This research is to seek the relationship between principle-based corporate governance practices on the firm financial performance of publicly-listed companies. In 2002, the Securities and Exchange Commission of Pakistan implement principles and guidelines for all business entities with an aim of improving corporate governance practices and increasing investor confidence in the Pakistan capital market.
The main goal of the research is to study the relationship between corporate governance indicators and firm value of companies listed at Karachi Stock Exchange. Therefore, we analyzed the relationship between corporate governance indicators and firm value as measured by market value to book value [MB] and corporate governance indicators: Inside ownership, Block Holding, Independent / Non-Executive directors, Board size, Debt ratio, Dividend payout ratio, audit committee, remuneration committee for a sample 5 years data of Top 25 companies for practicing good corporate governance as per Karachi Stock Exchange criteria. Companies are rewarded that not only pay good returns to their shareholders but also comply with the Listing Regulations, particularly the Code of Corporate Governance.
The research result indicates that corporate governance indicator practice does matter in Pakistan. However, not all governance indicators are important. The Block Holding, Dividend payout ratio and remuneration committee enhance company performance, whereas inside ownership, Block Holding, Independent / Non-Executive directors, Board size, Debt ratio, Audit committee has no significant effect on firm performance.
Key Words: Corporate Governance Indicators, firm Value.
1. INTRODUCTION
Good corporate governance contributes to sustainable economic development by increasing performance of companies and increasing the return for share holders and increasing in the value of companies. In developed and emerging markets good corporate governance serves many public policy objectives. It reduces transaction cost; reduce cost of capital, reinforcement property rights and leads to market development. Corporate governance relates the owner ship structure, board structure, Use of dividend and debt policy, board committees, controlling share holders, minority shareholders and other stake holders. In Pakistan, Securities and Exchange Commission of Pakistan [SECP] introduce Corporate Governance Code in 2002 for publicly listed companies. The main purpose / objectives of Code of Corporate Governance is to
Stimulate the performance of companies
Limit insider's abuse of power
Monitor manager behavior to ensure corporate accountability and protection of interest of investors and society.
A corporate governance system consist of a wide range of practices and institutions, from financial concerning disclosure and accounting standards, from board structures and board committees and concerning dividend and debt policies. A corporate governance system defines the rule by which companies returns are distributed among share holders, protect the right of minorities share holders, increasing the control system by independent board committees. Country's corporate governance system is necessary for employment system, organizations, capital markets and trading relationship. Corporate governance practice system in Pakistan is necessary for conduct of organizations and country business.
Corporate governance practice is a complementary set of economic, legal and social institutions that protect not only the interests of corporation's owners but also protect the interest of shareholders and stake holders. In the Anglo-American system of corporate governance these owners are shareholders. The concept of corporate governance presumes a fundamental tension between shareholders and corporate managers [Berle and Means (1932) and Jensen and Meckling (1976)].
The objective of organization's shareholders is a return on their investment, while managers objectives is the power and prestige of running a large and powerful organization, compensation and other perquisites of their position. In this situation, managers' have greater access to inside information and the relatively powerless position of the numerous and dispersed shareholders, mean that managers are likely to have the upper hand. The researchers have offered many solutions for this agency problem between shareholders and managers which fall under the categories of incentive, monitoring and discipline. Incentives of managers and shareholders can be aligned through practices such as stock options or other market-based compensation [Fama and Jensen (1983)]. Monitoring by an independent and engaged board of directors assures that managers behave in the best interests of the shareholders
[Fama and Jensen (1983)]. Chief Executive Officer (CEO)'s who fail to maximize shareholder interests can be removed by concerned boards of directors, and a firm that neglects shareholder value is disciplined by the market through hostile takeover [Jensen and Ruback (1983)] .
The code of corporate governance introduced by SECP in early 2002 is the major step in corporate governance reforms for publicly listed companies in Pakistan. The code of corporate governance includes many policies and regulations line with international good corporate practice. The major areas of enforcement include reforms of non-executive / independent board of directors and board committees in order to make it accountable to all shareholders and better disclosure including improved internal and external audits for listed companies. However, the code's limited provisions on director's independence remain voluntary and provide no guidance on internal controls, board compensation policies and risk management.
The main objective of this research study is to examine the relationship between corporate governance indicators and firm performance for publicly listed Karachi Stock Exchange (KSE) firms. To identify the relationship between corporate governance indicators and firm value in our sample KSE Top 25 firms are selected. Companies are rewarded that not only pay good returns to their shareholders but also comply with the Listing Regulations, particularly the Code of Corporate Governance. In Pakistan, low dispersion of ownership is the primary methods to solve agency problems and is the legal protection of minority investors, the use of Non-Executive / independent boards as monitors of senior management, and an active market for corporate control. In comparison to developed and emerging markets, Pakistan corporate governance is characterized by lesser reliance on capital markets and outside investors, but stronger reliance on large inside investors and financial institutions to achieve efficiency in the corporate sector. In this case, outside (smaller) investors face the risk of confiscation in the form of wealth transfers to larger shareholders.
CORPORATE GOVERNANCE IN PAKISTAN
The code of corporate governance introduced by SECP in early 2002 is the major step in corporate governance reforms in Pakistan. The code of corporate governance is initially started as a joint effort of SECP and Institute of Chartered Accountant Pakistan (ICAP). All listed companies are mandatory requirement to comply the provisions of the code of corporate governance. The corporate legal framework includes the corporate Ordinance 1984 which sets the rules for the governance and regulations of companies and certain other associations and is based on common law. Banks are regulated by the banking company ordinance (BCO) 1962 and prudential issued by State Bank of Pakistan [SBP]. The key legislation of corporate governance includes the Securities and Exchange Ordinance 1969 the Companies Ordinance 1984 and Securities and Exchange Commission Act 1997 that established the SECP as principle regulator of securities markets and non-bank companies and also non-listed companies. The Securities and Exchange Ordinance 1969 is the basic securities law, and provides for investor protection, market regulation, securities delisting and related matters, and the prevention of fraud and insider trading. The Securities and Exchange Ordinance Act 1997 established SECP as regulator of capital marked and controller of corporate entities. The listed Companies (Substantial Acquisition of Voting shares and Takeovers) Ordinance 2002 establishes additional take over and ownership disclosure rules. In addition to listing rules, disclosures, the listing rules include special regulations on transfer pricing. The
listed companies must inform the exchanges about dividends, annual general meetings (AGMs), capital increases and change in boards.
The code of corporate governance includes many recommendations in
line with International corporate governance practice. Several provisions of code were already added to Corporate Ordinance 1984, when it was amended into 2002, in order to strengthen monitory shareholders' rights. The State Bank also mandated the application of code for all listed and non-listed banks and Development Finance Institutes (DFIs). This requirement backed by State Bank considerable enforcement capacity resulted in significant changes within banking system. The SECP issued a separate code for insurance companies.
The rights of shareholders are protected in through corporate
governance regulations in Pakistan. Shareholders can demand a variety of information directly from the company and have a clear right to participate in AGM. Directors are elected using a form of cumulative voting and can remove through share holder resolution. The law does not support voting by post or electronically. The concentrated control limits and influence of minority shareholders, and effectively reduce their protection from abuse. When families
dominate the shareholders meeting and board, director's accountability to other
shareholders become critical and currently in Pakistan this accountability is absent in many companies.
The annual reports of SECP suggest that the percentage of companies
paying dividends is 35 percent and shareholders can complain SECP about non-payment of dividends. The quality of disclosure has improved over last four years due to increasing monitoring role of the SECP and the requirement of code. Shareholders owning 10 percent or more of voting capital disclose their ownership and the annual report includes the pattern for major shareholdings.
The code strengthen the role of non-executive directors by restricting the percentage of executive director to 75 percent in non-financial firms and recommending that institutional investor in 75 percent in non-financial firms and
recommending institutional investor be representation. However given the dominant ownership structure, this does not present controlling families from having disproportionate representation on the board.
The SECP is enforcing corporate governance regulations SECP is
receiving technical assistance from Asian Development Bank to improve corporate governance enforcement program and also from World Bank is build awareness and training. Other elements of enforcement regime are not so strong ICAP has some self-regulatory function and stock exchanges are lacked the resources and expertise to effective monitor implementation of the code. KSE has set up a Board Committee on the Code of Corporate Governance and a unit in the Company Affairs Department to monitor compliance with the code.
