Governance of PSEs, issues and way forward By : Syed Asad Ali Shah
Presentation Outline Public Sector Crisis in Pakistan Issues in Governance of PSEs Key Features of Draft Regulations on Governance of PSEs Proposed Reforms / Recommendations
Public Sector Crisis in Pakistan 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
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
• Comprehensive definition of “Independent• Definitions: Director” consistent with Revised Code• Compositio • Majority of the Board as Independent Directors. n of the Board • Appointing authority / govt and other shareholders, shall apply “fit and proper criteria”, in making nominations for election as Board members• Board • Annual evaluation of the Board’s performance. evaluation Chairman will take leadership of the process. & Role • 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 Chairman from Independent Directors Responsibilities of Chairman• Separation Leadership of the Board & ensuring its efficient & effective of working, setting its agenda Chairman Ensuring all directors are enabled and encouraged to fully and CEO participate in the deliberations and decisions of the Board. and their Should not be involved in day to day operations roles 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.
Exercise their powers and carry out their fiduciary duties with a sense of objective judgment in the best• Directors to interest of the company. Act in the best This provision shall apply to all directors, including ex- interest of the officio directors. Company (and not for their A director, once appointed / elected, shall hold office for nominating a period of three years in accordance with the organizations) provisions of the Ordinance, unless he resigns or is removed in accordance with the provisions of the• Security of Ordinance. tenure in line with law Removal of a director should only take place, in the event of misconduct or substandard performance• Provisions determined through a performance evaluation. apply to ex- officio directors as Ensure that: well 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
“Code of Conduct” for directors, executive and• Board’s all employees, articulates acceptable and Responsib unacceptable behavior. ilities Communication throughout the company with including posting on the website. regard to Adequate controls for the identification and Code of redressal of grievances arising from unethical Conduct 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
• Directors and executives do not allow a conflict of interest• “Conflict to undermine their objectivity and they do not use their position to further their personal interest. of • Where actual or potential conflict of interest exists, there Interest” should be appropriate identification, disclosure and management.• “Anti- • A “register of interests”, which shall be publicly available. corruption • Board shall develop and implement a policy on “anti- Policy” corruption” to minimize actual or perceived corruption in the company.• Related party • Comprehensive requirements on related party transation transactio disclosure and approval by Audit Committee & Board. ns
• Power of Board shall exercise its power of: Appointme Appointment, development and succession nt of CEO of the Chief Executive officer using “fit & must be proper criteria” and other members of exercised senior management. by the Board Board Policies on:• Policies on Corporate Corporate Social Responsibility initiatives Social including, donations, charities, contributions and other payments of a similar nature; Responsibili ty & Where decisions are taken in fulfilling social Expenditure objectives of the Government but which are not in the commercial interest of the entity, on GoP appropriate subsidy must be extended by the directives government. Effective communication policy with all stake holders
• Quarterly Accounts to be prepared and approved by the• Annual Board. Report & • Annual report including annual financial statements be Interim placed on the website. • Monthly accounts, whether audited or otherwise, for Financial circulation amongst the Board members. Statements • Required to hold Orientation Courses : At least one• Orientation Orientation Course per year • Encouraged to have certification under an appropriate Courses 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, including Audit• Formation Committee, Risk Management Committee (for of Board financial sector), HR Committee & procurement Committee committee. s • 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.
• Appointment, remuneration and terms and conditions of the CFO, the company secretary and• CFO and the CIA shall be determined with the approval of the Company Board. Secretary • 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.
• A formal and transparent procedure for fixing the remuneration packages of individual directors. No director shall be involved in deciding his own remuneration.• Director’s • Remuneration packages shall encourage value Remuneration 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.
Proposed Reforms / Recommendations• 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 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.