Towards better corporate governance

Sustained efforts undertaken by the SECP and Pakistan Institute of Corporate Governance (PICG), in collaboration with the IFC are bearing fruit and local companies, listed or unlisted, are realising that sound corporate governance (CG) leads to better business prospects. "In order to be more competitive internationally, local companies have to instil the international standards of corporate governance in their processes and structures," said project manager of IFCs PCG Project, Kaiser Naseem. "In 2002 the Securities and Exchange Commission of Pakistan issued a Code of Corporate Governance, most of which was made mandatory for listed companies. The State Bank of Pakistan requires non-listed commercial banks and DFIs comply with the code. The SECP has issued a separate code for all companies in the insurance sector," reads PICGs 2005-report entitled "Corporate Governance Country Assessment". Yet given the abundance of small, family-owned businesses in the country; the overall adherence to CG standards remains low. Also, despite the promulgation of the CCG, the collapse of Crescent Investment Bank and other such corporate failures lay bare the urgent necessity for further improvements in standards of disclosure and transparency. In the United States, prominent corporate failures resulted in the promulgation of the Sarbanes-Oxley Act (SOX); a bi-partisan draft that aimed to enhance corporate governance, disclosure and reporting requirements. The adoption of some of the caveats of this law can help improve the state of CG in Pakistan. The biggest distinction between the CCG enforced by the SECP in Pakistan and the SOX Act is the legal status of each. The CCG is only enforceable through the listing regulations of the countrys stock exchanges, while the SOX Act is legislation; making it legally enforceable. Likewise, the SOX Act contains strong deterrents against non-compliance including heavy fines and imprisonment of CEO and CFO. By comparison, Pakistans CCG relies on the same penalties that are prescribed against non-compliance with listing regulations of the local bourses. By enacting the code of corporate governance as a law and adding strong deterrents against non-compliance, companies can be forced to expedite and enhance transparency and disclosure. While the SECP code requires the existence of an audit committee, with the majority comprised of non-executive members; the SOX Act goes further, mandating that all members of the audit committee are independent and at least one of the members is a financial expert. Similarly, the CCG requires the existence of internal controls but the regulator has so far not framed any regulations regarding the specifications of the same. Resultantly, most companies seeking a statement of compliance from external auditors are able to secure it, while the auditors are not mandated to probe internal controls in great detail. By comparison, section 404 of the Sarbanes-Oxley Act mandates that the management assess internal controls, periodically while external auditors must verify these assessments. Another important achievement of the SOX Act, was the bifurcation of the duties of performing audits from the role of setting auditing standards. Prior to this legislation, the American Institute of Certified Public Accountants (AICPA) was responsible for both tasks. But this act created an independent, non-governmental organisation called the Public Company Oversight Board (PCAOB) to define standards for external auditors. In Pakistan, ICAP is still responsible for setting such standards while as the association of chartered accountants; it is a representative body of external auditors in the country. The creation of an independent organisation for setting standards of disclosure, transparency and oversight can expedite and improve corporate governance among companies in the country.