The shaky affair between family run business and corporate governance.
The case of Pakistan?
Farwa Sial 10 August 2011
Proceed with caution, that’s what entrepreneurs are told when dealing with Pakistan. Indeed International organisations and surveys contend that Pakistan is seen as one of the most corrupt countries in the world. No doubt the country has the potential to be an entrepreneurial nation. However, problems still persist, such as the stereotype that an entrepreneur can get rich overnight or the lack thereof and understanding how a business works have led to the demise of many entrepreneurial ventures. It appears that the last business model standing is those that are family run companies. But pundits would argue that to ensure a budding business in Pakistan whether family run or not, Corporate Governance is a crucial factor. The World Entrepreneur Society (WES) takes a look into the Pakistan business system. click here for the full report……
PAKISTAN DEFINED
From an international financial perspective, corporate governance ensures that a board of directors are accountable, fair and transparent in a company’s relationship with stakeholders such as investors, customers, management, employees, government and the community. Moreover, all financial stakeholders receive their fair share of a company’s earnings and assets. This also fosters investor confidence and provides for greater incentives and risk mitigation for both foreign and internal investment and capital flows; thus developing the market economy as well as civil society. So does this definition apply to Pakistan? Corporate Governance in Pakistan largely falls within the ambit of the Securities and Exchange Commission of Pakistan (SECP), which created the 2002 Code of Corporate Governance with a view to improve corporate operational behaviour, in conformity with Islamic law as well as international good practice. In addition the SECP, in private pubic partnership with the three major Pakistani stock exchanges, the State Bank of Pakistan and various banking and insurance institutions forms the Pakistani Institute of Corporate Governance (PINCG).
The 2002 code includes enhanced internal and external audits for listed companies, the reform of the Board of Directors with a view to greater accountability to all classes of shareholders as well as the possibility of single member /director companies, extending available corporate liability advantages yet simultaneously subjecting them to higher levels of corporate discipline. The Code (and subsequent consultations) also place great emphasis on the function and structure of Companies’ Boards of Directors and introduces the requirement for non-executive and external directors to ensure independent, judicious and unbiased corporate decision making. It limits the number of directorships an individual can hold and separates the offices of the Chairman and CEO. Company Directors are required to participate in Orientation Courses and be certified with the Board Development Series under PINCG. However, the Pakistani Corporate Governance is in its nascent stages and in spite of solid structural implementation requires extensive and wider development. In 2007, the SECP and PINCG conducted a survey on the 2002 Code targeting large and listed companies. The findings of the survey were the need for the creation of awareness amongst company management and officers, so as to move away from mere tick boxing but an actual implementation of the 2002 Code. Following the survey, in the context of mainly the Karachi Stock Exchange, the SECP took ‘action’ against companies which failed to pay listing fees or conform to listing rule, failure to declare dividends or bonuses for five years and defaulting companies who have not held meetings for more than three years.
MIXING FAMILY WITH BUSINESS
Many of the world’s most famous corporations of today began as family firms, such as that of Walmart, Ford and Tetra Pak. In Pakistan, family firms are a common business model. However, experts argue that Pakistani companies that are run by families encounter many problems. There exists conflict between management and owners that is the controlling family and the minority shareholders. The conflict between the two has often resulted in a lack of trust and transparency, as each considers their interests over and above that of the company. Experts have strongly argued that more attention needs to be paid to corporate governance, as such a mechanism in place ensures that outside shareholders can effectively check misbehaviour and mismanagement of the controlling family owners. PINCG has been trying to introduce corporate governance measures in Pakistani family firms since 2007; however this has been an uphill struggle. It really comes down to mixing family affairs with business, in various parts of the world there have been success stories of family run companies, however keeping it in the family may also be an obstacle. Should the family be kept out of business affairs? Or as in the case of Pakistan should the alternative be corporate governance in solving the woes of family run businesses? Have your say…..