S E C Manual of Corporate Governance Securities and Exchange Commission of Pakistan This manual is for reference only and does not constitute any legal requirement on companies, their officers, directors or auditors. This manual may be used for guidance and compliance must be ensured with the provisions of applicable laws and regulations. CONTENTS I.INTRODUCTION II.WHAT IS CORPORATE GOVERNANCE? (i)The Background (ii)Definition of Corporate Governance (iii)The Benefits of Corporate Governance (iv)The Pakistani Corporation (v)The Origins of Corporate Governance in Pakistan III.THE NEED FOR CORPORATE GOVERNANCE IV.THE STAKEHOLDERS (i)General (ii)Shareholders (iii)Directors (iv)Employees (v)Creditors V.PROMOTING REFORM AND SHAREHOLDER ACTIVISM VI.ROLE AND RESPONSIBILITIES OF DIRECTORS AND MANAGERS (i)Directors and Managers Distinguished (ii)Appointment and Proceedings of Directors (iii)Fiduciary Duties (iv)Powers and Responsibilities of Directors (v)Liability of Directors (vi)Executive and the Non-executive Directors (vii)The CEO 1 3 3 4 7 8 10 12 17 17 19 20 20 21 22 26 26 26 32 38 42 42 45 (viii)The Company Secretary (ix)The CFO (x)Internal Control System (xi)Reporting Requirements VII.SCRUTINIZING FINANCIAL STATEMENTS - WHAT EVERY DIRECTOR SHOULD KNOW (i)General (ii)Liability of Directors (iii)Preparation of Financial Statements (iv)Tools for Directors' Review (v)How to Prevent Misleading and Fraudulent Financial Statements (vi)External Auditors (vii)Role of the Audit Committee (viii)Role of Internal Audit VIII.CONCLUSION APPENDIX A DIFFERENCES BETWEEN DIRECTORS AND MANAGERS 47 49 49 50 54 54 54 55 60 61 65 75 79 81 82 CORPORATE GOVERNANCE IN PAKISTAN I.INTRODUCTION 1.1In March 2002, the Securities and Exchange Commission of Pakistan (the SEC) issued the Code of Corporate Governance (the Code) to establish a framework for good governance of companies listed on Pakistan's stock exchanges. In exercise of its powers under Section 34(4) of the Securities and Exchange Ordinance, 1969, the SEC issued directions to the Karachi, Lahore and Islamabad stock exchanges to incorporate the provisions of the Code in their respective listing regulations. As a result, the listing regulations were suitably modified by the stock exchanges. 1.2The Code is a compilation of “best practices”, designed to provide a framework by which companies listed on Pakistan's stock exchanges are to be directed and controlled with the objective of safeguarding the interests of stakeholders and promoting market confidence; in other words to enhance the performance and ensure conformance of companies. In doing this, the Code draws upon the experience of other countries in structuring corporate governance models, in particular the experience of those countries with a common law tradition similar to Pakistan's. The Code of Best Practice of the Cadbury Committee on the Financial Aspects of Corporate Governance published in December 1992 (U.K.), the Report of the Hampel Committee on Corporate Governance published in January 1998 (U.K.), the Recommendations of the King's Report (South Africa), and the Principles of Corporate Governance published by the Organization for Economic Cooperation and Development in 1999 have been important documents in this regard. 1.3The Code is a first step in the systematic implementation of principles of CORPORATE GOVERNANCE IN PAKISTAN I.INTRODUCTION 1.1In March 2002, the Securities and Exchange Commission of Pakistan (the SEC) issued the Code of Corporate Governance (the Code) to establish a framework for good governance of companies listed on Pakistan's stock exchanges. In exercise of its powers under Section 34(4) of the Securities and Exchange Ordinance, 1969, the SEC issued directions to the Karachi, Lahore and Islamabad stock exchanges to incorporate the provisions of the Code in their respective listing regulations. As a result, the listing regulations were suitably modified by the stock exchanges. 1.2The Code is a compilation of “best practices”, designed to provide a framework by which companies listed on Pakistan's stock exchanges are to be directed and controlled with the objective of safeguarding the interests of stakeholders and promoting market confidence; in other words to enhance the and ensure of companies. In doing this, the Code draws upon the experience of other countries in structuring corporate governance models, in particular the experience of those countries with a common law tradition similar to Pakistan's. The Code of Best Practice of the Cadbury Committee on the Financial Aspects of Corporate Governance published in December 1992 (U.K.), the Report of the Hampel Committee on Corporate Governance published in January 1998 (U.K.), the Recommendations of the King's Report (South Africa), and the Principles of Corporate Governance published by the Organization for Economic Cooperation and Development in 1999 have been important documents in this regard. 1.3The。