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