However, in most comparative corporate governance research, it is assumed that national institutions determine CG practices at the firm level (Aguilera & Jackson, 2003). The following section explains the semi-structured focus group that was used in this study.
Culture
Auditing
- Auditor Independence
- Audit Committee
- Risk Management
Furthermore, the focus group analysis also highlighted that the audit committee should be composed of independent directors. At Enron, serious issues arose regarding the independence of committee members despite the presence of the audit committee.
Political
- Political System
- Political Influence
- Corruption
The political system of a country can have implications for political system and ultimately corporate governance (Doidge, Karolyi, & Stulz, 2007). In a similar vein, researchers have documented that political system of a country is reflected by corporate governance (Adegbite, Amaeshi, & Nakajima, 2013) and political influence can manifest in business environment (Adegbite, 2012). The analysis of focus group shows that corporate standards and performance are dependent on economy and economy is dependent on political stability.
It is clear from the focus group that political issues are major concern in the implementation of CG practices in Pakistan. Ali, Tao, Shaikh and Sajid (2017) also documented that politics and leadership impact on corporate governance practices in Pakistan. The analysis of focus group also explains the similar situation among listed firms of Pakistan.
A focus group participant also spoke about political appointments on board at state-owned enterprises (SEOs). Focus group analysis shows that almost all companies have political influence and this has disastrous consequences for business performance and CG practices. The focus group analysis shows that corruption in Pakistan is high, especially in the corporate sector.
Legal
- Compliance
- Enforcement
- Regulators
It is increasingly recognized that politics shapes corporate governance (Roe, 1991), especially in more complex dimensions in developing countries such as Pakistan. This brings to the fore the need to understand the links between the state institution and corporate governance. In a similar vein, Adu-Amoah, Tsamenyi and Mensah Onumah (2008) documented that this raises concerns about the application of corporate governance codes in emerging countries developed by the Western world.
On the other hand, Inyang (2009) argued that enforcement is crucial to achieve good corporate governance system. In addition, complying with or clarifying the nature of corporate governance regulations presents additional challenge with respect to enforcement4. Due to lack of enforcement, the goal of good corporate governance is not being triumphed in Pakistan.
The focus group analysis shows that regulators have insufficient resources to ensure the implementation of CG practices. It is clear that regulators are unable to perform better due to limited resources and political and other pressures. Moreover, financial conditions could also convince regulators to engage in dodgy corporate governance activities.
Board
- Board independence
- Board Heterogeneity
- Nepotism/Kinship
Obviously, board independence not only helps in managing conflict of interest, but also ensures that minority shareholders are protected in terms of their rights and assets and their investments, so that the agenda taken by the board is focused mainly to minority shareholders. However, the focus group highlighted that the selection and appointments of board members are largely based on personal relationships and political benefits. There is no level of complete independence from each other, so when someone joins your board, the high probability is that even if he is an independent director, there is a high probability that there will be some degree of separation with the members of other members of the board or management or someone (Participant – II).
The analysis of focus group shows that diversity is very important to improve the CG practices in Pakistan. The focus group analysis shows that most of the business enterprises in Pakistan are family owned and ownership concentration is high. I think there is predominantly a lot of family ownership as you know it is dominated by large families, but historically that has been the trend (Participant-II)”.
In Pakistan you have a big shareholder who also has board representation, almost the entire board is made up of his family members and then they are also managing the business….In. In some firms, family members are employed at the board and executive level, therefore, this kinship is a major problem in evaluating board performance. So, again, it tends to change, but where the board and management are professionals and the internal auditor function is independent, there are greater chances for better effectiveness and compliance with corporate governance (Participant-II)”.
Shareholders Awareness
- Shareholders Rights Protection
- Education and Training
The focus group analysis also reveals that there is a lack of awareness about CG practices in Pakistan. If you were to work in Pakistan to create more awareness of the business case, if you make it clear to these family-owned majority shareholders that corporate governance is something that adds value to the bottom line of a company, and it's not something that's there for diluting their control, etc. According to traditional theory perspective, lower shareholder rights (weak external governance) create information asymmetry among managers and shareholders, providing opportunity and excessive incentives for managers to reduce transparency and manage earnings to increase their bonuses.
Focus group analysis reveals that the rights of minority shareholders are protected in law but not in practice. I would refer to the company ordinance 1984 which was before the companies act 2017, we had some provisions about minority shareholders and minority abuse. So this was initially an obstacle, but then the process itself was a judicial sanction process, so you had to make a request to the high court of the province (Participant-III)”.
Moreover, there is no corresponding provision for minority shareholders representing less than 10% not having the power to file a petition with the court or the SECP for mismanagement and minority oppression8. 8 In addition, section 290 of the Companies Order, 1984 maintains that minority shareholders representing less than ten percent do not have the power to file an application to the court for mismanagement and minority. It is argued that qualification and training alone are not the solution to the problems in developing countries (Abayo & Roberts, 1993), firms are unlikely to provide high quality information in the absence of demand and enforcement function.
Voting
- AGM participation
However, his study reveals that most shareholders lack relevant education and shareholder activism (Cutajar, 2015). Proxy voting is often seen as an opportunity for directors to strengthen their influence on the general meeting (Monks & Minow, 2001) and also influence the agenda, schedule and conduct of general meetings (Turnbull, 2000) at the company's expense. Most shareholders, especially minority shareholders, do not participate in general meetings, and those who do have no relevant knowledge and training.
See there are two ways one can gauge that one naturally votes according to their phase buying or selling shares vs. As for the buying and selling of stocks again, what I have seen with the way the prices have performed or the Pakistan Stock Exchange before it to the various Karachi Lahore Stock Exchanges is that the price changes don't seem to be based too much on fundamentals. of course when the company does well i mean the price increases there but it seems to have increased over a period of time despite the variations. Iwatani and Taki (2009) argued that opening AGMs to regular shareholders increases attendance, participation and questions specifically from individual investors, and annual meetings are now longer.
Similarly, Dimitrov and Jain (2011) argued that these meetings provide an opportunity for shareholders to show their concerns with corporate. Moreover, managers respond positively to questions and concerns of shareholders and try to influence them with positive news before AGMs. These meetings are very important for shareholders, especially minority shareholders, to exercise their rights and increase value for firm.
Culture
- Institutional Culture
- Organizational Whistle-blowers
In the extensive literature, researchers found that CG disclosure has been influenced by the dominant culture (Haniffa & Cooke, 2002), especially in developing countries (Licht, Goldschmidt, & Schwartz, 2005). Similarly, Oghojafor, George and Owoyemi (2012) conducted a study in Nigeria and found that national culture plays a crucial role in corporate governance effectiveness. The focus group analysis also shows that culture has an impact on corporate governance practices in Pakistan.
In addition, Licht et al. 2005) documented that the influence of culture on the practice of CG varies in different countries and depends on different factors. There are some social factors that can have an impact on corporate governance compliance, like maybe the religion of the culture or maybe lack of relevant experience or education or these kinds of things can have some impact on corporate governance compliance (Participant-V)” . Similarly, Pakistan has a national culture due to historical relationships and spiritual connection (Mughal, 2008) that influenced the corporate culture and hindered the adoption of corporate governance.
Sternberg (1996) also documented that whistleblowing policies are a proactive way to detect problems early and help organizations maximize long-term values for owners from an ethical perspective. Recently, the Public Interest Act (2017) was passed in Pakistan to protect whistleblowers and encourages employees to raise their voices about corruption and wrongdoing within departments and organizations. The BoDs must ensure the procedures to detect any whistleblowers and take the necessary steps to protect whistleblowers.
Values
- Family Systems
- Interpersonal Connections
Similarly, Kimani (2010) asserted that the family determines moral and social norms and preserves spiritual and material traditions and customs. Researchers documented that core family values influence family business (Hendrick, 2000) and determine family enterprise behavior (Klein, Astrachan, & Smyrnios, 2005). Focus group analysis reveals that family values are high in Pakistan and the entire family owns and controls the business.
I'm not going to say that just because companies are more family owned, there is less corporate governance, there are some family businesses that are actually very conscious of compliance and good corporate governance practices. It is also essential to mention that the family and the business are so intertwined. The sustainability and adoption of good corporate governance practices is just as important as the public company.
Similarly, people know each other in Pakistan's corporate sector and the independence of directors is at stake. So that level of complete independence is not there, I think more because of the social environment that we operate in compared to it. So what I'm saying is that social norms probably bring a level of informality to our board structures, which affects the implementation of corporate governance at several levels.
Conclusion and Recommendations
The study also finds that shareholders are not aware of the potential benefits of corporate governance practices. Moreover, the expression mechanism does not affect the practice of corporate governance in Pakistan.
