YUSUF H. SHIRAZI "Corporate Governance is........holding the balance between economic and social goals.......... The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources............... The incentive to corporations is to achieve their corporate aims and to attract investment. The incentive for states is to strengthen their economics.............." (Sir Adrian Cadbury - 1999) VALUE DYNAMICS Value dynamics of corporate governance is progressive increase in value creation through the corporate culture developed from time to time - that is the Stone Age to the Iron Age and then the Agriculture, Industrial, Technological phases leading to what is known as the Knowledge Age. In the context of an organization, the stakeholders who contribute to the value dynamics of a strong corporate culture include customers, employees, shareholders, suppliers, creditors, the government and the society at large. In order to strengthen and sustain good corporate practices, the shareholders directly and through the board of directors guide and support managements to follow such practices. This is complimented by the regulators and the auditors who play the pivotal role to enforce the law and the rules in letter and spirit, briefly explained in the following table: Constituents of Corporate Governance - Major Stakeholders A good corporate culture aims to maximize the efficiency of its resources. Thus, ideas and objectives developed within an organization need strong leadership to carry them through. A well thought out strategy needs to be executed through a structure with an all pervasive culture. In the current environment, the organizations have to be in step with both current knowledge and anticipated changes, relying on innovation wherever possible with commitment and effort to be ahead of their competitors. All this can however only happen if they employ the latest and the most efficient system processes and guard their intellectual property rights. Around all these intangibles are the tangible assets of the company comprising of its customer base and the channels through which these customers are serviced. These channels may take the form of associates and affiliates who need to be influenced in order to follow the best corporate practices as well. Other elements of an organization are its employees and its suppliers or business partners. Their behavior and actions are extremely important in that they reflect the culture of the organization and help in setting the standards to be followed: Value Dynamics Detailed Framework - Most Significant Assets In seeking the best corporate culture that maximizes the potential of companies there are certain aspects which may be invisible at first sight but are extremely valuable in promoting good governance. This implies awareness and understanding of a company's customer base, its employees, its supply chain, its shareholders, its systems and processes and most importantly its leadership qualities and values. The success of the company is in proportion to its investment in a corporate culture which nurtures values inherent in such a culture. In order to achieve sustainable value creation an organization needs to continuously focus upon its business model, devise ways and means to master risks associated with it, effectively manage the asset portfolio so created and lastly fairly measure and report all its assets. In dealing with risk there are inherent uncertainties. All strategies entail risk and operational processes need to have built in tools to counter these risks through information. Business risk models define sources of uncertainty such as environmental, process and information for decision making. These cover the viability of the business model, its execution and relevance and reliability of information used in decision making. In this respect, a general survey conducted to determine the ranking of performance measures rated customer satisfaction as the highest indicator of a good corporate culture. This was followed by employee retention, revenue growth, profit margin, technology investment and brand recognition: Performance Measures For Decision Making GLOBAL VALUE DYNAMICS People around the globe are more connected to each other than ever before. Information and money flow more quickly than ever. Goods and services produced in one part of the world are quickly available in all other parts of the world. International travel and communication is more frequent and commonplace. This phenomenon is best known as "Globalization". The new economy is founded upon the forces of new technologies, globalization and increasing importance of intangible assets, such as, brands, relationships and knowledge. Globalization refers to one world concept with world citizenship mind set. The growing integration of societies, politics and economies is fast turning the world into a frontier less society. Globalization and free trade has been a major challenge for the developing countries. In order to combat these challenges, the focus of developing economies has been on the economy of scale. The economy of scale demands quality of management, products and services, which results in lower cost. The economy of scale can be ensured by providing investment incentives and safeguarding the economy against dumping, under invoicing, smuggling and unfair competition from the developed world and moreover from some of the fast developing countries like India and China, which have different rules of the game for themselves and for the rest of the world. Without protection, neither industry nor any trade of any magnitude will develop with India and China as the leading examples of the approach which resulted in their achieving tremendous growth by providing right kind of incentives and protection to their indigenous industries. PAKISTAN VALUE DYNAMICS Despite varying political and economic value dynamics the economic growth on average in Pakistan has been 4.7% from 1951 to 2004. This period covered Ayub's "decade of development", Zia's Marshall Law and his "air crash", "Afghan crises", eight government changes in a short period during early 80s to late 90s, Bhutto's nationalization, nuclear explosion and Musharraf's current reform agenda. This progress is lower than fast developing countries like Malaysia, India and China, but compared with all the developing countries show inherent strength of economy despite political lapses: Economic growth and good corporate practices demand higher national focus; global investors are seldom interested unless "medieval" corporate practices are shed and replaced by the modern practices. Corporate governance is a set of relationship between a company's management, its boards, its shareholders and other stakeholders that provides a structure through which the objectives of the company are set and the means of attaining those objectives and the monitoring of their performance are determined. Good corporate practices enhance corporate creditability. The result of the survey of IFC's Global Private Equity Conference held on 9-11 May 2001 conducted by Mckinsey & Co., has revealed that 89% of the respondents would pay more for the shares of a well governed company than those of poorly governed company with comparable financial performance. The Code of Corporate Governance in Pakistan is applicable to all listed companies including non-listed insurance companies and the asset management companies which are managing mutual funds. Private limited companies, firms & proprietorships, Govt. organizations, such as, WAPDA, KWSB, Railways, regulatory authorities, charitable trusts and others falls outside the preview of the Code of Corporate Governance, which however reinforce the corporatization of value dynamics on the whole. The broad objectives of this Code are: * Establishment and implementation of sound internal control systems. * Risk management * Greater accountability. * Transparencies and fairness. * Ethical standards * Safeguard the rights and interests of stakeholders including of minority shareholders (individuals, institutions - public/private). * Reliability and integrity of information. * Compliance with policies, plans, procedures, laws & regulations. * Safeguarding of assets. * Economic and efficient use of resources. The scope of the Code of Corporate Governance broadly covers the following areas: * Appointment / role & responsibilities of the Board of Directors. * Corporate & financial reporting framework. * Frequency of financial reporting & meetings. * Disclosure of interests by Directors, Chief Executive Officer or Executives holding company's shares. * Role & responsibilities of Chairman, Chief Executive Officer, Chief Financial Officer, Company Secretary and Executives. * Audit Committee & Head of Internal Audit. * External Auditors. * Divesture of shares by Sponsors/ Controlling Interest. * Compliance with the Code of Corporate Governance. THE REGULATORS Securities & Exchange Commission, as a regulator, has a major role to play in monitoring compliance to the Code by the corporates in Pakistan. There is a strong emphasis on accountability in all the sectors and the companies not complying with the Code are to be de-listed. Reforms have been initiated in the public sector companies by inducting professionals, persons of known integrity and of good reputation in the board of directors. Likewise, in the Stock Exchanges, boards have been reconstituted through induction of non-members as directors and appointment of a professional as the managing director; also proposals for de-mutualizing and integration of stock exchanges are seriously being considered for better governance and transparency. Application of Code of Corporate Governance as a whole is by no means an easy task and requires a great deal of commitment, resources and thoughtfully implemented processes. The administrative cost - in time and monetary value - associated with undertaking such actions will at times outweigh these benefits. Likewise, cost of implementing and communicating corporate governance policies throughout the organization need expertise on part of the directors. Another problem could be that the directors may not be able to manage high profile chief executive officers, chief financial officers, company secretaries and heads of internal audit besides the fact of high cost to the organization. Also, the secrecy which is an important factor for incorporating private limited company may not be available in case outside directors are appointed. VAGUE STANDARDS OF EVALUATION The standards of evaluation, monitoring and implementation of corporate governance are vague, so are the sanctions and the process of imposition of sanctions for non-compliance. Despite reforms and reconstitution of boards of stock exchanges, the role of bourses in regulating the stock markets are far from being perfect. An important aspect of corporate dynamics is that it follows the government dynamics - a function of effectiveness of management of the state. With consistent policies and stringent implementation of rule of law and of regulations by the government, the improvement in corporate culture will follow. Judiciary has a critical role in implementing the rule of law, which unfortunately has not happened in Pakistan. Some jurists are considered indispensable and are able to successfully turn what is legal into illegal and illegal into legal. Courts invalidate their own judgments with change in political, economic and social scenarios raising serious doubts about the creditability of the whole system. Without judiciary dynamics there will be no government dynamics and eventually no corporate dynamics. Adhocism in government, judiciary and corporate dynamics have far reaching effects on the social, political and economic sectors of a country. It leads to an investment shy environment for both foreign and local investors, spreading default culture with industries declared sick so as to get away from defaults - reward for bad management. In short, it creates a culture where the norm is that regulations are for those who follow the regulations. CORPORATE DYNAMICS - INDUSTRY OR TRADE A shift in the government policies with respect to preferring trade over industry has not noticeably stalled. The menace of dumping, smuggling and under invoicing continues to inflict a serious blow to the development of indigenous industry resulting in idle capacity, lower volumes and productivity, higher costs and un-competitiveness. All this is causing loss of revenues in billions to the government annually. Trade on the whole, will lead Pakistan to being a nation of traders at the mercy of the developed countries which through protection of their own industries and by providing the right kind of investment incentives are today ruling the world. Pakistan must not concede to such pressures or otherwise there will be no incentive for future private investment, besides impairing the overall socio-economic fulfillment of objectives of more employment, more goods and services and becoming self reliant. In so far as Pakistan's economy is concerned, the solution lies in the economy of scale in the non-traditional hi-tech industries - steel, engineering, electronics, fertilizers, refineries, pharmaceutical, chemicals, which were recommended to be 'phased out' and value addition in its traditional industries - simple manufacturers - textiles, cement, sugar or leather. Agriculture is the country's main stay and deserves the same treatment as in other countries like USA and India, highly nurtured through huge subsidies. And, all this must rely on the Value Dynamics of Corporate Governance. This will help Pakistan's economy to combat challenges of globalization, trade with SAARC and lesser reliance on IFIs, which have deprived the country from its political and economic sovereignty: (There is a world beyond the world: One has only to see through it) Adhocism in government, judiciary and corporate dynamics have far reaching effects on the social, political and economic sectors of a country. It leads to an investment shy environment for both foreign and local investors, spreading default culture with industries declared sick so as to get away from defaults - reward for bad management. In short, it creates a culture where the norm is that regulations are for those who follow the regulations.