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A Case Study on

Dewan GroupDewan Group

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IDENTIFFY

the RRISK

AANDREDUUCE

the DDAMAGE

Presented toPresented toSSirirHH

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afarafar

A Project By;

Muhammad SaadSaadYusufi

KashifKashifShabbir ShaikhMadihaMadihaArif

AhmedSSayaaya

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The Agenda

Brief on Code of Corporate GovernanceBrief on Code of Corporate Governance

Short HistoryShort History

Short VideoShort Video

Presentation of CasePresentation of Case

SummarySummary

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The Code of Corporate Governance

Effective in Pakistan Via No. 2(10)SE/SMD/2002- March 28,2002.

Covers Explicitly the Areas of

Board of Directors

Qualification & Eligibility of Directors

Tenure of Directors

Reponsibilities, Powers & Functions of Board of Directors

Board Meetings

Appointment Criteria of Key Management Personnel

Reporting procedure

Role of Auditors & Audit Committee

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Short HistoryCorporate Governance issues came to prominence in the USA during1970s and in the UK and Europe from late 1980s.

The major corporate scandals had also played a key role in the

development of Code. Examples include Polly Peck Int, BCCI and

MaxwellMaxwell CommunicationsCommunicationsCorp.

The UKUK CadburyCadbury ReportReportsuggested key principles of openness, integrity

and accountability

The GreenburyGreenbury CoCodeof 1995 focussed on determination of Directors pay

through added stress on renumeration committee and specefic role ofnon-executive directors

The HampelHampel ReportReportof 1998 backed the Greenbury and Cadbury report

by addressing on application of corporate Governance Principles and the

policies representing Best Practise.

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Short History

THE DEVELOPMENT OF COMBINED CODE BASED ON

The TurnbullTurnbull ReportReport(1999, revised 2005) focussed on riskmanagement and internal controls

The SmithSmith ReportReport(2003) discussed the role of audit committee

The HiggsHiggs ReporReport (2003) focussed on the role of the non Executivedirector

Other contributions were made by the Kings ReportKings Reportand theSingapore code.

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Short Video

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Deewan Group

So, What Went Wrong.So, What Went Wrong.

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Deewan Group

But prayers of the companys Chairman Dewan Muhammad

YousufFarooqui which he had passionately made in the two-

paragraph directors report for first July-September quarter

have not been answered as sales have gone down 35pc

Financial losses have marred other textile companies of the

group. Loss ofDewan Khalid Textile jumped 26pc to Rs42m

from previous years Rs34m. Dewan Textile Mills is also in red

with Rs200m in losses, up 150pc.

MA Jabbar, Chairman SITE Association ofIndustry, says poor

performance of textile makers is repercussion of too much

reliance on states support for too long.

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An Analysis of the Case

Key Areas ExaminedKey Areas Examined

Directors Executive, Non Executive & Independent

Board Meetings & Representation ofDirectors

Board Committees

Auditors

Directors Report

Disclosures Pertaining to Remuneration ofDirectorsOther Disclosures

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Directors

The chairman for most of the Dewan Group is Mr.

Dewan M. YousufFarooqui

Mr. Farooqui also works as a ChiefExecutive Officer

for Deewan Cement and Deewan Farooq Motor

Company

Other members of the same family hold the directors

offices as well as CEO ship in key companies

The group has limited Non Executive or Independent

Directors

Infact most of the Related

Directors are part

of key Board Committees including Audit Committee

which should preferably have only non executive

directors.

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Q:Q: As per Code of CorporateAs per Code of CorporateGovernance, can a CEO of aGovernance, can a CEO of aCompany be the Chairman of theCompany be the Chairman of the

same company?same company?

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Answer!As per Code of Corporate Governance part (ix)

The Chairman of a listed company shall preferably be elected from

among the non-executive directors of the listed company.

The Board ofDirectors shall clearly define the respective Roles and

responsibilities of the Chairman and ChiefExecutive, whether or not

these offices are held by separate individuals or the same individual.

So the Answer is YES But lets review another clause of the Code

Clause (viii) e

Appointment, remuneration and terms and conditions of

employment of the ChiefExecutive Officer (CEO) and other

executive directors of the listed company are determined and

approved by the Board ofDirectors

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Final Word!

Preferably the CEO and the Chairman should

be two different officers as it would not only

provide better governance but also would

not open the channel of influence at the

board meetings while deciding for the

remuneration of the CEO.

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Board Meetings

The Board Meetings of the Company are held in the Same premises at

Dhabeji District at separate intervals but on the same day.

The agenda for most of the company Annual General Meeting is the

same.

Another alarming sign is that Dewan Farooq Spinning Mills and Dewan

Mushtaq Textile Mills have the same Chairman. This poses another

concern over the governance aspect in these companies.

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External Auditors

Dewan group has been using the services of M/s Feroze SharifTariq & Co formost of its companies

The minutes of the meetings even reflect re-appointment and extension ofthe term.

The Code of Corporate Governance is silent on the extent of work taken byauditors in engaging with clients.

Further the code however puts a limitation that incase the same firm isengaged in audit work for more then 5 years then the rotation of partner is amust.

In our given case M/s Feroze SharifTariq & Co have qualified their opinionon various grounds for the Dewan Group of Companies however theweakness of code of corporate governance is witnessed. Such anengagement may question the objectivity of the work performed by theexternal auditor.

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MissionStatement

Mission Statements are an indicator to how does the company differentiate itselffrom its competition and then makes a clear stance towards the strategic side ofthe business.

THE CODE OF CORPORATE GOVERNANCE UNDER CLAUSE (VIII)-B OUTLINES:

Every listed company shall ensure that:

The Board ofDirectors adopt a vision/ mission statement and overall corporatestrategy for the listed company and also formulate significant policies, havingregard to the level of Materiality.

The group in question has been using similar stance in most of the mission

statements.T

his is why the companies do not have a set direction on which theyshould move. We must clarify that the mission statement needs to be specific interms of how the company plans to march ahead. This has connection to thevision as well as the strategic goals.

Similar mission statements do not portray a competitive and strategic approach.

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TheDirectors Report

The Directors report is a presentation of how the strategic Gurus of thebusiness interpret the companies affairs. These statements have a great valuein determining the confidence of the Directors towards the company and itsaffairs.

In our particular case the Director mainly Mr. Dewan M. YousufFarooqui hasexponentially explained the affairs of the company. Though most the groupcompanies have faced significant losses due to lost sales and heavy debts.

The positive part of his reports has been him being vocal on the problems thecompany has been facing.

In his march he has also tried to put up the managements stance over theQualification of the External Audit Report. Defending the management viewson such instances may be a dire effort to lift the image however such casesare generally addressed in the management letter by the auditors and aresettled at those grounds,. Clarifying in the public only shows the lack ofweight in the managements arguments.

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Disclosures

We would now present to you theWe would now present to you the

extracts from the group companies,extracts from the group companies,

these extracts would provide a viewthese extracts would provide a viewof how variation is observed inof how variation is observed in

different reports of the company.different reports of the company.

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DisclosuresDewan Farooq Spinning Mills LtdDewan Farooq Spinning Mills Ltd

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DisclosuresDewan Cement LtdDewan Cement Ltd

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SummaryThe code of corporate governance provides a guidance towards better reporting howevergreater part of responsibility lies on corporations.

Standardized reporting is the only solution for better governance

The Directors report is an essential component of financial reports and should be criticallydrafted and reviewed

The committees of the board act as an arm and should be used for better control

The directors should ideally not be related parties and preference should be given toindependent and non executive directors

External and internal auditors have a specific duty to work in collaboration and ensure

that objectivity is maintained in the scope of work performed

The Terms of Reference are an important feature in defining the role of each boardcommittee.

Statement of compliance with code of corporate governance is a mandatory requirementand should be made part of the financial statements.

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