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Corporate Governance Department

World Bank Group

Corporate Governance in Pakistan:Results from the Corporate Governance

ROSC

Corporate Governance DepartmentPrivate Sector Development Vice Presidency

The World Bank GroupMay 29, 2006

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Outline

• About the CG ROSC for Pakistan

• Findings

• Recommendations

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Introduction to the Corporate Governance ROSC

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The ROSC Assessments Examine:

1.Legal and Regulatory Framework

2.Enforcement Activities

3.Private Sector Business Practices

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Corporate Governance ROSC Assessments

• Assessments are benchmarked against the 33 OECD Principles of Corporate Governance

• Voluntary

• Standardized report (Report on Observance of Standards and Codes, ROSC) including policy recommendations

• Four audiences:– Policymakers: to identify opportunities for legal & regulatory reform

– Private sector: understand strengths and weaknesses

– (International) analysts: benchmarking

– Technical assistance providers, including IFC: Identify key reform areas

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Corporate governance reform:the public policy rationale

An improved corporate governance framework will:

• Protect shareholders and depositors

• Protect public pension savings for retirement

• Improve corporates’ access to finance (both equity and debt)

• Help Pakistan:

– attract, allocate and monitor investment– Increase financial stability– Increase market capitalization and growth

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Overview- World Bank Corporate Governance Assessments

Completed 48Published 37On-going FY06 6

1 0

8

1 0

1 0

1 0

0 1 0 2 0 3 0 4 0 5 0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

A s s e s s m e n t s b y Y e a r Assessments by Region (through 2004)

A s s e s s m e n t s b y R e g i o n

A F R ( 4 )

E A P ( 7 )

E C A ( 2 1 )

L C R ( 8 )

M N A ( 4 )

S A R ( 4 )

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Overview of World Bank Corporate Governance Assessments

2001 2002 2003 2004 2005

Brazil Georgia Mauritius Egypt 2 Armenia

Croatia Czech 2 Brazil 2 Slovenia Poland 2

Czech Rep. Lithuania Hungary Russia Ghana

Egypt Bulgaria Ukraine India 2 Pakistan

India Latvia Korea Peru Thailand

Malaysia Morocco Hong Kong Romania 2 Malaysia 2

Philippines Romania Chile Indonesia Nepal

Poland South Africa Mexico Jordan Brazil 3

Turkey Slovakia Pakistan Macedonia

Zimbabwe Colombia Panama Azerbaijan

Notes: Assessments in bold are in process. Assessments in italics have not been published.

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A Review of Corporate Governance in Pakistan

- Findings -

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Corporate Governance Assessment: Summary of Assessment in Pakistan

• Summary of assessment carried out in May 2004

• Assessment results:– 4 principles “Observed”– 17 principle “Largely Observed”– 10 principles “Partially Observed”– 1 principles “Materially Not Observed”– no principles “Not Observed”

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Pakistan: Corporate Governance Landscape

• Awareness of the importance of corporate governance is rising

• Very important corporate governance code

• Rapidly rising market capitalization (60% last year)

• Creation of PICG

• Unique feature: strong regulator of securities and company law

• Strong concentration of ownership in hands of state/ families

• Relatively little foreign portfolio investment

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Key Issue: Investor Protection

• Basic shareholder rights are respected

• However, shareholder participation in the AGM can be cumbersome

• Concentrated ownership brings minority shareholder rights protection to foreground

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Key Issue: Disclosure

• Improved quality and timeliness of financial reporting in recent years

• Requirement to disclose indirect or ultimate beneficial ownership easily circumvented

• Recent controversy over related party transaction disclosure and transfer pricing

• No system of independent oversight over the audit profession

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Key Issues: Company oversight and the board

• No clear distinction between ownership and control Boards dominated by executives/controlling shareholders

• Insufficient guidance on duties of care and loyalty

• Independent directors are the exception rather than the norm

• Board remuneration is not adequate to attract qualified independent directors

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Key Issues: Enforcement

• Enforcement is centered on the SECP and the State Bank of Pakistan

• The Stock Exchanges are responsible for monitoring and enforcing compliance with the Code

• Market participants consider the judiciary to be inefficient and expensive, and an ineffective source of shareholder redress

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- Recommendations -

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Establish corporate governance enforcement priorities

• SECP should focus on enforcing the rules on the disclosure of ownership and related party transactions

• SECP should continue to work to build its enforcement capacity

• Develop a system of independent audit oversight

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Mobilize the private sector to improve corporate governance

• The Karachi Stock Exchange (and its successors) should consider a market differentiation strategy

• Institutional investors should play a more effective corporate governance role

• Build a core group of effective independent directors

• At the CDC, dematerialization and the move towards a central registry should be encouraged

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Legislative reform should focus on key areas of concern

• Strengthen rules for independent directors, improve board compensation, and clarify the role of the Chairman of the board.

• Improve the ownership disclosure framework

• Strengthen shareholder rights by improving access to the AGM, lowering thresholds for shareholder redress, and updating rules on changes in control

• Increase the accountability of directors

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Focus future technical assistance on high-priority implementation

• Development of a national action plan

• Training and awareness programs to develop a culture of corporate governance that extends beyond the SECP and the larger companies

• Improve corporate governance in the state owned enterprise sector

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Final Remarks

• Excellent progress, have come a long way

• But much now needs to be done in terms of implementation at corporate level

• Law on the books vs. practices

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Thank youFor More information, pls. contact:• Alex Berg - Corporate Governance Department, World Bank

E-mail aberg2@worldbank.org; Tel. +1 202-473-3687

• Kaiser H. Naseem - Manager, IFC Pakistan Corporate Governance Project E-mail knaseem@ifc.org; Tel. +92 51 909 0658

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Doing Business Indicator of Investor Protection

New Zealand 1

Singapore 2

Canada 3

Hong Kong 4

United States 7

United Kingdom 9

Bangladesh 17

Pakistan 20

India 29

Chile 36

Romania 44

Bhutan 52

France 56

Germany 57

Russia 73

Saudi Arabia 74

Turkey 75

Nepal 90

Spain 94

Egypt 114