Underperforming board rooms of public sector firms

Boards are full of friends of politicians, bureaucrats who lack professional capability

DELAWARE: Improvements in corporate governance of public sector companies (PSCs) are much talked about these days and unsurprisingly, the quality of corporate boards is at the centre of this conversation.

In this context, one would expect that a formal policy and process or mechanism for appointment, removal and evaluation of board members of PSCs would be in place to deliver good outcomes. Ironically, this is not the case.

What is alarming is that this omission has far reaching implications for the management of public money at the disposal of about 200 PSCs in the federal government.

The public sector landscape is now dotted with a variety of companies performing commercial and social functions, supposedly through professional and modern organisational structures. But the country has been suffering due to fiscal burden, poor service delivery and weak governance in sectors dominated by PSCs.

Reasons of underperformance of these PSCs are discussed in the author’s study, “State-owned enterprises in Pakistan”. One of the findings is, in order to improve performance, the way boards are formed, treated, evaluated and removed by the government needs to be reshaped.

Following good practices in corporate governance, the Securities and Exchange Commission of Pakistan has issued Public Sector Companies (Corporate Governance) Rules. These are applicable to PSCs registered under the Companies Ordinance 1984 and provide a framework for the role and appointment of board members.

This is a regulatory function and may not be confused with the ownership function of the government through a policy framework. In the absence of such ownership policy, even implementation of corporate governance rules is difficult.

Poor selection

The boards of PSCs are appointed by the prime minister on the proposal of the line ministry. No central database exists for potential independent directors that leads to poor and arbitrary selection of directors who are often not capable of holding such positions.

Astonishingly, the government does not document performance of the ex-officio and independent board members. It often happens that a member is appointed again on the same or other boards even if he had not performed well or did not serve the public interest on previous assignments.

Another serious loophole is ambiguity in jurisdictions of the board as “agent” and line ministry as “principal”, leading to principal-agent problem. The companies’ ordinance gives complete authority to the board for governing the respective PSC but this is not allowed by the line ministries.

Contrary to the perception that boards are independently acting only in the interest of entities that they represent, they more often than not serve as instruments for endorsement and implementation of government initiatives.

Those board members who continue to believe in the independence of their roles and remain defiant in the face of external pressure, face the wrath in the form of removal and sometimes leading to dissolution of the entire board.

Perks beyond entitlement

Ministries are generally considered as creating hurdles in the way of boards. However, it is also true that some of the board members try to benefit themselves from perks beyond their entitlement and derive advantages through exerting influence unlawfully.

A few view themselves as executive supervisors rather than overseeing the organisation at the strategic level. There is always a long queue of such potential directors and they use all forms of influential connections to get appointed on boards.

However, honest and capable professionals avoid serving on the boards on account of unlimited liability, lower remuneration and often disrespectful treatment by the government as a shareholder.

Resultantly, boards of PSCs are full of senior citizens and friends of politicians and bureaucrats. They lack diversity and professional capability. Women and young professionals rarely get seats in the board rooms.

Internationally, Bhutan, Norway and Sweden have developed ownership policies, while Finland, Hungary, New Zealand and the Philippines have developed robust legal frameworks to clarify roles and authorities of stakeholders, separation of regulatory and operational functions and illustration of decision-making process in case of PSCs.

Many countries have evolved institutions and mechanisms for board nomination in a transparent and professional manner.

Steps required

A good beginning for strengthening board governance in Pakistan can be made with following steps.

Firstly, a central database of qualified professionals be developed and board members may only be picked from them. Secondly, this process needs to be overseen by a high-level commission supported by a professional secretariat. Thirdly, the performance of board members needs to be documented. Fourthly, training of board members and corporate governance assessment of PSCs be carried out periodically. Lastly, the relationship between boards and ministries should be clarified via an ownership policy or legislation.

The writer is a doctoral student in public policy at the University of Delaware, USA and has served as a governance specialist in the Ministry of Finance

Published in The Express Tribune, January 25^th,  2016.

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