Vague law on corporate governance needs redrafting
Regulation is a key instrument through which governments achieve their social and economic policy objectives
The writer is president of the Institute of Cost and Management Accountants of Pakistan
Regulation is a key instrument through which governments achieve their social and economic policy objectives. In this context, regulators have a significant and increasingly complex role to transform the socio-economic goals of policymakers and to deliver regulatory regimes in an efficient manner. It is the prime responsibility of regulators to align balance for safeguarding interests of all stakeholders and protect private and public investment. A financial regulator supervises and controls a financial system and guarantees fair and efficient markets and financial stability.
On 31st August the Securities and Exchange Commission of Pakistan (SECP) notified for public comments a draft Listed Companies (Code of Corporate Governance) 2017, under the newly promulgated Companies Act of 2017. Through these regulations, the regulator has attempted to align the code with emerging challenges. The proposed draft, however, has compromised the principles of Code of Corporate Governance 2012 and maintains the status quo in the areas of corporate governance.
The draft CCG regulations were to become effective within 14 days of the date of notification but the deadline was extended to 30th September on ICMA Pakistan’s insistence. The institute pointed out insufficient time had been provided by the SECP to elicit the views of all stakeholders, especially the professional accounting bodies. Also the draft rules seemed ambiguous and unclear at many places that could lead to misinterpretation and misunderstanding of the rules. Proper references of the Companies Act of 2017 — the main source of corporate law — were also not provided. It contained undesirable provisions against the interests of stakeholders, including the minority shareholders. Specifically, Section 24 of the said regulation is quite adverse through which foreign qualified accountants have been allowed to become the head of the internal audit of listed companies in Pakistan. Such provisions are tantamount to encroaching upon the jurisdiction of recognised professional bodies and limiting the employment opportunities for Pakistani qualified professionals.
ICMA Pakistan, in line with its policy advisory role to the government, organised three stakeholders’ conferences at Karachi, Lahore and Islamabad which were largely participated by professionals, including CAs, CMAs, financial experts as well as audit practitioners, lawyers and industry and business representatives. There was a general consensus at these conferences that the draft CCG Regulations did not adequately safeguard their interests and are full of ambiguities that need to be removed for better understanding and interpretation. ICMA Pakistan submitted its comments and recommendations on the said draft regulations to the SECP and hoping that the same would be duly considered for incorporation in the final version of legislation.
The draft regulations also invade the jurisdictions of recognised bodies of professional accountants in Pakistan. By incorporating Section 24(2) allowing members of global accounting bodies to become eligible for the position of Head of Internal Audit of Listed companies, the regulator has provided a gateway to foreign qualifications to enter the Pakistani market at the cost of local professionals.
The regulator seems to be swayed by some external influence to incorporate this undesirable provision in the draft law which tends to negatively impact the accounting profession. It is recommended that Section 24(2) should be completely excluded from the final version, otherwise it would cast a bad image on integrity and independence of the regulator.
Let’s analyse some of the major provisions of draft regulations which require a revisit by the regulator in terms of its relevancy, rephrasing, referencing and applicability. Chapter II of the draft CCG regulations deals with composition of the board. The draft CCG regulations have confined the number of directorship to five whereas the Companies Act of 2017 under Section 154 says that a listed company shall have not less than seven directors. This is a flaw and need to be reconciled with the Companies Act of 2017. Further, the proviso related to listed subsidiaries must be deleted. If a director is on the board of a listed company, he has to attend at least two meetings in general on a quarterly basis, ie, the audit committee and the board and three meetings per quarter in particular, if he is a member of HR Committee as well. This comes to 15 meetings per quarter (5 Committees x 3) for a director. If we exclude listed subsidiaries from this counting then this figure will be at higher side and one may not be able to concentrate on agenda and working papers of meetings, as required by the code under directors’ role and responsibilities. The listed subsidiary may be considered a full listed company requiring the same attention on corporate governance matters as required for a listed holding company.
The inclusion of two independent directors on the board is a welcome step, however, this needs to be referenced with Section 166 of the Companies Act of 2017 which outlines the selection criteria and maintenance of data bank of independent directors.
Until such time the databank is notified by the SECP, listed companies may be allowed to appoint those professionals as independent directors who are ‘Certified Directors’ under any SECP-approved directors training programme. The procedure to fill up casual vacancy of independent directors needs to be provided.
The mandatory provision for having one female director on the boards of listed companies is also an praiseworthy initiative to synchronise with the global practice of gender diversity. Female representation can bring a different perspective, intuitiveness and a more collaborative style of leadership into corporate boardrooms. However, there is an element of concern that companies will comply by appointing female relatives of incumbent board members. In India and the UAE, there is a compulsory requirement for one female director on board whereas in EU countries the threshold is even higher, ie, 40% in Norway, Spain, Denmark and France and 30% in Germany, Malaysia and Italy. It is suggested that the qualification criteria and appointment procedure for female directors should be defined in the draft regulations.
To be concluded
Published in The Express Tribune, October 31st, 2017.
On 31st August the Securities and Exchange Commission of Pakistan (SECP) notified for public comments a draft Listed Companies (Code of Corporate Governance) 2017, under the newly promulgated Companies Act of 2017. Through these regulations, the regulator has attempted to align the code with emerging challenges. The proposed draft, however, has compromised the principles of Code of Corporate Governance 2012 and maintains the status quo in the areas of corporate governance.
The draft CCG regulations were to become effective within 14 days of the date of notification but the deadline was extended to 30th September on ICMA Pakistan’s insistence. The institute pointed out insufficient time had been provided by the SECP to elicit the views of all stakeholders, especially the professional accounting bodies. Also the draft rules seemed ambiguous and unclear at many places that could lead to misinterpretation and misunderstanding of the rules. Proper references of the Companies Act of 2017 — the main source of corporate law — were also not provided. It contained undesirable provisions against the interests of stakeholders, including the minority shareholders. Specifically, Section 24 of the said regulation is quite adverse through which foreign qualified accountants have been allowed to become the head of the internal audit of listed companies in Pakistan. Such provisions are tantamount to encroaching upon the jurisdiction of recognised professional bodies and limiting the employment opportunities for Pakistani qualified professionals.
ICMA Pakistan, in line with its policy advisory role to the government, organised three stakeholders’ conferences at Karachi, Lahore and Islamabad which were largely participated by professionals, including CAs, CMAs, financial experts as well as audit practitioners, lawyers and industry and business representatives. There was a general consensus at these conferences that the draft CCG Regulations did not adequately safeguard their interests and are full of ambiguities that need to be removed for better understanding and interpretation. ICMA Pakistan submitted its comments and recommendations on the said draft regulations to the SECP and hoping that the same would be duly considered for incorporation in the final version of legislation.
The draft regulations also invade the jurisdictions of recognised bodies of professional accountants in Pakistan. By incorporating Section 24(2) allowing members of global accounting bodies to become eligible for the position of Head of Internal Audit of Listed companies, the regulator has provided a gateway to foreign qualifications to enter the Pakistani market at the cost of local professionals.
The regulator seems to be swayed by some external influence to incorporate this undesirable provision in the draft law which tends to negatively impact the accounting profession. It is recommended that Section 24(2) should be completely excluded from the final version, otherwise it would cast a bad image on integrity and independence of the regulator.
Let’s analyse some of the major provisions of draft regulations which require a revisit by the regulator in terms of its relevancy, rephrasing, referencing and applicability. Chapter II of the draft CCG regulations deals with composition of the board. The draft CCG regulations have confined the number of directorship to five whereas the Companies Act of 2017 under Section 154 says that a listed company shall have not less than seven directors. This is a flaw and need to be reconciled with the Companies Act of 2017. Further, the proviso related to listed subsidiaries must be deleted. If a director is on the board of a listed company, he has to attend at least two meetings in general on a quarterly basis, ie, the audit committee and the board and three meetings per quarter in particular, if he is a member of HR Committee as well. This comes to 15 meetings per quarter (5 Committees x 3) for a director. If we exclude listed subsidiaries from this counting then this figure will be at higher side and one may not be able to concentrate on agenda and working papers of meetings, as required by the code under directors’ role and responsibilities. The listed subsidiary may be considered a full listed company requiring the same attention on corporate governance matters as required for a listed holding company.
The inclusion of two independent directors on the board is a welcome step, however, this needs to be referenced with Section 166 of the Companies Act of 2017 which outlines the selection criteria and maintenance of data bank of independent directors.
Until such time the databank is notified by the SECP, listed companies may be allowed to appoint those professionals as independent directors who are ‘Certified Directors’ under any SECP-approved directors training programme. The procedure to fill up casual vacancy of independent directors needs to be provided.
The mandatory provision for having one female director on the boards of listed companies is also an praiseworthy initiative to synchronise with the global practice of gender diversity. Female representation can bring a different perspective, intuitiveness and a more collaborative style of leadership into corporate boardrooms. However, there is an element of concern that companies will comply by appointing female relatives of incumbent board members. In India and the UAE, there is a compulsory requirement for one female director on board whereas in EU countries the threshold is even higher, ie, 40% in Norway, Spain, Denmark and France and 30% in Germany, Malaysia and Italy. It is suggested that the qualification criteria and appointment procedure for female directors should be defined in the draft regulations.
To be concluded
Published in The Express Tribune, October 31st, 2017.