1. Governance of PSEs, issues and
way forward
By : Syed Asad Ali Shah

2. Presentation Outline
Public Sector Crisis in Pakistan
Issues in Governance of PSEs
Key Features of Draft Regulations on
Governance of PSEs
Proposed Reforms / Recommendations

3. Public Sector Crisis in Pakistan
 ADB report 2012 highlights public sector losses, as one of the
major factors impeding growth.
 Annual losses of PSEs : Rs. 300 to 400 billion due to inapprop
governance, corruption, inefficiencies and inappropriate policy.
 Power Sector nearly Rs. 250 billion (resulting in huge circular
debt), other PSEs include PIAC, Pakistan Steel, Pakistan Railways.
 Contrary to general impression, several profit making PSEs, such
as two Ports, OGDC, PPL, PSO, SSGC, SNGPL, Insurance sector ..
 However, even these may be loosing significant amounts that
may be hidden due to inherent profitability of such entities.
 One major positive aspect of PSEs their contribution to taxes.
Source: http://www.thenews.com.pk/Todays-News-2-84780-Public-enterprises-become-white-elephants-with-Rs600-bn-annual-loss

4. 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

5. Key features of Draft Regulations on
Governance of PSEs

6. • Comprehensive definition of “Independent
• Definitions: Director” consistent with Revised Code
• Compositio • Majority of the Board as Independent Directors.
n of the
Board • Appointing authority / govt and other
shareholders, shall apply “fit and proper criteria”,
in making nominations for election as Board
members
• Board
• Annual evaluation of the Board’s performance.
evaluation Chairman will take leadership of the process.
& Role
• Policy formulation and oversight and not the
approval of individual transactions unless they are
of an extraordinary nature or involve materially
large amounts

7.  Separation of Chairman and CEO
 Chairman from Independent Directors
 Responsibilities of Chairman
• Separation  Leadership of the Board & ensuring its efficient & effective
of working, setting its agenda
Chairman  Ensuring all directors are enabled and encouraged to fully
and CEO participate in the deliberations and decisions of the Board.
and their  Should not be involved in day to day operations
roles  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.

8.  Exercise their powers and carry out their fiduciary
duties with a sense of objective judgment in the best
• Directors to interest of the company.
Act in the best  This provision shall apply to all directors, including ex-
interest of the officio directors.
Company (and
not for their  A director, once appointed / elected, shall hold office for
nominating a period of three years in accordance with the
organizations) provisions of the Ordinance, unless he resigns or is
removed in accordance with the provisions of the
• Security of Ordinance.
tenure in line
with law  Removal of a director should only take place, in the
event of misconduct or substandard performance
• Provisions determined through a performance evaluation.
apply to ex-
officio
directors as  Ensure that:
well  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.
 Establish sound system of internal control

9.  “Code of Conduct” for directors, executive and
• Board’s all employees, articulates acceptable and
Responsib unacceptable behavior.
ilities  Communication throughout the company
with including posting on the website.
regard to  Adequate controls for the identification and
Code of redressal of grievances arising from unethical
Conduct practices.
 Nominate a committee, a Board member or
senior Executive for investigating, where
necessary, on a confidential basis, any
deviation from the company’s code of ethics

10. • Directors and executives do not allow a conflict of interest
• “Conflict to undermine their objectivity and they do not use their
position to further their personal interest.
of • Where actual or potential conflict of interest exists, there
Interest” should be appropriate identification, disclosure and
management.
• “Anti-
• A “register of interests”, which shall be publicly available.
corruption • Board shall develop and implement a policy on “anti-
Policy” corruption” to minimize actual or perceived corruption in
the company.
• Related
party • Comprehensive requirements on related party transation
transactio disclosure and approval by Audit Committee & Board.
ns

11. • Power of  Board shall exercise its power of:
Appointme  Appointment, development and succession
nt of CEO of the Chief Executive officer using “fit &
must be proper criteria” and other members of
exercised senior management.
by the
Board
Board Policies on:
• Policies on
Corporate  Corporate Social Responsibility initiatives
Social including, donations, charities, contributions
and other payments of a similar nature;
Responsibili
ty &  Where decisions are taken in fulfilling social
Expenditure objectives of the Government but which are not
in the commercial interest of the entity,
on GoP appropriate subsidy must be extended by the
directives government.
 Effective communication policy with all stake holders

12. • Quarterly Accounts to be prepared and approved by the
• Annual Board.
Report & • Annual report including annual financial statements be
Interim placed on the website.
• Monthly accounts, whether audited or otherwise, for
Financial circulation amongst the Board members.
Statements
• Required to hold Orientation Courses : At least one
• Orientation Orientation Course per year
• Encouraged to have certification under an appropriate
Courses 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

13. • Formation of Board Committees, including Audit
• Formation Committee, Risk Management Committee (for
of Board financial sector), HR Committee & procurement
Committee committee.
s • 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.

14. • Appointment, remuneration and terms and
conditions of the CFO, the company secretary and
• CFO and the CIA shall be determined with the approval of the
Company Board.
Secretary
• 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.

15. • A formal and transparent procedure for fixing
the remuneration packages of individual
directors. No director shall be involved in
deciding his own remuneration.
• Director’s • Remuneration packages shall encourage value
Remuneration 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.

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

17. 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.

18. Thank You