Corporate Governance

Karachi dated 09-09-2009

CORPORATE GOVERNNACE

Introduction:  The governance was descended on the earth with the first man of the world in the shape of intelligence, knowledge, teachings and guidelines granted by Allah Almighty for the supremacy of mankind over all other creatures and especially for the purpose that by virtue of this knowledge and guidelines they (human beings) could reach the place from where they were thrown out.  Corporate Governance is a systematic activity of an organized body with a view to safeguard the interest of all shareholders and stakeholders by running the business affairs prudentially for making optimized profit keeping in view the prescribed rules and regulations issued by regulatory authorities as well as considering moral and social bindings by reducing discretionary powers voluntarily.  Cadbury Committee has defined “Corporate Governance” as under:-

“It is a system by which companies are directed and controlled”

The Corporate Governance has taken modern practices from 2001 due to collapses of high-profile firms of the world.  Honesty and integrity, openness, performance orientation, responsibility and commitment to the organization are principles of good governance.  Its adoption in all public affairs is vital as it creates public confidence.  In Pakistan Corporate Enterprises are being regulated under Companies Ordinance 1984, the Securities and Exchange Ordinance, 1969 and the Securities and Exchange Commission of Pakistan Act, 1997.  Moreover the banking companies are also regulated by the State Bank of Pakistan under Banking Companies Ordinance, 1962.   All Stock Exchanges operating in Pakistan are also regulating the listed companies under the authority given to them by SECP.  The Stock Exchanges are also required to follow the codes of corporate governance issued by SECP under SEO 1969 in March, 2002.  All listed companies are required to follow rules and regulations as well as instructions / advises issued by the regulating authorities operating in Pakistan failing which they may be de-listed or suspended and brought under fine.  Moreover, other special laws and regulations are also publicized for meeting the modern legal requirements for particular companies and enterprises.

It is pertinent to mention here that the qualities and merits of corporate governance can only be maintained and sustained if spiritual, domestic and social governances are fully addressed.

Spiritual & Domestic Governance:  The rules and principles of this Governance are not appropriately written down in any materialistic book of law.  Its rules and regulations have been framed by Allah and reached to human beings through His Messengers via Heavenly Books and through their characters and deeds span their whole lives.  It is initial basic governance and if principles of this governance are fully and justly applied and enforced by parents, guardians and teachers upon all their followers in accordance with the guidelines of Allah and His Messengers the application of quality of good governance upon two others elements (social level and institutional level) would be easy causing welfare of the mankind (basic requirement of Allah and His Messengers) and welfare of institutions, country, masses as well as the world.  Spiritual and Domestic Governance lead to in making spirit and character building causing welfare of mankind.

Society and Social Governance:  A group of people form society and their collective actions are known as society action.  Society Governance depends upon individuals’ activities whether they are observing the merits of society and fulfilling the social obligations.  Whether they are obeying the social bindings or not – their interactions amongst themselves are up to the mark or not and they are helping hand to each other or not.  Social governance is depended upon Domestic Governance (DG) and if it (DG) is in accordance to the guidelines of Allah and His Messenger the Social Governance would also be at higher level due to which society flourishes and produces good leaders and individuals who maintain good governance in all over the country either it is at corporate level or at government level.

Corporate Governance:  To run the business affairs by keeping in view the prescribed rules and regulations and constitutions made by corporate body to achieve the institutional goals and objectives by establishing corporate regime is known as corporate governance.  If embodied rules and regulations of the authorized establishment(s) are followed by individuals or body meticulously and categorically with good intention and spirit it is recognized as good governance otherwise deviations imply bad governance.  Now-a-days the echo of good governance is again striking all over the world and many seminar and classes in this context have been held in all over the world to facilitate the individuals to have thorough expertise over the subject so that they could enforce or follow the rules and regulations of corporate governance upon their respective areas of actions.  According to the Companies Ordinance, 1984 a public limited company’s affairs must be controlled and managed by a Board of Directors as it is major steering tool of Corporate Governance.  There are minimum seven members in Board of Directors which constitute a line committee or plural executive.  It is the composition of management and shareholders.  It is fact that good corporate governance cannot be sustained without the effective, sound and business-oriented steps by the Board of Directors. The important functions of Board of Directors are given below:

i)                    Trusteeship:  The BODs is responsible to look after the assets of shareholders as trustees and to fulfill the responsibilities as a guardian of shareholders so that their confidence and trust upon them could not be shaken.

ii)                    Selection of CEO, CFO and Company Secretary:  The directors are not employees of the company so they are not in a position to look after the business affairs.  To run the business and financial affairs they appoint full time Chief Executive Officer by obliging “fit and proper test” criterion.  Subsequently with the approval and consent of Board of Directors the CEO appoints Chief Finance Officer, company Secretary and Head of Internal Audit.   The Chief Executive Officer is responsible to all affairs of the business enterprise and reports to Board of Directors and takes instructions on strategic issues.  It is the responsibility of CEO to keep apprised Board’s Directors about the financial and strategic affairs of the company especially relating to law and litigation.     

iii)                 Determination of business goals, strategies and objectives:  The Board of Directors plans strategies, sets targets and goals and watches the performance of the CEO at organizational level and if they found any deficiency and deviations give guidelines to CEO to remove the deficiency and deviations.   The CEO follows the instructions of BOD and with the help of HR of the company tries to achieve the business targets and goals.

iv)                 Checking / monitor business affairs:  The Board’s Directors are not involved in the business affairs but being members of an active Board they  visionary check / monitor key performance of the management such as risk management, change management, human resource management, procurement management, investment management, assets & liabilities management, Write off and Recovery Policy as well as Re-scheduling / Restructuring of debt also to check the indicators of economy and conduct succession strategic planning & development.   They also present strategic guidelines to management for sound systems of internal control and for initiating forehand steps to mitigate the risks.  They also put a visionary eye upon annual business plans, cash flow projections, and internal and external audit reports as well as dividend and bonus share policy.  They minutely view the management letter issued by the external auditors.  The issue of court case(s), including cases of fraud or irregularities, promulgation or amendment of a law, rule or regulation, enforcement of an accounting standard is also brought to the knowledge of Board of Directors. 

v)                  Relationship:  It is the Board function to keep good relationship between the main governing bodies i.e. Shareholders, Directors and Managers.  The Board should also keep an eye on the working relationship between management and employees whether employees are satisfied with the management policy or not as for boosting up productivity and efficiency as well as for achieving organizational goals optimal number of  employees’ satisfaction (from top to bottom) is vital. 

vi)                  Approval of Budget: Budget is the reflection of income and expenditure for the determined coming period expressed in numeral terms.  Budget also represents the performance of the Management.  It is the function of the BOD to minutely see the financial estimations of different projects and tasks of the budgeted year and subsequently to approve company’s budget presented by CEO.  They firmly instruct the management to make differentiation between Task and Project so that financial austerity could be maintained. 

vii)               Appointment of Auditors & Establishment of Audit Committee:  An important function of BODs is to appoint external Auditors to check the books of accounts and other business functionalities of the company.   They also ensure that Auditors not to hold shares of any listed company or any of its associated companies.   The auditor usually holds the office for three years and cannot be removed without the permission of SBP.  They also have to establish an Audit Committee comprising at least three members including the chairman of the committee for effective internal audit function.   Preferably the Chairman of Audit Committee should be non-executive Director.

viii)              Approval of Annual Report: One important function of Board of Directors is to approve annual report issued and published by the Management.  In Annual Report all affairs of business containing balance sheet, Statement of Ethics and Business Practices and economic indicators are incorporated.  It also envisages the company / bank’s sound Corporate Governance structure.  The names of all members of Audit Committee are also incorporated in the Report.  Along with Annual Report a compliance report with reference to the code of corporate governance is also published and circulated with the approval of Board’s Directors.   

ix)                 Remuneration:  Besides above functions Board of Directors determine remuneration of CEO and Auditors.     

The qualification and eligibility of members of Board of Directors / CEO are given below:

ii)                   No person can be selected as member of BOD if he/she is convicted by a court of law or he/she has been declared as a defaulter in payment of any loan to a banking sector or other body.

iii)                 No person can be selected as member of BOD if he/she or his/her spouse is engaged in stock exchange business unless and until specific relaxation is granted by the Securities and Exchange Commission of Pakistan.

iv)                 No person can be selected as member of BODs who is already serving as a director of ten other listed companies.

v)                  Minor (below 18 years) and unsound mind person cannot be selected/elected as Board’s Member.

vi)                 No person can be selected as Member of BOD who has been declared violator under Section 217 of the Companies Ordinance, 1984 or has violated any requirements of regulatory authorities operating in Pakistan.   

vii)               No person can become Board’s Director who has been debarred for being Director or CEO of a company by any regulatory authority.

viii)              No person can become Director who has been removed or terminated in the capacity of an employee or as a Director of a company.

ix)                 No person can become Director who has been involved in any ethical or illegal activity especially in banking business.

x)                  No person can become Director or CEO of a bank / DFI unless he/she fulfils the criterion “Fit and Proper Test” devised by SBP.

Debarment of Directors:

            Generally a director automatically is debarred from holding the post of Director on the following conditions:

i)                    He becomes ineligible on any one or more of the grounds mentioned in different clauses of Section 187 (Company Ordinance, 1984).

ii)                   He remains absent in three consecutive meetings or all meetings of the Board of Directors.

iii)                 If he, without approval of the company in general meeting, detains any office of profit or gets a loan or guarantee from the company in contravention of Section 195. 

Experience:

            Directors must have five years experience in management and President / CEO must have 15 years experience including three years as senior management position.  Also he /she must have track record in companies in different capacities. 

Timeline of the office of Directors:  The time period of the office of Directors is three years which is extension-able for one term further. 

Requirements of Board / Directors:

• Board should ensure that appropriate Management Information Systems (MIS) is existed in the organization.  All the latest development regarding the business and other related information which are necessary to share-holders and stakeholders must be brought to internet web. 

• Minority shareholders must be facilitated to contest election of directors.

• The Board’s Directors and CEO are required not to show any interest in Stock Exchange Matter (shares). 

• The whole-time directors are not more than 75% of the elected directors including the Chief Executive Officer except relaxation is granted by Securities and Exchange Commission of Pakistan. However this clause may be waived by Securities and Exchange Commission of Pakistan.  Further this condition is not applied to banking sectors as they are adhered to Prudential Regulation No.9 issued by SBP for banks that their board should not hold more than 25% directors as paid executive of the banks. 

• All directors of listed companies are required to give declaration that they are aware of their duties and powers under the related law(s) or under listed companies’ Memorandum and Articles of Association also they are aware about the regulations of stock exchanges operating in Pakistan. 

• The Board should not become “musty” and new blood may be inducted as a continued process also they should have optimal role in overseeing risk.

• The Board of Directors is required to meet at least once in each quarter of a calendar year but preferably they should meet in every month. 

• The minutes of the Board of Directors are appropriately recorded and circulated to each director.  A Board Director has lien that if his remarks are not recorded properly he may refer the matter to Board’s Secretary for doing the needful otherwise he may file an objection with the Securities and Exchange Commission of Pakistan in the form of a statement.

• The Board is required to keep balance in decision making and not to allow an individual to dominate board meetings.  They should also ensure that independent and non-executive directors are free to express their independent view points.  They should also keep visionary eye that high level of effective communication are being made with all stakeholders by the management.  They should also make query to the management about the financial matter, accounting and audit policies, procedures and choices keeping in view safeguarding the interest of stakeholders.   

• The Board is required to observe whether all rules, regulations and directives of all Regulators (SECP, SE, SBP etc.) are being obeyed or not by the management.  They are also required to have known that the system of internal control is sound and their directives to the management are being implemented meticulously especially timely and accurate disclosure about the activities of the business.  . 

• External Auditors must be changed / rotated after every five years.  

• Creditors must have lien to nominate Directors from their end.

• Board is required to keep alignment between shareholders and management.  They also required evaluating the organization with risk exposure and risking leverage and in this context they should give instruction to the management to establish risk-oversight committee. 

• All Directors are required to disclose whether they or their dependents hold shares of the company in which they are directors.

• Board’s Directors are required to be loyal and careful in exercising their powers in business and financial affairs. 

• The Board is required to approve the minutes of the last meeting in each their seating.  

Conclusion:  In a nutshell we can conclude with the remarks that corporate governance stresses upon five principles i.e. Accountability, Fairness, Transparency, Responsibility and Ownership. It stresses upon openness, accounting standard and compliance reporting – all of these are know as “best practices”.  It also provides competitive markets and suitable structure through which organizational goals and objectives could be achieved by applying the tools of Corporate Governance especially by way of professionalism and dynamism.  Moreover, the world has become a global village and by virtue of it the corporate governance has globalized and interlinked as well as it impact & implication affects the world economy as one mistake occurs in one corner of the world puts its collision on the rest of the earth.   If the principles and tools of Corporate Governance are applied prudentially and with good intention it implies good corporate governance which not only spreads its goodness in other parts of the earth but also internally produces productivity, operational efficiency, capital mobilization, tranquility and development in all sectors of the economy.  It is worth-mentioning that good Corporate Governance maintains corporate culture which motivates all stakeholders leading to establishment of sound corporations and capacity building; also such business enterprises having good governance are free from all kinds of corruption and malpractice.

Written by:  Syed Manazir-ul- Haq,

                    R-71, Block-3,

                    Gulistan-e-Jauhar,

                     Karachi

                     Cell: 0300-2995600

                     e-mail “manazir61@yahoo.com”

               _____________________________________________________       

Ref: 

i)                    Comprehensive Presentation and Lecture on “Corporate Governance” delivered by honorable Trainer Mr. Arshad Mehmood Bhatti, JD (OSED), SBP, on 20-21 July, 2009 at SBP BSC North Nazimabad Office (NIBAF).

ii)                   Lengthy Training Materials supplied by the above officer.

iii)                 SBP handbook on Corporate Governance   

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