##ance by regulators. ” the rosc - cg assessment further notes that “ the sbp has also been instrumental in improving corporate governance in the banking system, by requiring banks and dfis to adopt the code, and by assessing compliance with other relevant aspects of prudential regulation specifically applicable to banks / dfis. ” similarly the world bank ’ s 2007 report on doing business in south asia recognizes that “ pakistan provides relatively strong protections for minority shareholders against the misuse of corporate assets ”. it ranks 19th worldwide on protecting investors. outstanding corporate governance reform agenda while considerable progress has been achieved in enhancing corporate governance practices of banks, sbp is geared towards filling in the remaining gaps. in this regard, foremost is the need to develop a suitable cadre of professional directors who are knowledgeable of banks ’ affairs as well as independent of their management and majority shareholders. allied to this is the need to clarify and strengthen directors ’ fiduciary duties to act in the interests of the bank and all of its stakeholders. it is also essential for banks to provide sufficient time and information to directors to prepare for board meetings, structure board meetings so as to allow ample time for discussion and establish appropriate criteria for assessing and improving performance of directors, including independent directors. to raise awareness on these and related aspects, sbp is working towards issuing comprehensive corporate governance guidelines for banks. as earlier discussed, pakistan ’ s corporate and financial sectors present corporate governance issues peculiar to complex ownership and group structures. by conducting operations through a complex network of subsidiaries, controlling shareholders often acquire control of operations and / or cash flows disproportionate to their equity stake in individual companies. the key issues that arise as a result include : ( i ) inequitable treatment of stakeholders ; ( ii ) dominance of controlling shareholder - directors over board proceedings ; ( iii ) lack of independence of the board from the management ; and ( iv ) channeling of bank resources to the benefit of group concerns. in order to address such corporate governance issues, there is a need for group supervision by the regulators. as regard the banking supervision, sbp is working towards introduction of consolidated supervision whereby it will not be monitoring banks as a stand - alone entity but rather as part of the entire banking group. this will help to evaluate the strength of the entire group and to mitigate risks arising from group companies. a significant component of consolidated supervision will be review of group structures and detailed examination of related party transactions. i would also like to

shamshad akhtar : corporate governance for banks speech by dr shamshad akhtar, governor of the state bank of pakistan, at the ibp convocation, lahore, 13 march 2008. * * * this morning i propose to share with you my thoughts on the topical issue of “ corporate governance for banks ”. corporate governance revolves around the basic principles of fairness, transparency and accountability. contrary to the perception of many, good governance is not a new phenomenon – the concept of well governed companies has been there ever since formal businesses took over the barter trading system. “ corporate governance ” received fresh impetus and widespread recognition during the 1990s with launching of the cadbury report in the uk and prognosis of east asian crisis of the late 1990s and a series of corporate scandals in west including the enron scandals. together the loss of investor confidence and economy generated by the corporate failures brought to forefront the significance of corporate governance. global and regional debates and initiatives have helped promote greater fairness, transparency and accountability, though there remains scope for still better understanding of its dimensions and effective implementation. corporate governance is critical to improving economic efficiency and growth. it serves as a deterrent to mismanagement and infuses discipline in the decision making process of boards of directors. adherence to the principles of good corporate governance serves to foster investor confidence and attract domestic as well as foreign investors. companies operating on the principles of good corporate governance are able to attract investment. a study conducted by mckinsey quarterly indicated that investors would be willing to pay as much as 30 percent more for shares in companies having effective corporate governance. a number of surveys of investors in europe and the us support the same findings and show that investors eventually reduce their investments in a company that practices poor governance. why corporate governance matters for banks? the need for corporate governance in pakistan is unmistakable. the country has steadily responded to the corporate governance challenges and progress in the banking sector is particularly impressive. before we consider the corporate governance reforms for banks and the outstanding agenda, let us first explore why corporate governance matters for the banking system! most importantly, the financial system in pakistan continues to be predominantly bankbased, with bank assets to gdp ratio of 58. 8 percent for 2007. good corporate governance for banks, therefore, becomes critical in ensuring solvency and stability of the financial system as effectively governed banks are more efficient and prudent in directing their resources. secondly, banks are highly - leveraged : they lend money borrowed from depositors