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Corporate behaviour as viewed by the corporate law authority.

Recent weeks have disclosed the revolt of shareholders against the management of some of the world's largest companies. "IBM, General Motors, Lasmo (UK), Westinghouse, American Express and Petro Canada have all had to suffer the indignity of shareholders publicly and vociferously accusing the chief executives of ineptitude and lack of decisive action". These are unique examples in corporate history of real owners of the company standing up for their rights. In the developed world senior executives have been forced to give up their posts unexpectedly, usually under pressure of poor corporate performance. In Pakistan we find daily examples of the corporate management taking the shareholders for a ride. Poor performance of a substantial number of companies has evoked no such response from their chief executives. The reason for this is the lack of appropriate corporate culture in our corporate management. The concept of corporate democracy is given short shift like the political democracy. Once a person has committed his money (or his vote) he is no longer considered valuable and the management forgets that he is a co-owner of the company. The rights of the shareholder are trampled upon and he is treated like an outsider.

The Corporate entity has a number of people interested in its well being besides the sponsors and the executive management. Collectively the people are the "stockholders" whose interests have to be safeguarded. Therefore any system of performance measurement needs to have a comprehensive framework for identifying and measuring the interests of various stockholders include:

1. Shareholders or providers of permanent risk capital. 2. Lenders who supplement the permanent capital. 3. The employees who invest time, energy and skills on developing the business. 4. The customers who create the need for the products and services of the business. 5. The State which maintains necessary infrastructure as well as the fiscal, monetary and legal systems. 6. The community at large. Each of these groups interact with the business and each group should be able to find proper satisfaction in a reasonable and balanced fashion.

The question is do they ? The answer is "No", while some of the multinationals and a few of the local entrepreneurs recognize the importance of all the stockholders and provide for their satisfaction, a vast majority of them, particularly in private limited companies deny their satisfaction to most of the stockholders. The corporate laws lay down the rights and privileges of each group and expert the corporate lords to respect them. In case of violation punishments are provided. But are these provisions effective? Are they adequate ? I am afraid the answer is in the negative. Legal provisions are adequate only if the society is educated and inculcated with democratic spirit of "give and take" and appreciation of rights of others. Where the standard of education is very low and the dispensation of justice time-consuming and expensive, the provisions would only remain provisions. Hence in Pakistan most of the aggrieved shareholders prefer to get relief either through CLA or through giving vent to their feelings in the Press. The CLA is not fully equipped, both law-wise and staff wise to take stringent action, yet with its meagre resources it has tried to safeguard corporate democracy by ensuring that the rights of the shareholders are protected and enforced. The corporate behaviour has been subject of much discussion but let us examine the various norms of corporate behaviour which are necessary for corporate democracy and have been violated and are being violated.

One of the basic rights of shareholders is to have the shares in his name. For this purpose Company Law provides that in the case of initial membership shares certificates must be issued within 90 days and in case of transfer within 45 days. It has been found that most of the companies do not issue the shares within the prescribed period and quite a few cases were brought to our notice where the shares are not transferred within 45 days. In some cases the shares are not deliberately transferred particularly in the private companies, so as to deny the right to the new shareholders to participate in the company's affairs.

The second important right of the shareholder is to participate in election of the company and have a share in the management of the company. However, it has been found in a number of cases that various methods are adopted so as to deny some of the shareholders, their right to participate in elections. In this case not only do the private limited companies resort to such tactics but even public listed companies resort to them. In order to deny the right to contest election the company does not accept the nomination papers or avoids accepting the nomination papers till the date for nomination is over. Another method is to raise objections and send the papersback. Thus the shareholder is denied the right to participate in the management of the company. Admittedly such cases are few but they do reflect the trend in the corporate behaviour of some of the companies.

Every shareholder has the right to attend and to receive the annual accounts of the company and has the right to examine he books of accounts. This aspect again has been violated in quite a few cases where even the directors of the company are denied access to the books of the accounts. The annual accounts are sent in such a manner so as to reach the shareholders late and thereby affect his right. In the case of half yearly accounts response is much better because default is punishable by imprisonment. Another serious observation is that the accounts are prepared in duplicate on different assumptions. There are different accounts maintained for the shareholders and the tax authorities and another set for the sponsors. Thus while the sponsors flourish the company deteriorates and the shareholder and government get no returns.

Right to attend AGM - Every share holder has the right to attend the AGM and this is the only occasion on which the shareholders express their views on the performance of the company. However, in few cases the management intentionally denies the shareholders this right. This is done by adopting the following techniques:-

a) adequate notice is not given so that the

shareholders cannot attend; b) the venue of the meeting is changed

abruptly without informing the

shareholders; c) tactics are adopted for diverting the

attention of shareholders from

commenting on the accounts.

An instance is the offer of gifts to them by the company with the result that the shareholders became more interested in the gifts rather than discussing the serious matters relating to company. Thus examples are available where people took away bags full of sugar, ghee tins and other things home but did not take back any dividend. The "gift giving" has now been banned by the CLA.

Shareholders expect a return on their capital investment but unfortunately the trend in corporate sector has been to show a loss or meagre profit and deny the shareholders their dividend. An analysis in the CLA has shown that there are 86 companies which have not paid dividend for 10 years or more while 125 companies have not paid dividend for over five years. This trend is apparent from the following figures where quoted companies had not declared dividends:
 Total Not
 No. Declared
 Year of Co. Dividend (%)

 1988 403 161 44.23
 1989 438 171 44.03
 1990 487 178 42.28
 1991 542 188 40.34
 1992 628 233 46.00

It will be seen from the above that substantial number of shareholders have not received any dividend or return on their income.

It is expected of the corporate management to manage their funds in a manner so that maximum return is earned by the company. Thus funds are to be invested wisely and intelligently so as to maximise the returns and ensure greater profit for the shareholders. However in practice it has been noted that a number of companies have diverted these funds to their associated companies who have been making a constant loss and later on these loans are written off or not charged any return. Thus the personal companies of the sponsorsget interest free loans/grants while the shareholder of the parent companies suffer a loss. CLA has recently suggested measures to control these violations.


of AGM

A number of companies did not prepare accounts in time and kept postponing their AGMs. A recent review has shown that at least 17 companies have not held their AGM for three years; thus denying the shareholders an opportunity of discussing the company's management and policies.


In certain cases it was found that where dividend is declared it was either not paid in time or not paid at all. Such cases have already been taken up for action.

Another corporate misbehaviour is to divert the fund of the workers General Providend Fund to their own uses. Under the law these funds are to be kept in a special account in scheduled banks or in the National Savings Schemes and no portion can be utilised by the company for other purposes. At the time of the last check eleven companies wee found violating the law.

It will thus be seen that corporate behaviour of quite a few companies needs to be improved upon particularly the private limited companies where gross corporate misbehaviour is observed. In view of the privatization and deregulation which have been put into effect by the present Government a strict regulatory control has to be exercised to curtail the wayward tendencies of some of the corporate lords.
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Author:Abdullah, Mian Mumtaz
Publication:Economic Review
Date:Jul 1, 1993
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