Corporate Governance in Public Sector Companies

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 Wapdaas 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 analysison the “Implications of Code of Corporate Governance for Public Sector Companies (2013) issued by the Securities and Exchange Commission of Pakistan”. It attempts to discussthe major requirements of the Code with an emphasis on the practical implications of these requirements.Where applicable, inter-relationship 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 valuablefeedback 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 / Implication
1 / Applicability
Section 1 / The rules are applicable to all the public sector companies.
Rules have issued on 8th March 2013 and shall come into force after 90 days of their issuance. / All the provisions of these rules have been made applicable from 7th June 2013.
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.
2 / Definition of Public Sector Company.
Section 2(g) / "Public Sector Company" means a company, whether public or private, which is directly or 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. / A very comprehensive definition which includes public sector companies,their subsidiaries,sub-subsidiaries 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 of Board
Section 3 / The Board shall consist of atleast 40% independent directors.
Casual vacancy to be filled in 90 days.
A person cannot be on the Board of more than 5 Public Sector companies and listed companies simuntaneously. / The mandatory requirement to have at least 40% independent director is introduced.
Within 2 years of this notification every PSC needs to fulfil 40% mandatory independent director’s requirement and 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 should be separate persons.
Chairman should be selected by BOD from independent directors. / This requirement would help to improve transparency,achieve an appropriate balance of power, increasing accountability,and 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 once in each quarter. / The requirement has been 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 and senior Management on annual basis. / A very good step to improve transparency and 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 / 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 accountfor, and balance-sheet 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.
8 / Board Committees
Section 12 / Every PSC shall have following committees:
Audit Committee
Risk Management Committee
HR Committee
Procurement Committee
Nomination Committee / PSC’s are required to have all these committee which would be chaired by non executive directors.
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 Company Secretary.
Section 13 / Every PSC should have a separate CFO,CIA and CS. / Many of Government companies do not have separate persons working 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 chief financial officer of a Public Sector Company unless he is,-
(a) a member of a recognized body of professional accountants with atleast five years relevant experience, in case of Public Sector Companies having total assets of five billion rupees or more; or
(b) a person holding a master degree in finance from a university recognized by the Higher Education Commission with at least ten years relevant experience, in case of other Public Sector Companies. / No exception has been provided in this clause therefore all the persons working on these positions thatdo not have the required qualifications and experience(where applicable) would have to be removed from this position.
The Guidelines which defines a professional body (Criteria/Guidelines for recognition of bodies of professional accountants and corporate/chartered secretaries for the purpose of prescribed qualification of CFO and Company SecretaryDated 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 professionalaccounting 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 thatdegree 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 Qualification
Sec 14(4) / No person shall be appointed as the company secretary of a Public Sector Company unless he is a,—
(a) member of a recognized body of professional accountants; or
(h) member of a recognized body of corporate or chartered secretaries; or
(c) person holding a master degree in business administration or commerce or being a law graduate from a university recognized by the Higher Education Commission with at least five years relevant experience. / No exception has been provided in this clause therefore all the persons working on these positions that do not have the required qualifications and experience(where applicable) would have to be removed from this position.
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.
11 / Directors Report
Section 17 / Directors Report shall be prepared and presented to the shareholders annually. / The material issues which need to be incorporated in 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 Auditor Qualification
Section 22(2) / No person shall be appointed as the Chief Internal Auditor of a Public Sector Company unless he has five years of relevant audit experience and is a,—
(a) member of a recognized body of professional accountants; or
(b) certified internal auditor; or
(c) certified fraud examiner; or
(d) certified internal control auditor; or
(e) person holding a master degree in finance from a university recognized by the Higher Education Commission: / Every PSC has to have a internal audit department and a separate person acting as Chief Internal Auditor.
Persons not fulfilling both the criteria i.e. experience and qualification stand removed immediately.
I strongly believe that a CIA should hold a professionalqualification 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 thatdegree 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 / External Auditors Rotation
Section 23(6) / Every Public Sector Company in the financial sector shall change its external auditors every fiveyears. 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 fiveyears. / 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.
14 / Management Letter
23(8) / Every Public Sector Company shall require external auditors to furnisha management letter to its Board not later than thirty days from the date of audit
report. / Previously there was no such requirement for external auditors to provide a ML.
15 / Fit and Proper Criteria / 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.
16 / Compliance Statement
Sec 24 / EveryPublic Sector Company shall
publish and circulate a statement along with its annual report to set out the status ofits compliance with these rules, and shall also file with the Commission and theregistrar concerned such statement alongwith its annual report. / Compliance statement needs to be reviewed by the external auditor.
Format of this statement has not been provided in the rules.
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.