Improving Disclosure quality practices in Pakistan

corporate governance

Presented to:
Ms. Samya
Presented by:
Waseem Akram 005
Maida Rafique 004
Umair safdar
008
M Zia Khalid
003
Awais Mumtaz 007

Contents
History of corporate governance in Pakistan
ICGP
Determinants of Disclosure Quality in Pakistani Corporate Culture
(Article)
Role of independent directors
Quality disclosure
Purpose of disclosure Quality
Implementations
Duality of chairperson
Improving corporate Governance practices in pakistan

Article Review
In this article the five variables has significantly impact ion the
disclosure quality or fair information.
Transparency and disclosure are important components of
corporate governance. The main purpose of this paper is to
examine the corporate governance attributes that explain the level
of disclosure quality of the firms listed on Karachi Stock
Exchange.

Data Methodology
For estimating the relationship between corporate governance
attributes and disclosure quality, we used the multiple
regression technique in this study. The corporate governance
attributes are audit committee independence.
The sample consists of 198 non-financial companies listed on
Karachi stock exchange for the period 2010. Information has
taken from the annual reports of the firms

History of corporate governance

In

March 2002,theSecurities and

Exchange Commission of Pakistan issued the

Code of Corporate

Governance to establish a framework for good governance of

companies listed on Pakistan's stock exchanges.. As a result, the listing
regulations were suitably modified by the stock exchanges

Parties to corporate governance

Chief executive officer
Board of directors
Management
Shareholders
Employees
Suppliers
Community at large

Summary of rules introduced by ICGP

Board of directors
Independent, at least 50% non executive
Prior ICGP clearance required
Law, rules and regulation, monitor progress of the
institution
Auditing and MIS
CFO and Company secretary appointment

 Disclosure
Publication of Quarterly accounts
SPB Panel of auditor

Ethics
Insider trading
Information dissemination
Code of conduct
Confidentiality
Tax or credit defaulter
Training on corporate governance

Practical implications
This study provides a measure of disclosure quality by
constructing a disclosure index for Pakistani listed firms. The
study sees the impact of various corporate governance
variables that may influence the quality of disclosure
practices.
The Pakistan Institute of corporate governance (PICG)
incorporates these findings in reviewing the code of corporate
governance for Pakistani listed firms.

Introduction
Transparency and disclosure are important components of
corporate governance.
Disclosure
is the act of releasing all relevant information relating to a
company that may influence an investment decision. To be listed
on major Karachi stock exchanges, companies must follow all of
the Securities and Exchange Commission's (SEC) disclosure
requirements and regulations. To make investing as fair as possible
for everyone, companies must disclose both good and bad
information.

Disclosure Audience
Those who make use of financial reports are from all walks of
life.
Who make use of accounting information include two primary
and secondary groups
The primary users are divided to investors and credit
providers, while secondary users include various groups such
as government, banks, people, employers, etc.

Quality of Disclosure
Empirical studies do not give precise and specific
differentiation between the quantity and quality of disclosure.
It is generally assumed that the quantity of disclosing
information is an indicator of its quality.
However, some believe that the quality and quantity of
disclosure are separated from each other.

Disclosure Levels
The level of information that must be disclosed partly
depends on the skills (or needs) of users. On FASB, for
example, it is ordained that the information disclosed in
reports must be understandable for the people with relative
understanding about the economic and commercial activities.
The level of disclosure also depends on the standards in this
context.

Three concept of disclosure

1. Adequate Disclosure
2. Fair Disclosure
3. Full Disclosure

Voluntary Disclosure versus Mandatory

Disclosure
Voluntary disclosure is beyond the disclosure where
there is no provision for enforcing the rules for
disclosure.
Mandatory disclosure If a financial information
disclosure becomes necessary due to an authority
enacting rule, it is considered mandatory

Disclosure rate in Pakistan

Primary Information
The following information is mandatory to be disclose
Financial statements
Board structure
Notes to the financial statements
Shareholding pattern
Number of meetings

Cont.
Practices adopted by the listed companies
Relationship between corporate disclosure that is integral to
corporate governance
Five Variables that affect the disclosure of Quality information

Review on Previous Research

Minimize the information asymmetry
Enhance the credibility
Reduce costs

Secondary information

Corporate failures in Pakistan due to lack

of corporate governance practices
Taj Company
The Taj Company was involved in poor corporate governance
practices. The company was running a scheme through which it
was able to receive huge amounts of deposits illegally. What was
far more disappointing was the religious affiliation the company
had attached with its name. Even 15 years after their fraudulent
practices have been stopped; the company still owes heavy
liabilities to over 25000 people.

Crescent Bank Fraud

The entire board of directors and CEO Anjum Saleem of
Crescent Standard investment bank were legally stopped from
running their offices on evidences of suspected fraud and
irregular accounting. External Auditors had predicted a
missing amount of over Rs.6 Billion, the SECP took legal
action against the companies officers, although much of the
actions taken were criticized as insufficient.

PTCL
The privatization of PTCL was also a big corporate scandal.
An ex-Senior Vice President has claimed the privatization as
Pakistan Biggest Financial fraud. PTCL former official
further commented that the deal was closed on 2.6 billion
dollars including U-fone & Paknet, however only U-fone had
enterprise value of more than 6 billion dollars which does not
include assets of U-fone.

Cont.
Moreover, pricing decisions were made through old records
instead of determining current market value, which means, it was
like Buy One Get 2 Free offer. It has been reported further that in
September 2006, when Etisalat had refused to honour the deal.
Supreme Court of Pakistan has already given decision against the
privatization of PSO and Pakistan Steel and if PTCL privatization
gets challenged on true facts, it will bring horrifying results.

ENGRO Group of Companies

SECP was at the receiving end of immense criticism once it
had allowed Fertilizer giant ENGRO to establish its subsidiary
ENGRO Foods. Critics believed that the company was
associated with the urea business and were tremendously
concerned about the extent to which hygiene requirements for
the industry would be met by ENGRO foods.

Cont.
However SECP counter argument was based on the fact that
ENGRO has had a rich history of sound corporate governance
which satisfied SECP that ENGRO will be responsible in
regards to hygiene issues associated with ENGRO foods. Time
proved that Engro corporate governance was in good practice
and has led to the success of ENGRO foods with products such
as Olpers Milk.

Duality of chairperson
CEO duality (CEO and chairman of the board are represented
by same individual) has been blamed for the failure of firms
to adapt to a changing environment and the poor
performance.
CEO duality refers to the situation when the CEO also holds
the position of the chairman of the board.

 The board of directors is set up to monitor managers such as

the CEO on the behalf of the shareholders. They design
compensation contracts and hire and fire CEOs. A dual CEO
benefits the firm if he or she works closely with the board to
create value.
Establishing a unity of command at the head of the firm
allows the firm to send a reassuring message to shareholders.
However, it is also easier for the CEO to assert control of the
board

Examples

Need for corporate

governance
The popularity and development of corporate governance
frameworks in both the developed anddeveloping worlds is
primarily a response and an institutional means to meet the
increasingdemand of investment capital. It is also therealization
and acknowledgement that weakcorporategovernance systems
ultimately hinder investment and economic development. In a
McKinseysurvey issued in June 2000, investors from all over the
world indicated that they would pay largepremiums for companies
with effective corporate governance. A number of surveys of
investorsin Europe and the US support the same findings and show
that investors eventually reduce theirinvestments in a company
that practices poor governance.

It enhances the performance of corporations by establishing and

maintaining a corporateculture that motivates directors, managers
and entrepreneurs to maximize the company'soperational efficiency
thereby ensuring returns on investment and long term
productivitygrowth.
2.Moreover, it ensures the conformance of corporations to laws, rules
and practices, whichprovide mechanisms to monitor directors' and
managers' behavior through
corporateaccountabilitythatinturnsafeguardstheinvestorinterest.It
isfundamentalthatmanagers exercise their discretion with due
diligence and in the best interest of
thecompanyandtheshareholders.Thiscanbebetterachievedthroug
hindependentmonitoring of management, transparency as to
corporate performance, ownership andcontrol, and participation in

implementtion
For the purpose of implementing corporate governance in Pakistani companies, these steps are
required to remove the poor corporate governance in Pakistani companies. Identification of the
causes of ineffectiveness of INEDs in Pakistani companies.
Changes that required to be introduced in the code.
Steps to be taken to improve the standards of corporate governance.
Handling these issues by other developing countries.
Solution for Pakistani environment.
Financial Reporting and Disclosure
The quality of transparency and disclosure depends crucially on accounting and auditing standards.
Independence of auditing is the keyto ensuring that the information is disseminated reliably and
credibly. The adoption of internationally acceptable accounting standards willcertainly help to
improve thequality of transparency.Good financial reportingsystems facilitate easyaccess
toreliable andcredible information by external investors and help develop confidence in capital
markets.It is also important to assess the prevailing incentives in the market forauditors and
accountants, in order toascertain incentive-compatibility with the requirements of better disclosure
and adoption of standards