Glasgow Theses Service http://theses.gla.ac.uk/ theses@gla.ac.uk Khan, Imtiaz Ahmed (2014) Adaptation and convergence in corporate governance to international norms in Pakistan. PhD thesis. http://theses.gla.ac.uk/5614/ Copyright and moral rights for this thesis are retained by the author A copy can be downloaded for personal non-commercial research or study, without prior permission or charge This thesis cannot be reproduced or quoted extensively from without first obtaining permission in writing from the Author The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the Author When referring to this work, full bibliographic details including the author, title, awarding institution and date of the thesis must be given Adaptation and Convergence in Corporate Governance to International Norms in Pakistan IMTIAZ AHMED KHAN Submitted for the Degree of Doctor of Philosophy School of Law College of Social Sciences University of Glasgow © Imtiaz Ahmed Khan January 2014 ii iii ABSTRACT This thesis discusses the adaptation and convergence in corporate governance to international norms in Pakistan. Pakistan is an underdeveloped but an emerging market with inefficient legal, regulatory, judicial, institutional and governance norms. In recent times there have been some reforms in the corporate sector of Pakistan but lack of infrastructure and a dearth of research were barriers to reform generally. Therefore, this thesis seeks to identify corporate governance issues in Pakistan, and discusses analytically the possibility and effectiveness of convergence in corporate governance to international norms in Pakistan. To this end, it focuses on three aspects of convergence in corporate governance in Pakistan. First, it discusses the prospects and application of convergence in corporate governance in Pakistan. Second, it analyses critically, from a comparative perspective, three core corporate governance issues in Pakistan. The corporate sector in Pakistan is highly concentrated with an underdeveloped capital market and inefficient enforcement mechanisms. The conflict between shareholders and management, and shareholders inter se are major issues of corporate governance in Pakistan. The former conflict is addressed by reducing agency cost and the latter by ensuring minority protection. These conflicts are analysed comprehensively through comparative studies. Furthermore, the market and judiciary in Pakistan have failed to provide investors with protection. This thesis discusses the reform process in the market and judiciary in order to improve enforcement mechanisms. In addition, it discusses the possibility of convergence and effectiveness of adaptation in these issues. Third, as Pakistan is an ideological country whose constitution prescribes Islam as the state religion which, in turn, prescribes Islamic injunctions as basic norms, convergence to any foreign corporate governance feature will have to pass the litmus test of Islamic norms. Therefore, the thesis also identifies the possibility of filtration of foreign governance features through Islamic norms. The thesis concludes that the corporate sector in Pakistan is underdeveloped with weak investor rights and enforcement mechanisms. There is, therefore, a need to enhance investor protection in order to improve corporate governance which, in turn, will improve the economy of the country. In addition, the conclusion is reached that in convergence to Western corporate governance features in Pakistan, Islamic norms may act as a litmus test which may not be as problematic as it appears at first sight. List of Publications 1. Imtiaz Ahmed Khan, ‘The Role of International Financial Institutions in Promoting Corporate Governance in Developing Countries: A Case Study Of Pakistan’ (2012) 23 (7) International Company and Commercial Law Review 223-233 2. Imtiaz Ahmed Khan, ‘The Fiduciaries Duties and Investor Protections in the Corporate Law of Pakistan’ 35 (5) Company Lawyer 146-157 3. Imtiaz Ahmed Khan, ‘ The Unfair Prejudice and Investor Protection Remedy in Pakistan’ (2014) 5 Journal of Business Law 389-408 4. Imtiaz Ahmed Khan and Iain MacNeil, ‘ Enforcement in Relation to Corporate Governance in Pakistan’ (Submitted) Acknowledgments First of all, I would like to express my deepest gratitude to Allah Almighty for His blessings which enabled me to complete this work. I owe Professor Iain MacNeil a great debt of gratitude for his continuous advice and guidance, and persistent encouragement which enabled me to achieve this goal. He has been a great mentor and will remain a constant source of inspiration to me. I also thank him for correcting numerous mistakes and suggesting many ideas to improve the quality of this work. Thank you to all my family members, especially my late mother and father who always prayed for me while they were still alive. My parents were my greatest mentors and a permanent source of encouragement throughout their life, and would continue to inspire me for the rest of my life. I learnt spiritual guidance from my mother, and hard work and self-reliance from my father. Thanks are also due to my dearest brothers, Iftikhar Ahmed Khan and Faisal Shehzad; my sisters, Nasim Nisar, Riffat Yasmin and Rubina; and my sister-in-law, Saba, for their constant moral support and patience over the course of four years. I would like to make special mention of my nephew, Affan; and nieces, Areeba and Arfah, for their innocent conversations over the telephone which always helped to restore my energy after many stressful working hours at the university. A special thanks to all my friends and co-workers in Pakistan for their support and encouragement. In particular, thanks to Nazir A Shaheen, M. Saleem, Ch M Aslam, Safdar AK, R Amanullah, I Ghaus, Waseem AK, M. Akhtar, Khalid M, AS Khan, A. Iqbal and M. Zia. I am especially thankful to Dr Muhammad Abrar for his wonderful company at home and university: I cannot forget his help during the earlier years while I was settling down in Glasgow. I am thankful to my friends in Glasgow, in particular, M Umar Qureshi for his company, and to the members of the university student and staff cricket club. I also acknowledge the contributions of teachers and staff of the School of Law at the University of Glasgow, and the excellent research facilities provided by the university. vi Last, but not least, I am also grateful to Bahauddin Zakariya University and the Higher Education Commission of Pakistan for immense financial support, without which it would not have been possible for me to undertake PhD studies in the United Kingdom. vii Declaration I hereby declare that, except where explicit reference is made to the contribution of others, this dissertation is the result of my own work and has not been submitted for any other degree at the University of Glasgow or any other institution. Section 2.8 of Chapter Two and Section 3.7.3.1 of Chapter Three has been published in the Company and Commercial Law Review. Section 4B.6.3 of Chapter Four has been published in Company Lawyer. Section 4B.6.4.2 of Chapter Four has been published in Journal of Business Law. ________________________ Signature IMTIAZ AHMED KHAN ________________________ Dated viii Contents ABSTRACT iii List of Publications iv Acknowledgments v Declaration vii Religious Sources xvi Laws, Rules, Regulations and Codes xvi Cases xix CHAPTER ONE: INTRODUCTION TO THESIS 1 1.1 The concept of convergence 1 1.2 Research objectives, issues and questions 3 1.3 Research methodology 4 1.4 Structure 5 CHAPTER TWO: THE NATURE AND OBJECTIVES OF CORPORATE GOVERNANCE 7 2.1 Introduction 7 2.2 Corporate governance 7 2.3 Theory of the firm 9 2.4 Theories of corporate governance 11 2.5 Objectives of corporate governance 15 2.5.1 Accountability 15 2.5.2 Financial performance 16 2.6 Structures of corporate governances 18 2.6.1 Dispersed ownership or market-based governance structure 18 2.6.2 Concentrated ownership or block-holder governance structure 20 2.6.3 The governance structure of state-owned enterprises 21 2.6.4 The governance structure of family-based enterprises 22 2.6.5 Which system is better? 22 2.6.6 Religion 23 2.7 Historical development of the corporate sector in Pakistan 24 2.8 The nature of the corporate sector in Pakistan 27 2.8.1 Voting in the corporate law of Pakistan 29 2.8.2 The judiciary and enforcement mechanism in Pakistan 29 ix 2.8.3 Institutional investors and corporate governance in Pakistan 29 2.8.4 Compliance with the Code of Corporate Governance in Pakistan 30 2.9 Sources of corporate governance 30 2.9.1 Company law 30 2.9.2 Securities laws 31 2.9.3 The company constitution 31 2.9.3.1 The articles of association 31 2.9.3.2 The memorandum of association 33 2.9.4 Listing rules 33 2.9.5 Codes of corporate governance 34 2.10 Elements of corporate law that support good corporate governance 35 2.10.1 Shareholders’ rights generally 35 2.10.2 Minority rights 40 2.10.3 Division of power between shareholders and the directors 41 2.10.4 Procedure and power to issue shares 42 2.10.5 Voting rights 42 2.10.5.1 Pre-emptive rights 45 2.10.5.2 The cumulative voting system 46 2.11 Conclusion 50 CHAPTER THREE: CONVERGENCE THEORY AND ITS APPLICATION IN PAKISTAN 52 3.1 Introduction 52 3.2 Convergence theory 53 3.3 Kinds of convergence 54 3.4 Factors that compel convergence 56 3.5 Factors that compel divergence 60 3.5.1 Path dependency 60 3.5.2 Complementarities 62 3.5.3 Politics, private rent seeking and control premium 64 3.5.4 Difference in culture, ideology and politics 65 3.6 Unique convergence in corporate ownership and corporate governance 66 3.7 The application of theory in Pakistan 69 3.7.1 Process of law making and standards setting in Pakistan 69 3.7.2 Development of a code of corporate governance 76 [...]... convergence to international norms may help to improve corporate governance in Pakistan In other words, the main objective of this research question is to see the possibility and effectiveness of convergence in corporate governance in Pakistan in order to improve it according to international norms This question is subdivided into five further questions: 1 The extent to which convergence in corporate governance. ..3.7.3 International corporate interaction with Pakistan: An inward focus .80 3.7.3.1 The role of international financial institutions in Pakistan 80 3.7.3.2 Adoption of international standards 85 3.7.3.3 The role of international investors .87 3.7.3.4 Institutional investors and corporate governance in Pakistan 91 3.7.4 Internationalization of Pakistani companies: An outward... In pursuit of this third objective, it analyses four core issues of corporate governance in Pakistan, namely (1) agency cost, (2) investor protection, especially minority shareholders protection, (3) enforcement problems, and (4) the role of religion in convergence to international norms in corporate governance in Pakistan The main research question is to establish the extent to which convergence to. .. cross-country investment, interdependent economies, interrelated economic interests, the enhanced role of international financial institutions and foreign investors are the main stimulants for convergence in corporate governance In this process the least developed jurisdictions are converging to the most developed jurisdictions in corporate governance By contrast, although different factors force convergence to. .. explaining terms and the context of the thesis In particular, the objective of this chapter is to analyse and discuss the nature and objectives of corporate governance in Pakistan In addition, the objective is to examine and analyse why the present corporate governance system in Pakistan has developed, and what the problems are that face good corporate governance in Pakistan This process will help to. .. used: (1) explanatory, (2) descriptive, (3) prescriptive and (4) comparative Explanatory, descriptive and prescriptive methods are applied when examining the international norms and corporate governance issues in Pakistan In particular, a comparative approach is used widely in the thesis to highlight corporate governance issues in Pakistan Pakistan is a least developed country in the world and is classified... process of convergence in a new world scenario in general and in Pakistan in particular Second, it examines the application of the theory of convergence in corporate governance in Pakistan Third, it highlights the problems of corporate governance in Pakistan, and different ways, means and measures to improve it through the application of the theory of convergence under prevailing circumstances in the country... begins with a critical analysis and concludes with recommendations on how to improve the issue in the light of the theory of convergence Chapter Three discusses the theory of convergence in corporate governance and its application in Pakistan It discusses the forms and prospects of convergence in corporate governance in the country It analyses a few issues in respect of corporate governance in Pakistan, ... theory In essence, it discusses three core aspects of corporate governance: (1) legal, (2) judicial and (3) stock market, which require reform in order to improve enforcement mechanisms in corporate governance in Pakistan Chapter Six examines the effect of religion on possible convergence in corporate governance to international norms in Pakistan As Pakistan is an ideological country whose constitution... import of any foreign corporate governance feature will have to pass the litmus test of Islamic norms In essence, this chapter discusses the role of Islam in corporate governance convergence in Pakistan It has two aspects The first aspect is to determine the possibility of convergence within the Muslim world which, in turn, may affect Pakistan in its convergence in corporate governance to the Muslim world . the adaptation and convergence in corporate governance to international norms in Pakistan. Pakistan is an underdeveloped but an emerging market with inefficient legal, regulatory, judicial, institutional. seeks to identify corporate governance issues in Pakistan, and discusses analytically the possibility and effectiveness of convergence in corporate governance to international norms in Pakistan. . financial institutions in Pakistan 80 3.7.3.2 Adoption of international standards 85 3.7.3.3 The role of international investors 87 3.7.3.4 Institutional investors and corporate governance