Corporate Governance, current

state, challenges and way forward

2012 & Beyond
Asad Ali Shah
 Purpose of Corporate Governance & Board’s Role
 Key changes / features of 2012 Code
 Independent Directors
 Board Evaluation
 Sustainability and governance
 Extent of compliance with the Code
 Outcomes of 2007 IFC survey
 What is missing
 Some provisions of King III
 Enforcement of the Code
 Approach to governance : Beyond compliance
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 Company’s objectives relate to performance
 conduct its business so as to enhance
corporate profit and long-term shareholder
value.
 Public interest : Accountability & reporting to
shareholders & market participants to ensure market
confidence

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What is the biggest reason for Corporate
Failure?

Inactive Boards.

Most CCG are an effort to define the

responsibilities of the BODs so that they
understand and perform their responsibilities
effectively.

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 Key to good governance is Board’s Role &
effectiveness
 In pursuing the company’s objective, board’s
role is to assume accountability for the
success of the company, by taking
responsibility for both failure and success.

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Composition of the Board
• Board encouraged to have a balance of
executive and non-executive directors,
including independent directors and
those representing minority interests
with the requisite skills, competence,
knowledge and experience so that the
board as a group includes core
competencies and diversity, including
gender, considered relevant in the
context of the company’s operations.
• Board shall have at least one and
preferably one third of the total
members of the board as independent
directors. The board shall state in the
annual report the names of the non-
executive, executive and independent
director(s).
Comments / Changes
No guidance on recommended size of
the board.
May have included:
“The board shall periodically review
its own size, and determine its size
for efficient performance and
attainment of its objectives”
One independent director made
mandatory.
Criteria for assessment of
independence substantially
expanded.
No disclosure required on the
board’s confirmation about
independence of some of its
directors.
Effective date : next election
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 Who is independent director?
• Explanation: "independent director" means a director who is
not connected or does not have any other relationship, whether
pecuniary or otherwise, with the listed company, its associated
companies, subsidiaries, holding company or directors. The test
of independence principally emanates from the fact whether
such person can be reasonably perceived as being able to
exercise independent business judgment without being
subservient to any form of conflict of interest.
• No director shall be considered independent if one or more of
the following circumstances exist :
• He/she has been an employee of the company, any of its
subsidiaries or holding company within the last three years;
• He/she is or has been the CEO of subsidiaries, associated
company, associated undertaking or holding company in the
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last three years;
 Who is independent director?
• No director shall be considered independent if one or more of
the following circumstances exist :
• He/she has, or has had within the last three years, a material business
relationship with the company either directly, or indirectly as a partner, major
shareholder or director of a body that has such a relationship with the company:
– Explanation: The major shareholder means a person who, individually or in
concert with his family or as part of a group, holds 10% or more shares having
voting rights in the paid-up capital of the company;
• He/she has received remuneration in the three years preceding his/her
appointment as a director or receives additional remuneration, excluding
retirement benefits from the company apart from a director’s fee or has
participated in the company’s share option or a performance-related pay scheme;
• He/she is a close relative of the company’s promoters, directors or major
shareholders:
Explanation: close relative means spouse(s), lineal ascendants and
descendants and siblings;

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 Who is independent director?
• No director shall be considered independent if one or more of
the following circumstances exist :
• He/she holds cross-directorships or has significant links with other
directors through involvement in other companies or bodies;
• He/she has served on the board for more than three
consecutive terms from the date of his first appointment
provided that such person shall be deemed “independent
director” after a lapse of one term.
Any person nominated as a director under Sections 182 and 183
of the Ordinance, shall not be taken to be an "independent
director" for the above-mentioned purposes.

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 Independent directors on the board

Number Percentage

None* 13.33%

One 50%

More than 1/3rd 16.67%

Majority independent 6.67%

* It includes Bank Alfalah Limited which has availed exemption from SECP for
appointment of independent director, and Pakistan state Oil Company Limited
whose BOM has been suspended.
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Composition of the Board Comments /
(Contd..)
Changes

(c) professional indemnity insurance Prof indemnity

cover in respect of independent
directors shall be encouraged.
(d) executive directors, i.e., paid
executives of the company from
among management, shall not be
more than one third of the elected
directors, including the Chief
Executive.
encouraged.
In Code 2002, number of
executive directors was
restricted 75% , now
further reduced to 33%
(including CEO).
Effective date : Next
election of directors.

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Responsibilities, powers and Comments
functions of board
• Directors fiduciary
iv. Exercise its powers and carry out its fiduciary responsibility / working
duties with a sense of objective judgment and in the interest of the
independence in the best interest of the company. company often not
properly understood.
v. Ensure that professional standards and
• Statement of ethics &
corporate values are put in place that promote
business practices no
integrity for the board, senior management and
more required.
other employees in the form of a Code of
• Some form of
Conduct and take appropriate steps to
confirmation should
disseminate Code of Conduct throughout the
still be desirable.
company along with supporting policies and
• Code of Conduct to be
procedures and these shall be put on the
placed on the website.
company’s website;
iv. Ensure that adequate systems and controls are in • Some fundamental
place for identification and redress of grievances aspects of Board’s role
arising from unethical practices. in governance not
properly elaborated.
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 Governance structures and practices should be designed by
the board to position the board to fulfill its duties
effectively and efficiently.
 The board of directors, as the central mechanism for
oversight and accountability in the corporate governance
system, is charged with the direction of the corporation,
including responsibility for deciding how the board itself
should be organized, how it should function, and how it
should order its priorities.
 For this purpose, the Board should develop its own charter /
mandate, as distinct from the powers and functions
delegated to other forums / CEO / senior management.
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 The board’s fiduciary objective is long-term value creation
for the company.
 Board’s primary duties are to select and oversee well-
qualified and ethical chief executive officer who, with other
management, runs the company, and to monitor
management’s performance and adherence to corporate
and ethical standards.
 Effective corporate directors are diligent monitors, but not
managers, of business operations.

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 The art of governance in Pakistan is postponing
decisions until they are no longer relevant.
 Information available for the board’s decisions is
insufficient.
 But the board members some time desire more &
irrelevant information than required for decision
 Independent board members are some times more
focused on compliance & accountability than
performance.
 Independent members do not contribute to the
business, and are more in the mode of avoiding risk
than managing risk.
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Board Evaluation Comments
New requirement in 2012 Code.
 Within two years of Guidance on “how” missing.
coming into force of
Nominating / Governance committee is not
this Code, a required.
mechanism is put in
No evaluation of Board Committees required.
place for an annual
No evaluation of individual directors required
evaluation of the It is not clear what is the deadline for
board’s own completion of board’s evaluation?
performance. Effective date: April 2014.

Materiality Intent appears to be that the Board should

define what is the level of issues that are
 Board shall define the brought to the board’s attention or decision,
materiality, keeping in and what should be handled at management
view the specific level.
circumstances of the There would be both qualitative &
company quantitative aspects, that need to be defined.
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Evaluation of Board Performance mechanism
implemented up to June 30, 2014

Evaluation mechanism Percentage

Implemented 16.67%

Not implemented 76.67%

In process 6.67%

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Chairman & CEO
• The Chairman and the Chief
Executive Officer (CEO),
shall not be the same person
except where provided for
under any other law.
• The Chairman shall be
elected from among the non-
executive directors of the
listed company. The
Chairman shall be
responsible for leadership of
the board and shall ensure
that the board plays an
effective role in fulfilling all
its responsibilities.
• The Board shall clearly
define the respective roles
and responsibilities of the
Chairman and CEO.
Comments
Separation of these roles now a mandatory
requirement.
Effective date (Reconstitution of the Board
after Dec 31, 2015)
Best practice through out the world.
Need for further elaboration of roles of
Chairman & CEO.
For instance, Chairman’s responsibilities
should include:
• Providing leadership to ensure effective
functioning of the board.
• CPD of the board
• Evaluation of the board and committees
• External communication & shareholder
rights
• Setting agenda, ensuring participation of all
board members & efficiency & effectiveness
of board meetings.
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Significant issues to be placed for Comments
decision of Board
The significant issues for this purpose may
include:

• the CEO shall immediately bring before the

New requirement & rightly
board, that the company will not be in a
position of meeting its obligations on any included in view of
loans (including penalties on late payments prevailing default
and other dues, to a creditor, bank or culture.
financial institution or default in payment of
public deposit), TFCs, Sukuks or any other
debt instrument. Disclosure in the
• Full details of the company’s failure to meet financial statement
obligations shall be provided in the should be in 4rth
company’s quarterly and annual financial schedule rather than the
statements. code.

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Significant issues to be
placed for decision of Board
• management letter
• report on governance, risk
management and compliance
issues. Risks considered shall
include reputational risk and
shall address risk analysis, risk
management and risk
communication;
• whistleblower protection
mechanism;
• report on CSR activities
Comments / Changes
Some new requirements
Only whistleblower protection is
not enough.
Fraud Reporting framework to
ensure violations of Ethics / frauds
/ irregularities are reported and
addressed not required.
Focus on sustainability (CSR+
Environment) required on the
pattern of King III governance
code of South Africa.
At present, no reporting required
on environment / company’s
carbon foot prints.
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 The old Governance Model
200 year Old Model
• Based on two false assumptions :
– Since 17th century Industrial Revolution
– That there were limitless resources in nature
– Nature had an infinite capacity to absorb waste

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200 Years model
 Take, Make and Waste
 Natural capital at no cost
 As a result, natural resources depleted,
water polluted and greenhouse gasses
(GHG) into sewer in the sky
 Business cannot be conducted as usual

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 Fresh Water Crisis
• No water – no existence
• Fresh water: 1% of world’s waters
• Contain 40% of aquatic biodiversity
• Sea occupies 75% of the earth’s surface
• Only 60% of fish species

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 The New Governance Model

New model
• Business as unusual
• Making more with less
• Profit, People and Planet
• Governance, strategy and sustainability are
inseparable!

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Integrated Governance, strategy &
Reporting

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 Sustainability Reporting in Pakistan

A growing number of Pakistani companies are beginning to

recognize sustainability and/or social responsibility, and have
commenced reporting the same, either via their annual reports
or by issuing dedicated sustainability reports.

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 Sustainability Reporting in Pakistan

Sustainable business initiatives are now becoming a business

imperative; KSE 100 currently has 19 companies that are
reporting on sustainability, of which 10 companies have issued
dedicated sustainability reports.

Of the 10 issuing separate sustainability reports, include ICI

Pakistan, Siemens Pakistan, Unilever Pakistan, Security Papers,
Lucky Cement, Attock Refinery, Fauji Fertilizers, Engro
Corporation, Engro Polymer & Chemicals Limited and Al Ghazi
Tractors.

Few banks (MCB, Askari ) are making limited disclosures on

sustainability, while JS reports on their CSR initiatives.

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2
Directors’ Training Program (DTP) Comments
Basically two requirements:
Compliance statement will
1) Companies to make appropriate require an annual
arrangements to carry out orientation confirmation on the courses
courses for directors to acquaint them with arranged during the year,
this code, applicable laws, their duties and which indicates that each
responsibilities to enable them to effectively year, some orientation
manage the affairs of the company. program is required to be
organized.
2) Mandatory certification under any
The Code is however, not
directors training program that meet
specific in terms of number
SECP criteria, whereby:
& frequency of orientation
• Minimum one director obtains
courses
certification year from June 12.
• All directors compliant by June, 2016. Certification under DTP
Exemption: Individuals with 14 yrs required from any
education & 15 yrs board experience on a Institution, which meets the
listed company(local or foreign) exempted criteria specified by the
from DTP. SECP.
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CFO, Company Secretary and Comments
Head of Internal Audit
Under 2002 code, CEO had
• Appointment, remuneration and terms the power with the approval
and conditions of employment shall be of the board.
determined by the board of directors.

• The removal of the CFO and Company Removal of CAE:

Secretary of listed companies shall be
made with the approval of the board of Require Approval of Board
directors. on the recommendation of
Chairman Audit Committee.
• The removal of Head of Internal Audit
shall be made with the approval of the
board only upon recommendation of the
Chairman of the Audit Committee.

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Requirement to attend board
meetings
• The CFO and Company Secretary
shall attend all meetings of the
Board, except such part of the
meeting which involves
consideration of an agenda item
relating to the CFO and Company
Secretary respectively.
Comments / Changes
This is a unique
requirement for CFO to
attend all board
meetings in Pakistan
code, retained from 2002
code.
There is no empirical
evidence that this
improves governance?
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Corporate & Financial Comments
Reporting Framework • No change
• An inappropriate requirement
Board required to report , which is similar to Sox 404 :
that: still continued from 2002.
The system of Internal • The statement is generally
Control is sound in design given without any review /
and has been effectively assessment of internal
implemented and control.
monitored. • Proper course would be UK
model : Combined Code &
Turnbull Report.
• Give descriptive disclosure

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Directors’ remuneration Comments / Changes
• A formal and transparent procedure Requirements on remuneration
for fixing remuneration packages of were missing in the 2002 code, but
individual directors. No director shall need further elaboration.
be involved in deciding his/her own
Most important issue in
remuneration.
Governance in developed world.
• Directors remuneration shall
encourage value creation, and shall be
Principle based requirements on
subject to prior approval of
remuneration introduced, but
shareholder / board as required by the
following are missing:
company’s Articles.
• Should be approved by
• Levels of Remuneration shall be
shareholders only.
appropriate to attract and retain the
• Individual director
directors needed to govern the
remuneration should be
company successfully.
disclosed.
• Details of aggregate remuneration to
• Require more guidance/
be disclosed separately for executive
amendments.
and non-executive in annual report.
Effective date: Immediate
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Initialed Accounts
• For six months and annual
financial statements, the
requirement for the CEO and
CFO is to present the financial
statements, endorsed by
themselves and initialed by
external auditors.
• In FAQs attached with the Code,
under question 52, it is stated:
“In terms of the requirements of Code
2012, the audit committee or the board
of directors can only approve duly
reviewed or audited accounts
respectively.”
Comments / Changes
These requirements (FAQ 52 and
46) are seriously flawed, and
rather illegal and in violation of
the Companies Ordinance.
The initialed financial statements
are not audited financial
statements. In fact, the auditors
initial the financial statements
only for identification.
The audit of financial statements
is only completed, after the
accounts are approved by the
board, and external auditors issue
their audit report duly signed by
them.
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Audit Committees
• The chairman of the Audit
Committee shall be preferably
an independent director, who
shall not be the chairman of the
board. The board shall satisfy
itself such that at least one
member of the audit committee
has relevant financial
skills/expertise and experience.
• Secretary of Audit Committee :
Either Company Secretary or
Head of Internal Audit but not
the CFO
Comments
2002 Code only required Chairman of the
audit committee to be a non-executive
director. Now, an Independent director can
be Chairman of AC.
Also, Chairman of the Board can not be the
Chairman of AC.
Board required to ensure that at least one
audit committee member has financial skills,
expertise and experience.
Head of IA allowed to be Secretary of AC :
inconsistent with best practice and need to
be modified.
Primary job of the secretary is to assist the
AC, whereas job of HIA is to serve as key
resource to AC on internal control
monitoring and functionally reporting to the
AC.
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Chairman Audit Comments
Committee & AGM.
• Chairman of the Audit The requirements should not be
Committee & Engagement confined to Chairman of the
Partner of the external Audit Committee only.
audit firm are required to
be present in the AGM. The Chairman of the Board and
all Chairs of Board Committees
should be required to attend
AGM and be available to
respond to shareholders
questions.
This is essential to make AGMs
more effective.

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Board Committees
• Human Resource and Remuneration
(HR&R) Committee with at least
three members comprising a
majority of non-executive directors,
including preferably an independent
director.
• The CEO may be included as a
member of the committee but not as
the chairman of committee. The
CEO if member of HR&R
Committee shall not participate in
the proceedings of the committee on
matters that directly relate to his
performance and compensation.
Comments / Changes
HR&R is a new requirement.
• A key requirement, missing
in the Code, is the
Nominating Committee /
Governance Committee,
which is considered critical
for good governance.
• Another critical aspect
missing / not properly
elaborated is the “Board’s
Role in annual evaluation of
CEO’s performance”,
although it is included in HR
committee’s TOR.
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Internal audit - outsourcing Comments / Changes
The internal audit function may be There was no guidance on
outsourced to a professional services firm or outsourcing of internal audit
be performed by the internal audit staff of in 2002 code.
holding company. However, due care shall be
exercised to ensure that suitably qualified Appointing or designating a
and experienced persons, who are conversant fulltime employee as head of
with the company's policies and procedures, internal audit may not be
are engaged in the internal audit. feasible, and therefore,
In the event of outsourcing the internal audit burdensome for small
function, company shall appoint or designate companies.
a fulltime employee other than CFO, as Head
of Internal Audit, to act as coordinator
between firm providing internal audit
services and the board:

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External auditors Comments /
Changes
• Requirement of Management letter
now required in 45 days of the date Previously, the time period
of audit report: for ML was 30 days.

Any matter deemed significant by Requirement to

the external auditor required to be
communicated in writing to the
board prior to the approval of the
audited accounts by the board.
communicate significant
matters specified.
Effective date: For accounting
period ending on or after June
30, 2012.

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Status of Compliance with the Code

Status Percentage

Clean report 75%

Non Compliances reported 25%

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 Nature of Non Compliances reported

Number of
Nature of Non Compliances Percentage
instances

Qualification criteria for Head of internal Audit

not met
2 3.33%

Board Performance not evaluated 8 13.33%

Requirement of Director’s training program
7 11.67%
not complied with
Certain Policies required by Code not
4 6.67%
documented
Different committees not formed as
2 3.33%
required by CCG
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IFC survey 2007- chairman of a local listed company
• Not corp. governance but the Code of Corp. Governance is
important: I have to follow each and every word of the Code. I
do not understand why independent directors, audit
committees, internal audit and company secretaries are
important but the Code wants them and I need to have them.
For me the profitability of the company is important. I
think the Code has not increased the profitability of my
company even though we do have four meetings of the board,
we have non-executive directors, we follow the Code but
having all this has decreased my profits, not increased my
profits. When I should be concentrating on business matters, I
am concentrating on internal audit reports. So why do I
follow the Code? Because I am the owner of a listed company
and have to follow the Code because the SECP wants us to
follow the Code.
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IFC survey – Company Sectry of local listed company

• Corporate governance is important because we have to follow

the Code of Corporate Governance… benefits like the ones
outlined by you relating to access to foreign capital,
institutional investors, increased reputation of the business, all
this does not matter to my company. What matters to the
company is the survival of the business and we need money
for that. We can take a loan from the bank at any time and
they are not worried about our corporate governance
practices so why do we need to think of foreign capital or
increased reputation or better governance?
• I only consider corporate governance important because the
SECP wants me to consider it important.

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IFC survey – Benefits of Corporate Governance

• For an overwhelming majority (82%) of the respondents, the

most important benefit of adoption of corporate governance
practices was compliance with legal and regulatory
requirements.
• There was no sufficient evidence of appreciation or
comprehension of other significant benefits, such as
protecting shareholders’ rights; building/enhancing the
company’s/bank’s reputation; improving strategic decision
making; gaining better access to external capital …….

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IFC survey – Board Practices (CFO of a listed company)

• We follow the Code of Corp. Governance in terms of board

composition and our board of directors do all that the
Code requires…we have to do this. We have board meetings,
we have a separate CEO and chairman. We have non-
executive directors who may be considered independent but
there is no compulsion to have non-executive directors who
are independent. …The Code wants the board to approve
annual reports, remuneration, strategy, etc. Thus most of the
board’s time is spent in approvals. The board hardly gets any
time to think of vision, succession planning, long-term
strategy, new business opportunities, going global.
• The board has human beings not robots who can comply with
the Code and also think of succession planning and vision.
The Code is more important than anything else.
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IFC survey – Role of Institutional shareholders
• It was observed from the interviews that key executives of
responding companies were unhappy with the duties and
functions performed by institutional investors as members of
the board of directors.
• They asserted that representatives of institutional investors are
overworked because each one is on more than ten different
boards and they do not generally come prepared for board
meetings.
• The SECP should incorporate in the Code a section on a revised
role for institutional investors. This is essential to make the
institutional investors aware of their duties and responsibilities.
It may also be helpful in ensuring that the institutional
investors and their nominee directors play a pivotal role in
effective implementation of corporate governance practices.
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 Elaboration of board’s role to achieve enhanced
performance needs, including requirement to define
the board’s charter.
 Guidance on Board and Committee evaluations.
 Emphasis & guidance on Board’s own annual
evaluation, evaluation of CEO’s performance & holding
the CEO accountable.
 Lack of requirement on Nominating / Governance
Committee to ensure right appointments on the board
 Incorporating sustainability in governance, strategy &
reporting

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 Reporting on Internal Control effectiveness by the board
should be based on review of int. contrl system.
 Confirmation of directors, which the board considers to be
independent.
 Elaboration of responsibilities of Chairman of the Board
and the CEO.
 Requirement to have executive sessions of the Board
(without the presence of management / CEO)
 Role of Institutional Investors in the Corporate Governance
 Guidance / requirements on shareholder communications,
holding effective general meetings and robust disclosure.

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 Confirms the role of the Board as the focal point for corporate
governance. The directors have to ensure that the company:
• operates ethically with integrity as a responsible corporate
citizen
• considers the interests of the community within which it
operates
• integrates governance, strategy, risk, performance and
sustainability
• employs structures and processes to ensure the integrity of
its integrated reporting.
• should ensure that prudent and reasonable steps have been
taken in regard to IT governance.
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• Strategic alignment with performance and
sustainability objectives;
• development and implementation of an IT
governance framework;
• value delivery: concentrating on optimising
expenditure and proving the value of IT;
• risk management: addressing the safeguarding of IT
assets, disaster recovery and continuity of
operations; and
• the protection and management of information.

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 Corporate governance should not be confined to
requirements of the Code, rather it should be
“beyond compliance” aimed at enhancing long-term
viability of the company.
 Code requirements should be considered as
minimum.
 Demand based Corp. Governance, mainly driven by
institutional investors / lenders rather than
regulators.
 “Comply or Explain” , or “Apply or Explain” model
should be considered
 More pro-active approach by front line regulator.
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Thank You

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