directed by state orders • Directed by market forces

• Striving for market share
• Striving for government
support and funding and earning
• Emphasis on operational
• Low employee productivity,
efficiency & higher profits
high debt, fiscal losses
• Guaranteed employment • Ongoing weeding out process
19 May 2005
MAJOR PUBLIC SECTOR AILMENTS
Prior to Corporate Governance Implementation
INTERNAL EXTERNAL
• Board meetings were used to • Aggressive Marketing &
chaired by the then Ministers Development by Competition
• Obsolete Systems / Weak • Political Intervention
controls • Economic Factors
• Dearth of Quality professionals
• Highly Regulated
• Myopic Business Vision
Environment
• Bureaucratic Management
• Products Substitution
• Ineffective Organizational
• New Players
Structure
• Profits dependent on • Tarnishing image & declining
Inventory Gains market share

• Inefficiencies • Innovation

19 May 2005
BARRIERS TO GOOD GOVERNANCE
IN PUBLIC SECTOR ORGANIZATIONS
• Excessive flow of government queries hindering

operational performance
• Commercial and business decisions often questioned by
government agencies
• Historical decisions / actions investigated after
considerable lapse of time (even the decision makers are
long gone)
• Government intervention in day to day affairs

19 May 2005
CONTENTS

PRIOR TO CG REGIME

DISLOSURE
RECOMMENDATIONS

19 May 2005
CHALLENGES
from a typical public-sector company to a market-driven company

Distribution oriented Customer service oriented
Large and centralized Lean and decentralized
Government control Managerial autonomy
Operational myopia Strategic vision
Diffused responsibility Ownership and accountability
Technical orientation Commercial orientation
Risk averse Entrepreneurial attitudes
Hierarchical and
bureaucratic setup Task driven organization
Reliance on managerial Teamwork and delegation of

authority responsibility
Product sale only Business diversification &
vertical integration

19 May 2005
MULTIDIMENSIONAL CORPORATE
GOVERNANCE INITIATIVES
CA
SYSTEMS PI
RE TAL M
RE
FO
RM KT
T U S
U C
R
ST
TRANSPA
New Regime
A Paradigm Shift
RENCY
A
C
C
O
U
N
TA
BI ION
LI IT
TY OGN
GREATER C
RE
EMPOWERMENT

19 May 2005
REFORM PROCESS
• Independent & Autonomous Boards appointed in all SOEs
– Majority of directors from private sector
– Commercial orientation introduced; SOEs to operate in

accordance with Companies Ordinance 1984
• In March 2002, the Security Exchange Commission of

Pakistan (SECP) issued the Code of Corporate Governance
to establish framework for good governance of companies
listed on Pakistan’s Stock Exchange

19 May 2005
REFORM PROCESS
• The code was issued to:

- Safeguard the interests of stakeholders
- Promote market confidence
- Enhance performance, and
- Ensure conformance of companies
• In addition the code addresses:
- Agency problems
- Transparency
- Accountability of Directors

19 May 2005
REFORM PROCESS
• Mandatory for SOEs to have Audit, HR and Finance

Committees
• Essential for listed SOEs and other public limited companies

to declare their accounts quarterly within the stipulated
timeframe
• Annual Reports also cover “Statement of Corporate

Governance” by the management and external auditors
• Mandatory for SOEs and others to disclose all material

changes in line with GAPP & IAS

19 May 2005
CONTENTS

PRIOR TO CG REGIME

DISLOSURE
RECOMMENDATIONS

19 May 2005
SHAREHOLDERS’ ROLE
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

19 May 2005
MINORITY SHAREHOLDERS
RIGHTS & ISSUES
• Voting rights given on the basis of information that is equally

available to all shareholders
• Section 4.8 of CG manual ensures that all shareholders,

including minority, should be able to obtain effective
redressal for violation (if any) of their rights
• Despite having voting power, minority shareholders’ votes

are unlikely to have an impact on key corporate decisions

19 May 2005
TRANSPARENCY & DISCLOSURE
EQUITABLE TREATMENT OF SHAREHOLDERS
• Annual financial statements are prepared in line with the

stipulated comprehensive criteria laid down by ICAP
• The criteria cover:
- A detailed report to shareholders encompassing
- Industry environment
- Strategic initiatives taken by companies
- HR & CSR activities
- Future outlook
- Key financial indicators (most widely used ratios)
- 10-year performance at a glance
Ample information is given to minority shareholders to keep them abreast of
corporate issues, performance & strategic initiatives allowing them to question
managements on all business matters during AGMs / EGMs
19 May 2005
SOME GENERAL APPREHENSIONS OF
MINORITY SHAREHOLDERS
• Lack of control in important decision making
• Minority shareholders are not always given enough time to

consider a right issue
• Major shareholders tend to eliminate minority shareholders

to obtain more management controls
• Difficult to exercise rights specifically thru judicial system

(too lengthy and too expensive)
• Sometimes no access to management/leadership of the

company

19 May 2005
DISJOINTED VS PARTICIPATIVE
APPROACH
Majority Disjointed
Minority
Approach
Majority Minority
Participative
Approach

19 May 2005
TRANSPARENCY & DISCLOSURE
EQUITABLE TREATMENT OF SHAREHOLDERS
SECP introduced several checks and balances, including:
- Disclosure of stockholding by Directors and meetings

attended by them
- News alerts on websites along with financial

results/statements
- During AGMs / EGMs, management and directors are

available to answer any query of shareholders on
business/operation (normally AGMs last upto 4-5 hours)

19 May 2005
CONTENTS

PRIOR TO CG REGIME

DISLOSURE
RECOMMENDATIONS

19 May 2005
RECOMMENDATIONS
Equitable treatment of minority shareholders calls for:

• Privatization of SOEs to maximize shareholders rights/value
• Empowering them to include agenda of their choice (provided
they hold over and above 5% holding)
• Preferential treatment in case of liquidation of business
• The provision that up to a minimum of 20% holdings can call
Extraordinary General Meeting (EGM)
• More General meetings for more disclosure for shareholders,
specifically for minority
• 6-monthly audit review to be introduced
• Timely disclosure of material information;Timely holding of
meetings

19 May 2005
RECOMMENDATIONS
• Developing tangible criteria to measure level of good

governance – a lesson from the Enron disaster
• Provision in laws to be made for business acquisition in
Pakistan
• Maximum distribution of profits for management to enhance
shareholders’ value
• A Code of business to be developed and signed by all
directors and employees to curb insider information and
penalty to be imposed
• Any dissenting Board decision should be incorporated in the
annual accounts

19 May 2005
THANK YOU

19 May 2005

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Transparency and Disclosure in SOEs;

Equitable Treatment of (Minority)

Pakistan International Airlines May 19,

CORPORATE GOVERNANCE IN PAKISTAN & STATE OF SOEs

MINORITY SHAREHOLDERS –ISSUES, TRANSPARENCY &

Pakistan International Airlines May 19,

• ‘….the distribution of rights & responsibilities

• Corporate Governance deals with the constraints

Pakistan International Airlines May 19,

• Operation in political • Operation in commercial

• Directed by state orders • Directed by market forces

Inventory Gains market share

Pakistan International Airlines May 19,

• Excessive flow of government queries hindering

Pakistan International Airlines May 19,

CORPORATE GOVERNANCE IN PAKISTAN & STATE OF SOEs

CORPORATE GOVERNANCE CHALLENGES & REFORMS

MINORITY SHAREHOLDERS –ISSUES, TRANSPARENCY &

Pakistan International Airlines May 19,

from a typical public-sector company to a market-driven company

Reliance on managerial Teamwork and delegation of

Pakistan International Airlines May 19,

Pakistan International Airlines May 19,

• Independent & Autonomous Boards appointed in all SOEs

– Majority of directors from private sector

– Commercial orientation introduced; SOEs to operate in

• In March 2002, the Security Exchange Commission of

Pakistan International Airlines May 19,

• The code was issued to:

Pakistan International Airlines May 19,

• Mandatory for SOEs to have Audit, HR and Finance

• Essential for listed SOEs and other public limited companies

• Annual Reports also cover “Statement of Corporate

• Mandatory for SOEs and others to disclose all material

Pakistan International Airlines May 19,

CORPORATE GOVERNANCE IN PAKISTAN & STATE OF SOEs

CORPORATE GOVERNANCE CHALLENGES & REFORMS

MINORITY SHAREHOLDERS –ISSUES, TRANSPARENCY &

Pakistan International Airlines May 19,

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

Pakistan International Airlines May 19,

• Voting rights given on the basis of information that is equally

• Section 4.8 of CG manual ensures that all shareholders,

• Despite having voting power, minority shareholders’ votes

Pakistan International Airlines May 19,

• Annual financial statements are prepared in line with the

• Lack of control in important decision making

• Minority shareholders are not always given enough time to

• Major shareholders tend to eliminate minority shareholders

• Difficult to exercise rights specifically thru judicial system

• Sometimes no access to management/leadership of the

Pakistan International Airlines May 19,

Pakistan International Airlines May 19,

SECP introduced several checks and balances, including:

- Disclosure of stockholding by Directors and meetings

- News alerts on websites along with financial

- During AGMs / EGMs, management and directors are

Pakistan International Airlines May 19,

CORPORATE GOVERNANCE IN PAKISTAN & STATE OF SOEs

CORPORATE GOVERNANCE CHALLENGES & REFORMS