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Arts and Social Sciences Journal Habib, Arts Social Sci J 2015, 6:5
DOI: 10.4172/2151-6200.1000149
ISSN: 2151-6200
Research Article Open Access
Stakeholders Perspective of an Ideal Board of Director in Pakistan: A
Survey from Pakistan
Habib M*
Muhammad Ali Jinnah University, Islamabad, Pakistan
*Corresponding author: Habib M, Muhammad Ali Jinnah University, Islamabad, Pakistan, Tel: 922134311325; E-mail:
[email protected]Received date: October 31, 2015; Accepted date: December 01, 2015; Published date: December 04, 2015
Copyright: © 2015 Habib M. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use,
distribution and reproduction in any medium, provided the original author and source are credited.
Abstract
The main purpose of this study was to formulate a perceived model from stakeholder’s perspective of an ideal
board of director in Pakistan. For this study we have reviewed critically the developed and developing nation’s family
controlled companies. A perceived model for Pakistani companies was proposed after studying the pros and cons of
the existing model. A suggestion has been made for SECP that a good quality of board, a good quality of individual
director and a good board performance can be achieved according to this perceived model of stakeholders. Non-
executive directors (NEDs) and independent executive directors (INEDs) will be encompassing in entire perceived
board. The aim of this perceived model would be overcome the main source of poor board in Pakistan i.e., to fill the
board in the sense of ensuring the balance of representation, talent, size, power and social responsibility.
This survey is about stakeholder’s perspective an ideal board of directors in Pakistan. This survey underlines the
stakeholder’s perspectives; respondents were provided a list of 37 indicators of board of directors and asked to rank
the indicators according to their order of preference. No.1 meant to be the most preferred indicator that was talent on
the board, No.2 representation of all stakeholders, No.3 NED/INEDs structure on board, No.4 balance size of the
board, No.5 power on the board and No.6 CSR meant to be the least preferred indicator. The researcher identify
knowledge gap when it comes to examine in Pakistan.
Keywords: Stakeholder; Governing activities; Local community; Author has been motivated to conduct the research and defines
Security exchange commission stakeholders and shareholders. Stakeholder is anyone that has an
interest or is affected by a corporation. In other words, the shareholder
Introduction isn't the only party having a stake in the corporation. Other
stakeholders in a corporation include the employees, the employees'
Corporate governance is a way of governing activities of a families, suppliers, customers, community, and others. Some
corporation for the well-being of all stakeholders (not only for organizations do not have shareholders, but have stakeholders. For
shareholders) that ultimately leads to better financial performance. It is example, the state university doesn't have shareholders but it has many
the set of process, customs, policies, laws, and institutions affecting the stakeholders: students, the students' families, professors,
way a corporation (or company) is directed, administered or administrators, employees, state taxpayers, the local community, the
controlled. “Corporate governance refers to the manner in which the state community, society in general, custodians, suppliers, etc.
affairs of a corporate body are or should be conducted in order to serve according to author comparison between the stakeholders and
and protect the individual and collective interests of all stakeholders”. It shareholders. The shareholders are stakeholders in a corporation but
has been commonly observed that corporate governance is not stakeholders are not always shareholders. A shareholder owns part of a
implemented in any of the firm/organization of Pakistan in true sense. company through stock ownership while a stakeholder is interested in
After the financial crisis of world in the last two decades, the focus of the performance of a company for reasons other than just stock
the researchers has been changed from shareholder approach to appreciation.
stakeholders. SECP has issued and finalized the first Code of Corporate
Governance for Pakistan in March 2002. All public listed companies of Stakeholders are any individuals or group who can effect by
the three stock exchanges were subsequently incorporated in the listing achievement of organizational objective i.e., Stakeholders are
regulations and are now applicable. In Pakistan the first institutional government, customer, shareholder, employees and suppliers. After the
effort of its kind is the code. To safeguard the interests of diversified understanding of stakeholder’s interest the next question arises
stakeholders and to establish a system the primary aim of the code whether all or any one of them should be a member of board or not
whereby with the best practices a company is directed and controlled because the business affairs shall be managed under the direction of
by its directors in compliance. The representation by minority board. Unfortunately the current managerial model focus only on
shareholders and by executive and non-executive directors and to companies’ shareholders interest and earnings are measure of all the
introduce and proposes the restructuring of the board of directors. For success [1]. By using the agency theory author is motivated to explain
the stakeholders larger interest of all in a transparent, informed, where principle is the (shareholder) director is the (watch dog) and
diligent and timely manner and directors to discharge their fiduciary manager is the (agent). The interest of large companies shareholders
responsibilities. The code emphasizes openness and transparency in are attached to the company only a few have chance to protect their
corporate affairs and the decision-making process.
Arts Social Sci J Volume 6 • Issue 5 • 1000149
ISSN:2151-6200 ASSJ an open access journal
Citation: Habib M (2015) Stakeholders Perspective of an Ideal Board of Director in Pakistan: A Survey from Pakistan. Arts Social Sci J 6: 149.
doi:10.4172/2151-6200.1000149
Page 2 of 3
interest. A group of people run the companies that have no concerned The current study will also pay attention to minority shareholders
in others interest. and beneficial be to all stakeholders interest.
The current paper would also recommend SECP to dove tail these
Statement of the Problem new standards for practical implementation for the help of all
It has been observed according to corporate governance perspective stakeholders.
in Pakistan most of the companies are owned by families or some
groups. Board is badly affected by the dominate shareholders that owns Conclusion
more than 50% of shares. The directors are elected by these majority,
Corporate governance practices are considered to be supportive of
these elected directors may be a part of controlling family or employee
capital markets. There are a large number of researches reflecting that
of the family controlling. Only these shareholders make decisions and
companies having better governance mechanism attract capital and are
put influenced on the companies only for their own interest. Mostly
considered credible both by shareholders and lenders. The companies
large companies remained in the hands of a single shareholder or a
that comply with the principles of good governance benefit national
small pool of shareholders. The board is ineffective here and played in
economies as a whole they not only lead to better financial
the hands of executive directors, that are taking injustice decisions and
performance but also fuel growth generate opportunities for
underhand dealing about the companies and approving the wrong
employment improve the quality and variety of their product and
financial statements. Many researchers have investigated various
contribute manifolds in improving the quality of life for the public at
feature / facts of corporate boards. What is the ideal board structure
large.
from stakeholder’s perspective? Very less theories is provided for
effectiveness of board structure of the company. It is shown that only In the context of Pakistan, there is a difference in corporate
board monitoring and improving governance are the features of governance run-throughs when compared with companies of
effective board. “The intention of the current research is to explore the developed economies.
stakeholder preferences for board structure, size, and board
Big families and closed groups are mostly controlling the companies
composition” [2,3].
in Pakistan wherein the individual directors or the Board of Directors
have minimal control over business decisions thus compromising the
Research objective effectiveness of company operations/business.
The main objective of this study is to highlights the loop holes in Big families and closed groups are mostly controlling the companies
structuring a board that was followed / practicing by all board in Pakistan wherein the individual directors or the Board of Directors
directors. It is a survey from Pakistan; author will attempt to suggest have minimal control over business decisions thus compromising the
the board structure, size, composition and individual qualities from effectiveness of company operations/business.
stakeholder’s perspective for board of directors in Pakistan.
Effectiveness of board depends on board of directors and its features. The present study deliberated on the stakeholder’s perspective of an
Ideal Board of Director. The dissection of Quality of Board of Directors
This is a survey of board of directors of good companies held to reveals that there is high percentage of directors with little or no
explore these questions well as examine the effect of directors on board knowledge of their company’s business in the Pakistani corporate
structure. This study also highlights and focuses on either the survey environment. A large number of companies are owned by small group
data support or contradicts the corporate governance literature. of individuals or families, which constitute certain amount of
Perspective of companies objective is to balance the conflicting interest subjectivity and thus comprise the quality of crafting any effective
and managing all stakeholders and through performance of board of strategy or sound mission with any long term vision by the corporate
directors who are elected by different groups. Criticism of corporate bodies. The BODS in Pakistan are generally believed to be not well
board structure have increased. They investigates the board functions informed with regards to varying business trends in the competitive
and independence of board [4]. market environment and are often struggling to devise effective
The goal for the current research is to focus on the ideal stakeholder measures in the face of market hicks and hitches. Another important
perspective board structure working in Pakistan and to pay attention fact is that the Company matters are not adequately discussed in the
to the interest of minority shareholder and all stakeholders. Company meetings or are dominated by big shareholders or other
influential stakeholders, thus limiting the space of communicative
Significance of the study rationality and chances of efficiently resolving issues.
In Pakistan, Security Exchange Commission of Pakistan (SECP) Recommendations
issued a Code of Corporate Governance in 2002 which was revised in
2012. In this paper author will put emphasis on stakeholders to suggest The rule of law on disclosure especially transactions of related
the ideal structure of board from their perspectives and to suggest parties and ownership should be focus and enforced by SECP. With
regarding global developments in corporate governance and upgrading this regards three areas seems to be very important. First, the control
the objectives of corporate governance in Pakistan. and beneficial ownership disclosure; Second, related parties
transactions way of reporting; third, with respect to the AGM the
The aim of this current study is to fill this gap from stakeholder’s compliance of company.
perspective of ideal board structure, size, composition, responsibilities
and individual qualities. The current study will also highlight which • The enforcement capability of SECP should continue to enhance.
kind of board structure is required from stakeholder’s perspective? The technical size and level of staff in critical areas like accounting
And the mode of making decision in the company’s board. etc. steps should be taken by SECP to increase the strength for this
purpose.
Arts Social Sci J Volume 6 • Issue 5 • 1000149
ISSN:2151-6200 ASSJ an open access journal
Citation: Habib M (2015) Stakeholders Perspective of an Ideal Board of Director in Pakistan: A Survey from Pakistan. Arts Social Sci J 6: 149.
doi:10.4172/2151-6200.1000149
Page 3 of 3
• Issues particular related to all accounting, legal and technical in • The optimum number of directors is between 7 and 9 as currently
code of corporate governance procedures should refine believes by the Board.
enforcement by SECP. • No immediate family members (i.e., spouse, parents, children,
• The independent non-executive director (INED) must be a siblings, mothers and fathers-in-law, sons and daughters-in-law,
chairman board of directors. brothers and sisters-in-law and anyone (other than domestic
• The expertise and experience related to the area of financial employees) who shares the Director’s home) who did not satisfy an
reporting the audit committee must have a member with all the independent director.
knowledge. • Directors should carefully consider the number of other boards on
• Some ADHOC committees are recommended in order to handle which they can serve consistent with the time and energy
the burning issues faced by the company. necessary to satisfy the requirements of Board and Committee
• On quarterly basis the stakeholders should be disclosed with the memberships.
statements regarding financial performance of the business. • More research is needed in this area. The researcher can also use to
• In the article of association/charter of the company the study this issue more with large sample size and by including other
independent non-executive director (INED) qualification should characteristics i.e., attitude of board, gender representation,
be clearly define. compensation, functions of board etc.
• The periodical trainings are strongly recommended for the
directors under the supervision of Pakistan Institute of Corporate References
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boards on which a director may sit, must also be taken into Journal of Banking and Finance 22: 371-403.
consideration by SECP. 3. Hermalin BE, Weisbach MS (2003) Boards of Directors as an
• What is expected from a director, including advance review of Endogenously Determined Institution: A Survey of the Economic
Literature. Economic Policy Review 9: 7-26.
meeting materials and basic duties and responsibilities with respect
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Behavior, Agency Cost and Ownership Structure. Journal of Financial
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• To determine whether it and its committees are functioning
effectively a self-evaluation at least annually should be conducted
by the board.
• For identifying, screening and recommending candidates for the
Board membership the responsibility is on Corporate Governance
Committee.
Arts Social Sci J Volume 6 • Issue 5 • 1000149
ISSN:2151-6200 ASSJ an open access journal
