Corporate Governance in Public Sector Companies
Prepared by: Noman Hameed
Introduction:
The importance of good Corporate Governance has been recognized and is on the agenda of law
makers in Pakistan over the last decade. The Securities and Exchange Commission of Pakistan
(SECP) formulated the Code of Corporate Governance (CCG) in 2002 which was based on
OECD’s principles of corporate governance and requirements of the local environment. In April
2012 SECP issued a revised Code which is applicable to all listed companies, in both the private
and public sectors.
During recent times there were several misappropriations highlighted in Government owned
unlisted corporations including National Logistics Corporation, Pakistan Steels, Distribution and
Generation Companies of Wapda as well as other Public Sector Enterprises. The scrutiny of
these issues highlighted that there were some major Governance issues in the Public Sector and
the provisions available in company law or any other law in force for the time being were not
enough to cope with these kinds of matters. Securities and exchange commission therefore
realized that they need to develop some Corporate Governance regulations specifically for the
Public Sector. SECP along with help of other Professional Bodies has developed a Code of
Corporate Governance for Public Sector Companies. The main focus of the Code is to bring
transparency and accountability in the governance of the Public sector in Pakistan.
ACCA Pakistan was a key stakeholder during the process of drafting a Code for Public Sector
through its recommendations in order to bring the Public Sector of Pakistan in line with the
global environment. ACCA has played a key role in the thought leadership on governance
conducting several debates over the emerging best practices in corporate governance in Pakistan.
In keeping with this commitment the Subcommittee for the Public Sector (of the Members
Network Panel of ACCA Pakistan) has prepared an analysis on the “Implications of Code of
Corporate Governance for Public Sector Companies (2013) issued by the Securities and
Exchange Commission of Pakistan”. It attempts to discuss the major requirements of the Code
with an emphasis on the practical implications of these requirements. Where applicable, interrelationship of the requirements with other company law provisions (as applicable in Pakistan)
has also been highlighted.
I would like to thank Ms. Gillian Fawcett, Head of Public Sector, ACCA for her
valuable feedback on this topic. I would also like to appreciate Ms. Nida Naeem, Chairman
Public Sector committee, Pakistan for her continuous effort and support.
The Detailed analysis is given as under:
Sr
No
Issue
Provision
1
Applicability
The rules are applicable to all the All the provisions of these
public sector companies.
rules have been made
applicable from 7th June
th
Rules have issued on 8 March 2013.
2013 and shall come into force after
90 days of their issuance.
In the case of listed Public
Sector Companies, where
there is any inconsistency
with
the
Code
of
Corporate Governance for
listed companies 2012, the
provisions of CCG 2012
for listed companies shall
prevail.
Section 1
2
Definition of Public "Public Sector Company" means a
Sector Company.
company, whether public or
private, which is directly or
Section 2(g)
indirectly controlled, beneficially
owned or not less than fifty percent
of the voting securities or voting
power of which are held by the
Government or any instrumentality
or agency of the Government or a
statutory body, or in respect of
which the Government or any
instrumentality or agency of the
Government or a statutory body,
has otherwise power to elect,
nominate or appoint majority of its
directors, and includes a public
sector association not for profit,
licensed under section 42 of the
Ordinance.
Implication
A very comprehensive
definition which includes
public sector companies,
their subsidiaries, subsubsidiaries
and
also
companies
registered
under Section 42(not for
profit
companies)
of
companies’
ordinance
1984.
Bringing
Section
42
companies
under
the
ambit of these regulations
is a very positive step
because nowadays most of
the
newly
formed
Government
companies
are
registered
under
Section 42.
Some
important
authorities like OGRA,
WAPDA, NADRA and
PTA are still outside the
ambit of these rules as
these rules are only
applicable to companies.
Government must take
some steps to bring these
authorities under some
kind
of
Corporate
Governance rules.
3
Composition
Board
Section 3
mandatory
of The Board shall consist of atleast The
requirement
to
have at
40% independent directors.
least 40% independent
Casual vacancy to be filled in 90 director is introduced.
days.
Within 2 years of this
A person cannot be on the Board of notification every PSC
more than 5 Public Sector needs to fulfil 40%
independent
companies and listed companies mandatory
director’s requirement and
simuntaneously.
majority
independent
directors by the next 2
years.
A comprehensive criteria
“FIT and Proper” is given
in the annexure to SRO
which the entails the
requirement
for
appointment as Director in
PSC.
4
Chairman and CEO
Section 5
The Chairman and Chief executive This requirement would
should be separate persons.
help
to
improve
transparency, achieve an
appropriate balance of
increasing
Chairman should be selected by power,
accountability,
and
BOD from independent directors.
improving the Board's
capacity for exercising
independent judgment.
Currently chairman of
PSC are appointed by
Government directly and a
post facto approval is
taken from the BOD. This
is in conflict of this rule.
BOD shall after applying
FIT and proper criteria
forward 3 names of person
for the position of CEO to
the
Government.This
would bring transparency
if applied in true spirit.
5
Meeting of BOD
Section 6
BOD meeting to be held atleast The requirement has been
once in each quarter.
introduced to improve
BOD
oversight
of
Companies Operations.
Previously there was no
such requirement other
than the one available in
CCG for listed companies.
6
Performance
evaluation of BOD.
Section 8
Performance evaluation of BOD A very good step to
and senior Management on annual improve transparency and
basis.
accountability.It
is
suggested
that
the
mechanism
followed
along with evaluation
reports for BOD should be
available on companies
website for general public.
An annual evaluation of
board members can be
considered
good
practice. This reminds
members
of
their
responsibilities to take an
active part and utilise their
skills for the benefit of an
organisation. Also, it is
ultimately a check on
performance.
7
Monthly,Quarterly
and Annual Accounts
Section 10
8
Board Committees
Section 12
Every Public Sector Company
shall, within one month of the close
of first, second and third quarter of
its year of account, prepare a profit
and loss account for, and balancesheet as at the end of, that quarter,
whether audited or otherwise, for
the Board's approval.
A new requirement for
preparation of quarterly
and monthly accounts has
been introduced.
Annual report needs to be
published on companies
website for general public.
Every PSC shall have following PSC’s are required to have
committees:
all these committee which
would be chaired by non
Audit Committee
executive directors.
Risk Management Committee
HR Committee
Procurement Committee
Nomination Committee
Majority Members of
these committees are
required to be independent
directors.
Chairman
and
Chief
executive
cannot
be
members
of
Audit
Committee. Sec21(2) of
CCG for PSC.
Exception:
For PSC whose total
assets are less than 5
billion
there
is
no
compulsion of having risk
management Comittees.
Note:
Minutes of the meetings of
BOD
and
these
committees
are
also
required to be published
on company’s website by
Public
Accounts
Committees. However the
companies
are
not
following this directive
taking the plea of “breach
of confidentiality”.
CFO,CIA
and Every PSC should have a separate Many of Government
Company Secretary.
CFO,CIA and CS.
companies do not have
separate persons working
Section 13
on these positions.
Exception:
Where the company
secretary is not separately
appointed, the role of
company secretary may be
combined with chief
financial officer or any
other member of senior
management.
9
CFO Qualification
Section 14(1)
No person shall be appointed as the No exception has been
chief financial officer of a Public provided in this clause
Sector Company unless he is,therefore all the persons
working on these positions
(a) a member of a recognized body that do not have the
of professional accountants with required qualifications and
atleast
five
years
relevant experience
(where
experience, in case of Public Sector applicable) would have to
Companies having total assets of be removed from this
five billion rupees or more; or
position.
(b) a person holding a master
degree in finance from a university
recognized by the Higher Education The Guidelines which
Commission with at least ten years defines a professional
relevant experience, in case of other body (Criteria/Guidelines
Public Sector Companies.
for recognition of bodies
of
professional
accountants
and
corporate/chartered
secretaries for the purpose
of prescribed qualification
of CFO and Company
Secretary Dated 29th April
2004)should be read in
conjunction with this
requirement of the Code.
Gillian Fawcett, Head of
Public Sector ACCA said
“I strongly believe that a
CFO should hold a
professional accounting
qualification
as
a
minimum and there should
be
no
other
options. Experience alone
doesn't make up for the
technical
skills
required
to
support
successful
financial
management. I also think
that degree courses that
have a finance element are
not a substitute for a
professional accountancy
qualification. There is also
the
ethical
dimension to consider i.e.
professional accountants
are
bound
by
a
strong ethical code the
same does not apply to
non-accountants”.
Practically there would be
many
difficulties
in
applying this regulation
because majority of small
Government
companies
have people working on
these positions who do not
fulfill this criteria.
Fit and proper criteria
given in the annexure to
CCG for PSC is applicable
for this position.
10
Company Secretary No person shall be appointed as the
Qualification
company secretary of a Public
Sector Company unless he is a,—
Sec 14(4)
(a) member of a recognized body of
professional accountants; or
No exception has been
provided in this clause
therefore all the persons
working on these positions
that do not have the
required qualifications and
(where
(h) member of a recognized body experience
of
corporate
or
chartered applicable) would have to
be removed from this
secretaries; or
position.
(c) person holding a master degree
in business administration or Practically there would be
difficulties
in
commerce or being a law graduate many
from a university recognized by the applying this regulation
Higher Education Commission with because majority of small
companies
at least five years relevant Government
have people working on
experience.
these positions who do not
fulfill this criteria.
Fit and proper criteria
given in the annexure to
CCG for PSC is applicable
for this position.
11
Directors Report
Directors Report shall be prepared The material issues which
Section 17
and presented to the shareholders need to be incorporated in
annually.
this report are more or less
the same as are required in
CCG for listed companies
2012 and also Section 236
of companies ordinance
1984.
Section 19(4) of CCG for
PSC requires criteria of
directors remuneration to
be disclosed in annual
report.
12
Chief
Internal No person shall be appointed as the
Auditor Qualification Chief Internal Auditor of a Public
Sector Company unless he has five
Section 22(2)
years of relevant audit experience
and is a,—
Every PSC has to have a
internal audit department
and a separate person
acting as Chief Internal
Auditor.
Persons not fulfilling both
(a) member of a recognized body of
the criteria i.e. experience
professional accountants; or
and qualification stand
removed immediately.
(b) certified internal auditor; or
(c) certified fraud examiner; or
(d) certified
auditor; or
internal
control
(e) person holding a master degree
in finance from a university
recognized by the Higher Education
Commission:
I strongly believe that a
CIA should hold a
professional qualification
as a minimum and there
should be no other
options. Experience alone
doesn't make up for the
technical
skills
required
to
support
successful internal audit
management. I also think
that degree courses that
have a audit element are
not a substitute for a
professional accountancy
qualification. There is also
the
ethical
dimension to consider i.e.
professional accountants
are
bound
by
a
strong ethical code the
same does not apply to
non-accountants.
Exception to rule:
Provided that individuals
serving as Head of
Internal Audit of a public
company for the last five
years at the time of
coming into effect of this
Code shall be exempted
from the above.
13
14
External
Rotation
Auditors Every Public Sector Company in
the financial sector shall change its
external auditors every five years.
Section 23(6)
Financial sector, for this purpose,
means banks, non-banking finance
companies,
mutual
funds,
modarabas, takaful companies and
insurance companies. Every Public
Sector Company other than those in
the financial sector shall, at a
minimum, rotate the engagement
partner after every five years.
Management Letter
Rotation of audit firm and
audit
partner(where
applicable)
has
been
introduced
to
ensure
transparency in the audits
of PSC’s.
Previously these rules
these regulations were
only for listed companies.
Practically it would create
difficulty
for
small
companies as many of
these were conducting
their
external
audits
through single partner
audit firms.
Every Public Sector Company shall Previously there was no
require external auditors to furnish such requirement for
a management letter to its Board external
auditors
to
not later than thirty days from the provide a ML.
date of audit
report.
23(8)
15
Fit
and
Criteria
16
Compliance
Statement
Proper
Sec 24
A detailed criteria has
been provided as an
annexure to CCG for PSC.
Previously
some
information has been
provided in companies
ordinance Section 187 for
ineligibilities of directors.
Every Public Sector Company shall Compliance
statement
publish and circulate a statement needs to be reviewed by
along with its annual report to set the external auditor.
out the status of its compliance with
these rules, and shall also file with Format of this statement
the Commission and the registrar has not been provided in
concerned such statement along the rules.
with its annual report.
Sample statement has
been provided in CCG for
listed companies and same
may be used here after
some amendments.
Abbreviations Used:
CCG: Code of corporate governance
PSC: Public sector company
PSE: Public sector entity.
SRO: Statutory Regulatory Order.