Corporate Governance in Public Sector

Mohammad Iqbal Ghori FCMA Chief Financial Officer FESCO

Scheme of Presentation1.

What is corporate Governance?

2.3.

Why for Public Sector?Code of Corporate Governance for Public

Sector4.

What Matters in Code of Corporate Governance

5. 6.

Recommendation Question & Answers

Corporate Governance?

Corporate Governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders. (OECD Principles Define Corporate Governance Comprehensively, 2004)

Core values / Principles of Corporate Governance are? Openness & Transparency

Accountability Fairness Transparency Responsibility & integrity Efficiency and effectiveness

Standards of corporate governance Reliability and predictability

Openness and transparency Accountability Efficiency and effectiveness Integrity

CCG: Why in Public Sector An imperative concern Excessive confidentiality in decision making Conflict of interests? Inefficiency in public expenditure Non-transparency

Now greater demand for: Openness and accountability in government, with Greater willingness to challenge decisions Stakeholders Participation

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

Concept originated in the Private Sector

Corporate failures: weak management boards over powerful chief executives weak internal controls

Characterized by: - lack of segregation of chairman and chief executive

- lack of audit committee/internal audit functions- weak control/override of controls

Strengthening Corporate GovernanceBuilding Firewall between the Government's policy making role and ownership role.

GoP BoD ManagementStrengthening of BoDs as envisioned under the Companies Ordinance

Professional and commercially oriented management selected by the BoDs 9

Corporate Governance in PSE Composition of Board Role of Chairman and CEO Responsibilities, Power and Function of Board Related Party Transaction Board Capacity Building

Board Committees Qualification of CFO and Company Secretary Directors Report Conflict of Interest Remuneration of Board Self Evaluation

CCG for PSE Board composition Including a certain number of independent non-executive directors

on the boards Ensuring continuity in the tenure of board members, Separating the roles of chairman and chief executive,

Forming specialized board committees, undertaking training and capacity building of the board members,

Strengthening the internal control mechanism,

Augmenting the disclosure and transparency requirements, Undertaking periodic performance evaluation of the board

members,

Definitions:

Comprehensive definition of Independent

Director consistent with Revised Code Majority of the Board as Independent

Compositio

n of the Board

Directors. Appointing authority / govt and other

Board

evaluation & Role

shareholders, shall apply fit and proper criteria, in making nominations for election as Board members Annual evaluation of the Boards 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

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

of Chairman and CEO and their roles

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.

Exercise their powers and carry out their

fiduciary duties with a sense of objective Directors to judgment in the best interest of the company. Act in the This provision shall apply to all directors, best interest including ex-officio directors. of the A director, once appointed / elected, shall hold Company office for a period of three years in accordance (and not for with the provisions of the Ordinance, unless he their resigns or is removed in accordance with the nominating provisions of the Ordinance. organizations ) Removal of a director should only take place, in the event of misconduct or substandard Security of performance determined through a performance tenure in line evaluation. with law Provisions Ensure that: apply to exofficio Obligations to all shareholders are fulfilled and directors as they are duly informed in a timely manner of all well material events through shareholder meetings and other communications. Establish sound system of internal control

Boards

Code of Conduct for directors,

Responsi bilities with regard to Code of Conduct

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 companys code of ethics

Directors and executives do not allow a conflict of

Conflict

of Interest Anticorruption Policy Related party transactio ns

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

Appointme nt of CEO must be exercised by the Board Policies on Corporate Social Responsibil ity & Expenditur e 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

Quarterly Accounts to be prepared and approved

Report & Interim Financial Statements Orientation

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

Courses

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

Formation of Board Committees, including

of Board Committee s

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.

Appointment, remuneration and terms and CFO and

Company Secretary

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.

A formal and transparent procedure for

fixing the remuneration packages of individual directors. No director shall be involved in deciding his own Directors remuneration. 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.

Proposed Reforms / Recommendations Government needs to rethink and decide its policy:1. 2. Decide on whether it is the business of the government to run the business? Reasons for owning or controlling companies critical to Pakistans security and economic well being Manage these investments on a sound commercial basis, separated from the Governments function of policy making, market regulation or social

3.

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.

What else Matters in Corporate Governance?

Mixed Board Independent directors: un-conflicted but uniformed Inside directors: conflicted but informed Best board might combine the two What else matters? Strengthening the process of selection and appointment of the BODs through structured and skill-based nomination process, transparent and based on merit. Establishing clear terms of reference for Board Sub-committee (Audit/Fiscal board in Brazil) Eliminating conflicts of interest Prioritizing the issues that need the attention of the Board to focus on items of material nature. Incentives (share ownership) Length of service might matter

Qualification Qualification of CFO and Company Secretary Member of ICMAP or ICAP but still opportunity

for conventional and rankers officer Composition of Director more focused on

independence than specialization / discipline

Recommendation Strengthening the process of selection and appointment of

BoDs, through structured and skill-based process, transparent and based on merit. Sectoral Specialist Establishing

nomination

clear terms of reference for Board Sub-

Committees Eliminating conflicts of interest thru declaration and external

audit Prioritizing the issues that need the attention of the Board to

ensure focus on items of material nature

Recommendation Performance Contract between BoD and GoP

Implementation of Integrated Reporting in Public

Sector Entities Mandatory Third Party Corporate Governance Audit

Scope of Corporate Governance Corporate Governance is concerned with holding the

balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interest of individuals, corporations and society. The foundation of any structure of corporate

governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to centers of economic activity that inspire trust. -Sir Adrian Cadbury.

Corporate Boards v PS Executive Boards Secretary/CEO/MD has ultimate/shared responsibility? Board members have consultative/decision-making roles? Board members have statutory/directors duties for which they

are personally liable? Board members are wholly internal/external? Board members are subject to formal/informal ministerial direction/influence in terms of appointment, decision-making, & dismissal? Board members have other/ministerial roles? Board members have little/much control over their Secretary/CEO/MD? Board members are/arent answerable directly to the Secretary/CEO/MD?