Principles of transparency and public sector corporate governance

Corporate Governance — explaining the principles of greater responsibility, accountability, fairness and transparency in relation to the primary responsibilities of the Board of Directors in providing strategic leadership and financial guidance — has assumed greater importance.

Although public sector companies have been formed with an intention to bring efficiency, effectiveness, transparency, accountability and rule of law, we have ritualistic or perfunctory practices of accountability at many companies, as stated by Dr Ishrat Hussain.

Companies, being the creation of law, are required to function within the boundaries imposed by the law. Therefore, any act committed outside those parameters is considered ultra vires and of no legal effect. And therefore, a set of checks and balances and methods have been introduced to enforce contractual obligations of corporate essentials.

Consequently, the Board of Directors, the pivot of a company, must have two-thirds non-executive directors who should be independent and have no material interest in the company other than the Board directorship.

However, studies reveal that as a contrast to the above principles and guide lines, the malaise affecting most of the public sector companies is the improper induction of directors, having material interest, and non-adherence to law and rules or even absence of clear rules. For instance, most of the directors of the board of a flagship public sector company managing industrial estates in Khyber-Pakhtunkhwa have material interests, being owners of industrial units and plots in the industrial estates. Thus, efforts to rationalise prices according to the market have been stymied. Similarly, the decreed amounts against enhanced land compensation amounting to billions are not being aggressively pursued against industrialists, instead the government is being asked for compensation. To make matters worse, the annual ground has been revised from Rs15,000 per year per acre (Rs1250 per month per acre) to Rs12,000 per year per acre (Rs833 per month per acre), which was already minimal.

Reportedly, five Board members of the companies have incentive claims of Rs185 million, which is 54% of the total incentives (Rs378 million). Therefore, in such circumstances, expecting them to act independently is naïve. Obviously, such members favour themselves through discussions, recording of minutes and also voting in favour of their own applications. Reportedly, even two of the applicants were allowed to vote in their absence, in utter violations of the rules.

In this regard, Section 204(4) and (5) of the Companies Act, 2017 is quite clear whereby “a director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company”.

Under section 506 B of the Companies Ordinance, 1984 (XLVII of 1984) read with sub-rule (2) of rule 5 of the Public Sector Companies (Corporate Governance) Rules, 2013 (the Rules), the Securities and Exchange Commission of Pakistan and the Public Sector Companies (Appointment of Chief Executive) Guidelines, 2015, guidelines make it obligatory that while making appointment of the chief executive, the board shall evaluate the candidates based on the fit and proper criteria specified in Schedule-II to the Guidelines. The Board may seek the assistance of its Nomination Committee to facilitate it in making appointment of the chief executive in accordance with rule 5 of the Rules. The principles of transparency, merit and equal opportunities shall be followed while making appointment to the position of the chief executive.

While making appointments to the position of chief executive, the advertisement of the post is a must for which the board shall initiate the process at least three months before the term of the incumbent chief executive expires. Once procedural requirements are met, the Board shall undertake evaluation of the shortlisted candidates based on the fit and proper criteria specified by the Commission.

Furthermore, the Board shall arrange necessary due diligence and pre-appointment scrutiny of the shortlisted candidates through the concerned departments/agencies, including SECP, FBR, NADRA, SBP, HEC, concerned sectorial regulator/professional body or association and others, as deemed appropriate.

Importantly, the Articles of Association and Memorandum of Association shall have to be in conformity with the Companies Act 2017 and) read with sub-rule (2) of rule 5 of the Public Sector Companies (Corporate Governance) Rules, 2013 (the Rules). The Securities and Exchange Commission of Pakistan has issued the Public Sector Companies (Appointment of Chief Executive) Guidelines, 2015; therefore, it shall not to be negated.

In this respect, Section 4 of the Companies Act 2017, vividly expresses that the provisions of the Act shall have effect notwithstanding anything contained in any other law or the memorandum or articles of a company or in any contract or agreement executed by it or in any resolution passed by the company in general meeting or by its directors, whether the same be registered, executed or passed, as the case may be, before or after the coming into force of the said provisions; and any provision contained in the memorandum, articles, contract, agreement, arrangement or resolution aforesaid shall, to the extent to which it is repugnant to the aforesaid provisions of this Act, become, or be, void, as the case may be. But, the Board — which has several members who have material interests, without agenda item of extension of the Chief Executive, in utter disregard to the aforementioned provisions and rules — has recommended the extension of the incumbent CEO.

The crux of the discussion is that spirit of the law in regulating the public sector companies is not being followed, which is fundamentally important to maintain transparency, accountability, equality of opportunities and rule of law. It is high time to ensure independent members on the board and provide equality of opportunities to all to compete for the post of Chief Executive Officer on the touchstone of corporate governance. Any decision taken in violation should be rescinded.

Published in The Express Tribune, January 25^th, 2023.

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