Corporate governance has been animportant and a major element for the economic and financial growth of acountry. In the most part of the world, where corporate governance has emergedas a significant factor of a country’s economy in developed countries, it isconsidered as the most crucial element for the emerging and developingeconomies also. Pakistan, as a developing country is not so far away from theneed of corporate governance practices. Corporate governance has gained a vitalrole in the development of the country’s economy (shah et al.
2011). Theoverall structure of corporate governance plays an important and substantialrole in justifying agency problems.Corporate governance is the centerof attention for businessman now-a-days.
The increasing influence and awarenessamong the shareholders have highlighted the idea of corporate governance. Abusiness cannot survive until there is a complete and stable governance system.In Pakistan, corporate governance is still at its developing stage. Theregulatory authorities like Securities and Exchange Commission of Pakistan andState Bank of Pakistan (SBP) are properly engaged in developing corporategovernance systems in Pakistan. Pakistan has developed an institute named asPakistan Institute of Corporate Governance (PICG) which is promoting corporatepractices through various ways.
The term “corporate governance”took birth in the era soon after the rise of conflicts among managers andshareholders when companies started their operations. From Smith (1776) toBerle and Means (1932), all economists wereconcerned about the separation of ownership from management. At the same time,when management gets separated from ownership, it gives rise to the agencyproblem1(Bonnazi & Islam, 2007). These conflictsarose and started affecting the corporate behavior of firms. Then the conceptof ‘corporate governance’ emerged. It was at its peak in late 1990s but itgained huge importance soon after the emergence of major scandals of WorldCom2and Enron3.1Agency Problem is the conflict of interest between a company’s management andthe company’s stockholders2WorldCom, the world’s 2nd largest telecommunication company gotbankrupted on June 25, 2002, due to overstated earnings by management.
(SeeLyke and Jikling, 2002)3Enron, an American energy corporation went to bankruptcy on Dec 2, 2001 due tothe fraudulent accounting methods used by directors to push up stock prices.(See Gillian and Martin, 2002)