A Brief History ofA Brief History ofCorporate Corporate

GovernanceGovernanceDr Safdar A ButtDr Safdar A Butt

CG as field of studyCG as field of study CG has existed for as long as CG has existed for as long as

companies have existed.companies have existed. But as a field of study it is less than 70 But as a field of study it is less than 70

years old.years old. Last 40 years:Last 40 years:

A lot of activity in this field.A lot of activity in this field. Codes, reports and laws have come out.Codes, reports and laws have come out. Number of research papers and theories Number of research papers and theories

have evolved.have evolved.

Corporate Wrongs -1Corporate Wrongs -1 Loss of ethicsLoss of ethics Earnings became every thing.Earnings became every thing. Ineffective boards, smart executives.Ineffective boards, smart executives. Huge remunerations for executive Huge remunerations for executive

directors.directors. Greed leading to disparity among Greed leading to disparity among

senior managers and other senior managers and other employees.employees.

Corporate Wrongs - 2Corporate Wrongs - 2 Short term goals and considerations.Short term goals and considerations. Collusion between directors and Collusion between directors and

auditors.auditors. Pressure from institutional investorsPressure from institutional investors Loss of interest by small investors in Loss of interest by small investors in

big companies.big companies. In Pakistan, family control of In Pakistan, family control of

companies.companies.

Some Scandals in USA -1Some Scandals in USA -1 WorldCom WorldCom

Overstatement of profits by $3.8 billionOverstatement of profits by $3.8 billion Adelphia CommunicationsAdelphia Communications

Illegal loan to founderIllegal loan to founder EnronEnron

Gross misuse of power by directorsGross misuse of power by directors Waste Management Inc.Waste Management Inc.

Overstatement of earnings by $17 billion Overstatement of earnings by $17 billion over 6 yrsover 6 yrs

Some Scandals in USA - Some Scandals in USA - 22

TycoTyco Evasion of sales tax on personal purchases.Evasion of sales tax on personal purchases.

Peregrine SystemsPeregrine Systems Overstatement of earnings by $100 million.Overstatement of earnings by $100 million.

Imclone SystemsImclone Systems Insider trading by CEOInsider trading by CEO

Rite AidRite Aid Accounting and securities fraud.Accounting and securities fraud.

Some Scandals in UK Some Scandals in UK BCCIBCCI

Improper accounting and policiesImproper accounting and policies Barings BankBarings Bank

Ineffective internal controls, $1.4 billion lossIneffective internal controls, $1.4 billion loss Mirror GroupMirror Group

Gross misappropriation of funds including Gross misappropriation of funds including pensionspensions

Polly PeckPolly Peck Diversion of funds to personal use.Diversion of funds to personal use.

Some Scandals in Some Scandals in PakistanPakistan

Crescent BankCrescent Bank Islamic Investment BankIslamic Investment Bank Bankers EquityBankers Equity Pakistan Steel MillsPakistan Steel Mills Indus BankIndus Bank

Evolution of CGEvolution of CG Cadbury Report 1992, UKCadbury Report 1992, UK Greenbury Report 1995, UKGreenbury Report 1995, UK Hampel Report 1998, UKHampel Report 1998, UK Combined Code 1998, UKCombined Code 1998, UK Turnbull Report 1999, UKTurnbull Report 1999, UK OECD Principles of CG, 1999OECD Principles of CG, 1999

OECD PrinciplesOECD Principles Rights of shareholders must be Rights of shareholders must be

protected.protected. All shareholders to be treated equitably.All shareholders to be treated equitably. All stakeholders to be allowed to play All stakeholders to be allowed to play

due role.due role. Timely and accurate disclosures.Timely and accurate disclosures. Accountability and responsibility of Accountability and responsibility of

directors.directors.

More ReportsMore Reports Basle Committee Guidelines 1999 (banks)Basle Committee Guidelines 1999 (banks) Myners Report 2001, UKMyners Report 2001, UK Cromme Report 2002, GermanyCromme Report 2002, Germany Higgs Review 2003, UK (INEDs)Higgs Review 2003, UK (INEDs) Smith Report 2003, UK (Audit committees)Smith Report 2003, UK (Audit committees) Revised Combined Code, 2003, UKRevised Combined Code, 2003, UK Kings Reports 1994, 2000, 2009, South Kings Reports 1994, 2000, 2009, South

AfricaAfrica Sarbanes Oxley Act 2002, USASarbanes Oxley Act 2002, USA

CG ModelsCG Models Anglo American Model (AAM)Anglo American Model (AAM) Japanese ModelJapanese Model German ModelGerman Model

Anglo American ModelAnglo American Model Free economy based: Market sets the price Free economy based: Market sets the price

of capital and expectations of returns.of capital and expectations of returns. Company runs for shareholders’ benefits, Company runs for shareholders’ benefits,

i.e. to maximize their wealth. i.e. to maximize their wealth. Triangular structure: Triangular structure:

SH/Board/ManagementSH/Board/Management Most companies run by people owning less Most companies run by people owning less

than a quarter of the company.than a quarter of the company. Major agency and CG issues.Major agency and CG issues.

Japanese CG ModelJapanese CG Model Keiretsu system of ownership:Keiretsu system of ownership: Large groups own the companies.Large groups own the companies. Inter-locking directorates and Inter-locking directorates and

shareholding.shareholding. All policies made by the group.All policies made by the group. Group funds, controls and helps where Group funds, controls and helps where

needed.needed. Management kept alert all the term.Management kept alert all the term. Agency issues still persist.Agency issues still persist.

German CG ModelGerman CG Model Group ownership is common. Strong Group ownership is common. Strong

hold of investors over the boards.hold of investors over the boards. Two tier boards by law.Two tier boards by law. Representation of workers and Representation of workers and

shareholders in Supervisory Board.shareholders in Supervisory Board. Size of Supervisory Board cannot be Size of Supervisory Board cannot be

changed by the company; regulated changed by the company; regulated by law.by law.

CG Related International CG Related International BodiesBodies

World Bank and IMFWorld Bank and IMF Global CG ForumGlobal CG Forum International CG NetworkInternational CG Network Commission on public trust and Commission on public trust and

private enterprise.private enterprise.

The Two PerspectivesThe Two Perspectives CG problem in WestCG problem in West CG problem in PakistanCG problem in Pakistan

Thank you.Thank you.

S A ButtS A Butt