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Companies Act of 1956, which has been amended about 20 times. Steps made
mandatory include having independent directors on company boards; boards
meeting at least four times in a year with a maximum gap of three months
between successive meetings; having audit committees; a corporate governance
report to be included as part of the directors™ report to shareholders annually;
and detailed management discussion and analysis of the company™s operations.
The distinction between management and direction was recognised and
respective duties articulated which call for robust systems to track KPIs and
strategy assessment. A revised Companies Act is under development.
Companies are now required to provide specific information on corporate
governance in their annual reports. However, information provided in annual
reports is often sketchy and is not of much relevance to shareholders and
would-be investors. Hence, there is a need for a reality check to ensure the qual-
ity of information given in the annual reports.
Traditionally, however, Indian organisations are prone to managing risks in
a fragmented way through departments or functions. The traditional and frag-
mented risk management mechanism would focus on managing such risk
through hedging activities. However, while managing risks is integral to man-
agement™s day-to-day activities, the reality for many organisations today is that
the risk management function is usually unsupported by a comprehensive risk
management process. As a result, many exposures are managed on a one-off
basis, leaving organisations vulnerable to harmful, unplanned, or unforeseen
Most recently the Securities and Exchange Board of India (SEBI) revised its
Clause 49 of listing agreements (January 2006) with a view to enhancing the
corporate governance requirements, primarily through increasing the responsi-
bilities of the board, consolidating the role of the audit committee and making
Chapter 23 “ Corporate responsibility, corporate governance and emerging jurisdictions 601

management more accountable. There are no requirements for director training.
However, guidance is weak in some areas. As one company secretary noted, there
are four lines on risk management which means companies either do little or
have to resort to consultant guidance at significant cost.
One of the main issues in India is that dominant shareholders in most of
the non-government public companies are often family members of the original
owner who set up the company. Even if the company is a public company listed
on stock exchanges, the board of directors is typically made up of family mem-
bers, a nominated director from the financial institutions, a government nomi-
nee and a few independent directors. By definition in Clause 49 in the listing
agreement, dominant shareholders cannot be considered independent. So these
companies had till 1 January 2006 to reconstruct their board of directors to at
least 50% of independent directors. While some are in violation of the stand-
ard, these companies are slowly in the process of restructuring their board of
Mere compliance with the existing legal and regulatory framework and
protecting the majority shareholders interests alone is not a guarantee for long-
term corporate survival. The bigger challenge in India lies in the proper imple-
mentation of rules at the ground level. More needs to be done to ensure
adequate corporate governance in the average Indian company.
Availability of information with respect to the following needs greater
attention: strategic review and guidance, and monitoring; selection, compensa-
tion and succession policies; risk policy and management; reviewing key execu-
tives and board remuneration; transparent board nomination process; monitoring
and managing potential conflicts of interests; integration of accounting and
financial systems and independent auditing including compliance with the
legal requirements; monitoring effective corporate governing policies and
practices; establishing appropriate systems of control; overseeing disclosures
and communications; and ensuring access to material information of all
The corporate governance framework in India encourages public participa-
tion but unlike institutional investors, public shareholders are not in a position
to influence managerial decision making. The right to vote according to the pro-
portion of shareholding, proxy voting, the right to resolve disputes with the
company, and the right to demand an independent audit do exist in the legal
framework. On the other hand, the minority shareholders are not represented
on the board. However, the shareholder™s voice needs to be strengthened further
to protect basic minimum rights as follows:

Basic rights of ownership such as being informed of and participating
in decisions to change the company statutes, capital structure or sell the
Right to elect members of the board; equitable treatment of all shareholders
including minority and foreign shareholding;
Right to be ensured that members of the board and management disclose all
material information regarding their interests in related party transactions;
Part E “ Case Studies of Business Risks

Employee share ownership representation on the board, creditor participa-
tion in insolvency proceeding; and
Access to relevant information for the participating stakeholders to assist
them in fulfilling their responsibilities.

Nepal has a small but active equity market. At the end of 2005 there were 124
companies listed on the Nepal Stock Exchange (NEPSE). Nepal™s family owned
business houses play an important role in corporate ownership. Most govern-
ment and market institutions lack efficiency, predictability, transparency and
accountability. The legal framework governing capital markets contains large
and significant gaps. Critical institutions, including the securities board and
company registrar, have few resources and little authority. The industrial activ-
ity of the country is concentrated in a small number of powerful families who
own and control about 27% of total private sector assets in the country. In add-
ition, a number of enterprises are still in the public sector and operate at a very
low efficiency level. The country has experienced a sharp economic downturn
since mid-2001, with GDP growth slipping mainly due to political uncertainty,
escalating insurgency and social unrest.
The government has adopted a market economy and has a liberal policy
towards foreign investors. However, foreign direct investment in the country is
still very low. Weakness in corporate governance also accounts for one of the
Awareness of the importance of corporate governance is growing in
Nepal. The government has adopted good governance as one of the pillars of its
five-year plan, recognising its critical importance in achieving poverty reduction
and economic development targets. The central bank has introduced higher cor-
porate governance standards for banks and other financial companies as part
of a wider programme of financial sector reform. Accounting and auditing
standards are being developed. Also a number of draft laws have been prepared
that, if passed and implemented, should deepen and accelerate the reform
Nepal has initiated corporate governance reform in the financial sector and
draft legislation has been prepared to spread reform to other companies. Fully
tapping the potential of capital markets and professionalising boards and man-
agement will require this legislation to be passed and implemented and overall
reform efforts to continue.

Key issues
1. Investor protection:
There are a number of weaknesses in the corporate governance framework
that limit investor confidence;
Chapter 23 “ Corporate responsibility, corporate governance and emerging jurisdictions 603

Shareholders can participate in the governance process; however, for some
shareholders participation involves demanding money and other benefits
at the AGM;
Share registration is cumbersome and prone to abuse. Information on com-
panies can be hard to access; and
Change in control is not common. Related party transactions take place
which are sometimes disadvantageous to the minority shareholders.

Minority protection is a problem when owner/managers solicit funds and then
abscond or mismanage the company. Minority shareholders do not have easy
access to legal protection in Nepal. The courts in Nepal are ill-equipped to deal
with business problems. Judges and lawyers have not been trained to analyse
the kinds of legal issues generated by a capital market. Judges should be further
educated to respond to new demands, but that is a long-term solution.

2. Disclosure:
Disclosure is poor especially for non-financial companies;
Ownership disclosure is limited; and
Standards for auditing and accounting are still being developed.

Poor disclosure of information is one of the impediments for gaining investors™
confidence at a high level. The issuers publish overoptimistic forecasts of
future profits and they often fail to publish annual accounts or hold annual gen-
eral meetings, and even pay no dividends.

3. Effectiveness and ethics of the board members:
Boards and management are under family control;
Directors have limited guidance on their duties or powers; and
Basic rules of conflict of interest are in place, but enforcement is
Because of the relationship-based system in Nepal, most boards do not satisfy
any of the conditions that accompany the principle of independent oversight.
Although there is a clear distinction between full-time directors and non-
executive board members, there is no legal definition of independence.
Moreover, the non-executives are family members or nominees from the gov-
ernment or institutional shareholders. It is common for prominent persons to
serve on the boards of several corporations simultaneously.
Management shares very little substantive information with the outside
directors. Most of the nominee directors fail to understand that they are fidu-
ciaries of the company. Most Nepali companies are driven by their management
and not by their boards.

4. Enforcement:
Key corporate governance institutions lack resources and authority; and
Enforcement is largely left to the NEPSE, district courts and the central
Part E “ Case Studies of Business Risks

The affiliated company board, a part-time court-like body, hears a steady
stream of cases, but these are regularly appealed. The standards developed by
ICAN and the Accounting and Auditing Standards Boards remain voluntary,
and only a fraction of registered accountants and auditors have been licensed
by the body.

1. Strengthen capital markets:
Nepal should continue the reform process and draft more effective com-
pany and security legislation; and
Strengthen the institutions which are in charge of enforcing the legisla-
tions and regulating the capital markets.
2. Protect shareholders™ rights:
Stress should be given on strengthening shareholders™ rights and more
productive AGMs; and
Establishing transparent procedures for major and related party
3. Enhance transparency:
Ensure that high standards for accounting and auditing are introduced and
enforced; and
Improve disclosure of ownership and control.
4. Increase the effectiveness and objectivity of boards:
Increase the effectiveness of boards through change in legislature and
introduction of a ˜code of corporate governance™;
Specify the directors™ duties and powers and introduce new codes for
directors to behave ethically and be responsible to legitimate stakeholders;
Encourage the development of independent directors; and
Training for board members and creation of institute of directors or cor-
porate governance.

Pakistan commenced its corporate governance programmes later, following the
Securities and Exchange Commission of Pakistan Act in 1997, the commence-
ment of operations by the Commission in 1999 and the introduction of the
national Code for Corporate Governance in early 2002. But despite the later
start, initiatives in Pakistan were driven by homegrown realities, in particular
the recognition that the traditional structures and operations of the capital mar-
ket, especially lending from state-owned banks, could no longer sustain the
financing needed for growth. This has led to a realisation of a critical need for
reform of the capital markets in order to mobilise domestic savings and foreign
portfolio investment (as there had been in India a decade earlier).
Chapter 23 “ Corporate responsibility, corporate governance and emerging jurisdictions 605

In fact, despite the later start with formal national policies, it could be said
that Pakistan focused on corporate governance earlier than many countries in
the world, not just the region “ note the importance of the 1984 Companies
Ordinance Act, which introduced a number of key features of good corporate
governance, at a time when the very term ˜corporate governance™ had only just
been coined and was still effectively unknown outside very specialised aca-
demic circles. Furthermore, during the mid-1980s there were some significant
policy and training programmes to strengthen corporate control, board direc-
tion and chairmanship in both the state enterprises and the private sector,
through the Expert Advisory Cell of the Ministry of Industry and the Lahore
University of Management Sciences and Institute of Personnel, supported by
USAID. Although these programmes were not described as ˜corporate govern-
ance™, they could be said to form part of the corporate governance heritage of
Assessment of corporate governance in Pakistan can be examined both in
relation to listed companies and SMEs.

Listed companies
There have been a number of achievements. Reform to improve corporate govern-
ance has been significant, including the introduction of a code of corporate gov-
ernance and increased vigilance by regulators. Regulators, industry associations,
academic institutions and non-governmental organisations have raised aware-
ness of the value of good corporate governance practice, and have established
the Pakistan Institute of Corporate Governance (PICG), which aims to build
understanding and provide training in an innovative public/private partnership.
The PICG is a dedicated centre established in Karachi, the business and finan-
cial centre. This is supported by regulators such as the Securities Exchange
Commission and the private sector such as Citibank as well as an international
professional accountancy body and aims to provide training and act as a centre
for sharing best practice nationally. Crucially it also has strong links to the lead-
ing research centre for corporate governance based in one of the country™s lead-
ing business schools (Lahore University of Management Sciences).
Among multinationals, corporate governance benchmarks, internal report-
ing and disclosure requirements are set out by the parent company and this
translates to practices that go beyond regulatory requirement. Such companies,
though few, are becoming effective drivers for corporate governance.
Basic shareholders™ rights are in place. Changes to company articles,
increasing authorised capital and sale of major corporate assets all require


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