Governance of PSEs, issues and way forward

By : Syed Asad Ali Shah

Presentation Outline

Public Sector Crisis in Pakistan

Key Features of Draft Regulations on Governance of PSEs

Proposed Reforms / Recommendations

Issues in Governance of PSEs

ADB report 2012 highlights public sector losses, as one of the

major factors impeding growth.

Annual losses of PSEs : Rs. 300 to 400 billion due to inapprop

governance, corruption, inefficiencies and inappropriate policy.

Power Sector nearly Rs. 250 billion (resulting in huge circular

debt), other PSEs include PIAC, Pakistan Steel, Pakistan Railways.

Contrary to general impression, several profit making PSEs, such

as two Ports, OGDC, PPL, PSO, SSGC, SNGPL, Insurance sector ..

However, even these may be loosing significant amounts that

may be hidden due to inherent profitability of such entities.

One major positive aspect of PSEs their contribution to taxes.

Source: http://www.thenews.com.pk/Todays-News-2-84780-Public-enterprises-become-white-elephants-with-Rs600-bn-annual-loss

Public Sector Crisis in Pakistan

Key Governance Issues in public sector• Inadequate Quality of Boards• Lack of ownership & accountability

– Decision making extremely slow (lack of initiative)– Absence of reward and punishment system

• Lack of empowerment of the boards:– CEO invariably appointed by the government and not by the Board– Several decisions require approval of Islamabad

• Lack of transparency – Lack of policies on conflict of interest, anti-corruption, ethical code etc.

• Corruption & Nepotism is rampant• Inadequate level of remuneration• Flawed structure : Secretaries / Ministers / Public representives on

the Boards• Lack of merit in recruitment & over staffing

Key features of Draft Regulations on Governance of PSEs

• Definitions:

• Composition of the Board

• Board evaluation & Role

• Comprehensive definition of “Independent Director” consistent with Revised Code

• Majority of the Board as Independent Directors.

• Appointing authority / govt and other shareholders, shall apply “fit and proper criteria”, in making nominations for election as Board members

• Annual evaluation of the Board’s performance. Chairman will take leadership of the process.

• Policy formulation and oversight and not the approval of individual transactions unless they are of an extraordinary nature or involve materially large amounts

• Separation of Chairman and CEO and their roles

Separation of Chairman and CEO Chairman from Independent Directors Responsibilities of Chairman Leadership of the Board & ensuring its efficient & effective

working, setting its agenda Ensuring all directors are enabled and encouraged to fully

participate in the deliberations and decisions of the Board. Should not be involved in day to day operations

Responsibilities of Chief Executive Management under the oversight of the Board. Implementation of strategies and policies approved by the

Board Making appropriate arrangements to ensure that funds

and resources are properly safeguarded and used economically, efficiently and effectively in accordance with any statutory obligations.

• Directors to Act in the best interest of the Company (and not for their nominating organizations)

• Security of tenure in line with law

• Provisions apply to ex-officio directors as well

Exercise their powers and carry out their fiduciary duties with a sense of objective judgment in the best interest of the company.

This provision shall apply to all directors, including ex-officio directors.

A director, once appointed / elected, shall hold office for a period of three years in accordance with the provisions of the Ordinance, unless he resigns or is removed in accordance with the provisions of the Ordinance.

Removal of a director should only take place, in the event of misconduct or substandard performance determined through a performance evaluation.

Ensure that: Obligations to all shareholders are fulfilled and they are

duly informed in a timely manner of all material events through shareholder meetings and other communications.

Establish sound system of internal control

• Board’s Responsibilities with regard to Code of Conduct

“Code of Conduct” for directors, executive and all employees, articulates acceptable and unacceptable behavior.

Communication throughout the company including posting on the website.

Adequate controls for the identification and redressal of grievances arising from unethical practices.

Nominate a committee, a Board member or senior Executive for investigating, where necessary, on a confidential basis, any deviation from the company’s code of ethics

• “Conflict of Interest”

• “Anti-corruption Policy”

• Related party transactions

• Directors and executives do not allow a conflict of interest to undermine their objectivity and they do not use their position to further their personal interest.

• Where actual or potential conflict of interest exists, there should be appropriate identification, disclosure and management.

• A “register of interests”, which shall be publicly available.• Board shall develop and implement a policy on “anti-

corruption” to minimize actual or perceived corruption in the company.

• Comprehensive requirements on related party transation disclosure and approval by Audit Committee & Board.

• Power of Appointment of CEO must be exercised by the Board

• Policies on Corporate Social Responsibility & Expenditure on GoP directives

Board shall exercise its power of: Appointment, development and succession

of the Chief Executive officer using “fit & proper criteria” and other members of senior management.

Board Policies on:Corporate Social Responsibility initiatives including, donations, charities, contributions and other payments of a similar nature; Where decisions are taken in fulfilling social objectives of the Government but which are not in the commercial interest of the entity, appropriate subsidy must be extended by the government.Effective communication policy with all stake holders

• Annual Report & Interim Financial Statements

• Orientation Courses

• Quarterly Accounts to be prepared and approved by the Board.

• Annual report including annual financial statements be placed on the website.

• Monthly accounts, whether audited or otherwise, for circulation amongst the Board members.

• Required to hold Orientation Courses : At least one Orientation Course per year

• Encouraged to have certification under an appropriate director training/education program offered by any institution, local or foreign.

• From June 30, 2012 to June 30, 2016 every year minimum one director shall acquire the said certification

• Formation of Board Committees

• Formation of Board Committees, including Audit Committee, Risk Management Committee (for financial sector), HR Committee & procurement committee.

• Chaired by non-executive directors and the majority of their members should be independent.

• Written terms of reference that define their duties, authority and composition.

• Carry out their performance evaluation on annual basis and submit such assessment to the board.

• Chairman of the board shall take leadership role in ensuring completion of such evaluation process.

• CFO and Company Secretary

• Appointment, remuneration and terms and conditions of the CFO, the company secretary and the CIA shall be determined with the approval of the Board.

• Can not be removed without Board Approval.

• CFO & Company Secretary to attend all board meetings, except where matters relating to them are discussed.

• Company Secretary : • Responsible for ensuring that Board procedures are

followed, and that all applicable statutes and regulations and other relevant statements of best practice are complied with.

• Director’s Remuneration

• A formal and transparent procedure for fixing the remuneration packages of individual directors. No director shall be involved in deciding his own remuneration.

• Remuneration packages shall encourage value creation, and shall align their interest with the PSE.

• Require prior approval of shareholders.• Sufficient to attract and retain directors

needed to run the company successfully.• Shall not be at a level perceived to compromise

their independence.• Annual report shall contain criteria and details of

Remuneration of each director, including salary, benefits and performance linked incentives.

• Government needs to rethink and decide its policy:

1. Decide on “whether it is the business of the government to run the business?”

2. Reasons for owning or controlling companies critical to Pakistan’s security and economic well being

3. Manage these investments on a sound commercial basis, separated from the Government’s function of policy making, market regulation or social

obligations.

Proposed Reforms / Recommendations

Proposed Reforms / Recommendations

First phase Corporate Governance Regulations (draft) for PSEs

issued by SECP : be finalized and effectively enforced.

Cabinet to approve such requirements for SOEs, that are not companies as well.

Use of “Fit & Proper Criteria” for board appointments

Second Phase Stand alone law for SOEs with appropriate

governance structure for implementation Administrative & legal Framework for nomination,

appointment, empowerment, accountability and remuneration directors of SOEs.

Thank You