Business Law

Board Practices in Iran Turkey and Pakistan

5 Mins read

Comparison the business environment, private sector development and the perceptions of company managers about the business environment, privatization process and corporate governance in Iran, Pakistan and Turkey is a very promising study. 

The three countries under consideration have recognised, particularly over the past decade, that their economic policies based on the centrality of the state sector has reached its limitations and further economic development has to be based on the expansion of the private sector. The private sector has been developing at varying rates in the three countries despite their difficult conditions. Its growth has been due to both its natural expansion and the privatization of state owned, or socially owned, enterprises. The privatization process itself was embraced by the governments of these countries as a concept and as an important element of their overall economic and social policy – even though the main aims of privatization may have changed over time.

 In Iran, the privatization process has been the largest (with some 315 companies and over $72 billion worth of assets) and implemented most rapidly in the last six years. The largest single method of privatization (accounting for $34 billion of the transferred assets) was through the ‘Justice Share Program’, the Iranian version of mass voucher privatization in which the minority shares of 56 very large state owned companies have been transferred, through a multitude of investment companies and township cooperatives, to the lowest six deciles of the population on preferential terms. The privatization program, however, suffers from several important shortcomings. There is no mechanism to ensure that the new owners can influence and help improve the performance of privatized companies. This is because in many cases the new owners are either semi-government organizations (such as the investment companies of state owned banks or the government controlled Social Security Organization or Pension Funds), or the newly developed holding companies belonging to military and religious foundations with close connections to certain sections of the government and the religious establishments. There is also every indication that the privatized companies would suffer from weak corporate governance. This is particularly true for companies in the ‘Justice Share Program’ and the financial intermediaries involved in this program.

 

Turkey and Pakistan, too, have experienced fairly successful privatization programs, though smaller in size compared to Iran, but with genuine transfers to the private sector. In Turkey 201 companies and in Pakistan 167 companies have gone through the privatization process, generating revenues of approximately 42 and 8.7 billion dollars respectively (until 2010). Although the number of companies privatised looks rather modest in Pakistan, it covers a considerable number of large entities with a significant number of employees. In Turkey, although privatization became an official state policy in the mid-1980s, its implementation did not gain momentum until the end of 2002 when the AK party gained power. The privatization process in Turkey has been accompanied by a variety of social support projects in order to ameliorate the social impact of the program, particularly targeting the individuals who were made redundant in the process of preparing companies for privatization.

 

Findings from the international surveys demonstrate that, in all three countries, the quality of business environment is not conducive to the establishment and conduct of business, and urgent reforms are needed. The regulatory aspects of the environment, those based on laws and regulations, are impediments to new businesses and discourage, rather than encourage, entrepreneurship in the formal sector of the economy. There are too many restrictions on foreign trade activities, labour and land market transactions, and the financial systems. The latter, therefore, cannot provide businesses with the levels of credit and other services they need and prevents them reaching their full potential. Levels of corruption and informal activities are high and pose a serious burden on companies. Reforms in all these areas are essential for the private sector in these countries to grow faster and to provide their citizens with greater employment opportunities and higher standards of living.

 

The findings from secondary sources were augmented by project-specific surveys conducted by the three organizations. The aims of these surveys were to identify the perceptions of the private sector about the business environment; their views on the privatization process, its impediments and benefits; and finally their awareness of the corporate governance principles and the level of compliance with these principles. The surveys show that the biggest obstacles in doing business in all three countries are factors external to the companies, i.e. not under companies’ control. These obstacles, which are rooted in business-unfriendly regulatory environment and weak institutional and infrastructural development, particularly affect the companies’ competitiveness on domestic and international markets.

 

As for the privatization process, our survey results seem to suggest that in none of the countries was privatization fully supported by all political factions while there seems to be a mild agreement amongst the respondents that the valuation of companies in the privatization process was carried out professionally. There is less agreement on the fairness and transparency of the procedures adopted for privatization, as well as on the importance of privatization for attracting foreign investment. Concerning the impediments to privatization, respondents identified some of the obstacles relevant in each country. While in Iran, the biggest identified impediment to privatization has been the lack of transparency about the identity of the new owners and the commitment of the government to genuine transfer to the private sector, in Pakistan it has been the social opposition to the privatization itself.  In Turkey, however, the respondents did not consider any of the identified factors to be a serious impediment to privatization.

 

Lastly, the corporate governance framework is in need of serious attention and improvement in all three countries. The survey of companies in this research project confirms that the level of awareness of the corporate governance principles is rather low in all three countries, even in Pakistan and Turkey where the codes of corporate governance have been discussed and adopted in 2002 and 2003 respectively. Of course, companies traded on the Stock Exchange in these two countries comply with their respective codes but these are only a small number of companies. In order to develop the interest of the business community, it is essential to publicise the business case for corporate governance widely. In Iran, although a code of corporate governance was adopted by the Securities and Exchange Organization in 2010, it has not become compulsory for listed companies yet and the knowledge has not gone beyond the Stock Exchange Company and the Securities and Exchange Organization. The level of compliance with the corporate governance principles in the surveyed companies was extremely poor. Further work in promoting good corporate governance and publicising its benefits for companies and their owners and for private sector development is essential in all three countries, particularly in Iran.

 

To sum up,
all three countries have accepted the importance of private sector development for their future economic growth and prosperity. But they have not always pursued policies that facilitate this development. There is a need to develop a business-friendly environment by eliminating regulations that restrict the operation of
labor, land and capital markets and raise the costs of doing business to private sector firms. At the same time, the privatization programs, subscribed to by all three countries, should be pursued until all SOEs are transferred in a fair and transparent manner to the genuine private sector. To complement these policies, the corporate governance principles should be institutionalized in all countries and all public joint stock companies be required to comply with these principles. This would help the privatized as well as private companies to improve their corporate governance framework with a view to creating an environment in which firms can raise finance easier and at lower costs from both domestic and foreign sources.
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Articles written exclusively by LegaMart legal professionals.

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