Code of Corporate Governance for Public Sector Organization
By Tahir Sartaj
Introduction:
Code of Corporate Governance was issued in 2002 by Securities and Exchange Commission of
Pakistan (SECP) to all the listed companies. It was subsequently revised in 2012 by SECP for all
listed companies. For Public Sector Companies ‘Corporate Governance Rules, 2013’ were issued
vide SRO 180(I)/2013 dated March 8, 2013, which shall come into force within ninety days of
the issuance of this notification.
However, the timeline was extended till July 8, 2013.
Comparison of revised and existing Code is annexed with this memo and marked as “Annexure
A”.
Following are the major areas of Code of Corporate Governance for Public Sector Organization:

Composition of the Board(BoD);
BoD is encouraged to have a balance of executive and independent director including
independent directors representing minority interests. Minority shareholders are
facilitated to contest election by proxy solicitation. No independent directors shall have
share options/similar schemes.
Within two years of this notification, atleast 40% directors must be independent, whereas
in the next two year’s majority of the members must be independent directors.
Maximum public sector/listed company directorship own by any director shall not be
more than five. Listed subsidiaries are excluded from this limit.
Casual vacancy of BoD is required to be filled up at the earliest but not later than 90
days.

Role of Chairman and CEO;
Office of the chairman shall be separate and his responsibilities shall be distinct from
Chief Executive. Chairman shall ensure that the BoD is working properly whereas Chief
Executive shall be responsible for the management of the company. Chairman shall be
elected from the independent directors

Responsibilities, power and functions of the BoD;
BoD shall evaluate the candidates based on the guidelines specified by SECP. In case of
appointment of CEO, BoD recommends atleast three names to the government. On
receiving concurrence BoD shall appoint CEO and are liable to develop secession plan of
CEO.

Key Information to be placed for decision by the BoD;
- Annual business plans,
- Internal audit reports;
- Management letters issued by the external auditors;
- Details of joint ventures or collaboration agreements etc;
- Promulgation or amendment of a law, rules or regulations or, enforcement of an
accounting standard;
- Status and implications of any lawsuit or judicial proceedings;
- Any show cause, demand or prosecution notice received from any revenue;
- Material payments of government dues, including income tax, etc;
- Inter-corporate investments in and loans to or from associated concerns;
- Default in payment of principal or interest, including penalties on late payments;
- Failure to recover material amounts of loans, advances, and deposits;
-
Any significant accidents, dangerous occurrences and instances of pollution and
environmental problems;
- Significant public or product liability claims made or likely to be made;
- Disputes with labor and their proposed solutions, any agreement with the labor union
etc;
- Payment for goodwill, brand equity or intellectual property;
- Annual, quarterly, monthly or other periodical accounts as are required to be approved
by the Board for circulation amongst its members;
- Reports on governance, risk and compliance issues;
- Whistle-blower protection mechanism;
- Report on Corporate Social Responsibility (CSR) activities; and
- Related party transactions.

Quarterly and Monthly Financial Statements and Annual Report;
Every public company shall place its quarterly accounts within one month of the quarter
end to BoD for its approval. Annual accounts shall also be placed on company website
and monthly accounts shall be prepared and circulated among BoD members

Related party transactions;
Details of the related party transactions shall be placed before Audit Committee. BoD
shall ensure that the transactions must be arm length and the pricing mechanism must be
approved.

Performance Evaluation;
Performance evaluation of BoD member shall be undertaken including Chairman/CEO
on annual basis. Chairman of BoD shall take the ownership for this. However, BoD shall
also assess performance of senior management at least once a year.

Board Orientation and learning:
Orientation courses shall be conducted by the company to enable its directors to better
comprehend the specific context.

Meetings of the Board;
BoD shall meet at least once in every quarter. Notice of which (duly approved by
chairman) must be circulated atleast seven days prior to the meeting. However, the
minutes shall be circulated within fourteen days of the meeting.

Formation of Board Committees;
Following committees shall be setup by BoD in performing its functions efficiently:

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

Audit Committee;
Risk Management Committee;
HR Committee;
Procurement Committee; and
Nomination Committee
All committees shall be chaired by non executive director and majority of the members
should be non executives. The independent director shall not be less than the
proportionate strength during the first four years of this notification. Such committees
have written TORs that define their duties, authority and composition and shall report to
the BoD.

Chief Financial Officer (CFO), Company Secretary (CS) and Chief Internal Auditor
(CIA);
Appointment, remuneration, terms and conditions and removal of employment of CFO,
CS and CIA shall be determined with the approval of BoD. CFO and CS are required to
attend all the meeting of BoD.

Financial Reporting Framework;
Every company shall adopt International Financial Reporting Framework as notified by
SECP.

Directors’ Report to Shareholder;
Every company shall ensure that Director Report shall be prepared and included in
Annual report.

Disclosure of Interest by Directors and Officers;
Every director or any other officer shall disclose his interest, directly or indirectly in any
contract or arrangement entered into by or on behalf of the company in the meeting of
directors.

Director Remuneration;
Formal and transparent procedure for remuneration shall be in place. For directors
remuneration BoD approval is required. However, no director shall be involved in
deciding his own remuneration and annual report should contain remuneration detail of
executive and independent directors separately.

Responsibility for financial reporting and corporate compliance;
Financial statements shall be circulated only after the signature of CEO/CFO and review
and approval of audit committee and BoD.

Audit Committee;
Audit Committee shall not include Chairman of BoD and CEO. BOD must be satisfied
that one member of the Committee has relevant financial skills and experience and
Chairman of audit committee shall preferably be a non-executive director.
CFO, CIA and representative of external auditor shall attend all the meetings of the audit
committee in which issues relating to the accounts and audit are discussed.
Atleast once a year audit committee shall meet CIA and its other members without CFO
and external auditor.
BoD shall determine the terms of reference of the audit committee. The audit committee
shall be responsible for recommending to the BoD for the appointment, resignation,
removal, audit fees of external auditor. They are also responsible for managing the
relationship including their objective, scope of audit and non audit work, discussing any
issues arising from the review of financial statements, communication with management
and management response their on, progress on accepted recommendation from the
external auditor.
In case of recommendation for change of auditor before the lapse of three consecutive
financial years, the reason for the same shall be included in director report.
Audit committee shall appoint secretary of the committee, who shall circulate minutes of
the meetings to all the member, director and CFO within fourteen days of the meeting

Internal Audit;
Every public company shall have an internal audit function and the CIA shall be
accountable to audit committee and have unrestricted access to the audit committee.

External Auditor;
External auditors shall independently report to the shareholders in accordance with
statutory and professional requirement. They should also report to the BoD and audit
committee, the matter of auditor interest as laid down in International Standard on
Auditing.
No company shall be appointed as firm of external auditor if firm or partner is noncompliant with the International Federation of Accountant (IFAC) on code of ethics.
Every company in the financial sector shall change its auditor after every five years.
Financial sectors for this purpose means, banks, non banking financial companies, mutual
funds, modarabas, takaful and insurance companies. Every company other than those in
the financial sector shall, at the minimum, rotate engagement partner after every five
years.
No company shall appoint a person as its CEO, CFO, CIA or director who was a partner
of the firm of its external auditor or employee involved in the audit at any time during the
two years preceding such appointment.
Every company shall require external auditors to furnish management letter within thirty
days of the date of audit report.