Corporate code: voluntary compliance
THE Security Exchange Commission of Pakistan is currently trying to promote best corporate practices. In the backdrop of the stock market crashes during Musharraf’s regime and the prolonged global financial crisis, the regulator is exercising greater vigilance over corporate sector.
Then there is the issue of transforming ‘family managed’ companies into modern corporate entities — something that is happening but too slowly in a fast changing environment.
The latest notification of the SECP directs private limited companies with paid-up capital of Rs200 million or more to maintain a functional website which, among other things, should display profile of their board of directors and annual reports for the last two years. It would mean more transparency which may lead to social accountability over time. But fears are being expressed that companies may opt to split into smaller business units to defeat the regulator’s directive.
The fears are grounded in the past experience. Independent business units were carved out of some big enterprises when people felt that government was serious about introducing value-added tax (VAT) This trend is more visible in outsourcing of non-core functions of major companies and inter-corporate financing of subsidiaries. That is why the SECP is also taking a closer look at inter-corporate financing and is setting prudent rules to improve corporate governance.
Private firms are not required to make as much disclosure as listed public companies. Many big corporations in advanced economies are now voluntarily de-listing themselves from the stock exchanges. Apparently, following their example, performing Unilever Pakistan decided to voluntarily de-list from Pakistan’s stock exchanges. Over the years, the number of listed companies at the Karachi Stock Exchange have either declined or stagnated apparently for different reasons. The tax incentive for private firms to encourage listing has been gradually withdrawn. Many find corporate rules too cumbersome and expensive. Defaulting companies have been de-listed by the regulator. Mergers and acquisitions have also reduced number of listed firms.
In the current complex business environment, there is, on one side, need for regulation while on the other, there are fears that organic growth of companies may be stifled by over-regulation. After all, the much lauded reforms could not prevent major stock market crashes during stewardship of Mr Shaukat Aziz. Nor were the regulators allowed to do serious investigation into the market fiascos.
The core issue is that markets lack self-discipline that tends to create crisis after crisis. The solution lies in voluntary self-discipline. Even ‘ best regulated’ businesses in advanced economies have been engaged in non-ethical practices. And the ‘too big to fail’ giant enterprises have been bailed out by tax payers money while they have damaged economies and destroyed the livelihood of millions of people.
Of course, bailout cannot be denied to enterprises which sink owing to externalities. But it is not prudent to help out those suffering from self-created crisis. If the private sector is to be engine of economic growth, it must evolve its own rules of the game. The bailout system encourages many to be reckless as the damage done is salvaged by the state with taxpayers’ money.
In his book Corporation 2020 Pavan Sukhdev, an eminent economist, forcefully argues that corporations have to get out of the incumbent ‘business-as-usual model’. He severely criticises what he calls ‘perverse subsidy.’ He argues strongly that “ a globally tilted playing field with around $1 trillion per annum in subsidies favouring a ‘business-as-usual model’ over greener
alternatives is, by definition, anything but free market. …Fossil fuel subsidies add up to an estimated $650 billion dollar per year or about one per cent of the global GDP. …The free market they seek to preserve is most often the status quo market.”
The author visualises “a new capitalism would prevail in the world of corporation 2020. … Growth in complexities — rather than just size — would be an underpinning principle of the emerging green economy. …Economics and politics would finally be aligned. On all counts—innovation, decent jobs, wealth, systemic risks and income distribution — corporation 2020 would gradually build up a successful and green macro economy.”
In Pakistan, the government has given tax relief amounting to Rs656 billion over the past four years in custom duties, income-tax and sales tax to both private and public sector companies. Critics says almost all foreign loans and aid is going to subsidise a segment of the economy which should normally be able to fend for itself.
‘Perverse subsidy’ promotes rent seeking, obviates the need for best corporate practices, discourages entrepreneurship, and thwarts the building-up of a globally competitive economy.