Q: a) how is corporate governance is related to Corporate performance.

Illustrate your
answer with suitable examples from Pakistan Corporate Sector?
b) Justify need and relevance of corporate governance to developing countries with
particular references to Pakistan also discuss some of most prominent issues of Corporate
governance in relevance to Pakistan.

Corporate governance refers to the management decisions taken either in the favor of
shareholders or against them which could impact the overall corporate performance. There is a
positive relation between corporate performance and corporate Governance. Different Styles of
Corporate Governance (Semi democratic. Democratic or Authoritative) affect Corporate
Performance in terms of return on equity, return on asset, asset to debt ratio, profitability ratios
etc. Corporate performance could be affected by how different policies are being formulated
under corporate governance by senior Management and how they are being implemented, how
they are perceived by employees. Whether they are forced to follow them or doing it willingly.
The relationship of shareholders with the top management also affects the firm performance.
Data collected from different financial institutions of Pakistan including National Bank of
Pakistan, Meezan Bank, Silk Bank, UBL and ABl proved that there is a strong effect of Attitude
of Management, attitude of employees and Shareholder Vs management relation on Corporate
performance. (Mobeen Ur Rehman and Aabid Hussain, 2013)
As Per the analysis of data collection from 30 Pakistani listed firms there exists a relationship
between the four corporate governance mechanisms (board composition (proportion of executive
and non executive directors), board size, CEO/chairman duality and audit committee) and two
firm performance measures (return on equity and Net profit margin). Return on equity has a
positive and significant relationship with board size, board composition and Audit committee but
has a weak significant relationship with CEO/Chairman duality. Similarly, Net profit margin has
strong and significant relationships with board size, board composition and Audit committee but
has negative relationship with CEO/Chairman duality which means that It implies that the
sampled firms of KSE demand separation of persons to occupy the positions of chief executive
and the board chair. (Qaiser Rafique Yasser et al, 2011)
Good governance ensures insiders proper and good behavior and raised firm value. The growth
opportunities reflect the valuation of the firm, implying a positive relationship between
governance and firm performance. Corporate governance practices (Board size and composition,
ownership, disclosure) do affect the firms overall performance. The ownership and Board
composition have some significant influence on firm performance. Also investors are not willing
to pay a premium for companies that are engaged in open and full disclosure. (Attiya y. javed
and Robina iqbal, 2006)
Corporate governance in terms of board size, board composition and CEO/Chairman duality
affect Corporate Performance in terms of return on Assets. According to the data collection from
Sugar industry of Pakistan board size, board composition and CEO/Chairman duality have
significant impact on ROA. 25.6% change in ROA is due to change in corporate governance
mechanisms. As per sugar industry in Pakistan more the independent directors in the board less
will be the performance. Large no. of directors will significantly impact return on assets. In
family firms when position of CEO and chairman is held by same person performance of firm
will increase. (Bilal Latif et al, 2013)
In Cement Industry of Pakistan Board size, CEO/Chairman duality and family controlled firms
have impact on the overall performance of the firm. CEO duality has negative and significant
impact on the performance. Family owned cement firms have high profitability and high earning
on per share (EPS) as compared to non-family controlled cement industries. Board size has
negative and insignificant relationship with the overall performance of the firm. (haliq Ur
Rehman Cheema and Muhammad Sadat Din, 2013)

b) Corporate Governance Code surely yet strongly improves the governance and decision
making process of firms. It has become a center of attention in todays business world.
In Pakistan, the first Code of Corporate Governance was finalized and issued by SECP in March
2002. Then it was consequently incorporated in all the listed companies at stock exchanges in
Pakistan. It was the very first effort by the government of Pakistan in this regard. In 2004, SECP
took the first step to establish the Pakistan Institute of Corporate Governance in public-private
partnership.
The SECP believes that the best way to promote the interests of all corporate stakeholders is to
ensure that business is conducted in accordance with the highest prevailing ethical standards.
Case of poor corporate governance in the form of fraudulent practices could be found all over
the world which includes irregularities in accounts, misrepresentations, non compliance with law
nepotism and exploitation of minority shareholders. Pakistan also has its share of corporate
scandals and frauds e.g Taj Company Scandal, Meezan Bank fraud Crescent Bank Fraud etc for
which government has taken steps to formulate certain standards which are must to be followed.
NEED FOR CORPORATE GOVERNANCE
IN March 2002, the Securities and Exchange Commission of Pakistan issued the Code
of Corporate Governance to establish a framework for good governance of companies listed on
Pakistan's stock exchanges. In exercise of its powers under Section 34(4) of the Securities and
Exchange Ordinance, 1969, the SEC issued directions to the Karachi, Lahore and Islamabad
stock exchanges to incorporate the provisions of the Code in their respective listing regulations.
As a result, the listing regulations were suitably modified by the stock exchanges. The Code is a
compilation of best practices, designed to provide a framework by which companies listed on
Pakistan's stock exchanges are to be directed and controlled with the objective of safeguarding
the interests of stakeholders and promoting market confidence; in other words to enhance the
performance and ensure conformance of companies. In doing this, the Code draws upon the
experience of other countries in structuring corporate governance models, in particular the
experience of those countries with a common law tradition similar to Pakistan's. The Code of
Best Practice of the Cadbury Committee on the Financial Aspects of Corporate Governance
published in December 1992 (U.K.), the Report of the Hampel Committee on Corporate
Governance published in January 1998 (U.K)
The Code is a first step in the systematic implementation of principles of good corporate
governance in Pakistan. Further measures will be required, and are contemplated by the SEC, to
refine and consolidate the principles and to educate stakeholders of the advantages of strict
compliance. Corporate governance is a relatively new term used to describe a process, which has
been practiced for as long as there have been corporate entities. This process seeks to ensure that
the business and management of corporate entities is carried on in accordance with the
highest prevailing standards of ethics and efficacy upon assumption that it is the best way to
safeguard and promote the interests of all corporate stakeholders.
Good and proper corporate governance is considered very important for the establishment of a
Competitive market. There is an empirical evidence to suggest that countries that have
implemented good corporate governance measures have generally experienced robust growth of
corporate sectors and higher ability to attract capital than those which have not. The positive
effect of good corporate governance on different stakeholders ultimately is a strengthened
economy, and hence good corporate governance is a tool for socio-economic development. After
East Asian economies collapsed in the late 20th century, the World Bank's president warned
those countries, that for sustainable development, corporate governance has to be good.
Economic health of a nation depends substantially on how sound and ethical businesses are.
Upon independence, Pakistan inherited the Indian Companies Consolidation Act, 1913. In 1949,
this Act was amended in certain respects, including its name, where after it was referred to as the
Companies Act, 1913. Until 1984, when the Companies Ordinance, 1984 (the Companies
Ordinance) was promulgated, following lengthy debate, Pakistani companies were established
and governed in accordance with the provisions of the Companies Act, 1913
CORPORATE GOVERNANCE IN PAKISTAN
The SEC, since it took over the responsibilities and powers of the Corporate Law Authority
in1999, has been acutely alive to the changes taking place in the international business
environment, which directly: and indirectly impact local businesses. As part of its multi-
dimensional strategy to enable Pakistan's corporate sector meet the challenges raised by the
changing global business scenario and to build capacity, the SEC has focused, in part, on
encouraging businesses to adopt good corporate governance practices. This is expected
to provide transparency and accountability in the corporate sector and to safeguard the interests
of stakeholders, including protection of minority shareholders' rights and strict audit compliance.
Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive
Officer, the board of directors, management and shareholders). Other stakeholders who take part
include suppliers, employees, creditors, customers and the community at large. In corporations,
the shareholder delegates decision rights to the manager to act in the principal's best interests.
This separation of ownership from control implies a loss of effective control by shareholders
over managerial decisions. Partly as a result of this separation between the two parties, a system
of corporate governance controls is implemented to assist in aligning the incentives of managers
with those of shareholders.
The following of corporate governance principles is not that common in Pakistan and it is still
ignored by companies because the market is not aware of it. But the short benefits should not be
given more importance than long term benefits that Corporate Governance brings with it. If a
company wants to establish a long term loyalty base relationship with stakeholders than there is
no other way but to adopt good Corporate Governance ideals.


















References:
Mobeen Ur Rehman and Aabid Hussain, 2013, IMPACT OF CORPORATE GOVERNANCE
ON OVERALL FIRM PERFORMANCE interdisciplinary journal of contemporary research in
business, Vol 4, pg 581-601
Qaiser Rafique Yasser et al, 2011, Corporate governance and firm performance in Pakistan: The
case of Karachi Stock Exchange (KSE)-30 Journal of Economics and International Finance
Vol. 3(8), pp. 482-491
Attiya y. javed and Robina iqbal, 2006, Corporate Governance and Firm Performance:
Evidence from Karachi Stock Exchange The Pakistan Development Review 45 : 4 Part II
(Winter 2006) pp. 947964
Bilal Latif et al, 2013, Impact of Corporate Governance on Firm Performance: Evidence from
Sugar Mills of Pakistan European Journal of Business and Management www.iiste.org ISSN
2222-1905 Vol.5, Pg 51-59
Bilal Latif et al, 2013, Impact of Corporate Governance on Performance of Firms: A Case
Study of Cement Industry in Pakistan Journal of Business and Management Sciences, 2013 1
(4), pp 44-46