1. “Energy Sector”Shell Pakistan Limited“Corporate Governance Practices”Subject: Corporate GovernanceSubmitted To: Sir Ishtiaq AhmedClass: MBA-V Submitted By:1. Qasim Raza2. Faiza Batool3. Faisal HafeezDepartment of Management ScienceNATIONAL UNIVERSITY OF MODERN LANGUAGESSECTOR H-9, ISLAMABAD
2. History:Shell has a rich legacy and long association with Pakistan. The company is a subsidiary of ShellPetroleum Limited, United Kingdom (immediate Parent) which is a subsidiary of Royal DutchShell plc (ultimate parent). The company markets petroleum products and compressed naturalgas. It also blends and markets various kinds of lubricating oils. Shell Pakistan Limited is alimited liability company incorporated in Pakistan and is listed on the Karachi and Lahore StockExchange.The objective of Shell Pakistan Limited, are engage to efficiently, responsibly and profitably inoil, gas, chemical and other selected businesses and to participate in the search and fordevelopment of other sources of energy to meet evolving customer needs and the worlds growingdemand for energy. We believe that oil and gas will be integral to the global energy needs foreconomic development for many decades to come.Company Goals:The goal of our company is to constantly improve on our customer’s experience, and in anincreasingly competitive environment, Shell’s commitment to providing top quality, rightquantity and superior service has been the driving strength of our business in Pakistan.Core Values at Shell Pakistan Limited:.Being at Shell Pakistan Limited is about core values of honesty, integrity and respect for peopleare at the heart of the way we manage our business.
3. Financial Reporting and Auditing1. Company Information: Board of DirectorsSarim Sheikh (Chairman)Rafi H BasheerFarrokh K CaptainChang Keng ChenImran R IbrahimNaseer N S JafferZaffar A KhanMichael NollHaroon RasheedOmer Y SheikhBadaruddin F Vellani Managing Director & CEOSarim Sheikh Audit CommitteeBadaruddin F VellaniImran R IbrahimMichael Noll External AuditorA. F. Ferguson & Co. Legal AdvisorsVellani & VellaniAdvocates & Solicitors
4. 2. Audit committee: Members of audit committeeShell has audit committee formed by board having 3 members all of them including chairmanare non-executive directors. Meeting of audit committee held at least one meeting prior toapproval of final results. According to report of the director financial statements prepared bymanagement are fairly state its affairs, results of operations, cash flows and change in equity.There is appropriation and consistency in use of accounting policies. All related party transactionwas placed before the audit committee and have been reviewed and approved by the Boards ofDirectors in accordance with the requirement of the code. External auditorExternally it is audited by A. F. Ferguson & Co. In their opinion he is best of information givento them like balance sheet, profit & loss, cash flow statement and statement of changes in equitywith their notes are conformed to approved accounting standards in Pakistan. External auditorplay a vital role for gives “True and Fair view” on company financial statements and to developtheir good image in the market by increase in share price. Moreover, the opinion of externalauditor on company’s financial statement creates shareholders trust on the company’s growth.3. Financial Reporting:The financial statements have been prepared under the historical cost convention, as modified by re-measurement of certain financial assets and final liabilities at fair value and recognition of certain staffretirement and other service benefits at present value.The financial statements of Shell Pakistan are prepared according to the Companies Ordinance 1984, anddirectives given by the SECP and the approved accounting standards applicable in the Pakistan. Theyfollowed approved accounting standards compromise of such International Financial Reporting standardsAccounting Standards (IFRS) issued by the International Accounting Standard Boards (IASB) as arenotified under the provisions of ordinance.1. Financial assets are classified as are held for trading if acquired principally for the purpose ofselling in the short term.2. Loans and receivables are non-derivative financial assets with fixed and determinable paymentsthat are not quoted in an active market.3. There were no held to maturity financial assets in the balance sheet.4. Gain or loss from changes in fair values of monetary and non-monetary securities classified asavailable for sale are recognized in other comprehensive income.5. Stock-in-trade is valued at the lower of the costs, calculated on the first-in first-out basis, and netrealizable value.
5. Directors Benefits1. Director Bonuses :Aggregate amount charged in the financial statement in respect of the staff retirement benefitschemes as follows:2011 (Rupees’ 000) 2010- In respect of pension and gratuity scheme 104,232 180,982- In respect of provident fund 56,331 32,224- In respect of post retirement medical benefit scheme 10,461 10,387171,024 223,593
6. 2. Remunerations of Chief Executives, Directors and Executives:____________________2011________________Chief Executives Directors Executives__________ (Rupees’000) __________Short-Term Employees Benefits:Managerial remuneration 35,769 51,922 866,922(Including Bonus)Housing:Rent 5,540 - -Utilities 847 1,032 24,144Other items 108 270 6,468Medical expenses _95_ _262_ 22,83642,359 53,486 920,370Post-employment Benefits:Company’s contribution to pension,Gratuity and provident fund _1,675_ 2,563 115,48444,034 56,049 1,03,5854No of person (s) at year end ___1__ ___3__ 389__1. Shell Pakistan Ltd charged aggregate amount in financial statements for the year for fee to 6 Non-executive Directors was Rs. 1,120 Thousands (2010: 5 Non-executive Directors Rs. 1,080Thousands).
7. 2. The Chief executive, Executive Directors and some of the Executives were also provided with feeuse of company maintained cars and are entitled to certain benefits from Shell group. The ChiefExecutive was also provided with the furnished accommodation.3. Stock Options:Shareholders Category No. of Shareholders No. of Shares HeldDirectorsMr. Farrokh K. Captain 1 469,816Mr. Imran R. Ibrahim 1 45,084Mr. Zaffar A. Khan 1 5,156Mr. Badaruddin F. Vellani 1 125Chief Executive Officer - -Directors’ / CEO’s SpousesMrs. Samina Ibrahim 1 17,864W/o Mr. Imran r. IbrahimExecutives 3 2,435
8. Corporate Social ResponsibilitySocial issues are generally given more political, economic, and media emphasis in developing countriesthan environmental, ethical, or stakeholder issues. The shell has comprehensive set of policies andprograms relating to the society which they integrate with their business operations and decision makingprocesses.1- Training for Development:Shell is providing corporate social responsibilities through giving training to the student. And also payattention on the government staff to give them training to protect the development and also to NGO’ssector and private and school students.2- Training for Employment: Shell provides corporate social responsibilities to train the public on different level to foremployment. The benefit of this opportunity is provided to the graduate students and diplomaholders. For their own employees there is Health Safety Environment standards in the country to get thecomplete control company want to train their employees so that in case of emergency it is helpful.3- Road Safety: The responsibility of shell to provide road safety to their employee families and their citizens. The Social Investment portfolio at Shell is aligned with three broad global thematic areas:Enterprise Development, Road Safety and Access to Energy & Education. It has conducted a number of Road Safety related campaigns with stakeholders in the public andprivate sectors. Shell also hosts the Shell Eco-marathons around the globe where student teams design, build andrace ultra fuel efficient cars.4- Life Skills: The other corporate social responsibility of the shell is to develop personal youth. Under the corporate social responsibility the social environment is most important to protect theenvironment and manage the desirable resources. They respect the people and made development projects for them to protect and safeguard.
9. 5- Concern for environment: Shell contributes to sustainable development by helping the world meet growing energyneeds in economically, environmentally and socially responsible ways. . Sustainable development for Shell also means benefitting local communities it works in,reducing the impact its operations have on the environment, adding business value tocustomers and business partners, and developing and creating opportunities for staff.Internal Controls and Financial ControlInternal controls:Internal controls are methods or procedures adopted in a business to: Safeguard its Assets Ensure financial information is accurate and reliable Ensure compliance with all financial and operational requirements And generally assist in achieving the business objective To improve the communicational barriers among management and field employees To adopt the upgraded technology for purification of crude oil into different products (high speeddiesel, Kerosene oil, High octane diesel, Petrol etc) and also produce By-product from realproducts. Better environment culture in the organization with highly professional management team.Statement of Compliance with code of conduct:1. The company continues to encourage effective representation of Independent non-executiveDirectors and Directors representing minority interest on its Board of Directors. At the present,the Board includes five Independent non-executive Directors, two of whom represent minorityshareholders.2. The Directors have confirmed that none of them is serving as a director in more than ten listedcompanies, including this company.3. To the best of our knowledge all resident directors of the company are registered tax payers andnone of them has defaulted in payment of any loan to a banking company, a DFI or NBFI orbeing a member of Stock Exchange, has been declared as a defaulter by that stock exchange.None of the Director or their spouse is engage in the business of stock exchange.
10. 4. The Board has adopted the vision/ mission statement and overall corporate strategy and hasformulated significant policies of the company.5. The board met at least once in every quarter and all its meetings were presided over by thechairman.6. All the powers of the Boards have been duly exercised and decision on material transaction(including appointment and remuneration) and terms and conditions of employment of the CEOand other executive directors have been taken by the Board.7. No change occurred in the office of the CFO and company secretary during the year underreview.Financial Controls:1. Trade mark and manifestations fees and Global Infrastructure Desktop charges are based on theagreement entered into by the company with the Shell Group of Companies.2. Expenses recovered from or charged by related parties are based on actual charged by orrecovered from the related parties.3. Capital expenditures contracted for but not incurred as at September 30, 2011 amounted toapproximately Rs. 283,794 thousands.4. Commitment for rental for assets under operating lease agreements as at September 30, 2011amounted to Rs. 2, 827, 198 thousand.5. Letter of credits and bank guarantees outstanding as at September 30, 2011 amounted to Rs.3,309,313 thousand.6. The accumulated levy up to September 30, 2011 amounted to Rs. 69,216 thousand.Risk Management ProfileThe company activities are exposed to be numerous financial risks namely credit risk, foreign exchangerisk, interest rate risk and liquidity risk. The company finances its operations through equity, borrowingsand management of working capital with a view of maintaining appropriate mix between various sourcesof finance to minimize risk and provide maximum return to shareholders.Credit RiskCredit risk represents the accounting loss that would be recognized at the reporting date if counters partiesfailed completely to perform as contracted. Credit risk arises from cash equivalents and deposits withbanks and financial institutions, as well as credit exposures to customers, including trade receivables and
11. committed transactions out of financial assets aggregating Rs. 7,509,734, the financial assets subject tocredit risk amount to Rs. 7,495,935 Thousands.Market RiskMarket risk is the risk that fluctuates as a result of changes in market interest rates, foreign exchangerates, and change in market sentiments, speculative activities, supply and demand of securities andliquidity in the market.i). Currency RiskCurrency risk is the risk that fair value of future cash flow of financial instruments will fluctuate becauseof changes in foreign exchange rates. Foreign currency risk arises where payable exists due to imports ofgoods transactions with foreign related parties as well as trade receivables from foreign related parties.The company primarily has foreign currency exposures in US Dollar (USD), Great Britain Pound (GBP)and Euro (EUR).ii). Interest Rate RiskThe company analysis its interest rate risk on regular basis by monitoring existing facilities and marketinterest rate. At Dec 31, 2011, if interest rate on company’s borrowings had been 1% higher/ lower withall other variables held constant, post profit would have been for the year would have been lower/higherby Rs. 102, 343 thousand (2010: Rs. 64, 912 thousand) mainly as a result of higher/ lower interestexposure on variable rate borrowings.iii). Price RiskThe company is not exposed to equity securities price risk as currently the company has no investment inlisted securities.Liquidity RiskThe liquidity risk is the risk that an enterprise will encounter difficulties in raising funds to meetcommitments associated with financial instruments. Through the functions the company continuouslymonitors its liquidity positions. Company ensures the availability of funds by maintaining commitmentwith credit line. When the company manages its capital the prime objective is to safeguard its capital andprovide returns to shareholders and other stakeholders and reduce cost of capital. In order to maintaincapital structure, the company may adjust amount of dividend that is paid to shareholders andstakeholders and issue new shares to reduce debts.