corporate governance and financial sector development

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Implicit impact of corporate governance and financial sector

development

Abstract

This paper investigates the relationship between corporate

governance and financial sector development. It finds

that better corporate frameworks benefit firm through greater

access to financing, lower cost of capital, better firm performance,

and more favorable treatment of all stakeholders. Numerous

studies agree that these channels operate not only at the level of

the firm, but in sectors and countries as wellalthough causality

is not always clear. There is also evidence that when a countrys

overall corporate governance and property rights system are

weak, voluntary and market corporate governance mechanisms

have limited effectiveness. Less evidence is available on the direct

links between corporate governance and poverty. There are also

some specific corporate governance issues in various regions and

countries that have not yet been analyzed in detail. In particular,

the special corporate governance issues of banks, family-owned

firms, and state-owned firms are not well understood, nor are the

nature and of determinants of enforcement. Importantly, the

dynamic aspects of corporate governancethat is, how

corporate governance regimes change over timehave only

recently received attention.


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Corporate governance, a phrase that not long ago meant little to all but a handful

of scholars and shareholders, has now become a mainstream concerna staple

of discussion in corporate boardrooms, academic meetings, and policy circles

around the globe. Two events are responsible for the heightened interest in

corporate governance. During the wave of financial crises in 1998 in Russia, Asia,

and Brazil, the behavior of the corporate sector affected entire economies, and

reference

(Presented at the Global Corporate Governance Forum Donors Meeting, held in the

Hague, The Netherlands, March 13, 2003. I would like to thank the participants for

their useful comments. I would also like to thank Florencio Lopez de Silanes for

useful suggestions.)

deficiencies in corporate governance endangered the stability of the global financial

system. Just three years later confidence in the corporate sector was sapped by

corporate governance scandals in the United States and Europe that triggered some

of the largest insolvencies in history. In the aftermath, not only has the phrase

corporate governance become nearly a household term, but economists, the

corporate world, and policymakers everywhere began to recognize the potential

macroeconomic consequences of weak corporate governance systems. The

scandals and crises, however, are just manifestations of a number of structural

reasons why corporate governance has become more important for economic

development and well-being (Becht, Bolton, and Rell 2003). The private, market

based investment process is now much more important for most economies than it

used to be, and that process is underpinned by better corporate governance. With

the size offirm increasing and the role of financial intermediaries and institutional

investors growing, the mobilization of capital has increasingly become one step

removed from the principal-owner. At the same time, the allocation of capital has

become more complex as investment choices have widened with the opening up and

liberalization of financial and real markets, and as structural reforms, including pricederegulation and increased competition, have increased companies exposure to


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market forces risks. These developments have made the monitoring of the use of

capital more complex in certain ways, enhancing the need for good corporate

governance.

To do so, it reviews the extensive literature on the subjectand identifies areas

where more study is needed. A well-established body of research has for some time

acknowledged the increased importance of legal foundations, including the quality of

the corporate governance framework, for economic development and well-being.

Research has started to address the links between law and economics, highlighting

the role of legal foundations and well-define property rights for the functioning of

market economies. This literature has also started to address the importance and

impact of corporate governance. Some of this material is not easily accessible to the

nonacademic. Importantly, much of it refers to situations in developed countries, in

particular the United States, and less so to developing countries. The paper is

structured as follows. It starts with a definition of corporate governance, as that

determines the scope of the issues. It reviews how corporate governance can and

has been defined. It describes why more attention is been paid to corporate

governance in particular. The paper next explores why corporate governance may

matter. It also provides some background on the ownership patterns around theworld that determine and affect the scope and nature of corporate governance

problems. After analyzing what the literature has to say about the various channels

through which corporate governance affects economic development and wellbeing,

the paper reviews the empirical facts about some of these relationships. It explores

recent research documenting how legal aspects can affect firm valuation, influence

the degree of corporate governance problems, and more broadly affect firm

performance and financial structure.


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OVERVIEW OF CORPORATE GOVERNANCE

IN PAKISTAN

Corporate governance matters for the financial development by increasing the flow

of capital to the capital market. East Asian financial crisis attract serious attention to

importance of corporate governance in developing countries. The OECD has

established a set of corporate governance principles in 1999 that have become the

core template for assessing a countrys corporate governance arrangements. La

Porta, et al. (2000) Defined, Corporate governance is, to a certain extent, a set of

mechanisms through which outside investors protect themselves against

expropriation by the insiders. They define the insiders as both managers and

controlling shareholders.

Corporate governance comprises the private and public institutions (both formal andinformal) which together govern the relationship between those who manage

corporations and those who invest resources in corporations. These institutions

typically include a countrys corporate laws, securities regulations, stock-market

listing requirements, accepted business practices and prevailing business ethics

[Omran (2004)]. Thus, changes in Pakistani system of corporate governance are

likely to have important consequences for the structure and conduct of country

business. The issue of Corporate Governance of banks has also fundamental

importance for emerging Economies. SBP restructured the regulatory framework

governing the commercial banking industry and issued some guidelines for corporate

governance. The study of Kalid and Hanif (2005) provides an overview of

development in the banking sector and measures of corporate governance in

Pakistan. Their study observes that SBP organized its role as a regulator and

supervisor and make the central bank relatively more effectively in recent years.

Moreover, the legal and regulatory structure governing the role and functions of

commercial banks has been restructured. However, as the process of corporate

governance of banks in Pakistan is very recent, not enough information is available

to make an assessment of the impact of these policies such as an evaluation of the

improvement in bank efficiency or reduction in bank defaults. Securities and

Exchange Commission of Pakistan issued Code of Corporate Governance in March2002 in order to strengthen the regulatory mechanism and its enforcement. The code

of corporate governance is the major step in corporate governance reforms in

Pakistan. The code includes many recommendations in line with international good

practice. The major areas of enforcement include reforms of board of directors in

order to make it accountable to all shareholders and better disclosure including

improved internal and external audits for listed companies. However, the codes

limited provisions on directors independence remain voluntary and provide no

guidance on internal controls, risk management and board compensation policies


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Corporate governance is particularly important for banks, given the banks important

role in the financial sector. The rapid changes brought about by globalization,

deregulation and technological advances are increasing risks in the banking

systems. Moreover, unlike other companies, most of the funds used by banks to

conduct their business belong to their creditors, in particular their depositors. Linkedto this is the fact that the failure of a bank affects not only its own stakeholders, but

may have a systemic impact on the stability of other banks. Theoretically, information

asymmetry gives rise to agency problems and conflicts of interest between owners

and managers. Good corporate governance is designed to address this problem.

Further, government regulations and frequent interventions reduce the incentive for

effective monitoring and at the same time make supervision (or supervisors) less

effective. In this context, the corporate governance of banks becomes a more

important challenge as compared to other firms.

reference

(Ahmed M. Khalid and Muhammad Nadeem Hanif*

*An earlier version of this paper was presented at the LUMS-SEC Conference on

Corporate Governance

in Pakistan: Regulation, Supervision and performance, held at LUMS, Lahore,

Pakistan, May 29-30, 2004.

Internationally, the issue of corporate governance for banks has been recognized as

one of the most important issues of the corporate sector. The OECD has produced aset of corporate governance principles that have become the core template for

assessing a countrys corporate governance arrangements. Similarly, the Basel

Committee on Banking Supervision has made recommendations for the corporate

governance of banks. Following the recommendations of the Basel Committee,

OECD and the IMF, many developed countries have designed policies to implement

best practice bank management. (Reference Examples are United Kingdom,

Sarbanes-Oxley legislation in the United States, Australia and the New

Zealand (Bollard, 2003). Also see Macey and Miller (1995).)

Developing countries, especially emerging economies in the South Asian region

followed the same recommendations and introduced certain guidelines for corporate

governance. In Pakistan (as well as other South Asian countries), the banking

sector restructuring took place only in the early 1990s and some steps towards good

governance were initiated in late 1990s and early 2000. As such, not enough time

has passed to conduct a meaningful assessment of the impact of these policies on

bank efficiency


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Corporate Governance for Banks

Banks are critical elements in any economy. They provide financing for commercial

enterprises, basic financial services to a broad segment of the population and

access to payment systems. Banks are also the major credit providers and, as such,

must deal with the problem of information asymmetry. Although, banks are similar to

other firms in terms of the composition of shareholders, debt holders, board of

directors, competitors, etc. However, there is one important decision between banks

and other firms. Rather than any firm, which is a profit-maximize, the nature of

transactions that banks are involved in makes them an expected utility (or expected

profit-maximize). The short-term liabilities (such as demand deposits) are invested

in long-term risky assets (such as mortgage loans) and may take several years to

mature (20 to 30 years). As a result, the risk factor increases substantially and risk

management becomes important. Another related issue is the role of the central

bank in providing financial stability through efficient risk management, essential forsustainable growth. The central bank performs three important functions for the

stability of the banking system. It acts as a lender of last resort, to help any short to

medium-term liquidity problems of a bank and thus helps to avoid a bank run.

Central banks also develop and implement a good regulatory authority

WHAT IS CORPORATE GOVERNANCE AND WHY IS IT RECEIVING MORE

ATTENTION?


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What is corporate governance?

Definition of corporate governance vary widely. They tend to fall into two categories.

The first set of definition concerns itself with a set of behavioral patterns: that is, the

actual behavior of corporations, in terms of such measures as performance,

efficiency, growth, financial structure, and treatment of shareholders and other

stakeholders. The second set concerns itself with the normative framework: that is,

the rules under which firm are operatingwith the rules coming from such sources

as the legal system, the judicial system, financial markets, and factor (labor)

markets. For studies of single countries orfirm within a country, the first type of

definition is the most logical choice. It considers such matters as how boards of

directors operate the role of executive compensation in determining firm

performance, the relationship between labor policies and firm performance, and the

role of multiple shareholders. For comparative studies, the second type of definition

is the more logical one. It investigates how differences in the normative framework

affect the behavioral patterns offirm, investors, and others. In a comparative review,

the question arises how broadly to define the framework for corporate governance.

Under a narrow definition, the focus would be only on the rules in capital markets

governing equity investments in publicly listed firm. This would include listing

requirements, insider dealing arrangements, disclosure and accounting rules, and

protections of minority shareholder rights. Under a definition more specific to the

provision of finance, the focus would be on how outside investors protect themselves

against expropriation by the insiders. This would include minority right protections

and the strength of creditor rights, as reflected in collateral and bankruptcy laws. It

could also include such issues as the composition and the rights of the executive

directors and the ability to pursue class-action suits. This definition is close to the

one advanced by economists.

Andrei Shleifer and Robert Vishny in their seminal 1997 review: Corporate

governance deals with the ways in which suppliers of finance to corporations assure

themselves of getting a return on their investment (1997, p. 737). This definition can

be expanded to define corporate governance as being concerned with the resolution

of collective action problems among dispersed investors and the reconciliation

ofconflicts of interest between various corporate claimholders. A somewhat broader


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definition would be to define corporate governance as a set of mechanisms through

which firms operate when ownership is separated from management. This is close to

the definition used by Sir Adrian Cadbury, head ofthe Committee on the Financial

Aspects of Corporate Governance in the United Kingdom: Corporate governance is

the system by which companies are directed and controlled (Cadbury Committee,

1992, introduction).

An even broader definition is to define a governance system as the complex set of

constraints that shape the ex post bargaining over the quasi rents generated by the

firm (Zingales, 1998, p. 499). This definition focuses on the division of claims and

can be somewhat expanded to define corporate governance as the complex set of

constraints that determine the quasi-rents (profits) generated by the firm in the

course of relationships and shape the ex post bargaining over them. This definition

refers to both the determination of value-added by firm and the allocation of it among

stakeholders that have relationships with the firm. It can be read to refer to a set of

rules, as well as to institutions. Corresponding to this broad definition, the objective

of a good corporate governance framework would be to maximize the contribution of

firm to the overall economythat is, including all stakeholders. Under this definition,

corporate governance would include the relationship between shareholders,creditors, and corporations; between financial markets, institutions, and corporations;

and between employees and corporations. Corporate governance would also

encompass the issue of corporate social responsibility, including such aspects as the

dealings of the firm with respect to culture and the environment. When analyzing

corporate governance in a cross-country perspective, the question arises whether

the framework extends to rules or institutions. Here, two views have been advanced.

One is the view that the framework is determined by rules, and related to that, to

markets and outsiders. This has been considered a view prevailing in or applying to

Anglo-Saxon countries. In much of the rest of the world, institutionsspecifically

banks and insidersare thought to determine the actual corporate governance

framework. In reality, both institutions and rules matter, and the distinction, while

often used, can be misleading. Moreover, both institutions and rules evolve over

time. Institutions do not arise in a vacuum and are affected by the rules in the

country orthe world. Similarly, laws and rules are affected by the countrys

institutional setup. In the end, both institutions and rules are endogenous to other


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factors and conditions in the country. Among these, ownership structures and the

role of the state matter for the evolution of institutions and rules through the political

economy process. Shleifer and Vishny (1997, p. 738) take a dynamic perspective by

stating:

Corporate governance mechanisms are economic and legal institutions that can

be altered through political process. This dynamic aspect is very relevant in a cross-

country review, but has received much less attention from researchers to date. When

considering both institutions and rules, it is easy to become bewildered by the scope

of institutions and rules that can be thought to matter. An easier way to ask the

question of what corporate governance means is to take the functional approach.

This approach recognizes that financial services come in many forms, but that if the

services are unbundled, most, if not all, key elements are similar (Bodie and Merton

1995). This line of analysis of the functionsrather than the specific products

provided by financial institutions, and marketshas distinguished six types of

functions: pooling resources and subdividing shares; transferring resources across

time and space; managing risk; generating and providing information; dealing with

incentive problems; and resolving competing claims on the wealth generated by the

corporation. One cans define corporate governance as the range of institutions andpolicies that are involved in these functions as they relate to corporations. Both

markets and institutions will, for example, affect the way the corporate governance

function of generating and providing high-quality and transparent information is

performed. were previously in the hands of the state. Firms have gone to public

markets to seek capital, and mutual societies and partnerships have converted

themselves into listed corporations.

Second, due to technological progress, liberalization and opening up of financial

markets, trade liberalization, and other structural reformsnotably, price

deregulation and the removal of restrictions on products and ownershipthe

allocation within and across countries of capital among competing purposes has

become more complex, as has monitoring of the use of capital. This makes good

governance more important, but also more difficult.

Third, the mobilization of capital is increasingly one step removed from the principal-

owner, given the increasing size offirm and the growing role of financial


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intermediaries. The role of institutional investors is growing in many countries, with

many economies moving away from pay as you go retirement systems. This

increased delegation of investment has raised the need for good corporate

governance arrangements.

Fourth, programs of deregulation and reform have reshaped the local and global

financial landscape. Long-standing institutional corporate governance arrangements

are being replaced with new institutional arrangements, but in the meantime,

inconsistencies and gaps have emerged.

Fifth, international financial integration has increased, and trade and investment

flows are increasing. This has led to many cross-border issues in corporate

governance. Cross-border investment has been increasing, for example, resulting in

meetings of corporate governance cultures that are at times uneasy.

Literature review

The research on the subject for the Balkan area is limited enough and there are only

a few working papers performing several analyses. OEDC, Organization for

Economic Co-Operation and Development has been the most active in publishing

frequently topics and raising discussions through different panels considering as very

important the role of Banks in corporate governance system; however such studies

are in general for all companies and do not focus on the Corporate Governance of

banks specifically. (OEDC publications, 2004, Corporate Governance A survey of

OEDC countries)

There are other reviews in the field regarding Basel II implementation as a strong

tool for enhancing corporate governance in banks. The Basel Committee on

Banking. Supervision though their meeting on Sept1999 took important decision in

order to support government, especially the ones of developing countries like Balkan

Countries, to improve the regulatory environment for corporate governance. Such

guidelines were addressed to different fields like suggestions for stock exchanges

operations, investors, corporations, and other parties that have a role in the process

of developing good corporate governance (Enhancing Corporate Governance for

Banking Organizations, Basel Committee, Basel, September 1999)


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The recommendations of the Basel Committee towards the supervisory authorities of

banks as well as to second tier banks concern to establishment of proper

accountability and clear definition of reporting lines. This will improve at a great

extent the internal controls of banks and moreover the banking supervision itself.

The recommendations of Basel Committee include as well general guidelines on the

structure of the bank in terms of board of directors and senior management,

considering them as two decision making authorities separated from each other.

(Enhancing Corporate Governance for Banking Organizations, Basel

Committee,Basel, September 1999)

In February 2006, the Basel Committee on Banking Supervision published the

principles for sound corporate governance (Enhancing corporate governance for

banking organizations, February 2006) giving emphasis mainly to the important role

of the board of directors in the decision making process regarding banks strategies,

in the proper implementation of the corporate governance policy, oversight of the

daily banks management, transparency, defining the proper operational structure of

the banks, etc. Another working paper, referring to corporate governance in banks in

developing countries emphasizes the importance of corporate governance

implementation in banks of the developing countries for the following reasons The

important role of banks in financing the local economy through the lending activity to

the private companies but even through the soft term loans given to the government

for the public works. Banks plays a decisive role in decreasing the informal economy

and increasing the transparent operations of the companies through bank accounts

Banks serves as saving institutions by collecting the deposits of the market and by

increasing the confidentiality of the consumer. However, the foreign banks supports

the economy by injecting funds borrowed by the mother companies as well;

however, such phenomenon was limited during the last year derived from the

liquidity problems in general banks faced. Banks in the Balkan were forced to limit

the lending activity since the source of funding from both sides consumer (though

deposits) and group (through borrowings) was limited.

From the other side, the fact that the regulatory framework in the Balkan countries is

not at the proper levels, the internal control levels should be enhanced through the

corporate governance policy. The tendency of top managers of banks in these


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countries is to act in a more free way in governing the banks activities. Therefore,

the government role should be strong in the way of restricting bank managers

behavior.

(Corporate Governance of Banks in Developing Economies: Concepts and Issues,

Arun & Turner)

In the same paper, it is mentioned that in the empirical studies performed by

Demirguc-Kunt (1998) and Levine (1999) is suggested that the presence of foreign

banks reduces the likelihood of banking crises and may result in banks becoming

more prudentially sound. In addition, new legal and regulatory reforms should be

obligatory implemented in the regional economies and banks structure as well.

The existence of the audit committee is a must for all banks and the composition

should be the adequate one, with at least one member with thorough knowledge on

financials and accountings. The financial independence of the members is of much

importance as well. The establishment of other committees in the bank providing for

risk prevention and compliance with internal and external regulations is becoming

the issue of the day for banks in developing countries.

Addition, the board of directors should ensure the proper definition of clear lines of

responsibilities and accountabilities in order to avoid the creation of vacuum in which

nobody is in charge of the decisions made.

(Corporate Governance of Banks in Euroasia - A policy brief)

The yearly assessments that EBRD performs on evaluating improvements of the

corporate governance legislation were strong basis for the dissertation since involve

all countries of the Central Eastern Europe. The assessment is based comparing the

improvements on the subject per country to the OEDC corporate governance

principles and Basel Committee CG guidelines. (Corporate Governance Legislation

Assessment Project for Albania, Serbia, Romania, Bulgaria, year 2007)

The literature used gives and overall view of the importance of the corporate

governance in the banks performance as well as the important role of international

groups in improving the corporate governance of the banking systems in the Balkancountries. There is a positive correlation between strong corporate governance and


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banks market share and expansion. The definition of corporate governance differs

from country to country. For the case of Continental European countries such as

Germany, the term refers to all the stakeholders of a firm while for Anglo-American

countries corporate governance focuses on generating a fair return for investors

(see Goergen, Manjon and Renneboog, 2005).

The corporate governance devices utilized to ensure economic efficiency include

among others shareholder monitoring, creditor monitoring, executive remuneration

contracts, dividend policy and the regulatory framework of the corporate law regime

and the stock exchanges. The increasing international integration, deregulation and

technological development and the resulting challenges are calling for a review of

national corporate governance systems. Countries that are in dire need of external

financing require stronger and effective corporate governance systems. Pakistans

failure to attract external finance some of it from foreign investors may be largely

attributed to weak investor protection.

Improved corporate governance practices increase firm share prices; hence, better-

governed firms appear to enjoy a lower cost of capital. Operational performance is

higher in better corporate governance countries, although the evidence is less

strong. Well governed companies have less volatile stock prices in times of crisis.Companies with boards composed of a higher fraction of outsider or independent

directors usually have a higher market valuation. Improvements in corporate

governance quality lead to higher GDP growth, productivity growth, and the

increased ratio of investment to GDP. The effect is particularly pronounced for

industries that are most dependent on external finance.

When a countrys overall corporate governance and property rights systems are

weak, voluntary and market corporate governance mechanisms have limited

effectiveness. Proper regulatory framework and enforcement mechanisms are

crucial to promote good CG practices.Large, more concentrated ownership can be beneficial, unless there is a disparity of

control and cash flow rights. The quality of shareholder protection positively

correlates with the development of countries capital markets. Better corporate

governance leads to a better developed financial system, which, in turn, is

associated with greater access to financial services for small and medium

enterprises and poorer people.

Corporate governance measures in PakistanThe literature regarding corporate governance in Pakistan is enormously thin, given

the lack of research culture in Pakistani academic and institutional areas.


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International literature, reviewed in the earlier subsections has focused on East

Asian countries like China, Malaysia, Thailand, Korea, and Japan to name a few.

Among the South Asian countries, there is relatively much more literature on India

than any other country (Khanna et al., 1996, 1997, 1998, 1999; Pankaj, 1996;

Goswami et al., 1996; Singh et al., 2000, 2002, 2003). Cheema et al. (2003) sum up

the corporate growth history of Pakistan, providing an overview of the ownership

structures, state of financial market, and market dynamics. Cheema et al. (2003)

contribute to the sparse literature in Pakistan by studying the various determinants of

corporate structure in the same pattern that important corporate governance studies

(Claessens et al., 1999; LaPorta et al., 1999) have. These researchers observed the

concentration of ownership and control to determine the ownership structure and

capital market structure of Pakistan. Culture may change as corporate structures

change, however if a particular set of cultural traits is too deeply embedded in the

society, that it fits many institutions, then it will not change if it is impeding the

objectives of one institution (Roe, 2002). In Pakistan, a change in cultural traits

cannot occur if the regulatory institutions desire the change only.

Corporate governance and performance

Numerous studies have investigated the connection between corporate governance

and firm performance

(Yermack, 1996; Claessens et al., 2000; Klapper and Love, 2002; Gompers et al.,

2003; Black et al., 2003; Anda et al., 2005), with mixed results. Adjaoud et al. (2007)

concluded that there is little evidence of a systematic relationship between the

characteristics of the board. Bhagat et al. (2000) and Weir et al. (1999) observed a

positive relationship between corporate governance and firm performance.

Corporate governance contains various aspects of complex regimes as Zingales

(1998) also examines it as a comprehensively broad, multifaceted notion that is

enormously relevant, while difficult to define, due to the variety of scope that it

encompasses. Friend and Lang (1998) examine that shareholders, having high

concentration in firms, play an important role to control and direct the management

to take keen interest in benefit of the concentration group. However, corporate

governance command also allows shareholders to direct the management for

betterment of their investment. Shleifer et al. (1997) urged that concentration groups


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with large shareholdings; check the managers activities better. However, only the

check and balance not only causes to reduce the agency cost but as well resolves

the issues between managers and owners. Furthermore, Williamson (1988)

examined the relationship between corporate governance and securities. Jensen

(1986) seems to be quite keen to analyze how corporate governance directly or

indirectly influences the capital structure and firm value.

Driffield et al. (2007) stated that higher ownership concentration has a positive

impact on capital structure and firm value. In the other case, lower ownership

concentration, the relationship depends upon the strictness of managerial decision

making which enforce to bring change in the capital structure. Gompers et al. (2003)

analyzed the relationship between corporate governance, long-term equity returns,

firm value and accounting measures of performance, while Rob et al. (2004) found

combined relationship between corporate governance, firm value and equity returns.

The Code of Corporate Governance (2002) issued by Securities and Exchange

Commission of Pakistan describes the following benchmarks for international best

practices.

Corporate Governance in the Banking sector

By examining 49 countries, La Porta et al. (1997) confirm the hypothesis that

countries with poor investor protection have smaller capital markets. Their results

provide support for the link between the legal environment and economic

development. In particular, they find that countries with common law provide better

shareholder protection than countries with civil law. Common law is case-based law

and it is essentially the judges who make law by setting precedents in court. Civil law

is codified law and the role of the judges is limited to interpreting the law texts in

court. La Porta et al. report that common law countries that is, countries of English

law provide the highest investor protection, followed by the Scandinavian civil law

countries. Civil law countries of French origin provide the worst investor protection.

Countries whose law system is based on German civil law are somewhere between

the Scandinavian and French law countries.

Shleifer and Vishny (1997) argue that greater investor protection increases investors

willingness to provide financing. In turn, the greater availability of financing will leadto a lower cost of capital. For countries with emerging capital markets, such as


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Pakistan, corporate governance holds even more significance for both individual

companies and the national economy as a whole. Since the quality of corporate

governance is an important factor to investors when choosing their investment

targets, the introduction of international corporate governance practices in Pakistan

may help improve the national investment climate and stimulate economic growth.

If corporate governance improves e.g., in the sense of increased investor protection,

this will attract more investment and external resources which will strengthen the

national economy. The corporate landscape is changing dramatically all over the

world. In developed countries, legal experts, practitioners and policy makers are not

only striving to appraise corporate activity in better ways, but are also helping to

design rules that are intended to improve the way companies are managed. In these

countries, major corporate governance reforms are now under way

(see e.g., Goergen, Martynova and Renneboog(2005) for a review of the ongoing

reform on takeover regulation in the European Union).

Leora and Love (2002) document evidence that, for the case of 14 emerging

economies, the quality of corporate governance is important to investors when

choosing their investment targets. They find that the quality of corporate governanceis highly correlated with market valuation as measured by Tobins Q. Similarly, if

market value is measured by the return on assets (ROA), there is a positive

correlation between corporate governance and firm performance.CLSA (2001)

calculate an index with corporate governance rankings (CGR). CLSA provide a CGR

for 495 companies from 18 sectors in 25 emerging markets. They also assign

rankings to the 25 markets according to factors such as overall market valuation,

accounting and stock price performance. The study investigates whether firm level

differences in terms of corporate governance have an impact on future performance,

market valuation and access to external finance. CLSA (2001) assign Pakistan a

weighted score of just 3.1 out of 10 in their ranking; only the Czech Republic (2.8)

and Russia

They find a significant relationship between corporate governance on one side and

financial ratios, valuation and share price performance on the other side in emerging

markets. Gompers et al. (2003) study whether variations in firm-specific corporategovernance are associated with differences in firm value. Their results are consistent


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with those of Leora and Love (2002) and CLSA (2001). They use Tobins Q as a

measure of firm value and construct their own corporate governance index. They

report a strong positive relationship between their corporate governance index on

one side, and stock returns and firm valuation on the other side.

There are scores of studies that touch upon various issues of corporate governance

in emerging markets. Nevertheless, corporate governance within the financial sector

has as yet not been explored extensively, particularly not for the case of developing

economies (Arun and Turner, 2004). Ciancanelli and Gonzalez (2003) document that

almost three quarters of the member countries of the International Monetary Fund

(IMF) experienced significant episodes of a systemic crisis and associated bank

failures due to agency hazards. They further argue that commercial banks differ from

other types of firms because of a more intricate structure of information asymmetry

arising from the presence of regulation. Further, they show how regulation limits the

power of markets to discipline the banks, their owners and managers. They argue

that regulation must be seen as an external force, which alters the parameters of

governance in banks. They believe that, agency theory is unsuitable for analyzing

governance in commercial banks for two reasons. First, the assumptions made by

agency theory are not satisfied. In particular, banks are unique in the sense as theprincipal-agent relationship is subject to regulation. Second, bank regulation,

intended to prevent risk, limits the disciplinary power of market forces.

Doidge, Karolyi, and Stulz (2004) develop a model to examine the relationship

between country-specific characteristics (such as the financial and economic

development and investment opportunities) and the cost and benefits from improving

the national corporate governance system. The model outlines the distinguishing

features between investor protection granted by the countrys legal system and that

offered by the firm. They report that a countrys economic and financial stability as

well as its investment climate are an integral part of its corporate governance

environment. They observe that a firms decision of whether to offer better investor

protection than that granted by the legal system is largely dependent on the costs

and benefits of doing so. These costs and benefits in turn depend mainly on country-

specific characteristics such as economic and financial development and openness.

Crespi, Carcia-Cestona and Salas (2003) examine the governance of Spanishbanks. They investigate whether poor economic performance triggers corporate


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governance interventions such as changes to the board of directors and takeovers.

They find that financial performance triggers corporate governance interventions.

However, the type of governance intervention varies with the form of ownership.

They distinguish between independent commercial banks, dependent commercial

banks (which are wholly owned by another bank), and savings banks. For example,

takeovers and the replacement of the chairman are more frequent in badly

performing savings banks whereas the replacement of the CEO is more frequent in

independent commercial banks.

Barro and Barro (1990), who study a sample of large US commercial banks over the

period of 1982-1987, explain CEO dismissals in banks as the result of poor

economic performance. Prowse (1995) analyzes a sample of US bank holding

companies from 1987 to 1992 to determine how many of these companies used

corporate governance interventions. He finds that overall the market-based

corporate governance mechanisms in banks are not as efficient at disciplining

managers as they are in other firms. In most of the developing countries, banks

make up most of the financial sector.

Hussain (2005a) reports that banks account for 95% of the financial sector of

Pakistan. Arun and Turner (2004) discuss corporate governance in the banking

sector of developing economies. They argue that the distinctive characteristics of

banks call for regulation to protect depositors interests. They further suggest that the

market value of a banking institution will increase once it introduces corporate

governance mechanisms. In particular, improved corporate governance yields better

proceeds from the privatization of public sector banks. Arun and Turner also

recommend a broader approach to corporate governance for banks to protect the

interests of depositors and shareholders alike.

Corporate Governance Reforms in Pakistan

One of the rationales behind the recent corporate governance reforms aimed at

Pakistans financial sector is to minimize risk. As mentioned above, banks in

Pakistan account for 95 percent of the financial sector and hence their good health is

essential to ensure sustained economic growth and the development of Pakistan

(Hussain, 2004).However, banks in Pakistan have been catering largely for the


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needs of the government. The government has been pressurizing banks to meet its

financial needs, and to issue loans to corporations benefiting from favoritism.

As a result, banks have ended up with bad loans and financing has not been

channeled to the most efficient firms in the economy.

Hussain (2005a) describes the banking sector over the past decades. The

government used the banks deposits to finance its fiscal deficit. Lending to the

government was considered to be safe and profitable. Moreover, the government

owned most of the banks and their employees had little incentive to work hard and

absenteeism was high. The banking sector was characterized by low levels of

competition, unnecessary bureaucracy, overstaffing, loss-making branches and poor

customer service. Further, favoritism at the time of lending resulted in huge amounts

of debt defaulting subsequently. The corporate tax rate in the banking sector was 58

percent compared to only 35 percent in other sectors. As a result there was a

continuous trend for lending rates to increase at the detriment of depositors who

earned lower and lower returns. Over the last decade, the banking sector has been

undergoing a tremendous transformation, which has been recognized by the IMF

and the World Bank. IMF (2005) observes that credit to the private sector has been

increasingly steady over the last few years. It further reports that credit to the

corporate sector has been generally stable and is declining in the case of public

sector owned enterprises. The Financial Sector Assessment Report (2004)

distinguishes between domestic private financial institutions and foreign financial

institutions. According to the Report, domestic private financial institutions have

attracted almost 86 percent of credit by end of the 2004 financial year compared to

67.2 percent at the end of 2000. The government has undertaken some of the much-

needed corporate governance reforms, such as the privatization of banks, the

appointment of individuals of standing and integrity as chief executive officers

(CEOs) and changes to the boards of directors. Hussain (2005b) believes that good

corporate governance is vital for bringing about improvements in the internal controls

and the organizational culture. A summary of achievements and initiatives taken by

the government is outlined below (Hussain 2005b):

Regulation defining the responsibilities of the board of directors.


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Applicants for the posts of CEO, other board members and key executives have to

fulfill certain criteria.

Banks have to adhere to minimum (quarterly and annual) disclosure requirements.

Family representation on the boards has been limited to 25 percent of the seats

and the remaining directors have to be independent non-executives and not related

to the controlling family.

Stockbrokers and all others who may suffer from conflicts of interests are barred

from getting involved in the management and oversight of banks.

A Handbook on Corporate Governance for banks/development financial

institutions (DFIs) containing international best practice and State Bank of Pakistan

(SBP) guidelines on the subject have been compiled, published and disseminated.

The Handbook also refers to OECD practices and the Cadbury (1992) code. The

main objective of publishing this document is to reinforce the significance of

corporate governance as an effective business tool for bankers, auditors and the

general public. Members of banks/DFIs were organized to train them.

An institute namely, Pakistan Institute of Corporate Governance has beenestablished in Karachi and the SBP is among its founder members.

Corporate governance requirements for banks/DFIs are continually reviewed to

keep them in line with internationally recognized best practice.

External audit firms are screened, categorized and rated for the purpose of auditing

financial institutions. Whenever they are found deficient, they are delisted or even

black-listed. SBP claims that these steps have resulted in better market discipline

and conduct, improved risk management, better-qualified board members and

CEOs, and better self regulation. To set good examples, the regulatory agencies

such as SBP and SECP have themselves subjected to higher standards of

disclosure and transparency.

Hussain (2005a) reports that both the SBP and SECP have undertaken a number of

measures, including an open consultative process and the dissemination of

information. As part of its accountability strategy, SBP now issues an annualcorporate performance report.


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CORPORATE GOVERNANCE REFORM

The analysis so far suggests that better corporate governance generally pays for

firms, markets, and countries. The question then arises why firms, markets, and

countries do not adjust and adopt voluntarily better corporate governance measures.

The answer is that firms, markets, and countries do adjust to some extent, but that

these steps fail to provide the full impact, work only imperfectly, and involve

considerable costs. The main reasons for lack of sufficient reform are entrenched

owners and managers at the level of firms and political economy factors at the level

of markets and countries. Both issues are considered below.

The role of entrenched owners and managers

Evidence shows that firms adapt to weaker environments by adopting voluntary

corporate governance measures. A firm may adjust its ownership structure, for

example, by having more secondary, large block holders, which can serve as

effective monitors of the primary controlling shareholders. This may convince

minority shareholders of the firms willingness to respect their rights. Or a firm may

adjust its dividend behavior if it has difficulty convincing shareholders that it will

reinvest properly and for their benefit. These voluntary mechanisms can include

hiring more reputable auditors. Since auditors have some reputation at stake as well,

they may agree to conduct an audit only if the firm itself is making sufficient efforts to

enhance its own corporate governance. The more reputable the auditor, the more

the firm needs to adjust its own corporate governance. A firm can also issue capital

abroad or list abroad, thereby subjecting itself to higher level of corporate

governance and disclosure.

Empirical evidence shows that these mechanisms can add value and are

appreciated by investors in a variety of countries. A study of a sample of U.S. firms

found that the more firms adopt voluntary corporate governance mechanisms, the

higher their valuation and the lower their cost of capital (Gompers, Ishii, and Metrick

2003). Similar evidence exists for Korea (Black, Jang, and Kim 2002), Russia

(Black 2001), and the top 300 European firms (Bauer and Guenster 2003).13

Gompers, Ishii, and Metrick (2003) also report that these firms have higher

profitability and sales growth, and lower their capital expenditures and acquisitions to

levels that are presumably more efficient.

There is also evidence that the voluntary corporate governance adopted by firmsmatter more in weak corporate governance environments. Two studies compared


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indexes of firm-specific corporate governance measures with countries corporategovernance indexes to analyze the effects on firm valuation and firm performance(Klapper and Love 2002; Durnev and Kim 2002). They found that firm-level corporategovernance matters more to firm value in countries with weaker investor protection.Markets can adapt as well, partly in response to competition, as listing and trading

migrate to competing exchanges, for example. While there can be races to thebottom, with firms and markets seeking lower standards, markets can and will settheir own, higher corporate governance standards. One example is the NovoMercado in Brazil, which has different levels of corporate governance standards, allhigher than the main stock exchange. Firms can choose the level they want, and thesystem is backed by private arbitration measures to settle corporate governancedisputes. Efforts like these can help corporations improve corporate governance atlow(err) costs as they can list locally.There is evidence, however, that these alternative corporate governance

mechanisms, apart from being costly, have their limits. In a context of weakinstitutions and poor property rights, firm measures cannot and do not fully

compensate for deficiencies.The work of Klapper and Love (2002) and Durnev and Kim (2002) shows thatvoluntary corporate governance adopted by firms only partially compensates forweak corporate governance environments.There are also elements of self-selection, with worse firms choosing to list in worseenvironments. Competition between stock exchanges takes many forms, includingnot only listing standards, but also the direct cost of trading. This suggests that firmsconsider several dimensions in selecting where to list. One study, for example, hasargued that family-owned firms prefer to choose to list in weak corporate governanceenvironments (with perhaps higher trading costs). These markets would have littleincentives to improve their corporate governance standards.By contrast, (large) firms with diversified ownership structures prefer to list ininternational markets (Coffee 1999 and 2001). Nevertheless, there are many otherreasons why firms do not adjust their corporate governance or list in the environmentoptimal from a cost of capital point of view, including entrenched owners.

The role of political economy factorsImportantly, countries do not always reform their corporate governance frameworksto achieve the best possible outcomes. In some sense, this is shown by thepervasive importance of the origin of the legal system in a particular country in manyanalyses and dimensions. Whether a country started with or acquired as a result of

colonization a certain legal system some century or more ago still has systematicimpact on the features of its legal system today, the performance of its judicialsystem, the regulation of labor markets, entry by new firms, the development of itsfinancial sector, state ownership, and other important characteristics (Djankov andothers 2003). Evidently, countries do not adjust that easily and move to some betterstandards to fit their own circumstances and meet their own needs. Partly this isbecause reforms are multifaceted and require a mixture of legal, regulatory, andmarket measures, making for difficult and slow progress.Efforts may have to be coordinated among many constituents, including foreign

parties.Legal and regulatory changes must take into account enforcement capacity, often a

binding constraint. While markets face competition and can adapt themselves, theymust operate within the limits given by a countrys legal framework. The Nova


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Mercado in Brazil is a notable exception where the local market has attempted toimprove corporate governance standards using voluntary mechanisms. But it needsto rely on mechanisms such as arbitration to settle corporate governance disputes asan alternative to the poorly functioning judicial system in Brazil.Experiments with self-regulation in corporate governance, as in the Netherlands,

have often not been successful.14 The ability of corporations to borrow theframework from other jurisdictions by listing or raising capital abroad, or evenincorporating, is limited to the extent that some local enforcement of rules is needed,particularly concerning minority rights protection (see Seigel 2002 for the case ofMexico).

Causality is unclear, as weak corporate governance standards could have led tomore concentrated corporate sector wealth. Conversely, a higher concentration ofwealth could have impeded improvements in corporate governance. For example, inIndonesia, there are direct relationships between the government and the corporatesector. The sample is too small to make any statistical inference. Nevertheless, it

does suggest that wealth structures may need to change in order to bring aboutsignificant corporate governance reform. This can happen through legal changes(over time), and also as a result of direct interventions (such as privatizations andnationalizations, as during financial crises). Reforms can also be impeded by a lackof understanding. Partly this will be linked to political economy factors, perhapsdirectly related to ownership structures, as when the media is tightly controlled.To date, the relationships between institutional features and countries more permanent characteristics, including culture, history, and physical endowments, hasnot been widely researched. Institutional characteristics (such as the risk ofexpropriation of private property) can be long-lasting and relate to a countrysphysical endowments (Acemoglu and others 2003 show this for a cross-section ofcountries). Both the origin of its legal systems and a countrys initial endowments areimportant determinants of the degree of private property rights protection(Beck, Demirg-Kunt, and Levine 2003).

The role of culture and openness in finance, including in corporate governance, isalso important (Stulz and Williamson 2003).More generally, the dynamic aspects of corporate governance reform are not yet wellunderstood. The underlying political economy factor that may drive changes in thelegal frameworks over time is the subject of a study by Raghuram Rajan and LuigiZingales (2003a). They highlight the fact that many European countries had more

developed capital markets in the early twentieth century (in 1913) than for a longperiod after the Second World War.

Importantly, many of these countries capital markets in 1913 were more developedthan the U.S. market at that time. A review of ownership structures at the end of thenineteenth century in the United Kingdom (Franks, Mayer, and Rosi 2003) showsthat most UK firms had widely dispersed ownership before they were floated on thestock exchanges. And in 1940 in Italy, the ownership structures were more diffusedthan in the 1980s (Aganin and Volpin 2003).

The Code of Corporate Governance


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In March 2002, the SECP issued the Code of Corporate Governance (the Code). The

Code is a code of best practice and all listed companies have to include a statement

in their annual report as to the level of compliance with the best practices detailed in

the Code. This statement must be reviewed and certified by the companys auditors.

The Code specifies best practice in terms of:

The composition and the duties of the board of directors;

The appointment, qualification requirements and the responsibilities of the chief

financial officer (CFO) and the company secretary;

Corporate and financial reporting including the disclosure of directors interests and

trades;

The required free float at the time of the flotation;

Takeovers;

The need for an audit committee and its duties;

Internal auditing;

Corporate Governance as a Legitimizing Force

From an institutional perspective, legitimacy is not a commodity to be possessed or

exchanged but a condition reflecting cultural alignment, normative support, or

consonance with relevant rules or laws (Scott, 2001: 45). As such, corporate

governance practices mediate between corporate sovereignty and social legitimacy

(Bonnafous-Bouchler, 2005). As Kostova and Zaheer (1999) point out, traditional

institutional theory examines legitimacy at two levels of analysis: (1) the

organizational field level, and (2) the organizational level.

In this study, we examine legitimacy at the societal level within the context of

corporate governance practices.

This extension of institutional theory to the societal level is not only interesting to

institutional scholars, but also relevant and useful to practitioners. In our increasingly


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global economy, nation-states are often viewed a potential investment locations

(Friedman, 2000). If governance practices are viewed as in general as legitimate or

improving in legitimacy, then multinational enterprises (MNEs) would be more likely

to invest in those locations. Alternatively, if governance practices are generally

viewed as illegitimate or declining in legitimacy, then MNEs might not invest or might

even divest operations. Consistent with institutional theory at this level, we focus on

the institutionally-based practices underlying Denis and McConnells definition of

corporate governance as those mechanisms that induce the self-interested

controllers of a company to make decisions that maximize the value of the company

to its owners (2003: 2).

In sum, nation-states tend to acquire reputations for the acceptability and legitimacy

of its corporate governance practices. Since neo-institutional theory is concerned

with social legitimization processes and outcomes and since corporate governance

practices tend to vary systematically by nation-state, an empirical study of the

institutional predictors of corporate governance legitimacy seems appropriate.

The term corporate governance refers to the relationships among management, the

board of directors, shareholders, and other stakeholders in a company. These

relationships provide a framework within which corporate objectives are set and

performance is monitored (Mehran, 2003). Corporate governance also provides a

structure through which the objectives of the company are set, and the means of

attaining those objectives and monitoring performance are determined. Good

corporate governance should provide proper incentives for the board and

management to pursue objectives that are in the interests of the company and

shareholders and should facilitate effective monitoring, thereby encouraging firms to

use resources more efficiently (OECD, 1999).

Empirical findings

Findings on Corporate governance issues after financial crisis, corporate scandals

and market manipulation

First of all, we found out that the internal and external committee audit showed

disadvantages and weak points during the audit process which lead to rooms for

managers using manipulation tools to create an unreal financial picture of scandal


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companies. The reasons might be including: there still exists an insufficient

information system or database which contribute to ineffective business decision

making in those companies. The second important corporate governance issue is

that the corporate governance mechanisms is not complete and perfect in the aspect

that controlling shareholders and group of minority shareholders participate into

internal business issues of top management over the acceptable necessary

requirements and therefore, it puts a lot of pressure on the efficiency, the

effectiveness of the business , also the higher ROI commitment on the shoulder of

the board of directors and CEO without considering to the current business context.

This leads to negative manipulation and unstable changes in the businesss security

market.

Third, among important covered issues is the timing issue of corporate annual

reports announcement to the public is another corporate governance issue. It

includes issues such as:

a) Common delays in delivering on-time annual financial statements to the public;

and

b) Insufficient data or information announced to the public on company website atcertain points in the fiscal year, especially during and after financial crisis or

suddenly changing in the management board. So, this also relates to the validity and

control of regulations in information management on the company website. We can

point it out another CG, corporate governance, and issue. That is, the appraisal of

following code of ethics of the company and industry in specific markets is not done

with full of responsibility or is done just on the business surface. Or in another word,

there still lacks of the appraisal of the role of the legal or compliance division in the

company which contributes to the bad results on the corporate performance and

scandals. Last but not least, one major corporate governance issue existing as the

main cause to corporate scandals of these companies is that there is a question on

the quality of the management skill and talent of companies CEO and his or her

colleagues in the board of management. Or in another way, it is the issue of

evaluating and appraising the efficiency and effectiveness of their management and

governance capacity during both business growing stage and recession stage


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Findings on Construction of a Limited Common Asian Pacific Corporate

Governance standards

Asia Corporate governance standards analysis

In Japan

One of major different features in the Japan 2009 revised principles is that it views

the Company or Corporation as the whole entity in constructing its corporate

governance standards. Therefore, it, the company, has a responsibility in developing

and improving an internal check and balance system for the Auditors, Board and

other groups make their business judgments. And it also guarantees necessary

facilities such as human resources and infrastructures to support the audits.Besides, the 2009 Code expands the interests from the corporations shareholders to

its stakeholders, in order to create a harmony relationship between the company and

its stakeholders and to create corporate value and jobs. Here we can see the role of

the corporation when it is looked at as the whole entity and take into consideration of

building a corporate culture in favor of its stakeholders.

Additionally, The Japan Corporate governance principles have an ambiguous point

when it describes the other relevant groups in supervising Management. And also, itstill does not pay more attention to the supervisory roles and structure in favor of the

CEO and Board. In conclusion, the Japan principles cover a variety of issues which

is based on a shareholders- oriented point of view.

In Philippines

In the Philippines, the general corporate governance guide is called the Code of

Corporate Governance which has a good foundation on reference criteria of

corporate governance guidelines from World Bank and OECD principles of

Corporate Governance. It is established in 2002 by SEC and revised in 2009 afterthe World Bank issuing the ROSC in 2006 (ROSC stands for Report on the

Observance of standards and Code). It aims to strengthen the investor confidence,

develop the capital market and help the corporate sector and Philippines economy to

achieve the sustainable growth. Within the appropriate timeline and research

objectives, this paper cannot cover the changing features of the old 2002 Code,

compared to the new 2009 Code, so this is its limitation. Below analysis is focusing

on the Code that took effect on July 15th, 2009 in Philippines. According to the

revised 2009 Code, Corporate governance is understood as a framework of rules,

systems and processes that govern performance by the Board of Directors and

Management of their respective duties and responsibilities to the stockholders. This


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formed a general legal system governing the corporation and also provides good

understanding for the authorities and auditors while still exclude the emphasis of

CEO roles. Besides, the internal control functions are separated from the internal

audits ones, with the goals covering the accomplishment of the companys goals,

efficient operation, reliability of financial reports, and faithful; compliance withapplicable laws and internal rules. The Code has a good point when it mentions the

internal audit department in this revised 2009 version with an emphasis on objective

assurance to add value to the company itself. Next, the Board of Director is classified

in 2 groups: executive and non-executive directors which involve the independent

directors. Non-executive directors are appointed not to be Head of Department and

not performing any work related to the companys operation. So, the co-existence of

both independent and non-executive directors probably causes a misunderstanding

or difficulty in separating and clarifying their duties. Additionally, while The 2009

Code allow the unify of CEO and The Chair, it also describes clearly the roles of the

Chair in the Corporation which still has points misleading the CEO in many cases of

decision -making in the Company. The reason is that the CEOs qualification and

responsibilities are not well and clearly defined, in regarding to the Chairs duties.

Another point is the organization of the Audit committee in the company. Though it

provides a good definition on the composition of the board committee, it still had an

overlap or might probably cause confusion between the roles of compliance and the

roles of the audit division.

One of the point show the importance of this body is the obligation to ensure that the

internal and external auditors have unrestricted access to the companys records,

properties and personnel. Therefore, it will be better if the Code clarify more on the

responsibilities of the Internal Auditor and the difference between them and the

External Auditor when it mention the independent internal auditor in the appointment

and organization of Internal audit department. Moreover, in the light of the Code, we

can see the detailed role of the Audit committee in the evaluation of non-audit work

of external auditors which are difficult to some corporations, but we have to define

the clear boundary again between a so-called non-audit versus audit works and the

evaluation process as well. Last but not least, the Secretary of the Corporation is

pointed either its legal counsel or the one aware of laws and rules. After the financial

crisis, it is necessary to conclude that this criteria should be updated for him or heras the sub quality factor in the below table. And it is quite helpful to suggest that he

should ensure that the meeting members have accurate information, before, that

facilitates an intelligent decision. Finally, the 2009 Code highlight the role of the

Compliance Officer in giving recommendation and measures to avoid the repetition

of the Code or Rules violation. In general, the Philippine Code 2009 built a good

standard for the Internal Audit department and mechanisms. It clarifies the duty of

the Internal Auditor in delivering an annual report on its activities, duties and audit

plan covering risk and control issues. Besides, it, the Code, still has some more

works to do with constructing a good standard for the CEO of the company, and theprocedures for separating the Chair and the CEO in case they are different people.


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Also, it still has to clarify terms such as other matters or issues which cause

ambiguous understanding for the Internal Auditors responsibilities. To be better in

transferring the Code message to the Companys Top management team, it should

focus more on describing the separate functions between the Board of Directors and

The CEO. Based on the revised 2009 Code, each corporation can build its owncorporate governance system including rules, procedures and principles in

accordance to the Code

CONCLUSION

In efforts to prevent and control the above analyzed corporate governance issues

after crisis, scandals and negative manipulation, each country in this research paper

is on the way to modify and revised their suitable Code of Corporate Governance

and achieve important and different levels of corporate governance system,

structure, mechanisms and positions. Philippines Code is mainly allocating the

corporate governance system to the corporations Board of Directors while Japan

Code uses a shareholder-oriented philosophy and considers the company as the

whole entity in establishing and maintaining its governance relationships

La Porta et al. (1998) assign Pakistan, a common-law country, a maximum score of

5 for their anti-director rights index. Pakistan should therefore be a country with good

investor protection attracting large amounts of investments. However, the reality

could not be more different. Pakistan has been lagging behind other, comparableAsian economies in terms of incoming foreign direct investment as well as GDP-per-

capita growth. Given the crucial role that the finance industry plays in promoting and

sustaining economic growth in emerging markets, this paper focuses on Pakistans

banks. The paper reviews some of the recent reforms of corporate governance, such

as the introduction of the Corporate Governance Code (2002). It also comments on

reforms that target the banking industry such as the privatization of financial

institutions and the strengthening of its financial structure.

To conclude, Pakistan has made major steps in improving the governance of its

corporations in general and that of banks in particular. However, more efforts need tobe made in terms of improving levels of compliance with the Code. Given its crucial

role in promoting and sustaining economic development, Pakistans banking industry

needs to be aware of its role as a leader in high corporate governance standards.

It has been seen that owing to the opacity of banks and the relatively high degree of

regulation, corporate governance measures are often faced with a hindrance. While

this is generally true for all banking institutions, the governance issues become more

difficult in government owned banks or public sector banks because the government

typically owns, manages and regulates such banks


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