Corporate Governance Department World Bank Group Corporate Governance

Corporate Governance Department World Bank Group Corporate Governance in Pakistan: Results from the Corporate Governance ROSC 1 Corporate Governance Department Private Sector Development Vice Presidency The World Bank Group May 29, 2006

Outline • About the CG ROSC for Pakistan • Findings • Recommendations 2

Introduction to the Corporate Governance ROSC 3

The ROSC Assessments Examine: 1. Legal and Regulatory Framework 2. Enforcement Activities 3. Private Sector Business Practices 4

Corporate Governance ROSC Assessments • Assessments are benchmarked against the 33 OECD Principles of Corporate Governance • Voluntary • Standardized report (Report on Observance of Standards and Codes, ROSC) including policy recommendations • Four audiences: – – 5 Policymakers: to identify opportunities for legal & regulatory reform Private sector: understand strengths and weaknesses (International) analysts: benchmarking Technical assistance providers, including IFC: Identify key reform areas

Corporate governance reform: the public policy rationale An improved corporate governance framework will: • Protect shareholders and depositors • Protect public pension savings for retirement • Improve corporates’ access to finance (both equity and debt) • Help Pakistan: – attract, allocate and monitor investment – Increase financial stability – Increase market capitalization and growth 6

Overview- World Bank Corporate Governance Assessments Completed Published On-going FY 06 48 37 6 Assessments by Region (through 2004) 7

Overview of World Bank Corporate Governance Assessments 2001 2002 2003 2004 2005 Brazil Georgia Mauritius Egypt 2 Armenia Croatia Czech 2 Brazil 2 Slovenia Poland 2 Czech Rep. Lithuania Hungary Russia Ghana Egypt Bulgaria Ukraine India 2 Pakistan India Latvia Korea Peru Thailand Malaysia Morocco Hong Kong Romania 2 Malaysia 2 Philippines Romania Chile Indonesia Nepal Poland South Africa Mexico Jordan Brazil 3 Turkey Slovakia Pakistan Macedonia Zimbabwe Colombia Panama Azerbaijan 8 Notes: Assessments in bold are in process. Assessments in italics have not been published.

A Review of Corporate Governance in Pakistan - Findings - 9

Corporate Governance Assessment: Summary of Assessment in Pakistan • Summary of assessment carried out in May 2004 • Assessment results: – – – 10 4 principles “Observed” 17 principle “Largely Observed” 10 principles “Partially Observed” 1 principles “Materially Not Observed” no principles “Not Observed”

Pakistan: Corporate Governance Landscape • Awareness of the importance of corporate governance is rising • Very important corporate governance code • Rapidly rising market capitalization (60% last year) • Creation of PICG • Unique feature: strong regulator of securities and company law • Strong concentration of ownership in hands of state/ families • Relatively little foreign portfolio investment 11

Key Issue: Investor Protection • Basic shareholder rights are respected • However, shareholder participation in the AGM can be cumbersome • Concentrated ownership brings minority shareholder rights protection to foreground 12

Key Issue: Disclosure • Improved quality and timeliness of financial reporting in recent years • Requirement to disclose indirect or ultimate beneficial ownership easily circumvented • Recent controversy over related party transaction disclosure and transfer pricing • No system of independent oversight over the audit profession 13

Key Issues: Company oversight and the board • No clear distinction between ownership and control Boards dominated by executives/controlling shareholders • Insufficient guidance on duties of care and loyalty • Independent directors are the exception rather than the norm • Board remuneration is not adequate to attract qualified independent directors 14

Key Issues: Enforcement • Enforcement is centered on the SECP and the State Bank of Pakistan • The Stock Exchanges are responsible for monitoring and enforcing compliance with the Code • Market participants consider the judiciary to be inefficient and expensive, and an ineffective source of shareholder redress 15

- Recommendations - 16

Establish corporate governance enforcement priorities • SECP should focus on enforcing the rules on the disclosure of ownership and related party transactions • SECP should continue to work to build its enforcement capacity • Develop a system of independent audit oversight 17

Mobilize the private sector to improve corporate governance • The Karachi Stock Exchange (and its successors) should consider a market differentiation strategy • Institutional investors should play a more effective corporate governance role • Build a core group of effective independent directors • At the CDC, dematerialization and the move towards a central registry should be encouraged 18

Legislative reform should focus on key areas of concern • Strengthen rules for independent directors, improve board compensation, and clarify the role of the Chairman of the board. • Improve the ownership disclosure framework • Strengthen shareholder rights by improving access to the AGM, lowering thresholds for shareholder redress, and updating rules on changes in control • Increase the accountability of directors 19

Focus future technical assistance on high-priority implementation • Development of a national action plan • Training and awareness programs to develop a culture of corporate governance that extends beyond the SECP and the larger companies • Improve corporate governance in the state owned enterprise sector 20

Final Remarks • Excellent progress, have come a long way • But much now needs to be done in terms of implementation at corporate level • Law on the books vs. practices 21

Thank you For More information, pls. contact: • Alex Berg - Corporate Governance Department, World Bank E-mail aberg 2@worldbank. org; Tel. +1 202 -473 -3687 • Kaiser H. Naseem - Manager, IFC Pakistan Corporate Governance Project E-mail knaseem@ifc. org; Tel. +92 51 909 0658 22

Doing Business Indicator of Investor Protection New Zeal and 1 Romani a 4 4 Singap ore Bhutan 5 2 Canada 3 France 5 6 Hong Kon g Germa ny 5 7 Russia 7 3 Saudi Arab ia 7 4 Turkey 7 5 United Stat es 2 4 7 United 23 King dom 9