Corporate Governance Department World Bank Group

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

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

3. Introduction to the Corporate Governance ROSC

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

5. 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: • 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

6. 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

7. Overview- World Bank Corporate Governance Assessments Completed 48 Published37 On-going FY06 6 Assessments by Region (through 2004)

8. Overview of World Bank Corporate Governance Assessments Notes: Assessments in bold are in process. Assessments in italics have not been published.

9. A Review of Corporate Governance in Pakistan - Findings -

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

11. 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

12. 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

13. 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

14. 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

15. 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

16. - Recommendations -

17. 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

18. 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

19. 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

20. 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

21. 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

22. Thank you For More information, pls. contact: • Alex Berg - Corporate Governance Department, World BankE-mailaberg2@worldbank.org; Tel. +1 202-473-3687 • Kaiser H. Naseem - Manager, IFC Pakistan Corporate Governance Project E-mailknaseem@ifc.org; Tel. +92 51 909 0658

23. Doing Business Indicator of Investor Protection