UNIVERSITY OF CENTRAL PUNJAB

CORPORATE GOVERNANCE
SECTION: L

SUBMITTED TO: PROF. KAINAT RIAZ

SUBMITTED BY: ZAIN ALI SYED AHAD CHAUDHARY SAMI-UL-HASSAN IRFAN QADEER BUTT M. WAQAS FAROOQ DATE: 1/06/13 (L1F10MBAM2171) (L1F10MBAM2174) (L1F10MBAM2169) (L1F11MBAM2138) (L1F10MBAM2256)

Acknowledgement:

Contents
Executive Summary....................................................................................................................................... 4 Company Profile:........................................................................................................................................... 5 Vision:........................................................................................................................................................ 5 Principle lines of business: ........................................................................................................................ 5 Corporate structure of Engro: ....................................................................................................................... 5 Chairmans message: ................................................................................................................................ 5 Shareholders pattern of Engro: ................................................................................................................ 5 Board of directors: .................................................................................................................................... 6 Board committees:.................................................................................................................................... 7 Mckinsey model application ......................................................................................................................... 8 Corporate governance theory application .................................................................................................... 9 Corporate governance model application .................................................................................................... 9 Corporate social responsibility ..................................................................................................................... 9 Role of government in ensuring corporate governance of company in Pakistan ...................................... 10 Governance hallmarks/issues ..................................................................................................................... 10 Conclusion ................................................................................................................................................... 10 Recommendations ...................................................................................................................................... 11 References: ................................................................................................................................................. 11

Executive Summary
Engros vision is to be the premier Pakistani enterprise with a global reach passionately pursuing value creation for all stakeholders. Engro philosophy is to not only grow and increase shareholders wealth but also work for the betterment of customers, society, employees, partners and government. Engro is actively participating in CSR activities and wants to provide a engergatic environment to their employees. Engro has 4 corporate, 18820 individual and 97 institutional shareholders. Engro board consists of thirteen boards of directors. Eight of them are non-executive directors and five of them are executive directors. Engro has also made committees like audit committee, compensation committee and investment committee in order to prevent fraud, make payment according to employees performance and make investment in right areas. As the Engro has dispersed owner ship, aligned incentives, high disclosure and institutional ownership etc., the Mckinseys model that Engro is following is the Market Model. The theory that applies to Engro Corporation is the Stakeholders theory as in their vision that they want value creation for all stakeholder and they are also working for society, employees and government etc. Subcontinent model best suits to Engro corporate governance as they are working for all shareholders like shareholders, customers, employees, government, enduring high disclosure and transparency. Engro has also actively working for CSR and providing health facilities, education, and livelihood and disaster management to the people of Pakistan. They have so far provide education to 3635 students and provided health facilities to 19725 patients and also providing clean water in different areas of Pakistan. Corporate governance in Pakistan is developing and different issues related to corporate governance like Taj company scandal and Mehran Bank scandal etc. But the SECP is working on it and developed a complete code of conduct for corporate governance including composition of board and board committees etc.

Engro Corporation Limited

Company Profile:
Vision:
To be the premier Pakistani enterprise with a global reach passionately pursuing value creation for all stakeholders

Principle lines of business:

Engro is the largest conglomerates with businesses from fertilizer to power generation in Pakistan. Currently Engro portfolio has seven businesses including fertilizers, PVC resin, a bulk liquid chemical terminal, industrial automation, foods, power generation and commodity trade. Besides providing vision and overseeing subsidiaries Engro corporation is responsible for capital allocation, HR polies, leadership development, public relation and CSR etc. Engro Corporation is providing dynamic and energetic environment which promotes leadership, teamwork and excellence. Engros core values are health safety and environment, ethics and integrity, innovation and risk taking, dignity of people and working for the welfare of community and society. Besides growing business in profitable, ethical and sustainable way Engro Corporation is also investing in community and society and health safety and environment.

Corporate structure of Engro:

Following is the corporate structure of Engro Corporation.

Chairmans message:
Chairmans message we will continue to implement action consistent with our corporate motto Enabling Excellence in everything that we think and do

Shareholders pattern of Engro:

Engro Corporation has dispersed ownership. Engro shareholders include individuals, investment companies, insurance companies, joint stock companies, financial institutions, modarba companies and Securities and Exchange Commission of Pakistan etc. as mentioned below in the table. About 45% of Engro shares are held by four corporate shareholders and about 26% shares are held by 18280 individual shareholders and about 11% are held by 97 institutional shareholders.

Category of shareholding as at December 31, 2012

Board of directors:
Engro Corporation board of directors consists of 5 executive directors and 8 non-executive directors. These directors have collective responsibility to ensure that affairs of organization are management with full integrity and competently. Boards of directors of Engro Corporation are Hussain Dawood Muhammad Aliuddin Ansari Shabbir Hashmi Shahzada Dawood Saad Raja (Chairman, Executive director ) (President & CEO, Executive director) ( Non- executive director) ( Non- executive director) ( Non- executive director)
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Ruhail Mohammed Shahid Hamid Pracha Khawaja Iqbal Hassan Khalid Siraj Subhani Sarfaraz A. Rehman Afnan Ahsan Abdul Samad Dawood Andalib Alavi

(Executive director ) ( Non- executive director) ( Non- executive director) ( Non- executive director) ( Non- executive director) (Executive director) ( Non- executive director) (secretary, Executive director )

Board committees:
The Board has established three committees, chaired by independent non-executive directors as follows:

1. Board Compensation Committee:

The purpose of committee is to review and recommend all elements of the Compensation, Organization and Employee Development policies relating to the senior executives' remuneration and to approve all matters related to the remuneration of the executives of all companies and members of the management committee and meet at least one every year. The President attends Board Compensation Committee meetings by invitation. The committees met five times during 2012. Following are the members of committee including one executive and 4 non-executive director.

Hussain Dawood Abdul Samad Dawood Sarfaraz A. Rehman Shabbir Hashmi Shahzada Dawood

(Chairman, Executive director) ( Non- executive director) ( Non- executive director) (Non- executive director) ( Non- executive director)

The Secretary of the Committee is Tahir Jawaid, Senior Vice President, HR and PA. 2. Board Audit Committee: The committee meets at least once every quarter and assists the Board in fulfilling its oversight responsibilities, primarily in reviewing and reporting financial and non-financial information to shareholders, systems of internal control and risk management and the audit process. It has the power to call for information from management and to consult directly with the external auditors or their advisors as considered appropriate. The Chief Financial Officer regularly attends the Board Audit Committee meetings by invitation to present the accounts. After each meeting, the Chairman of the Committee reports to the Board. The Committee met four times during 2012. Following are the members of committee including four non-executive directors
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Shabbir Hashmi Khawaja Iqbal Hassan Sarfaraz A. Rehman Shahid Hamid Pracha

(Chairman, Non- executive director) ( Non- executive director) ( Non- executive director) ( Non- executive director)

The Secretary of the Committee is Naveed A Hashmi, General Manager Corporate Audit

3. Board Investment Committee:

The purpose of committee is to assists the Board in reviewing the Company's investment transactions and performances, and in overseeing the Company's capital and financial resources. The Committee meets at least three times a year on need basis, and met seven times during 2012 giving its recommendations to the Board. Following are the members of committee including four non-executive directors Abdul Samad Dawood Khawaja Iqbal Hassan Saad Raja Shahid Hamid Pracha ( Chairman, Non- executive director) ( Non- executive director) ( Non- executive director) ( Non- executive director)

The Secretary of the Committee is Eqan Ali Khan, Senior Manager Finance and Accounting

Mckinsey model application

The Mckinseys model that applies to Engro Corporation is the market model. Engro Corporation has non-executive majority board as they have 8 non-executive directors from a total of 13 boards of directors which ensures that all the transaction of company are done in a free and fair manner. The incentives that are given at Engro are aligned incentives. These incentives are aligned with the performance of professionals. Engro has made a board compensation committee that reviews and recommends all element of compensation, policies regarding executives remuneration and approve remuneration of executives. The Engro Corporation has developed a good system of transparency and accountability. There is a high disclosure in the corporation. In order to maintain a high disclosure Engro corporation has made a board audit committee
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Corporate governance theory application

The theory that applies to Engro Corporation limited or most suitable is stakeholders theory. As they mentioned on their website that they not only want to grow their business but also wants to work for communities and society and health and safety of employees. Their first focus is on protecting shareholders interest and growing their business in order to increase shareholders wealth. For this purpose Engro has made different principles like conflict of interest, insider trading, internal control system, directors in other companies and speak out. These principle insures that employee are not working for their own interest, there is no issues regarding fraud and no director can act as a director of other companies which are not the subsidiary and joint venture of Engro with some exceptions. For employees Engros principle include healthy and safe environment and human resource management including the employee compensation and employee career development. These insure that employees will be provided with an ideal environment so they can best serve the company and provide their full competencies and skills. To customers they are providing the best quality products by using the latest technologies. They also believe in giving the gifts to other stakeholder in order to sustain their business. Engro is also helping government: first b giving taxes to the government and secondly by working for the society and people of Pakistan. Engro is running different government schools and working for proving clean water to the people etc.

Corporate governance model application

The model that Engro Corporation is following is the subcontinent model of corporate governance. In a corporate governance environment Engro is working for the interest of every stakeholder in some way. Engro has made audit committee and has non-executive board of directors to ensure that there is transparency and high disclosure of financial statements. Engro is also working for the society and providing help in different areas like education and health etc. Engro is also providing support to government through their societal work like they are running different schools for government and providing clean water in some areas of Pakistan. Engro is also ensuring that their employees work in safe and healthy environment and providing incentive and working for their career development. Engro is also ensuring that their customers get the best quality products in reasonable price. They are following all the government regulations and keep care of culture of corporation and values of this society.

Corporate social responsibility

Engro Corporation is not only growing their business but also ensuring their corporate social responsibility. In CSR they are working for livelihood, education, health, infrastructure and disaster management. Engro is providing technical education and made Hunar foundation and Descon technical institute etc. With the mutual collaboration with USAID, Engro has started a program name khushaal livestock project for improving productivity of animals. For the health of People Engro has made a Dialysis Centre, Eye Care Centre, and a Mother and Child Care Centre, in Taluka Hospital in Daharki. 9

Engro also support the establishment of thalassemia Centre in sukkur and many more. So far Engro Corporation has provided health services to 19,725 patients, provided education to 3635 students and made 166 model homes in model villages etc.

Role of government in ensuring corporate governance of company in Pakistan

Corporate governance in Pakistan is on developing stage. There are many examples of bad corporate governance in Pakistan like Taj Company, mehran band scandal and Efroz chemical scandal. These are scandal were because of fraudulent activities in the company and companies could not make their account transparent and free from frauds. To prevent frauds in Pakistan, SECP has issued the code of conduct related to corporate governance. With the passage of time SECP is making changes in the code of conduct because corporate governance environment is dynamic and rules should be changed according to the environment. The first thing they explained in the code of conduct is the composition of board that the board should be equally divided between the executive and non-executive directors to ensure independent judgment and diversity of work. No person can act as a director of more than seven listed companies. Any casual vacancy of director should be filled within 90 days. Then they have mentioned about the power and function of a director that they should make vision, mission and strategies for company and ensure adequate systems and controls and should take steps to follow code of conduct. There are also rules for committees. There should be audit committee which should include at least three non-executive directors. The chairman of the committee should be independent and there should be at least one member who has relevant financial skills. The code of conduct includes many more rules to ensure the good corporate governance in the organizations.

Governance hallmarks/issues Conclusion

The Engro Corporation is not only working for growth of their business but also for the improvement of society employees and the customers. Engro has all the types of shareholders and the board of Engro includes 8 non-executive and five executive directors. Engro is following Mckinseys market model. The theory that applies to Engro is stakeholders theory and the model that applies is the sub continental model. Engro has also made committees to ensure fairness and transparency and compensation according to performance. These committees include audit committee, compensation committee and 10

investment committee. Engro has also invested in CSR as they are working for livelihood, health and education etc. of people of Pakistan. There are different examples of bad corporate governance in Pakistan but the SECP has introduced code of conduct to ensure good corporate governance practices in the organizations.

Recommendations

References:
http://engro.com/wp-content/uploads/2012/03/Engro-Corp-Annual-Report-2012.pdf http://www.engro.com/our-company/leadership/board-of-directors/ http://www.engro.com/board-committees/ http://www.engrofoundation.com/our-work/ http://www.secp.gov.pk/CG/CodeOfCorporateGovernance_2012.pdf

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