Corporate Governance as a field of Business Study

While it can be said with reasonable authority that corporate governance as a practice has existed for as long as companies have, it would be fair to add that corporate governance as a field of study has gained significance only over the past fifty or so years. From mid-1970’s, there has been a lot of debate on this subject in both developed and developing economies. Bold, broad efforts to reform corporate governance have been driven, in part at least, by the needs and desires of shareholders to exercise their right of corporate ownership and to increase the value of their shares, and therefore, wealth. In the first half of 1990’s, the issue of corporate governance received considerable press attention in USA due to the wave of CEO dismissals (e.g. IBM, Kodak, and Honeywell) by their boards. The California Public Employees Retirement System, an institutional investor, led a wave of institutional shareholder activism as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationship between the CEO and the board of directors.

In 1992, the Report of the Committee on the Financial Aspects of Corporate Governance (the Cadbury Report) was published in the UK. This document is often described as the landmark in thinking on corporate governance. The report included a code of best practices which has since been widely adopted by listed companies. The Myners Report was published in 1995 which made a variety of recommendations on the relationship between institutional investors and company management. Also in 1995 came the Greenbury Report that dealt with directors’ remuneration. In 1998, UK issued a Combined Code of Corporate Governance (that put the recommendation of several earlier reports into one set) which applied to all UK listed companies. This combined code was revised in 2003.

In 1997, the East Asian financial crisis saw the economies of Thailand, Indonesia, South Korea, Malaysia and Philippines severely affected by the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanism in these countries highlighted the weaknesses in the institutions in their economies.

In the early 2000’s, the massive bankruptcies and criminal malfeasance of Enron and WorldCom as well as lesser corporate debacles such as AOL, Arthur Anderson, Tyco, etc. led to increased shareholder and governmental interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002 in USA.

In Pakistan, Securities and Exchange Commission of Pakistan (SECP) issued a Code of Corporate Governance in 2005 which was subsequently revised a year or so later. It also made changes in listing requirements for company by amending Clause 35 of Companies Act. Key provisions of this code are given as an appendix to this book. It is still advisory in nature; it is not mandatory for the companies to follow all of its provisions. However, some of the recommendations contained in this code have been adopted by better managed companies in the country.