Over the last two decades, vast developments in corporate governance taken place across the world. The corporate governance reforms both in developed and in developing countries have occurred. The rapid developments in corporate governance have driven some structural changes in governance model of the country.
The paper is structured as follows. The section one of the paper explores the endogenous country level situations and factors that have driven the Indian corporate governance model towards the Anglo- American framework. The
National Level: Endogenous variables
Economic Crisis of 1990 and Failure of previous governance model
After independence, India adopted a socialist path with economic development strategy of Import-substituting industrialization (ISI) (Mukherjee reed, 2002; Reed, 2002). The peculiarity was government intervening policies with licensing system that give rise to the Business house model of corporate governance in which only few business house survived. The inefficiency prevailing in the country finally gestated in form economic crisis of 1990, with huge fiscal deficit and low foreign exchange reserves and large number of loss making public sector undertakings. The economic pressures arising in early 1990s marked by failure of Business House model of Governance provided the necessary impetus for government to change their policies and move towards the Anglo American model of governance (Mukherjee Reed, 2002; Reed 2002, Afsharipour, 2009)
Economic Development and Growth
Several researchers have pointed that in addition to internal economic pressures, the Anglo-American model of corporate governance was potential tool for economic growth and development. The adoption of an Anglo-American model of corporate governance is understood as key element in unleashing the “development potential” of corporations, as they are considered as primary drivers of development in Anglo-American framework. In order to drive economic development of country through the economic growth, for which country was dependent external sources of investments, the process of economic liberalization was carried out that certainly made India to move closer to American model. These reforms included allowance for foreign direct investment (FDI), foreign portfolio investment (FPI) and agreement between domestic and foreign firms (Reed, 2002). In response to attract and retain foreign investors which call for codes of good governance for protection of their rights, it become imperative to adopt these codes to match their expectations( . Therefore, adoption of such for foreign investment certainly triggered the convergence of Indian corporate model towards Anglo-American framework.
Corporate Frauds and Scams
The market scams and corporate frauds of 1990’s made policy makers and regulators to believe that country governance structures and framework being inadequate to deal with them. Early 1990’s Harshad Mehta securities market scam of 1992 followed with unfair governance practices of issuing preferential shares to promoters of company at heavily discounted prices and disappearing companies frauds, Ketan Parekh scam of 2001 and failure of UTI (2001) brought capital reforms and attention to corporate governance norms that led the convergence to Anglo- American model (Goswami, 2002, Chakrabarti et. al., 2008; Sehgal and Mulraj, 2008)
Close Anglo American Relations
India has been integral part of the commonwealth nations being a former British colony. It has long historical ties with Anglo American model as being a former British colony (Reed AM, 2002). It shares a common law system and its company law being modeled on the lines of United Kingdom. The Companies Act, 1956 that provides the broad corporate governance framework for all listed, unlisted and private companies has largely been influenced by English company. It has been codified and modeled on similar pattern (Afsharipour, 2009)
Business Interest Groups
Convergence to Anglo- American framework was also driven by the interest of large business houses and business groups like Confederation of Indian Industries (CII). In fact, it was CII, which first proposed the Desirable Corporate Governance Code (CII Code) in India for the listed companies. The code derived from the Anglo- American Framework with focus on shareholders and creditors (Afsharipour, 2009). Reed (2002) has pointed that the CII was candidly opposed another other model other than Anglo American in Indian context.
International level exogenous factors
The convergence towards the Anglo American model in like in many other emerging economies was not only driven by the country’s endogenic necessities, but also by the international exigencies. The varying global political, economical and other contingencies necessitated India to adopt a corporate governance framework that was inevitably based on Anglo-American model.
Internationalization and Integration of Capital Markets
The capital market markets have now crossed national territories. The internationalization and integration of capital markets have driven the corporate governance convergence (Yoshikawa and Rasheed, 2009, Varottil, 2009, Netsor and Thompson, 2000). It has resulted in India moving closer to Anglo-American governance model as it allowed Indian firms to list in developed markets, foreign firms to list India, greater foreign portfolio investment in India, international cross-border mergers and acquisitions, ease of capital flow (Yoshikawa and Rasheed, 2009; Varottil, 2009). Most of firms now list in UK, for a number of reasons like recognition, prestige, assess to cheaper capital market and increasing in firm value. However, it requires them to comply with Anglo-American framework of these countries with greater transparency and disclosure norms. This leads to firm level formal convergence in Indian companies. Similarly, international of capital markets have led to emergence of strong global investors who demand for greater disclosures for protection of their rights and value maximization. Foreign portfolio investors, which predominately belong to US and UK demand for good governance, therefore, also become driver for convergence (Jeffers, 2005). Similarly, cross border mergers and acquisitions in India and developed countries provide reciprocal effect for such convergence.
Internationalization of corporations and Product market competitions
The corporations as result of globalization have now become internationals in terms they compete globally for resources and markets. The internationalization and integration of product market giving rise to competition between firms across globe has also driven the convergence (Yoshikawa and Rasheed, 2009, Khanna and Palepu, 2004). In order to compete in global competitive environment, Indian companies has no option but to be innovative, change their governance structure and practices for enhancing their efficiency. Most of the software and healthcare Indian firms have faced stiff competition in UK and US market, so they altered their governance structure and practices accordingly to either or survive or gain competitive advantages in these markets. Convergence of Anglo American practices by some Indian companies because of global market interaction forces also result in spill over effect on other companies, there by further enabling firm level convergence. (Roe, 1996 ; Rubach and Sebora, 1998). Economic liberalization has also resulted domestic companies to face competition resulting thereby resulting convergence (Reed, 2002). Yoshikawa and Rasheed (2009) also point that “Nations and Firms that flowing suboptimal governance systems will be less efficient and will fail or will have adopt the more efficient governance system. In either case, the result is convergence.
Conditionality and recommendations of transnational of Organizations
India faced huge debt crisis in 1990. It looked upon international financial bodies like IMF and World Bank for recovering from such crisis. These transnational institutions have forced emerging countries to adopt corporate models as perquisite for obtaining loan that have tested in developed economies ( Siddiqui, 2009). India was also imposed structural adjustment program to liberalize its economy to get relief from debt crisis (Reed, 2002). Therefore, conditionality and recommendations of transnational financial institutions played a major role driving convergence to Anglo-American model. Also International organisations like Organization for Economic Cooperation and Development (OECD) have come up with corporate governance code and encourage their members countries and other nations to voluntarily adopt them.
Neo-Liberal global Economy
Over the last two decades there have exemplar changes in global economic order and arrangements. The world has moved from a “liberal international” structure to “neo-liberal global” arrangement (Reed, 2002). There has worldwide liberalization of economies by countries, development of several new multilateral economic arrangements (e.g. GAAT, NAFTA, and the WTO), institutions like (ASEAN, SAARC) and bilateral agreements have taken place. New economic groups G20 consisting of both developed and developing countries has came into existence in 1999. The new neo-liberal global economic order provides no incentive for governments to follow interventionist industrial policies and convergence to Anglo American model of corporate occur as a complement (Reed, 2002)
Developments of Anglo American codes as best practices
Harmonization of international best practices
The last two decades have seen harmonization in transparency and disclosure practices and accounting internationally The global harmonization disclosure practices and accounting standards have also gives encouragement to convergence towards Anglo American model (Yoshikawa and Rasheed, 2009,Coffee, 1999). The Indian Accounting standards have gradually moved and complied with International Accounting standards (IAS). Country has also adopted international disclosure practices common cross globe like publishing quarterly financial result, disclosure on board structure and meeting, ownership structure and insider trading.
The process of urbanization in pakistan
Urbanization is a worldwide phenomenon with different countries experiencing various rates and patterns of rural urban migration. The entire world is changing into an urbanized centre with most of the people moving to large cities during the past few decades. Every nation, every city, every individual is somehow involved in this process. Before mid-century, urban development was mostly restricted to developed countries but has spread to developing countries since. Now almost all the developing countries in the world are experiencing accelerated process of urbanization.
Pakistan has a moderate level of urbanization within the Asia-Pacific region based on both, the level of urbanization and urban growth. However among the South Asian countries, Pakistan has the highest share of people living in urban area. In figure 1, we can see the levels of urbanization that are based on population censes. Year 2005 shows an estimated value of 35 percent of urbanization. Urban population increased from 17.4 percent to 32.5 percent during 1951 to 1998. According to UN, half of the population will be living in urban centers by 2030.
Large scale urbanization is breaking down the old structure leading to a fundamental revolution in our society. The growth of urbanization in Pakistan reflects the aspirations and hopes of billions of new urbanites. It is a cyclical process a country experiences as it evolves from an agrarian to an industrial society. They migrate from economically depressed areas to a place where better opportunities are offered. Urbanization is spread between the four provinces. The most urbanized province is Sindh (Karachi and Hyderabad) followed by Punjab (Lahore, Faisalabad and Pindi) whereas NWFP is the least urbanized one. Natural increase (population growth) and rural urban migration significantly contribute to urban growth. Although urbanization is the best test of industrialization, in case of Pakistan urbanization has gone out of step from economic development. Over urbanization reflects that there is more ‘push’ of people from rural to urban than ‘pull’ from urban to rural. It is equally important for the ‘liveability ranking’ to rise together with growing urbanization. However the current scenario indicates that the ‘liveability ranking’ will decrease tremendously if nothing is done to improve the environment. Knowing the gravity of the problem, its concern is increasing amongst social scientist and the government of Pakistan to take corrective measures for sustainable development of these cities because of the increased burden on limited resources of urban areas.
Significance of rural urban migration in economy Human beings are like other organisms who have been polluting their environment with the by-products of their actions. As long as population was low, the environment was able to manage these alterations. However in case of Pakistan, environmental degradation is sounding alarms.
Over the last 60 years, the process of economic development has brought about a number of changes and the most critical element of the process is rural to urban migration. It is changing the faces of large cities and villages. It is expected to shoot up further although many cities have already reached the saturation point where further population can endanger the delivery of basic services to all. The intensity of impact is critical in larger cities such as Karachi, Lahore, Faisalabad and Rawalpindi where the civic bodies are badly failing to manage these problems.
One of the major urban nightmares is solid waste management. Due to lack of professionalism and proper wastage disposal, 40% of the waste is not picked up and keeps on rotting in streets. As a result, more and more people become vulnerable to air and water born diseases. Moreover, eating up of green and open space, important for ecological balance, also leads to deteriorating environment. Air governs the quality of environment. The air in Pakistan is so polluted that it can clearly be seen with naked eye.
Historical building can no longer be seen and even protected monuments are getting vandalized. The trees are being cut without a second thought. No one coordinates the work of development agencies with reference to rural urban migration.
Urban decay in Pakistan cannot be overlooked at any cost. There is no proper sewage system, traffic on roads has lead to serious accidents, the crime in urban centres is increasing day by day and litter can be seen at every possible place. The government is no longer able to provide security, good quality of primary/secondary education and healthcare at affordable prices due to limited resources. Because of this reason, private sector has come forward to play such roles but at the cost of social justices, as the services offered are very expensive and only a small percentage is able to afford it.
The ideal situation would be an equitable distribution of people between rural and urban areas. However, migrants are attracted to urban life with better economic and educational opportunities and better quality of life. It is high time that policy makers of Pakistan should think hard to check the current demographic trend. Urbanization is screaming out loud, pleading for intervention.
Historic evolution of rural urban migration The city planning in Indus valley (Moen-jo-Daro and Harappa) together with the status of development in Lahore during the Mugal rule is a witness to the fact that rural life flourished along with the urban culture. After independence, urbanization gained speed and Population Census of Pakistan stated that one out to four individuals could be considered as urban (Population Census of Pakistan, 1972; 1981). In 1947, only 15% of the population lived in urban areas whereas now more than 40% of Pakistan’s population lives in urban centres. It has been predicted that, by 2030, about half of Pakistan’s population will be settled in cities. “The rural growth rate fluctuated substantially between 1951 and 1998; it first increased from 1.8% for the 1951-61 period to 3.4% for the next intercensal period, 1961-72. Since then it has continuously declined reaching 2.2% for the 1981-98 period. The average annual growth rate of urban population declined continuously from 4.9% for the intercensal period of 1951-61 to 3.5% for the period of 1981-98” (Arif