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Role of regulators in improving corporate governance

Dr. Tariq Hassan
MORE than two hundred years ago, Adam Smith, in his classic essay •Wealth of Nations', wrote the following:
"The directors of such (joint-Stock) companies, however, being , , the managers of other people's money rather than of their own. it j cannot well be expected, that they should watch over it with the same j 1 anxious vigilance with which the | partners in a private company , frequently watch over their own. j Like the stewards of a rich man. they are apt to consider attention to small matters as not for their master's honour and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.'
(Adam Smith, The Wealth of Nations)
It is evident from the passage .quoted above, that corporate i governance is neither a buzz word 5 nor a new area of interest. The conduct of companies and its impact on stakeholders has been I yan area of active research and Interest since a very long time. However, alongside the advances in communication. Increases in volume of International trade and the phenomenon of globalization, the world has also experienced a spate of corporate scandals and economic crises like those in Asia in the 1990s. The combination of these factors has brought corporate governance into the lime light and It is now a leading policy agenda in the developed and developing world alike.
Adherence to the principles of good corporate governance serves to foster investor confidence and iStract domestic as well as foreign Investors. It is empirically tested that the extent to which a company is perceived to operate within the principles of good corporate governance largely affects its ability to attract investment. The need for corporate governance In South Asia is vastly recognized. The countries In the region have made a slow but posi-(Uve response to corporate gover-
nonce challenges. South Asian regulatory bodies have played a very active role in introducing corporate governance practices, and sustaining these efforts is now the key to developing the good governance paradigm.
Regulatory responsibilities for improving corporate governance
The regulator has a key role in Implementing corporate governance requirements. Creation of a strong legal and regulatory framework that is adequately enforced serves to protect stakeholders'
interests and engender Investor confidence, as a first step. The second step Is taking an iterative approach, and continuously improvising on the existent framework.
In implementing, promoting and improving good corporate governance framework, the regulatory role varies from consultative to administrative. Foremost, the introduction of a code of corporate governance requires the involvement of regulatory authorities and corporate sector representatives to ensure that it fulfills the fundamentals of transparency and accountability. Only a consultative process can ensure that such a framework objectively addresses the needs of diversified stakeholders.
Once the corporate governance code has been developed, it requires legal backing to allow a certain level of enforceability. The manner in which the framework is to be implemented varies according to the needs and circumstances of every jurisdiction. This can take the form of necessary amendments in corporate laws or incorporation in listing regula-
tions of stock exchanges or encouraging voluntary adaptation through issuance as guidelines. Whatever may be the manner of introduction of a code of good governance, its effective implementation requires vigilant oversight by the regulatory body concerned.
It is also essential that the regulator maintains a regular dialogue with various stakeholders to allow them to understand and discharge their responsibilities in the corporate governance framework. This requires that compliance with good gover-
nance practices is understood by companies to be in their own interest of enhancing business value. It also requires directors and managers to set strategic goals, establish financial and other policies, and run the affairs of the company while being accountable to shareholders for the performance and activities of the company and ensuring conformance with laws, rules and regulations. Furthermore, shareholders particularly institutional shareholders should play an active role in Assessing the performance of management and exercising their rights. The regulator may need to create an enabling environment for improving participation of these various groups of stakeholders in Implementing good corporate governance.
Improvement In corporate governance practices comes with the regulators’ ability to reward those companies that display committed compliarice with good corporate governance as well as take action against erring companies and their directors or mana^ ors.
Our experience in promoting corporate governance in Pakistan
Pakistan's frontline corporate regulator, Securities and Exchange Commission of Pakistan (SEC), has been proactively pursuing Its agenda of instilling good corporate governance practices since 2002. Making a steady start to adopt and implement good governance practices, SEC issued the Code of Corporate Governance in March 2003. The Code was incorporated into the listing regulations of the stock exchanges. It is mandatory upon listed companies to
comply with the Code and the stock exchanges ensure compliance therewith.
The Code of Corporate Governance seeks to establish a system whereby a company is directed and controlled by its directors in compliance with the best practices so as to safeguard the interests of diversified stakeholders. It proposes to restructure the composition of board of directors in order to introduce representation by minority shareholders and broad-based representation by executive and nonexecutive directors. It also emphasizes openness and transparency In corporate affairs and decisionmaking process and requires directors to discharge their fiduciary responsibilities in the larger interest of all stakeholders in a transparent, informed, diligent, and timely manner. Furthermore, it seeks to achieve the objectives of good corporate governance by recommending strengthening of corporate.working, internal control system and external audit requirements.
Subsequent to the introduction ,of the Code, a number of measures
arc being taken to ensure that there is adequate awareness in the corporate sector of the need for and benefits of good governance. In this regard, a number of seminars and training workshops of directors and management of listed companies have been held under the auspices of the SEC os well as a number of private sector organizations.
Earlier this year, in partnership with notable private sector representatives. SEC established the Pakistan Institute of Corporate Governance to serve as the focal point for training and research on corporate governance in the country. It is expected that establishment of the Institute would provide an enabling environment for effective implementation of the Code of Corporate Governance.
Also, compliance with the Code of Corporate Governance has been Incorporated into the criteria of awards announced by professional and industry associations. This has served to give due recognition to companies that follow better corporate governance practices.
Conclusion
Good corporate governance is now widely recognized as essential for establishing an attractive investment climate characterized by competitive companies and efficient financial markets. It is imperative that economies in the South Asian region develop necessary framework of corporate governance and achieve implementation through active participation of key stakeholders. In order to provide impetus to economic growth.
Good corporate governance is not about conformance in letter but in spirit as well. It cannot be measured by a box ticking exercise and companies therefore must be enabled to develop a corporate culture In which transparency and accountability are predominant features. Providing an enabling environment with a conducive regulatory framework is the foremost responsibility of the frontline regulators of every country. Once this job is well done, the rest falls into place more easily!
Dr. Tariq Hanan is Chainun. Seojritie* and Erthango Commission of Pakistan