Corporate conflicts among managers and shareholders when companies started

Corporate governance has been an
important and a major element for the economic and financial growth of a
country. In the most part of the world, where corporate governance has emerged
as a significant factor of a country’s economy in developed countries, it is
considered as the most crucial element for the emerging and developing
economies also. Pakistan, as a developing country is not so far away from the
need of corporate governance practices. Corporate governance has gained a vital
role in the development of the country’s economy (shah et al. 2011). The
overall structure of corporate governance plays an important and substantial
role in justifying agency problems.

Corporate governance is the center
of attention for businessman now-a-days. The increasing influence and awareness
among the shareholders have highlighted the idea of corporate governance. A
business cannot survive until there is a complete and stable governance system.
In Pakistan, corporate governance is still at its developing stage. The
regulatory authorities like Securities and Exchange Commission of Pakistan and
State Bank of Pakistan (SBP) are properly engaged in developing corporate
governance systems in Pakistan. Pakistan has developed an institute named as
Pakistan Institute of Corporate Governance (PICG) which is promoting corporate
practices through various ways.

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The term “corporate governance”
took birth in the era soon after the rise of conflicts among managers and
shareholders when companies started their operations. From Smith (1776)  toBerle and Means (1932), all economists were
concerned about the separation of ownership from management. At the same time,
when management gets separated from ownership, it gives rise to the agency
problem1(Bonnazi & Islam, 2007). These conflicts
arose and started affecting the corporate behavior of firms. Then the concept
of ‘corporate governance’ emerged. It was at its peak in late 1990s but it
gained huge importance soon after the emergence of major scandals of WorldCom2
and Enron3.

Agency Problem is the conflict of interest between a company’s management and
the company’s stockholders

WorldCom, the world’s 2nd largest telecommunication company got
bankrupted on June 25, 2002, due to overstated earnings by management. (See
Lyke and Jikling, 2002)

Enron, an American energy corporation went to bankruptcy on Dec 2, 2001 due to
the fraudulent accounting methods used by directors to push up stock prices.
(See Gillian and Martin, 2002)