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Report of theResearch Study on

Harmonizing Code of Corporate

Governance with otherLaws/Regulations in Pakistan

April 2003


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PREFACE

The Securities and Exchange Commission of Pakistan (SECP) introduced the Code of Corporate

Governance (the Code) in March 2002 for the stated purpose of establishing a framework of goodcorporate governance whereby a listed company is managed in compliance with best practices. Inorder to bring about such a change, the Code has been incorporated in the listing regulations of thethree stock exchanges and is thus applicable to all listed companies, which - being the repository ofshareholder investments - require additional regulation and scrutiny in view of the SECP.

This study was commissioned by the SECP to evaluate the substantive value of the Code whilecomparing it to internationally recognized best practices of good governance. The report endeavoursto identify any legal and/or implementation issues, which may arise, keeping in mind the alreadyexisting laws and regulations of the country in the area of corporate governance. At the same time,the report also attempts at elucidating as to how the existing laws and regulations in the area of

corporate governance may actually facilitate and further the goals of the Code. The laws selected forreview include the very important, overarching laws such as the Companies Ordinance, 1984 and thelaws empowering the SECP within specific frameworks, for specific purposes.

The report highlights that the Code breaks new ground in areas such as the role of non-executivedirectors, appointment of company secretary, quantity and quality of information to be presentedbefore boards of directors, audit committees and internal auditors. These are essentially areas, whichhave not been addressed in existing laws and hence there is no question of a conflict. It alsoidentifies that issues, such as the structure and responsibilities of the board of directors, powers andduties of executive directors, role of external auditors and disclosure requirements have beenaddressed quite adequately by existing laws and are augmented and well-supplemented by theprovisions in the Code. The overall picture, which emerges is that of harmony rather than conflict.

The report supports efforts towards setting up an Institute for Corporate Governance in Pakistan,which should provide training programs for directors and office bearers of companies and also makeavailable a forum for open debate on topical issues of governance. Other recommendations foreffective implementation of the Code, in view of certain dynamics of the Pakistani capital market,follow.

The SECP acknowledges the support of the United Nations Development Programme in initiatingthis research study. We would also like to appreciate the work of the consultant, Mr. OsamaSiddique in undertaking the research and preparing this report on the crucial subject of harmonizingthe Code with other laws and regulations.


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TABLE OF CONTENTS

CHAPTER 1. EXECUTIVE SUMMARY 1

CHAPTER 2. THE BACKGROUND TO THE EMERGENCE OF THE CODE OFBEST PRACTICES IN THE UK: A COMPARATIVE ANALYSISBETWEEN THE CORPORATE GOVERNANCE STANDARDS IN THE UK AND THE PAKISTANI CODE

CHAPTER 3. ASSESSMENT AND REVIEW OF THE LAWS GOVERNING THECORPORATE SECTOR IN PAKISTAN. RECOMMENDATIONS, WHERE APPLICABLE, FOR AMENDING THE SAME TOHARMONIZE THEM WITH THE CODE 35

CHAPTER 4. POWERS OF THE REGISTRAR AND THE SECP UNDER THEORDINANCE FOR THE PROTECTION OF SHAREHOLDERSRIGHTS AND THE ROLE PLAYED BY THE COURTS 104

CHAPTER 5. CONCLUSIONS AND RECOMMENDATIONS 111

LIST OF RENCESREFE 119


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Harmonizing Code of Corporate Governance with other Laws/Regulations in Pakistan

CHAPTER 1. EXECUTIVE SUMMARY

In August 2002, the SECP, the United Nations Development Programme (UNDP) and the

Economic Affairs Division (EAD) signed a Memorandum of Understanding under which UNDPagreed to provide technical and financial assistance to the SECP for encouraging good corporategovernance practices and establishing a sound regulatory framework for the corporate sector inPakistan (the Project on Corporate Governance).

One of the initiatives taken by the SECP under the Project on Corporate Governance was a decisionto fund a Research study on harmonizing the Code of Corporate Governance with otherlaws/regulations in Pakistan. As mentioned in Chapter 1, SECP had introduced the Code in March2002 and now felt that since the initial implementation of the Code had taken place, it was anappropriate time to identify and resolve any issues which may be emerging due to any potentialconflicts of any provisions of the Code with existing corporate laws. According to the Terms ofReference (the TOR) issued for this Report, it was to focus on the following main objectives:

To review the Code to establish overlap/nexus with other important laws governing thecorporate sector.

To identify conflicting and overlapping provisions in other laws and regulations with theCode.

To propose amendments in the Code as well as in other laws to harmonize regulatoryframework for corporate sector.

To give policy guidelines for effective implementation of the Code.

The following is a brief outline of the contents and findings of this Report under the headings of the

objectives listed above:

(1) To review the Code to establish overlap/nexus with other important laws governingthe corporate sector in Pakistan.

Apart from reviewing the Code, Chapter 4 of this Report looks at twenty-one importantPakistani laws in detail, which include broad regulatory laws such as the CompaniesOrdinance, 1984 and the SECP related laws as well as specific statutory regimes for settingup certain banks and other institutions of national significance. What emerges is that thereare comparatively very few areas of actual conflict, which require any amendment to therelevant laws. These are in the areas of tenure of office of directors; frequency of meetingsof board of directors and appointment of external auditors and these have been highlighted

in Chapter 4. Chapter 5 of the Report contains a detailed analysis of the existing corporateregime for the protection of shareholder rights through the special powers of the (a)Registrar; (b) the SECP; and (c) the Courts. This evaluation gives a useful backdrop to theexisting corporate laws against which the Code has come into play.

On the other hand, the Report finds that the Code breaks new ground in areas such as roleof NEDs and officers of the company such as the Company Secretary and the CFO, thequantity and quality of information, which needs to be before boards of directors to take

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better decisions, the roles of audit committees and of internal auditors. These are essentiallyareas, which have not been addressed in existing laws and hence there is no question of aconflict. Then there are areas such as the structure and responsibilities of the board ofdirectors, powers and duties of executive directors, role of external auditors, and disclosurerequirements, which have been addressed at times quite adequately by existing laws but

which are augmented and well-supplemented by the new provisions in the Code. The overallpicture, which emerges is that of harmony rather than conflict. Furthermore, the newamendments, which have been recently introduced to the Companies Ordinance, 1984further entrench and bolster some of the important provisions of the Code.

(2) To identify conflicting and overlapping provisions in other laws and regulations withthe Code.

As mentioned above, there are various features of the existing law, which supplement andadvance the goals of the Code and have been discussed at length in Chapter 4. Then thereare other areas where the Code fills some gaps. The areas of conflict are comparatively fewand have been identified in detail in Chapter 4.

(3) To propose amendments to the Code as well in other laws to harmonize regulatoryframework for corporate sector.

This Report evaluates the Code at two levels: (a) against the existing Pakistani laws; and (b)against the code of corporate governance in place in the UK. As far as the former isconcerned, this Report finds the Code to be introducing some very useful additionalmeasures and does not propose any amendments to the Code itself in view of existingPakistani corporate laws. On the other hand, in Chapter 4 it does propose someamendments to existing laws where they conflict with the Code. Coming to the secondparadigm of analysis, Chapter 3 of the Report conducts an exhaustive analysis of theCorporate Governance debate and the resulting reports and codes in the UK. The Report

finds the Code to be quite sophisticated and up to speed with the recent code introduced inthe UK. However, it does propose some amendments to the Code itself, the approachtowards implementing the Code as well as institutional mechanisms to keep the Codesensitive to the actual and emerging corporate markets realities in Pakistan, in view of theUK experience. These have been discussed at length in Chapter 6 and include, inter alia, thefollowing:

(i) the entrenchment of a mechanism in the SECP whereby the Code is being constantlyevaluated with the flexibility to amend it in view of persuasive market feedback;

(ii) the courting of institutional and market support by the SECP in order to make theCode more in touch with ground realities as well as more successfully implementable;

(iii) the constant emphasis on the nexus of good governance with greater profitability;

(iv) extensive market studies to get an accurate picture of the actual profile of listedcompanies in Pakistan and the Pakistani capital markets to review the contents of theCode for possible amendments; and

(v) a focus on creditors rights given the nature of the capital markets in Pakistan.

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(4) To give policy guidelines for effective implementation of the Code.

Apart from what has been said above and discussed at length in Chapter 6, the Report, inChapter 6, further evaluates additional recommendations for effective implementation of theCode. This includes support for the ideas of a permanent Research Cell at the SECP, the

proposed setting up of the Institute for Corporate Governance, the proposed introductionof a Compliance Rating System, the proposal for a transparent and detailed set of criteria forgranting exemptions from compliance with the Code and opposition to any proposals forgiving statutory protection to the Code by amending the Companies Ordinance, 1984 forincorporation in it of all the provisions of the Code.

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CHAPTER 2. THE BACKGROUND TO THE EMERGENCEOF THE CODE OF BEST PRACTICES IN THE UK: ACOMPARATIVE ANALYSIS BETWEEN THE CORPORATEGOVERNANCE STANDARDS IN THE UK AND THE

PAKISTANI CODE

Introduction

Recent years have seen a spate of activity in and tremendous emphasis on the area of CorporateGovernance all over the world. This development has been for a variety of reasons, ranging from adownturn in economic performance exposing otherwise undisclosed corporate governance weaknesses to downright corruption in the uppermost echelons of corporate management. The

reasons why this area has been comparatively understudied in Pakistan have more to do with thelevel of development of its corporate sector. The past few years, however, have been very significantin terms of legal developments in the Corporate Governance area and some recently introduced lawsand regulations are progressive and up to speed with the latest global trends. There is growingawareness in the legal and corporate circles in Pakistan that Corporate Governance is not just asophisticated buzzword, but of profound importance to the sound functioning of a corporatesystem and fundamental to the establishment of investor and creditor confidence.

Reason for using the experience of Corporate Governance in the UK as abenchmark for the Pakistani initiative

The overview conducted in this Report of the fast evolving legal regime governing Corporate

Governance in Pakistan has been undertaken, keeping in view certain internationally acceptedprinciples and standards of good Corporate Governance as the fundamental benchmark. While thereis a wealth of contemporary literature on the subject, these benchmarks for best practices ofCorporate Governance have been gleaned primarily from the experience of Corporate Governancein UK. This is primarily due to the following three reasons:

(1) UK A Pioneer in the debate on Good Governance: UK is in many ways the forerunnerof the debate on Corporate Governance in the world with detailed studies undertaken andproposals given in the early 1990s. The fact that over a decade has passed since theintroduction of the first code of best practices in the UK has meant that there has beenenough time to observe and evaluate the working of the initial code and that there now existsa wealth of literature, which analyzes several aspects of the debate, including implementation

successes and failures. It is this decade long, constant market scrutiny and academic debate, which has resulted in the introduction of additional studies and finally a modified code in1998. Therefore, much can be learnt from the UK experience in terms of not just thesubstantive merit of what the experts in that country consider to be best practices but alsothe practicalities of implementation of such best practices.

(2) The UK Code its place in the international context: The evolving code of bestpractices in the UK has served as a benchmark and reference point for the codes of goodgovernance/ best business practices in many other countries in Europe and elsewhere. Hence,

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it would not be an overstatement to say that the final version of the code of best practices inthe UK in many ways embodies and is one of the primary contributors to what may beconsidered an internationally recognized set of principles which contribute to and bring aboutgood governance.

(3) The nexus between Pakistani Law and the Common Law tradition:The Pakistani legal

approach and system stems primarily from the Common Law tradition of the UK. In other words, the fundamental approach to the law is the same in both countries and Pakistansunique historical experience has resulted in many laws, which tally with their UK counterparts. This includes the primary and overarching corporate law statute in Pakistan i.e. theCompanies Ordinance, 1984. Therefore, in spite of the fact that the contemporary UKeconomy and market realities are quite different in many ways from the Pakistani economyand market realities (and this factor is duly kept in mind in and discussed later in this Report)the commonality of legal approach and jurisprudence cannot be understated or overlooked.Thus, this factor further supports the conducting of a comparative analysis of the codes in thetwo countries as the legal systems in which these codes operate, have many similarities andoverlaps.

Given the above, we now proceed to take a brief look at the evolution of UKs code of bestpractices and the modern approach to Corporate Governance in the UK.

From Cadbury to the Combined Code: The Evolution of the Code of BestPractices in the UK

The contemporary debate in the UK on Corporate Governance can be traced back to the Report1(hereinafter referred to as the Cadbury Report) of a Committee set up in the UK to look into thefinancial aspects of Corporate Governance (hereinafter referred to as the Cadbury Committee),which was submitted under the Chairmanship of Sir Adrian Cadbury on 1st December, 1992. SirAdrian Cadbury in many ways, one of the pioneers of this debate and widely regarded as one ofthe leading international experts on the subject has recently come up with a book2 (hereinafterreferred to as the The Cadbury Evaluation 2002) which traces and evaluates this debate and itsoutcome in the UK.

The Cadbury Report

The Cadbury Report is regarded as one of the most penetrative and exhaustive contemporarystudies of the issues of modern Corporate Governance and puts forward detailed findings andrecommendations. The output of the Cadbury Report has been widely discussed in recent years andforms the basis of several subsequent reports on Corporate Governance and codes of bestpractices, including the Code, which has been recently introduced in Pakistan.

Financial and Institutional support extended to the Cadbury Committee:It is important to look at the financialand institutional support extended to the Cadbury Committee, which sheds light on why its outputfound acceptability and recognition in the corporate environment of the UK. The CadburyCommittee was set up in 1991 by the Financial Reporting Council, which is responsible foraccounting standards in the UK as well as the London Stock Exchange and the accountancyprofession. The fact that these three sponsoring bodies joined forces shows their collective concern

1 Report of the Committee on the Financial Aspects of Corporate Governance. 1st December, 1992.

2 Corporate Governance and Chairmanship: A Personal View by Sir Adrian Cadbury. Oxford University Press, 2002.

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over the reliability of the reports and accounts produced by the UK companies in the early 1990s.The output of the Cadbury Committee not only stimulated debate in the UK but helped fuel similarapproaches world wide and different countries as well as organizations such as the OECD, theWorld Bank, the IMF and the Commonwealth Association for Corporate Governance followed suitby bringing out their own codes of best practice. Later on, major institutional investors also

warmed up to the task and produced their own codes of best practice, which set out the standardsthat they expect from the boards of the companies in which they invest.3

The reasons for growth of interest in Corporate Governance:Sir Adrian Cadbury attributes this overwhelminginterest in the subject to the following factors: (a) rapid growth in the international capital marketsand the wish on part of countries to attract investment and the consequent need to convincepotential investors that reliable governance structures are in place; (2) the growth in size andinternationalization of companies thus raising new questions over their accountability; and (3)growing societal concerns over corporate activities and the media attention on the same.4

The thrust of the Cadbury Report: The Cadbury Report includes recommendations to investors,accountants and auditors and its core is encapsulated in its Code of Best Practices, designed toachieve the necessary high standards of corporate behaviour. The Cadbury Committee adopted a

definition of Corporate Governance, which described Corporate Governance as being the systemby which companies are directed and controlled. The Cadbury Report operates upon the basicpremise that company boards must be free to drive their companies forward, but exercise thatfreedom within a framework of effective accountability. In other words, companies and their boardswork within certain boundaries. This, according to the Cadbury Report, is the essence of any systemof good Corporate Governance.

The Cadbury Reports recommendations are focused on the control and reporting functions ofboards of companies as a whole and the various important components of the corporate structuresuch as the chief executive, chairman of the board, executive and non-executive directors, companysecretary, other executives and internal and external auditors. This reflects the Cadbury Committeespurpose, which, according to it, was to review those aspects of Corporate Governance, which are

specifically related to financial reporting and accountability. The Cadbury Reports proposals do,however, seek to contribute positively to the promotion of good Corporate Governance as a whole.

The Greenbury Report

Other committees subsequently took up the process started by the Cadbury Committee. Theselooked in even greater detail at different aspects of Corporate Governance, which caught publicattention in the UK in the mid 1990s, and came up with their own recommendations. The StudyGroup on Directors Remuneration, usually referred to after its Chairman as the GreenburyCommittee (hereinafter referred to as the Greenbury Committee), was set up in January 1995 inresponse to public and shareholder concerns over executive pay. Importantly, the GreenburyCommittee was constituted primarily of heads of major businesses, whose lead on executive

remuneration was likely to be followed by their fellow chairmen. The Greenbury Committeepublished its report in July 1995 (hereinafter the Greenbury Report). For purposes of this Report,we do not look in any great detail at the Greenbury Report or for that matter the component inother such reports which deals with the area of executive remuneration because: (a) executiveremuneration is not an area addressed in any detail by the Code in Pakistan, and (ii) for reasons to be

3 Ibid.

4 Ibid.

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discussed later, it can be argued that it is a topic which is premature and not immediately relevant forattention in the Pakistani corporate environment, and that other areas of more immediate attentionrequire our focus.

The Hampel Committee Report

The afore-mentioned reports received great public attention and in view of contributions andcriticisms from various quarters, the need was felt in the UK to revisit the area. In November 1995,the Committee on Corporate Governance was established by the Chairman of the FinancialReporting Council under the Chairmanship of Sir Ronald Hampel (hereinafter referred to as theHampel Committee). Once again there was tremendous market and institutional support as theCommittee was sponsored by the London Stock Exchange, the Confederation of British Industry,the Consultative Committee of Accountancy Bodies, the National Association of Pension Funds,and the Association of British Insurers and thus had a broader basis of support than any of itspredecessors. The Hampel Committee was entrusted with the task of reviewing previous governancerecommendations, identifying new issues and pulling together existing recommendations, plus thoseof its own into a single Combined Code. The final report of the Hampel Committee was publishedin January 1998 (hereinafter referred to as the Hampel Report, the Cadbury Report, the

Greenbury Report and the Hampel Report are hereinafter collectively referred to as the UKCorporate Governance Reports). It is important to look at the Hampel Report as it brings aboutcertain changes to the recommendations made by the Cadbury Report and the Greenbury Report,although by and large it agrees with and proposes the same recommendations as propounded in theearlier two reports. The changes, however, give an insight into how the outlook towards CorporateGovernance underwent change in the UK in view of changing market realities and concerns, thecriticisms and recommendations made by various components of the UK corporate bodies and thepractical difficulties faced in implementing the earlier codes. A review of this process of change isthus educative from the Pakistani perspective as it looks at both substantive and process dimensionsand may help us in determining not just the substantive credentials of the Code in Pakistan but alsoin evaluating the process through which it came about.

The Combined Code

The Hampel Committee followed up with a Combined Code, which came out in June 1998(hereinafter referred to as the Combined Code). At this point, the London Stock Exchange alsopublished its new listing rules together with the related Principles of Good Governance and theCombined Code. The Combined Code is highly significant as it supersedes all previous codes andthus it is the one code, which ultimately determines the effect of various Corporate Governanceinitiatives on the boards of the UK listed companies. This Report, therefore, includes a detailedcomparison of the Code introduced in Pakistan with the Combined Code to determine thesimilarities and differences and possible reasons for the same as well as a determination of whetheranything needs to be done, if at all, to achieve greater parity between the two.

The Most Recent Review of the Combined Code in the UKThe prevailing institutional and market sentiment in the UK remains that the Combined Code canand should regularly evolve to stipulate the best practices in the boardroom and to raise the bar forperformance. The most recent initiative to focus on the Non-Executive Directors component ofCorporate Governance and to improve and clarify the role of Non-Executive Directors in theCombined Code is the Review of the Role and Effectiveness of Non-Executive Directors that waspresented to the Chancellor of the Exchequer and the Secretary of State for Trade and Industry onJanuary 20, 2003 by Derek Higgs (the Higgs Review).

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Pursuant to the terms of reference for this study, the UK Government commissioned Derek Higgs(a senior independent figure from the business world) to lead a short independent review of the roleand effectiveness of Non-Executive Directors, specifically in the UK. Realizing the central role inthe UK Corporate Governance of Non-Executive Directors, the Company Law Review5 noted agrowing body of evidence from the US suggesting that companies with a strong contingent of non-

executives produce superior performance.Thus, the Higgs Review aims principally to advance and reflect best practices in this area throughproposed revisions to the Combined Code. It includes a focus on the existing behaviours of andrelationships with companies of Non-Executive Directors in the UK, and underlines the continuingneed for the best people, for Non-Executive Director positions, a set of executives, which the HiggsReview considers to be essential for an effective board.

The Higgs Review further develops the UK framework of Corporate Governance, whichcommenced with the publication of the Cadbury Report and was taken forward by the Greenburyand Hampel Reports. It forms part of a systematic re-appraisal, across leading market economies, ofthe adequacy of Corporate Governance arrangements in the wake of recent corporate failures.

The Higgs Review identifies the Non-Executive Directors as the custodians of the governanceprocess. It notes that over the years, expectations from Non-Executive Directors have risen asincreased business complexity has made it more difficult for individual shareholders to effectivelyhold managements to account. Consequently, the Higgs Review focuses on the requisite quality ofNon-Executive Directors and the boardroom climate and behaviours necessary for their success. Itfinds that raising the quality of appointees is critical to improving the effectiveness of Non-Executive Directors. The evidence collected in connection with the Higgs Review shows that thecurrent population of Non-Executive Directors in the UK is narrowly drawn. What is thus proposedis an open, fair and rigorous appointment process regarded as essential to a successful board.

The Higgs Report builds on the comply or explain approach established by Sir Adrian Cadbury adecade ago and sets out an agenda for change that builds on the existing Combined Code best

practices. It attempts to clarify the role of the Non-Executive Directors, fosters a relentlessmeritocracy in appointments, and seeks to create conditions that will maximize their effectiveness.Since the recommendations of the Higgs Report are still under discussion and have not formallyaltered the current substantive nature of the Combined Code by the time this Report was submitted,it remains to be seen what changes will eventually come about. Therefore, for purposes of thisReport, the Combined Code remains the applicable set of best practices in the UK and theprovisions of the Higgs Report have not been used as benchmark for the Code nor have they beendiscussed any further elsewhere in the Report.

Creditors Rights

One significant area of Corporate Governance, which was not within the ambit of the UKCorporate Governance Reports, is creditors' rights. Partially to fill this gap and partially to

supplement the UK Corporate Governance Reports with another more recent study in the area,additional standards and principles, especially for the creditors rights area, have been obtained

5The Company Law Review is the UK Governments initiative for a fundamental revision of British Company Law. In thisconnection, a three-year review was launched in 1998 to develop a simple, modern, efficient and cost-effective company lawframework. The Reviews final report was presented to the Secretary of State for Trade and Industry in July 2001. In July 2002, theGovernment published a White Paper titled Modernising Company Law which makes proposals for company law reform. This alsoincludes a codification of the general duties of directors.

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from a Paper by La Porta, Lopez-de-Silanes, Shleifer and Vishny6 (the La Porta Report, the UKCorporate Governance Reports and the La Porta Report are hereinafter collectively referred to asthe International Corporate Governance Reports). The La Porta Report conducts an analysis ofthe Corporate Governance rules pertaining to the protection of the rights of shareholder andcreditors in 49 countries, the origin of these rules and the quality and effectiveness of their

enforcement. The La Porta Report thus offers additional standards with a very international appealand applicability.

Having briefly outlined the reports and studies, which form a background and reference point forthe analysis to be conducted in this Chapter, the following are the basic themes of analysis for theremaining Chapter.

o Hampel Committee on Corporate Governance: Tracing the changes in a fast evolvingmarket and suggesting changes to the UK approach to Corporate Governance.

o The UK Code and the Pakistani Code: A Comparative Analysis.

2.1 Hampel Committee on Corporate Governance: Tracing the Changes In

A Fast Evolving Market and Suggesting Modifications to the UK Approach toCorporate Governance

As mentioned earlier, the entrusted task of the Hampel Committee was that of reviewing previousgovernance recommendations, picking up any new issues which had arisen and pulling together allthe existing recommendations, plus those of its own, into a single Combined Code. The following isa list of the basic differences between the approach to Corporate Governance adopted by theHampel Committee vis--vis the recommendations in the earlier reports. As regards the actualchanges in terms of the recommendations made by the Hampel Committee, which will be discussedat a later stage, it has to be emphasized that the changes are comparatively few and are essentially anelaboration upon and further tightening of the principles already enumerated in the earlier reports.

The Combined Code, like its predecessors, is recommendatory rather than prescriptive. The essential approach tothe issues has not changed and the Combined Code, like its predecessors, remains persuasive ratherthan prescriptive or mandatory. The fundamental principles on which it is based are that ofdisclosure and transparency leading to board effectiveness and corporate accountability.

Recommendations based on actual experiences of the listed companies in the UK. It is also significant to note thatthe recommendations are not based on abstract theory but are rooted in actions and experiences ofthe leading companies in the UK and are applicable to all listed companies in the UK, regardless ofsize. Many of the provisions in the Hampel Report clarify or refine existing recommendations. Theadditions are mainly in the fields of remuneration and the role of institutional shareholders.7

Corporate Governance is not just about regulation but a contributor to business prosperity. An important andspecially emphasized ingredient of the Hampel Report is that it highlights the role of Corporate

Governance as a contributor to business prosperity in addition to its previous focus on financialreporting. It thus puts the contribution of governance to performance into context. A poignantquotation from the Hampel Report demonstrates this: Business prosperity cannot be commanded.People, teamwork, leadership, enterprise, experience, and skills are what really produce prosperity.

6 Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer -- Harvard University. Robert W. Vishny -- University of Chicago. The Journal of PoliticalEconomy, Volume 106, Issue 6 (Dec, 1998), 1113-1155.

7 Corporate Governance and Chairmanship: A Personal View- by Sir Adrian Cadbury. Oxford University Press 2002.

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There is no single formula to weld these together, and it is dangerous to encourage the belief thatrules and regulations about structure will deliver success.

Hampel Report -- the result of an exercise to determine all relevant perspectives on CorporateGovernance. The Hampel Committee consulted widely. Before producing its preliminary report, theHampel Committee issued a questionnaire in answer to which over 140 submissions were received,

and members of the Hampel Committee took part in over 200 individual and group discussions. Itreceived a further 167 written submissions on the preliminary report and had a substantial numberof further discussions. In total 252 organizations or individuals responded in writing to one or boththese consultations. The breakdown of these respondents by category was:

Public companies 114

Institutional investors 14

Professional partnerships 12

Representative bodies 24

Other organizations 29

Individuals 59

Summary of the Main Principles and Broad Findings propounded by the Hampel Report

The following is a summarized overview of the most significant principles enumerated in theHampel Report as well as departures from the approach adopted in the past reports as well as areemphasis of certain principles which were already there in the past reports but lost sight of in viewof the Hampel Committee. The Hampel Committee not only endorses the substance and outcomeof the previous codes in many ways but also states where it differs with their approach, explaining itsresultant modified approach. This summary is useful towards understanding the overallcontemporary philosophy and approach towards Corporate Governance in UK, thus providing abenchmark for evaluating the corresponding approach and philosophy in Pakistan.

1. The importance of Corporate Governance lies in its contribution both to businessprosperity and to accountability. Emphasis on accountability should not cause one tolose sight of this.

Public companies are now among the most accountable organizations in society. Theypublish trading results and audited accounts; and they are required to disclose muchinformation about their operations, relationships, remuneration, and governancearrangements. The Hampel Committee strongly endorses this accountability and recognizesthe contribution made to it by the Cadbury and Greenbury Committees. But, it suggests thatthe emphasis on accountability has tended to obscure a boards first responsibility toenhance the prosperity of the business over time.

2. Business prosperity cannot be commanded. Rules and regulations about structuredont deliver success but success comes from other facts.

Unlike its predecessors, the Hampel Committee is very concerned with the prosperitydimension of Corporate Governance and says that people, teamwork, leadership, enterprise,experience and skills are what really produce prosperity. There is no single formula to weldthese together, and it is dangerous to encourage the belief that rules and regulations aboutstructure will deliver success. Accountability by contrast does require appropriate rules andregulations, in which disclosure is the most important element.

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3. The purpose of Good Governance.

Good Governance ensures that constituencies (stakeholders) with a relevant interest in thecompanys business are fully taken into account. In addition, good governance can make asignificant contribution to the prevention of malpractice and fraud, although it cannotprevent them absolutely.

4. No single recipe of success for every jurisdiction. Corporate structures andgovernance arrangements vary widely from country to country. They are a product ofthe local economic and social environment.

The Hampel Committee also looked at expert advice on how Corporate Governance worksin practice in the United States and in Germany. It found no support for the import into theUK of a whole system developed elsewhere. But it concedes that the underlying issues ofmanagement accountability are the same everywhere.

5. The need to restrict regulatory burden.

The Hampel Committee made it clear at the outset that it would keep in mind the need torestrict the regulatory burden on companies, and to substitute principles for detail whereverpossible. This is in view of the market feedback about the earlier codes and some of theproblems being faced by companies in implementation, which regarded those codes as strictand prescriptive rather than recommendatory.

6. Much is right in the Cadbury and Greenbury Reports. The Hampel Committeeendorses the overwhelming majority of the findings of the two earlier committees.

In the Hampel Report, the Hampel Committee comments on matters where it takes adifferent view, or which Cadbury and Greenbury did not deal with at all. However,according to it, it does not attempt to record every point of agreement. But the HampelCommittee does approach Corporate Governance from a somewhat different perspective. Itfinds that both the Cadbury and Greenbury reports were responses to things which were

perceived to have gone wrong corporate failures in the first case, unjustified compensationpackages in the privatized utilities in the second. Understandably, both concentrated largelyon the prevention of abuse. The Hampel Committee is equally concerned with the positivecontribution, which good Corporate Governance can make.

7. Hampel Reports verdict on the market acceptance and implementation of the earlierCodes. A great success!

The Hampel Report says that it is generally accepted that implementation of the CadburyCodes provisions has led to higher standards of governance and greater awareness of theirimportance. It says that despite the belief in some quarters to the contrary, the GreenburyCode was not about controlling board remuneration, nor can that ever be done in a free

market economy. But it is already clear that Greenbury Codes primary aim full disclosure is being achieved. Indeed, the new Corporate Governance requirements for the fulldisclosure of directors emoluments and for a remuneration committee report have led to adisproportionate part of annual reports being devoted to these subjects. For the most part,the larger listed companies have fully implemented both the Cadbury and Greenbury Codes.Smaller companies have also implemented most provisions, but there are some aspects withwhich they find it harder to comply.

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8. One Code should apply to all sizes.

The Hampel Committee considered carefully whether it should distinguish between thegovernance standards expected of larger and smaller companies. The Hampel Committeeconcluded that this would be a mistake. Any distinction by size would be arbitrary; moreimportantly, it considers that high standards of governance are as important for smallerlisted companies as for larger ones. But the Hampel Committee urges those considering thegovernance arrangements of smaller listed companies to do so with flexibility and a properregard to individual circumstances.

9. Good Corporate Governance all about Broad Principles.

The Hampel Report finds that good Corporate Governance is not just a matter ofprescribing particular corporate structures and complying with a number of hard and fastrules. There is a need for broad principles. All concerned should then apply these flexiblyand with common sense to the varying circumstances of individual companies. It says thatthis is how the Cadbury and Greenbury Committees intended their recommendations to beimplemented. It implies on the one hand that companies should be prepared to review and

explain their governance policies including any special circumstances which in their viewjustify departure from generally accepted best practices and on the other hand thatshareholders and others should show flexibility in the interpretation of the code and shouldlisten to directors explanations and judge them on their merits.

10. Important to remove the misconception that the Codes are prescriptive. The Codesare just guidelines.

The Hampel Committee finds that the experiences of various companies in the UK suggeststhat too often they believe that the earlier codes should be treated as sets of prescriptiverules. That the shareholders or their advisors would be interested only in whether the letterof the rule had been complied with yes or no. A yes would receive a tick, hence the

expression box ticking for this approach. The Hampel Committee however, concludes thatbox ticking takes no account of the diversity of circumstances and experience amongcompanies, and within the same company over time. It assumes, for example, that the rolesof chairman and chief executive officer should never be combined; and that there is an idealminimum number of Non-Executive Directors, and an ideal maximum notice period for anExecutive Director.

The Hampel Committee does not think that there are universally valid answers on suchpoints. It believes, as did the Cadbury Committee, that there can be guidelines, which will beappropriate in most cases; but that there will be valid reasons for exceptions. Wherepractices are approved by the board after due consideration, it is not conducive to goodCorporate Governance for the companys explanations to be rejected out of hand and for its

reputation to suffer as a result.11. Corporate Governance is not just mere box ticking but a diligent pursuit of some

Principles.

The Hampel Committee points out another problem with box ticking. It can be seized on asan easier option than the diligent pursuit of Corporate Governance objectives. It would thennot be difficult for lazy or unscrupulous directors or shareholders to arrange matters sothat the letter of every governance rule was complied with but not the substance. It might

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even be possible for the next disaster to emerge in a company with, on paper, a 100% recordof compliance. The true safeguard for good Corporate Governance lies in the application ofinformed and independent judgment by experienced and qualified individuals Executiveand Non-Executive Directors, shareholders and auditors.

12. Need to expand the definition of Corporate Governance.

The Hampel Committee says that its conclusions have caused it to start from the beginningand consider what is meant by Corporate Governance. One can accept the CadburyCommittees definition of Corporate Governance as the system by which companies aredirected and controlled. The Hampel Committee, however, feels that this definition puts thedirectors of a company at the centre of any discussion on Corporate Governance, linked tothe role of the shareholders, since they appoint the directors. The Hampel Committee findsthis definition to be a restrictive one as it excludes many activities involved in managing acompany, which may nevertheless be vital to the success of the business.

13. Preservation and enhancement of shareholder investment is the ultimate aim.

The single overriding objective shared by all listed companies, whatever their size or type of

business, is the preservation and the greatest practicable enhancement over time of theirshareholders investment. All boards have this responsibility and their policies, structure,composition and governing processes should reflect this. A company must developrelationships relevant to its success. These will depend on the nature of the companysbusiness; but they will include those with employees, customers, suppliers, credit providers,local communities and governments. It is managements responsibility to develop policies,which address these matters; in doing so they must have regard to the overriding objective ofpreserving and enhancing the shareholders investment over time. The boards task is toapprove appropriate policies and to monitor the performance of management inimplementing them.

14. Directors vis--vis shareholders and creditors Different Relationships.

The Hampel Committee recognizes that the directors relationship with the shareholders isdifferent in kind from their relationship with the other stakeholder interests. Theshareholders elect the directors. The directors as a board are responsible for relations withstakeholders but they are accountable to the shareholders. This is not simply a technicalpoint. From a practical point of view, to redefine the directors responsibilities in terms ofthe stakeholders would mean identifying all the various stakeholder groups and deciding thenature and extent of the directors responsibility to each. The result would be that thedirectors were not effectively accountable to anyone since there would be no clear yardstickfor judging their performance. This is a recipe neither for good governance nor forcorporate success.

15.

Directors duty is towards Shareholders both present and future to the sustainedprosperity of the Company.

The Hampel Committee carries on to say that it is obvious that directors must not run thecompany exclusively in the short-term interests of todays shareholders. The directors dutyis to shareholders both present and future. The shareholders, many of whose holdingsremain largely stable over time, are interested in a companys sustained prosperity. Asregards stakeholders, different types of company will have different relationships, anddirectors can meet their legal duties to shareholders, and can pursue the objective of long

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term shareholder value successfully only by developing and sustaining these stakeholderrelationships. Shareholders recognize that it is in their interests for companies to do this and increasingly to have regard to the broader public acceptability of their conduct.

16. Important to recognize limitations on shareholder actions as well.

The Hampel Committee says that it is also important to recognize the limitations onshareholder action. Firstly, shareholders themselves are subject to constraints they rangefrom the smallest individual shareholders who act on their own behalf, to the largestinstitutional shareholder who invests third party funds, frequently under instruction, andalways in a competitive environment. Secondly, shareholders cannot be denied their rights;they must be free to buy or sell as they see fit. Thirdly, shareholders by and large are notexperienced business managers and cannot substitute for them. Shareholders however canand should test strategy, performance over time and governance practice, and can andshould hold the board accountable provided they do this with integrity.

17. Broad conclusions followed by a small number of broad principles.

Having reached broad conclusions on the nature and purpose of Corporate Governance, theHampel Committee identifies a small number of broad principles some already identifiedin the Cadbury and Greenbury Reports, which the Hampel Committee hopes will commandgeneral agreement. In doing this, the Hampel Committee has been mindful that a businessmust have proper regard to its responsibilities and to disclosure; but it is equally important tohave structures and principles, which allow businesses to flourish and grow. These principlesare directed largely at the process of Corporate Governance, which is the HampelCommittees remit.

18. Process is only the means and not an end.

The Hampel Committee believes, however, that it is worth repeating that process can onlyever be a means, not an end in itself; it will be far less important for corporate success and

for the avoidance of disaster than having properly informed directors of the right calibre,bringing openness, thoroughness and objectivity to bear on the carrying out of their roles. Itis the boards responsibility to ensure good governance and to account to shareholders fortheir record in this regard.

The above is a synopsis of approach adopted by the Hampel Committee to the area of CorporateGovernance an approach which stresses that codes are not meant to obstruct the functioning ofcompanies but to enhance it and make it profitable through recommending a set of broad principles.It is more concerned with how companies abide by these principles instead of how far are theycomplied with. It also stresses that Corporate Governance is actually good for the profitability ofcompanies and that the profit-making dimension of companies is fundamental and should not belost sight of by a prescriptive and limiting approach towards the codes. Given below are the more

detailed recommendations derived from the Hampel Report, which against the backdrop of theprinciples already enumerated, gives a complete picture of the Hampel Committees worldview ofCorporate Governance.

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Summary of Conclusions and Recommendations

1. Principles of Corporate GovernanceThe Hampel Committee recommends that companies should include in their annual reports anarrative account of how they apply the broad principles of Corporate Governance set out inthe Hampel Report.

2. Application of the PrinciplesCompanies should be ready to explain their governance policies, including any circumstancesjustifying departure from best practice; and those concerned with the evaluation ofgovernance should apply the principles in the Hampel Report flexibly, with common sense,and with due regard to companies individual circumstances. Box ticking is neither fair tocompanies nor likely to be efficient in preventing abuse.

The Future3. The Hampel Committee intends to produce a set of principles and code of good corporate

governance practices, which will embrace the Cadbury and Greenbury recommendations andits own work. The Hampel Committee shall pass this to the London Stock Exchange.

4. The Hampel Committee envisages that the London Stock Exchange will in future makeminor changes to the principles and code; and it is suggested that the Financial ReportingCouncil should keep under review the possible need for further studies on CorporateGovernance. There is no need for a permanent Hampel Committee on CorporateGovernance.

Directors5. Executive and non-executive directors should continue to have the same duties under the

law.

6. Management has an obligation to provide the board with appropriate and timely informationand the chairman has a particular responsibility to ensure that all directors are properly

briefed. This is essential if the board is to be effective.

7. An individual should receive appropriate training on the first occasion that he or she isappointed to the board of a listed company and subsequently as necessary.

8. Boards should appoint as executive directors only those executives whom they judge able totake a broad view of the companys overall interests.

9. The majority of non-executive directors should be independent and boards should disclose inthe annual report which of the non-executive directors are considered to be independent.This applies to companies of all sizes.

10. There is overwhelming support in the UK for the unitary board, and virtually none for the

two-tier board.11. The Hampel Committee suggests that boards should consider introducing procedures for

assessing their own collective performance and that of individual directors.

12. The Hampel Committee considers that to be effective, non-executive directors need to makeup at least one third of the membership of the board.

13. The Hampel Committee believes that people from a wide range of backgrounds are able tomake a real contribution as non-executive directors.

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14. Separation of the roles of chairman and chief executive officer is to be preferred, otherthings being equal, and companies should justify a decision to combine the roles.

15. Whether or not the roles of chairman and chief executive officer are combined, a senior non-executive director should be identified in the annual report, to whom concerns can beconveyed.

16. Companies should set up a nomination committee to make recommendations to the boardon all new board appointments.

17. All directors should submit themselves for re-election at least every three years, andcompanies should make any necessary changes in their Articles of Association as soon aspossible.

18. Names of directors submitted for re-election should be accompanied by biographical details.

19. There should be no fixed rules for the length of service or age of non-executive directors;but there is a risk of their becoming less efficient and objective with length of service andadvancing age, and boards should be vigilant against this.

20. It may be appropriate and helpful for a director who resigns before the expiry of his term togive an explanation.

Directors Remuneration21. The Hampel Committee urges caution in the use of inter-company comparisons and

remuneration surveys in setting levels of directors remuneration.

22. The Hampel Committee does not recommend further refinement in the Greenbury Codeprovisions relating to performance related pay. Instead the Hampel Committee urgesremuneration committees to use their judgment in devising schemes appropriate for thespecific circumstances of the company. Total rewards for such schemes should not beexcessive.

23. The Hampel Committee sees no objection to paying a non-executive directors remunerationin the companys shares, but does not recommend this as universal practice.

24. The Hampel Committee considers that boards should set as their objective the reduction ofdirectors contract periods to one year or less but recognizes that this cannot be achievedimmediately.

25. The Hampel Committee sees some advantage in dealing with a directors early departure byagreeing in advance on the payments to which he or she would be entitled in suchcircumstances.

26. Boards should establish a remuneration committee, made up of independent non-executivedirectors, to develop a policy on remuneration and devise remuneration packages for

individual executive directors.27. Decisions on the remuneration packages of executive directors should be delegated to the

remuneration committee; the broad framework and cost of executive remuneration shouldbe a matter for the board on the advice of the remuneration committee. The board shoulditself devise remuneration packages for non-executive directors.

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28. The requirement on directors to include in the annual report a general statement onremuneration policy should be retained. The Hampel Committee hopes that these statementswill be made more informative.

29. Disclosure of individual remuneration packages should be retained; but the HampelCommittee considers that this has become too complicated. It welcomes recent

simplification of the Companies Act rules; and it is hoped that the authorities concerned willexplore the scope for further simplification.

30. The Hampel Committee considers that the requirement to disclose details of individualremuneration should continue to apply to overseas based directors of UK companies.

31. The Hampel Committee supports the requirement to disclose the pension implications ofpay increases, which has been included in the Stock Exchange Listing Rules. It is suggestedthat companies should make clear that transfer values cannot meaningfully be aggregatedwith annual remuneration.

32. The Hampel Committee agrees that shareholder approval should be sought for new long-term incentive plans; but it does not favour obliging companies to seek shareholder approval

for the remuneration report.Shareholders and the AGM33. The Hampel Committee recommends pension fund trustees to encourage fund managers to

take a long view in managing their investments.

34. The Hampel Committee believes that institutional investors have a responsibility to theirclients to make considered use of their votes; and it strongly recommends institutionalinvestors of all kinds, wherever practicable, to vote the shares under their control. But it doesnot recommend that voting should be compulsory.

35. The Hampel Committee suggests that the problem caused by the existence of different andincompatible shareholder voting guidelines be examined.

36. The Hampel Committee recommends that institutions should make available to clients, onrequest, information on the proportion of resolutions on which votes were cast and non-discretionary proxies lodged.

37. The Hampel Committee encourages companies and institutional shareholders to adopt aswidely as possible the recommendations in the report Developing a Winning Partnership.

38. Companies whose AGMs (Annual General Meetings) are well attended should considerproviding a business presentation at the AGM, with a question and answer session.

39. The Hampel Committee recommends that companies should count all proxy votes andannounce the proxy count on each resolution after it has been dealt with on a show of hands.

40. The Hampel Committee looks forward to the implementation by DTI (defined in thatreport) of their proposals on the law relating to shareholder resolutions, proxies andcorporate representatives.

41. The Hampel Committee considers that shareholders should be able to vote separately oneach substantially separate issue; and that the practice of bundling unrelated proposals in asingle resolution should cease.

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42. The chairman should, if appropriate, provide the questioner with a written answer to asignificant question, which cannot be answered on the spot.

43. The decision on who should answer questions at the AGM is one for the chairman; but theHampel Committee considers it good practice for the chairmen of the audit, remunerationand nomination Committees to be available.

44. Companies should propose a resolution at the AGM relating to the report and accounts.

45. Notice of the AGM and related papers should be sent to shareholders at least 20 workingdays before the meeting.

46. Companies may wish to prepare a resume of discussion at the AGM and make this availableto shareholders on request.

47. The Hampel Committee commends the practice of some companies in establishing in-housenominees, in order to restore rights to private investors who use nominees.

Accountability and Audit48. Each company should establish an Audit Committee of at least three non-executive directors,

at least two of them independent. The Hampel Committee does not favour a generalrelaxation for smaller companies, but recommends shareholders to show flexibility inconsidering cases of difficulty on their merits.

49. The Hampel Committee does not recommend any additional requirements on auditors toreport on governance issues, nor the removal of any existing prescribed requirements.

50. The Hampel Committee suggests that the bodies concerned should consider reducing from10% the limit on the proportion of total income, which an audit firm may earn from oneaudit client.

51. The Hampel Committee suggests that the Audit Committee should keep under review theoverall financial relationship between the company and its auditors, to ensure a balance

between the maintenance of objectivity and value for money.52. The Hampel Committee recommends that the word effectiveness should be dropped from

point 4.5 in the Cadbury Code, which would then read The directors should report on thecompanys system of internal control. The Hampel Committee also recommends that theauditors should report on internal control privately to the directors, which allows for aneffective dialogue to take place and for best practices to evolve.

53. Directors should maintain and review controls relating to all relevant control objectives, andnot merely financial controls.

54. Companies, which do not already have a separate internal audit function, should from timeto time review the need for one.

55. The requirement on part of directors to include a going concern statement in the annualreport should be retained.

56. Auditors are inhibited from going beyond their present functions by concerns about the lawon liability. Account should be taken of these concerns by those responsible for professionalstandards and in taking decisions on changes in the law.

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Main areas of change and modification in the Combined Code vis--vis the Cadbury Report

While the Hampel Report, outlined above, reiterates many of the principles enumerated in theCadbury Report, the following are the areas, in brief, where it makes new contributions:8

(a) Appropriate and on-going training of directors;

(b)

Requirement to give public justification if the post of chairman and chief executive combinedin a company;

(c) Non Executive Directors to comprise not less than one-third of the board;

(d) Non Executive Directors considered by the board to be independent to be identified in theannual report;

(e) Nomination Committees to be appointed, unless the board is small, to makerecommendations to the board on all new appointments;

(f) All directors subject to election at first opportunity and re-election at intervals of no more thanthree years, to preclude the possibility of insulation of elections on part of any director;

(g) Performance-related elements of remuneration to form a significant proportion of the totalremuneration package of the executive directors;

(h) Remuneration Committees to consider what compensation commitments their directorscontracts of service, if any, would entail in the event of early termination;

(i) Remuneration Committees to be constituted of independent Non Executive Directors toavoid conflicts of interest;

(j) All proxy votes to be counted and level of proxies lodged on each resolution to be indicatedetc.

(k) Companies to propose a separate resolution at the Annual General Meeting on eachsubstantially separate issue etc., to prevent different issues being bundled together in a singleresolution;

(l) Chairman of the board to arrange for chairmen of audit, remuneration and nomination

committees to be available for questions at the Annual General Meeting;

(m) Notice of the Annual General Meeting and related papers to be sent to shareholders at least 20working days before the meeting;

(n) Boards responsibility to present a balanced and understandable assessment extends to interimand other price-sensitive public reports and reports to regulators as well as informationrequired to be presented by statutory requirements; and

(o) At least on an annual basis, there should be a review of the effectiveness of the system ofinternal controls including financial, operational and compliance controls and riskmanagement and a report to the shareholders that such a review has taken place.

Conclusion

A quick review of the above and a comparison with the Cadbury Report shows that these are furtherrefinements of and add-ons to the superstructure already provided by the Cadbury Report as a resultof market feedback as well as regulator scrutiny conducted after the introduction of the same. Inother words, the Hampel Report does not depart in any major way from its predecessors. Itprimarily bolsters and elaborates upon what had already been said.

8 Ibid.

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2.2 The UK Code and the Pakistani Code: A Comparative Analysis

Introduction

As mentioned earlier, the Hampel Report, which incorporated the recommendations from both theCadbury and Greenbury Committees as well as some amendments from the London Stock

Exchange, was published as the Combined Code in June 1998. The Combined Code is appended to,but is not part of, the London Stock Exchange Listing Rules. However, the Combined Code is nowthe final authority in the field of Corporate Governance in the United Kingdom. It is divided intotwo sections. The first section focuses on companies and the second section deals with institutionalshareholders.

Section I of the Combined Code, which is the most relevant part for purposes of this Report,contains fourteen governance principles and boards are asked to report on the way in which theyhave applied them. The intention is that boards should have a free hand in explaining theirgovernance policies in the light of these principles. The section then has forty-five provisions inrespect of which boards are required to state whether they comply with them and to provide anexplanation where they do not.

Section 2 of the Combined Code, focusing on institutional shareholders, contains three governanceprinciples and as many specific provisions.

Thus, the Combined Code brings together the work of all three committees (Cadbury, Greenburyand Hampel) in a form, which is aimed at enabling boards to obtain positive benefits fromcompliance. The Combined Code supersedes all previous codes and hence is the code whichultimately determines the effect of the various Corporate Governance initiatives on the boards ofUK listed companies.

The Broad Comparative Analysis

Below please find the broad principles of the Combined Code with a comment at the end of eachstated principle as to whether the code of best practices in Pakistan (the Code) has anything

similar to offer or if it does not address a particular area at all.

PRINCIPLES OF GOOD GOVERNANCE

SECTION 1: COMPANIES

A. DIRECTORSThe Board

1. Every listed company should be headed by an effective board, which should lead and controlthe company.

Many provisions in the Code try to ensure this and are discussed below.

Chairman and CEO

2. There are two key tasks at the top of every public company 1. the running of the boardand 2. the executive responsibility for the running of the companys business.

There should be a clear division of responsibilities at the head of the company, which willensure a balance of power and authority, such that no one individual has unfettered powersof decision.

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While such a clear division of responsibilities at the head of the company is not sought bythe Code, Clause ix of the Code tries to bring about reform in this area.

Board Balance

3. The board should include a balance of executive and non-executive directors (includingindependent non-executives) such that no individual or small group of individuals candominate the boards decision taking.

The Code addresses this issue and Clauses i (a), (b) & (c) of the Code are relevant for thispurpose.

Supply of Information

4. The board should be supplied in a timely manner with information in a form and of a qualityappropriate to enable it to discharge its duties.

Once again the Code recognizes this and Clause xiii of the Code is relevant for this purpose.

Appointments to the Board

5. There should be a formal and transparent procedure for the appointment of new directors tothe board.

The Code does not quite address the procedure for the appointment of directors.

Re-election

6. All directors should be required to submit themselves for re-election at regular intervals andat least every three years.

Clause vi of the Code mentions the same tenure of office of directors but does not clearlyaddress the topic of re-election.

B. DIRECTORS REMUNERATION

The Level and Make-up of Remuneration1. Levels of remuneration should be sufficient to attract and retain the directors needed to run

the company successfully, but companies should avoid paying more than is necessary for thispurpose. A proportion of executive directors remuneration should be structured so as tolink rewards to corporate and individual performance.

Clause viii (e) of the Code is relevant here but it should be noted that the area of directorsremuneration is otherwise not addressed in the Code.

Procedure

2. Companies should establish a formal and transparent procedure for developing policy onexecutive remuneration and for fixing the remuneration packages of individual directors. No

director should be involved in deciding his or her own remuneration.

The area of directors remuneration is not addressed in the Code.

Disclosure

3. The companys annual report should contain a statement of remuneration policy and detailsof the remuneration of each director.

The area of directors remuneration is not addressed in the Code.

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C. RELATIONS WITH SHAREHOLDERSDialogue with Institutional Shareholders

1. Companies should be ready, where practicable, to enter into a dialogue with institutionalshareholders based on the mutual understanding of objectives.

The area of institutional shareholders is not addressed in the Code.

Constructive Use of the AGM

2. Boards should use the AGM to communicate with private investors and encourage theirparticipation.

There is no counterpart for this in the Code.

D. ACCOUNTABILITY AND AUDITFinancial Reporting

1. The board should present a balanced and understandable assessment of the companysposition and prospects.

The Code focuses on this area through its Clauses xix to xxv.Internal Control

2. The board should maintain a sound system of internal control to safeguard shareholdersinvestment and the companys assets.

Clause viii (c) of the Code deals directly with this though no guidance is provided as to thecomponents and criteria of sound internal control.

Audit Committee and Auditors

3. The board should establish formal and transparent arrangements for considering how theyshould apply the financial reporting and internal control principles and for maintaining an

appropriate relationship with the companys auditors.This area receives a lot of attention in the Code and its Clauses xxx-to xliv deal with it.

SECTION 2: INSTITUTIONAL SHAREHOLDERS

E. INSTITUTIONAL INVESTORSShareholder Voting

1. Institutional shareholders have a responsibility to make considered use of their votes.


Dialogue with Companies

2. Institutional shareholders should be ready, where practicable, to enter into a dialogue withcompanies based on the mutual understanding of objectives.


Evaluation of Governance Disclosures

3. When evaluating companies governance arrangements, particularly those relating to boardstructure and composition, institutional investors should give due weight to all relevantfactors drawn to their attention.

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The Detailed Comparative Analysis

Below please find the broad principles as well as detailed provisions of the Combined Code with acomment at the end of each provision as to whether the Code in Pakistan has anything similar tooffer or if it does not address a particular area at all.

COMBINED CODESECTION 1: COMPANIES

A. DIRECTORS A.1 The Board

Principle: Every listed company should be headed by an effective board, which should leadand control the company.

Code Provisions

A.1.1 The board should meet regularly.

Clause xi of the Code The Board of Directors of a listed company shall meet at leastonce in every quarter of the financial year directly deals with this requirement.

A.1.2 The board should have a formal schedule of matters specifically reserved to it fordecision.

The following clauses of the Code have recommendations for formalization andqualitative improvement of decision-making on part of directors.

Clause xiii of the Code In order to strengthen and formalize corporate decision-making process, significant issues shall be placed for the information, consideration anddecision of the Boards of Directors of listed companies. Significant issues for thispurpose may include (a list of significant issues/matters given).

Clause viii (b) - requirement of a vision statement for formulation of significant policies.

Clause viii (d) - powers exercised by the Board of Directors vis--vis materialtransactions and significant matters.

Clause xi - requirement for circulation of written notices (including agenda) ofmeetings.

A.1.3 There should be a procedure agreed by the board for directors in the furtherance of theirduties to take independent professional advice if necessary, at the companys expense.

There is no mention of any procedure to take independent professional advice at thecompanys expense by the Board in the Code although the explanation to Clause viii (b)

in the Code does state that The Board of Directors shall define the level of materiality,keeping in view the specific circumstances of the company and the recommendations ofany technical or executive sub-committee of the Board that may be set up for thepurpose.

A.1.4 All directors should have access to the advice and services of the company secretary,who is responsible to the board for ensuring that board procedures are followed and that

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applicable rules and regulations are complied with. Any question of the removal of thecompany secretary should be a matter for the board as a whole.

The role of the Company Secretary is not as explicitly defined in the Code as it is above. The Code, however, deals with the appointment, qualifications and requirement toattend board meetings vis--vis the Company Secretary Clauses xv to xviii.

A.1.5 All directors should bring an independent judgment to bear on issues of strategy,performance, resources, including key appointments, and standards of conduct.

Clause vii of the Code specifically states that the directors of listed companies shallexercise their powers and carry out their fiduciary duties with a sense of objectivejudgment and independence in the best interests of the listed company.

A.1.6 Every director should receive appropriate training on the first occasion that he or she isappointed to the board of a listed company, and subsequently as necessary.

Clause xiv of the Code deals with orientation courses for directors to acquaint them withtheir duties and responsibilities and to enable them to manage the affairs of the listedcompanies on behalf of shareholders.

A.2 Chairman and CEOPrinciple:There are 2 key tasks at the top of every public company the running of the

board and the executive responsibility for the running of the companys business.There should be a clear division of responsibilities at the head of the company,which will ensure a balance of power and authority, such that no one individualhas unfettered powers of decision.

Code Provision

A.2.1 A decision to combine the posts of chairman and chief executive officer in one personshould be publicly justified. Whether the posts are held by different people or by thesame person, there should be a strong and independent non-executive element on theboard, with a recognized senior member other than the chairman to whom concerns canbe conveyed. The chairman, chief executive and senior independent director should beidentified in the annual report. (Certain words have been put in bold letters for emphasisby the author of this Report).

Clause ix of the Code does not preclude the possibility of one individual holding theposts of the Chairman and Chief Executive. It states that the Chairman of a listedcompany shall preferably be elected from among the non-executive directors of thelisted company. The Board of Directors shall clearly define the respective roles andresponsibilities of the Chairman and the Chief Executive, whether or not these officesare held by separate individuals or the same individual. There is no requirement in the

Code that a decision to combine the posts of chairman and chief executive officer in oneperson should be publicly justified or the mechanism whereby concerns can beforwarded to a an independent non-executive element along with a recognized seniormember other than the chairman. However, there are provisions in the Code for astrong and independent non-executive element on the board (See Clause i (b) & (c)).

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A.3 Board BalancePrinciple: The board should include a balance of executive and non-executive directors

(including independent non-executives) such that no individual or small group ofindividuals can dominate the boards decision making.

Code Provisions

A.3.1 The board should include non-executive directors of sufficient calibre and number fortheir views to carry significant weight in the boards decisions. Non-executive directorsshould comprise not less than one third of the board.

Clauses i (b) & (c) of the Code are pertinent in relation to the above. Clause i (b) calls forthe inclusion of at least one NED representing institutional equity interest in the boardof each company. Clause i (c) states that executive directors, i.e. working or whole timedirectors, are not more than 75% of the elected directors including the Chief Executive.

A.3.2 The majority of non-executive directors should be independent of management and freefrom any business or other relationship, which could materially interfere with theexercise of their independent judgment. Non-executive directors considered by the

board to be independent in this sense should be identified in the annual report.Apart from the above quoted Clauses, the Code explains that for the purpose of Clause i(b), the expression independent director means a director who is not connected withthe listed company or its promoters or directors on the basis of family relationship and who does not have any other relationship, whether pecuniary or otherwise, with thelisted company, its associated companies, directors, executives or related parties. The testof independence principally emanates from the fact whether such person can bereasonably perceived as being able to exercise independent business judgment withoutbeing subservient to any apparent form of interference. There is no requirement in theCode for identifying independent non-executive directors in the annual report.

A.4 Supply of InformationPrinciple: The board should be supplied in a timely manner with information in a form andof a quality appropriate to enable it to discharge its duties.

Code Provisions

A.4.1 Management has an obligation to provide the board with appropriate and timelyinformation, but information volunteered by management is unlikely to be enough in allcircumstances and directors should make further enquiries where necessary. Thechairman should ensure that all directors are properly briefed on issues arising at boardmeetings.

Clause xiii of the Code deals with key information to be placed for decision by Board of

Directors. However, there is no particular stipulation for directors to make furtherenquiries where necessary. Whereas, Clause xii of the Code states that the Chairman shallensure that minutes of board meetings are appropriately recorded.

A.5 Appointments to the BoardPrinciple: There should be a formal and transparent procedure for the appointment of new

directors to the board.

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Code Provision

A.5.1 Unless the board is small, a nomination committee should be established to makerecommendations to the board on all new board appointments. A majority of themembers of this committee should be non-executive directors, and the chairman shouldbe either the chairman of the board or a non-executive director. The chairman and

members of the nomination committee should be identified in the annual report.Clause viii (e) of the Code ascribes responsibility to the Board of Directors fordetermining and approving the appointment, remuneration and terms and conditions ofemployment of the CEO and other executive directors. However, there is no provisionfor the establishment of a nomination committee in charge of all new boardappointments in the Code.

A.6 Re-electionPrinciple: All directors should be required to submit themselves for re-election at regular

intervals and at least every three years.

Code Provisions

A.6.1 Non-executive directors should be appointed for specified terms subject to re-electionand to Companies Act provisions (the UK Companies Act, Companies Ordinance, 1984in our case) relating to the removal of a director, and reappointment should not beautomatic.

Clause vi of the Code states that the tenure of office of directors is three years, however,there is no specific mention of re-election. Sections 174-197-A of the CompaniesOrdinance, 1984 deal with this area. Also, see Clause i paragraph 3 of the Codecontaining the Explanation of independent director.

A.6.2 All directors should be subject to election by shareholders at the first opportunity aftertheir appointment, and to re-election thereafter at intervals of not more than three years.

The names of directors submitted for election or re-election should be accompanied bysufficient biographical details to enable shareholders to take an informed decision ontheir election.

Clause i (a) of the Code provides for minority shareholders as a class to contest electionof directors by proxy solicitation. The Code does not provide for the election or re-election of other directors in detail. The Companies Ordinance, 1984, Sections 174-197-A, however, deals with this area and some of the relevant sections have been mentionedin Chapter 4 of this Report.

B. DIRECTORS REMUNERATIONB.1 The Level and Make-up of Remuneration

Principle: Levels of remuneration should be sufficient to attract and retain the directorsneeded to run the company successfully, but companies should avoid payingmore than is necessary for this purpose. A proportion of executive directorsremuneration should be structured so as to link rewards to corporate andindividual performance.

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Remuneration Policy

There is no separate treatment and discussion of the area of remuneration policy fordirectors in the Code. In fact, the Code is all but silent about the level and make-up ofremuneration for directors and the only clause in the Code which specifically mentionsremuneration (of directors) is clause viii (e) which states that the Board of Directorsshould determine and approve the appointment, remuneration and terms and conditionsof employment of the CEO and other executive directors of the listed company. Thereis also no specific provision for a remuneration committee anywhere in the Code.Thus, remuneration is one area, which may in the future require some attention in thePakistani context and this is discussed at a later stage in the Report. This explanationapplies to all of the following specific provisions of the Combined Code.

Companies Ordinance, 1984, Section 191(b) says that the remuneration to be paid toany director for attending the meetings of the directors or a committee of directors shallnot exceed the scale approved by the company or the directors, as the case may be, in

accordance with the provisions of the articles. The same applies to remuneration of adirector for performing extra services such as the holding of the office of the chairmanaccording to clause (a) of the same section. Thus unlike the Code, the Ordinance allowseither the company or the directors to make this decision and this is thus an area ofconflict.

B.1.1 The Remuneration Committee should provide the packages needed to attract, retain andmotivate executive directors of the quality required but should avoid paying more than isnecessary for this purpose.

B.1.2 Remuneration Committees should judge where to position their company relative toother companies. They should be aware what comparable companies are paying andshould take account of relative performance. But they should use such comparisons with

caution, in view of the risk that they can result in an upward ratchet of remunerationlevels with no corresponding improvement in performance.

B.1.3 Remuneration Commit

harmonizing code

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