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shareholders™ approval. The regime for related party transactions and conflict
of interest is developed in the law and requires audit committees to concur
with any departures from arm™s length pricing and super majority of sharehold-
ers in case of investment in an associated company or an associated undertak-
ing. Quality and timely financial disclosure have improved over the past few
years. Shareholders owning 10% or more of voting capital must disclose their
ownership and the annual report includes the pattern of shareholdings. The
Part E “ Case Studies of Business Risks
606



Code of Corporate Governance (2002) strengthens the role of non-executive
directors, restricting the percentage of executive directors to 75% in non-financial
companies.
There are a number of enforcing institutions in part reflecting the govern-
ment™s strong commitment to economic reform:
The Securities and Exchange Commission (SECP) is committed to enforcing
corporate governance regulations;
The State Bank of Pakistan (SBP) has also been instrumental in improving
corporate governance in the banking system, by requiring non-listed banks to
adopt the Code of Corporate Governance;
The Pakistan Institute of Corporate Governance (PICG) has been created with
the goal of training directors and building more awareness; and
The Institute of Chartered Accountants of Pakistan (ICAP) has been an import-
ant force for corporate governance reform in Pakistan. It has some self-
regulatory functions and stock exchanges are responsible for overseeing listing
requirements.
Key obstacles include highly concentrated control by significant shareholders,
which has limited the objectivity of boards and reduced the impact of some of
the recent reforms. More generally, many smaller and family-owned companies
have a limited awareness of the potential benefits of improved corporate govern-
ance. Remuneration paid to directors has traditionally been token.


SMEs
Almost 90% of businesses in Pakistan are SMEs, mostly working in the undocu-
mented sector. They are run as family businesses lacking standard entrepre-
neurial and managerial skills. Concerns about ˜standards of financial
reporting™, ˜effective accountability™ and transparent management and business
conduct are increasing. In this regard the Securities and Exchange Commission
of Pakistan (SECP) has laid down a specific code of conduct to be followed by
the corporate sector to improve the state of corporate governance in the coun-
try. As per prevailing guidelines one of the non-executive directors on the
board of a company should be the professional lawyer/legal advisor but many
SMEs have been avoiding this clause for some time.
Geopolitical factors also have an impact. As one business leader noted in a
CBC workshop in 2006, ˜the law and order situation due to the US led war on
terror is also impeding corporate governance and is a risk factor to our corpo-
rate sector. The advent of Reconstruction Opportunities Zone (ROZs), a US
sponsored mechanism to quell poverty, is a program which will try to encour-
age economic stability for the individual thereby digging out poverty, the root
cause of terrorism [and] the corporate sector of our region will definitely be
improved.™
Corporate governance reform needs to percolate throughout the corporate
sector “ listed companies and unlisted companies/SMEs, including family-
owned businesses. Further steps need to be taken to protect shareholders™
Chapter 23 “ Corporate responsibility, corporate governance and emerging jurisdictions 607



rights, including disclosure of beneficial ownership. Boards must become
more effective, with stronger fiduciary duties and more capable independent
directors.
Compliance needs to be improved in three areas “ disclosure of beneficial
ownership and control by shareholders; reporting of related party transactions;
and compliance with regards to the AGM. Independent oversight for account-
ing and auditing should be introduced to enhance credibility. There should be
enhanced provisions for majority board independence (currently voluntary).
Institutional investors should adopt and disclose their corporate governance
and voting policy. The move towards a central registry should be accelerated.
Provisions for independent directors are relatively weak; in practice only direct
ownerships are reported, although law requires disclosure of direct and indir-
ect. The requirement for shareholders to disclose indirect ownership should be
clarified. Distance voting for the AGM, by post or electronic means, should be
introduced. Companies should disclose significant shareholders in their
annual report and all shareholders agreements. Thresholds for shareholder
action should be lowered (the threshold for filing lawsuits of 20% is high). The
Companies Ordinance (CO) could be amended to include the concept of inde-
pendent directors as opposed to non-executive directors, making it a require-
ment to have up to 25% certified directors with a minimum of one independent
director.


Sri Lanka
In Sri Lanka, the concern for corporate governance originated in the numerous
company failures, especially finance companies, in the late 1980s and early
1990s, which caused investors to lose faith in the regulatory and semi-regulatory
frameworks, as well as the standards of financial reporting. Accordingly, the
Institute of Chartered Accountants of Sri Lanka set up a task force in 1992
(about the same time as the Cadbury Committee in the UK) to enforce Sri
Lankan accounting standards, and then extended this initiative in 1996 (again
before the East Asian financial crisis) to set up a committee to make recommen-
dations on the financial aspects of corporate governance.
Many Sri Lankan publicly listed companies have subsidiaries in which the
directors of the holding company have significant shareholdings. Some of the
subsidiaries purport to perform management services, computer services and
similar types of services. Because of the significant financial interest of the
directors in these subsidiaries, it is possible for the boards of the holding com-
panies to make decisions in favour of the subsidiaries to the detriment of the
other shareholders of the holding company. Non-executive directors are often
not effective in controlling such practices, as the board appoints them.
The Sri Lankan equity market does not have active independent sharehold-
ers. Unit trusts and other forms of fund management have not developed to a
significant degree to influence the decisions of the management. As sharehold-
ings of most companies are concentrated in few shareholders who are also
directors, the directors are able to make decisions which are favourable to
Part E “ Case Studies of Business Risks
608



themselves and unfavourable to minority shareholders. Therefore, the minority
shareholders are largely at the mercy of the directors, and it is unlikely that the
market forces would change the situation.
Minority shareholders who participate in general meetings often feel that
they do not have a significant voice at these meetings. There is little share-
holder participation in important decisions, and in particular on material-
related party transactions. In the plantation sector most companies have
delegated management to other companies in which directors of the plantation
company are the shareholders and directors. The delegated company enjoys
substantial management fees. Most minority shareholders feel that this arrange-
ment is disadvantageous to the company and its shareholders and have been
done to benefit the directors.
Company legislation as well as accounting standards require disclosure of
related party transactions. However, Sri Lanka accounting standards, as well as
international accounting standards on which the Sri Lanka standards are based,
exclude intercompany transactions between members of a group of companies
from this disclosure requirement. Many minority shareholders feel that the
directors of companies use this exclusion to avoid disclosing transactions with
companies of the group in which directors have a large financial interest.
The 2003 Revision to the Corporate Governance Code of 1997 contained
several key enhancements. The voluntary Code of Best Practice was updated to
be in line with the Combined Code of UK. Clearly defined functions of the
board were set out. The ˜lead director™ concept was introduced if the chairman
is also the CEO. There was guidance on non-executive directors, independent
directors™ and board balance. Other areas covered included appraisal of the
board and CEO, disclosure of directors™ remuneration, constructive use of the
AGM and disclosure of major transactions. In the 2004 Guidelines for Listed
Companies on Auditor and Audit Committees, the Voluntary Code of Best
Practice took into consideration certain provisions of the Sarbanes-Oxley Act.
The guidelines are now focused on two areas: auditors of listed companies
(their qualifications, appointment, powers, audit partner rotation, independence
of auditors, disclosure of fees for other services, restricted and permissible non-
audit services) and audit committees of listed companies (their composition,
objectives, powers and duties). Most recently in the 2006 Revisions to the Code
of Best Practice on Corporate Governance several further steps were taken.
Mandatory rules are to be introduced in the first quarter of 2007. There is
enhanced guidance on non-executive directors, independent directors, and dis-
closures relating to directors. The role and responsibility of the remuneration
committee, audit committee and nominations committee is further set out with
the appraisal of the board and board committees. There is a definition of inde-
pendence and self-declaration of independence required of non-executive direct-
ors. There is a Voluntary Code of Best Practice formulated by a select committee,
taking account of corporate governance standards in several jurisdictions includ-
ing the UK (Combined Code) and New York (New York Listed Company Manual).
In October 2005 the Asian Development Bank ˜found accounting and
auditing in Sri Lanka to be of a generally good standard with the exception of
Chapter 23 “ Corporate responsibility, corporate governance and emerging jurisdictions 609



public sector entities™. It noted that ˜there are two major challenges to establish-
ing effective financial sector governance in Sri Lanka. One is the significant
role played by state-owned institutions, and the second is the prevalence of
complex and interrelated corporate groups in the private sector.™


Recommendations
The CBC has made the following recommendations to governments and busi-
ness for further action to strengthen corporate governance in South Asia:
1. Adopt the ˜CBC Business Principles™ as a standard applicable for all busi-
nesses and other relevant entities in Commonwealth countries;
2. Endorse the legal and institutional environment advocated in the OECD
Policy Framework for Investment;
3. Agree the need for the private sector and government to work together in
pursuit of better corporate governance;
4. Allocate specific responsibility at cabinet level for enhancement of cor-
porate governance;
5. Reinforce good corporate governance through enhancement of the legal and
institutional framework as described in the CBC approach above. Of particu-
lar importance are listing rules and codes of practice of stock exchanges and
financial regulatory authorities;
6. Support and encourage development of a best practice national body in each
country for advancement of good corporate governance, bringing together
business, professions, regulators, investors and financiers, academia and
policy-oriented research centres;
7. Support regional centres of excellence possibly associated with regional
institutions, such as SAARC, to promote awareness, education and training;
8. Ensure a focus is also maintained on significant groups beyond listed com-
panies as these are important in South Asia, i.e. unlisted companies, state-
owned enterprises and SMEs.


Chapter summary
In order to achieve a sustainable approach to business risk, varying drivers and
approaches must be considered, as well as differing standards that exist. An
awareness of strengths and weaknesses of problem-solving efforts in different
jurisdictions is required. For example, the US corporate governance reforms may
be insufficient to prevent future corporate failures like Enron (see Chapter 22).
These reforms were brought in haste and therefore they have had unintended
consequences on corporations, causing them hardships to achieve compliance.
On the other hand the UK approach, being self-regulatory, allows some scope
for manipulation of rules and regulations by fraudulent geniuses, although it
has worked well to date as there have been no corporation collapses of the mag-
nitude of Enron. This reality is evident more in the case of developing countries
where the law enforcing machinery is unlikely to be as efficient as in a developed
Part E “ Case Studies of Business Risks
610



jurisdiction like the UK. Apart from the recommendations referred to in this
chapter another could be that before rules and regulations are made mandatory
they should be tested by incorporating them in a code adopting a comply and
explain approach as done in the UK. This kind of test and legislate approach may
assist corporate governance in developing countries and enable sustainable risk
management. One point is very clear: this is an ongoing and vital debate in
today™s era of global business expansion and change.
24
Conclusions and future trends
24 Conclusions and future trends



CHAPTER OVERVIEW
At the early stages of the new millennium, there is little doubt that certain
major risks will dominate global business affairs in the years to come; in
particular sustainability related risks covered in previous chapters. This
final chapter reviews some of the themes and trends affecting organisa-
tions and the risk levels that pose a threat to value. By structuring your risk
management activities into a more cohesive and sustainability orientated
process you can reduce your risk levels.
The essence of this book is to protect the average 12.5% of market
value at risk from sustainability issues by bringing together various ele-
ments of risk management into a sustainable and economic/enterprise risk
management system.
We hope the book is a one-stop resource that helps business, non-profit,
and government organisations to improve the economic, environmental and
social conditions of their organisations and increase their “capital” in these
areas. This chapter provides a brief overview of the business case, its imple-
mentation, and monitoring, which demonstrates that improved risk man-
agement and better relationships with stakeholders can ultimately build
more sustainable organisations and economies.




Introduction
The business case for sustainable and economic risk management of a wide
range of contemporary issues has been outlined in the previous chapters and is
summarised in this chapter.
The main message is that whatever the current trends for describing new
methods for assessing companies “ business ethics, corporate social responsi-
bility, corporate responsibility, corporate governance and accountability, best
practice, sustainable development and other methods “ the broader view is that
there is an increased interest in the value of values and the benefit of viewing
sustainability issues as business issues.
Chapter 24 “ Conclusions and future trends 613



There is an increasingly wide definition of what constitutes value as intangible
assets (also called non-financial and extra-financial) gain in importance, such as:
Brand value and reputation;
Goodwill;
Stakeholder and shareholder value; and
Customer loyalty, retention and value.
As mentioned in Chapter 9 these intangible assets are quite often of a higher
value than tangible assets, i.e. 71% of the value of the UK™s largest listed compa-

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