Key features of Draft Regulations on Governance of PSEs
Oct 20, 2014
Key features of Draft Regulations on Governance of PSEs
• Definitions:
• Composition of the Board
• Annual Board Evaluation
Comprehensive definition of “Independent Director” consistent with Revised Code
Majority of the Board as Independent Directors.
Board to identify executive, non-executive and independent directors in the annual report.
Annual evaluation of the Board’s performance. The board shall establish a process, including evaluation of independent directors. The chairman will take leadership of the process.
• Constitution of the Board
• Role of the Chairman and CEO and separation of the two positions
The appointing authority / government and other shareholders, shall apply the “fit and proper criteria”, in making nominations for election as Board members
Separation of Chairman and CEO.
Responsibilities of Chairman Leadership of the Board & ensuring its efficient &
effective working Setting its Agenda Ensuring that all the 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
• Role of the Chairman and CEO and separation of the two positions
Responsibilities of the Chief Executive Management of the PSE 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 are used economically, efficiently and effectively in accordance with any statutory obligations.
Chairman from amongst the Independent
Directors so as to achieve an appropriate balance of power, increasing accountability, and improving the Board’s capacity for exercising independent judgment.
•Responsibilities, Powers and Functions of the Board
Exercise their powers and carry out their fiduciary duties with a sense of objective judgment and independence 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.
• Board’s Responsibilities with regard to Code of Conduct
Board to ensure that: Professional standards and corporate values are
in place that promote integrity for the board, senior management and other employees in the form of a “Code of Conduct”.
Code shall articulate acceptable and unacceptable behavior.
Appropriate communication of the Code throughout the company including posting on the company’s website.
Adequate systems and controls for the identification and redressal of grievances arising from unethical practices.
The Board shall nominate a committee, one of its members or senior Executives for investigating, where necessary, on a confidential basis, any deviation from the company’s code of ethics
• Responsibilities of the Board regarding “Conflict of Interest” & “Anti-corruption Policy”
Directors and executives do not allow a conflict of interest to undermine their objectivity and they do not use their position to further their private gains in a social or business relationship.
Where actual or potential conflict of interest exists, there should be appropriate identification, disclosure and management.
A “register of interests” to record all relevant personal, financial and business interests, of directors and executives who have any decision making role, which shall be made publicly available.
A declaration by the directors and executives that they shall not offer or accept any payment, bribe, favor or inducement which might influence (or appear to influence) their decisions and actions.
Board shall develop and implement a policy on “anti-corruption” to minimize actual or perceived corruption in the company.
• Power of Appointment of CEO must be exercised by the Board
• Policies on Corporate Social Responsibility & Expenditure on GoP directives
Appointment, development and succession of the Chief Executive officer on a fit & proper criteria and other members of senior management, and other aspects of human resource 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.
•Related Party Transactions
Details of related party transactions be placed before the Audit Committee and upon recommendations of the Audit Committee the same shall be placed before the board for review and approval.
Related party transactions which are not executed at arm's length price will also be placed separately at each Board meeting along with necessary justification for consideration and approval of the Board on recommendation of the Audit Committee.
The Board shall approve the pricing methods for related party transactions that were made on the terms equivalent to those that prevail in arm’s length transaction only if such terms can be substantiated.
Maintain a party wise record of transactions with related parties.
•Annual Report, Quarterly and Monthly Financial Statements
PSE 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 balance-sheet as at the end of, that quarter, whether audited or otherwise, for the board’s approval.
Annual report including annual financial statements should be placed on the company’s website.
PSE shall also prepare monthly accounts, whether audited or otherwise, for circulation amongst the Board members.
•Orientation of the Board
Orientation courses shall be held by PSEs to enable directors to better comprehend the specific context in which it operates, including its operations and environment, awareness of public sector company’s values and standards of probity and accountability as well as their duties as directors.
Encouraged to have certification under an appropriate director training/education program offered by any institution, local or foreign.
Provided that from June 30, 2012 to June 30, 2016 every year minimum one director on the Board shall acquire the said certification under this program and thereafter all directors are encouraged to obtain such certification.
At least one orientation course in a year shall be arranged for the directors.
•Formation of Board Committees
•Board’s Role
The Board Committees shall be chaired by non-executive directors and the majority of their members should be independent.
Board Committees should have written terms of reference that define their duties, authority and composition, should report to the full board, and the minutes of their meetings should be circulated to all board members.
Committees formed by the board, will carry out the evaluation of their performance on annual basis and submit such assessment to the board.
The Chairman of the board shall take leadership role in the ensuring completion of such evaluation process.
The board shall concern itself with policy formulation and oversight and not the approval of individual transactions which are of an extraordinary nature or involve materially large amount.
•Chief Financial Officer, Company Secretary and Chief Internal Auditor –Appointment & Removal
Appointment, remuneration and terms and conditions of employment of the chief financial officer, the company secretary and the chief internal auditor of Public Sector Companies shall be determined with the approval of the Board.
Chief financial officer, the company secretary, or the chief internal auditor of Public Sector Companies shall not be removed except with the approval of the Board.
•Role & Qualifications of CFO and Company Secretary
CFO
Master degree in business administration or commerce from a university recognized by the Higher Education Commission with at least five years relevant experience.
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 Report to the Shareholders
They recognize their responsibility to establish and maintain sound system of internal control, which is regularly reviewed and monitored.
• 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.
Remuneration shall be sufficient to attract and retain directors needed to run the company successfully.
Remuneration levels 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.
Implementation Modality
Minister of SOEs
Minister of Finance
Board of Directors
CEO
Management
SOE
Feedback
AdviceCCMAU Treasury
Monitoring, Information and Relationship Management
Monitoring, Information and Relationship Management
Corporate Governance Structure in New Zealand
Temasek – Corporate Governance Structure in Singapore
Government of Singapore Cabinet headed by Prime Minister
BoDsChairman
Experienced in Government and Industry
High Ranking Civil Servants
and Industrialists of utmost
integrity and honesty
Management
http://eastlaw.net/jyworks/tan-wang-corpgov.pdf
http://www.temasek.com.sg/abouttemasek/
Temasek – Three Step Strategy
Legacy Investments
GLC Transformation
New Investments
Human Capital Management
Creating Sustainable Value
Increasing National Competitiveness
Cultivating a culture of High Performance
Key PrinciplesKey Principles Key PillarsKey Pillars Key Performance IndicatorsKey Performance Indicators
Financial Metrics Profits and RoE
Financial Metrics Profits and RoE
Strategic Value Creation
Strategic Value Creation
Institution BuildingInstitution Building
http://www.temasek.com.sg/abouttemasek/
Khazanah – Corporate Governance Structure in Malaysia
New Zealand Temasek Khazanah
Legal Structure
Board Composition
Accountability
Each SOE has 2 Shareholding Ministers, each of whom own 50% of the company’s shares.
Shareholder’s statutory powers in the company's act
and SOE act
Incorporated in 1974 as an exempt private company
Incorporated in 1993 as an holding company, wholly owned by the ministry of
finance
Shareholding ministers appoint a BoD of each SOE with advice from CCMAU
9 member (5 Private sector) Board assisted by 3
committees including LDCC
8 member (5 from Private sector) Prime Minister chairman of the Board
Under SOE act shareholding ministers are responsible to
the house of RepresentativesPresident of Singapore Prime Minister of Malaysia
* The holding company structure as a way to manage state assets “ under one roof” is now a global trend especially in the developing countries.
A Comparison
Ministry of Heavy Industries & Public Enterprises
Department of Public Enterprises (DPE)
Composition of Board
Role and Power of
Audit Committee
Required Disclosure
How to implement
the guidelines
Guidelines on Corporate Governance for Public Sector Enterprises
Source: Policy Brief Asia OECD
Corporate Governance of SOEs in India
These guidelines though voluntary in nature should be followed by all CPSEs
Proper implementation of these guidelines would protect the interests of shareholders and relevant stakeholders
The compliance with these guidelines requires to be reflected in
Directors’ report, Annual Report and Chairman’s speech in the Annual General Meeting
DPE would also grade the CPSEs on the basis of their compliance of the corporate governance guidelines
Source: Policy Brief Asia OECD
Implementation Guidelines
Quarterly evaluation done by line ministries
Annual reviews are carried out with the help of the Department of Public Enterprises
A special Task Force discusses SOE targets with both the CEO and line ministry concerned
Yearly performances are first evaluated by the SOEs themselves, then sent to the DPE
Task Force evaluates compliance and performance on a scale of 1 to 5
The performance of CEOs and board members linked to this score
Source: Policy Brief Asia OECD
Evaluation and Accountability
Recommendations
Government needs to decide:
1. Reasons for owning or controlling companies critical to Pakistan’s security or economic well being
2. Manage these investments on a sound commercial basis, separated from the Government’s function of policy making ,
market regulations or social obligations.
Recommendations for Pakistan
Recommendations for Pakistan
Interim Solution Code of Corporate Governance for PSEs approved by
Federal Cabinet Circulated to all PSEs for adoption by their governing
bodies for compliance
Long Term Stand alone law for SOEs with appropriate governance
structure for implementation
1. Legal structure; Incorporate a holding company, wholly owned by the Ministry of Finance. Governed by an SOE Act which defines shareholders responsibilities and the overriding objective of operating the SOE’s on a sound commercial basis.*
2. Board Composition: Chaired by Minister of Finance, but majority from the private sector selected under a fit & proper criteria.
3. Accountability; To parliament through Minister of Finance.4. Subsidiary of holding company to be created for
monitoring and advisory purposes with sole responsibility for advising on board composition, performance and managing the directors appointment process.
* Any social cost incurred as a result of fulfilling social obligations should be subsidized by the government
Recommendations for Pakistan