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: 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.