Corporate Governance under Companies Act, 2017 of Pakistan

CORPORATE GOVERNACEUnder Companies Act, 2017

Sayyid Mansoob Hasan

• FCMA, ACIS, Accredited Mediator, Certified Lead Assessor

• Managing Partner MANSOOB & CO.

Cost & Management Accountants

Management Consultants

Mediators & Arbitrators

• Chairman – Small Dispute Resolution Committee, Karachi (Sindh & Baluchistan) formed under Insurance Ordinance, 2000

• Vice President – Pakistan Institute of Public Finance Accountants

• Chairman – SME Board ICMA Pakistan

• Member – Permanent Panel of Arbitrators Pakistan Stock Exchange

• Have over 25 years of professional experience

Contact: [email protected]

Website: www.mncglobal.com

SAYYID MANSOOB HASANMANSOOB & CO.

CORPORATE GOVERNANCE UNDER COMPANIES ACT, 2017

What is Corporate Governance?

• The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (shareholders, financiers, customers, management, employees, government, and the community).



Why Corporate Governance? – 1

Corporate Corruption

• The classic cases of corporate fraud e.g. Enron and Worldcom (MCI) and the fall of Arther Anderson, one of the top audit firms, triggered the need of a stringent mechanism for corporate governance. 2001-02.

Corporate Corruption in Pakistan

• Simply countless…

• SECP did not come up with CCG for corporate corruptions in Pakistan but because of the “International Wave” to curb corporate frauds.

• Prudential regulations were the first attempt in 1991-92 by Mr. MoinQureshi, a caretaker Prime Minister of Pakistan.




Owner manager separation

• Companies are run by “Directors” who are elected by shareholders in the general meeting

• Directors are generally involved in day to day business operations and are aware of the state of affairs of the company

• Shareholders on the other hand only get information upon publication of information by the Directors (quarterly and annual)




Safeguarding of public money

• Companies having public money in the shape of capital (e.g. listed companies)

• Companies having public money in the shape of deposits, investments (e.g. banks, insurance, mutual funds)



Corporate Governance Mechanism in Pakistan

• Companies Act, 2017 – The Source

• Code of Corporate Governance – Applicable• 2002, 2005 and 2012

• Listed Companies (Code of Corporate Governance) Regulations, 2017 – New draft circulated



Companies types



Types of companies in Companies Act, 2017

• Single member company – SMC-PVT Ltd. (A proprietorship)

• Private limited company (2-50 members)

• Public company – unlisted (3-n)

• Public company – listed (3-n)

• Guarantee limited company – with and without share capital

• Guarantee limited company – licensed under section 42 (with charitable purposes)



Companies subject to Code of Corporate Governance

• Reference: Section 156. The Commission may prescribe framework..

• CCG applicable on listed companies



Corporate Governance Structure



Statutory Officers



Statutory Officers

• Directors

• Chairman

• Chief Executive

• Chief Financial Officer

• Head of Internal Audit

• Company Secretary



Directors



Directors – 1

154. Minimum number of directors of a company

(d) a listed company shall have not less than seven directors:

Number of Directorship in listed companies

• Section 155 says 7

• Draft code limits to 5



Directors – 2

Independent Director

• 166 (2) For the purpose of this section, an independent director means a director who is not connected or does not have any other relationship, whether pecuniary or otherwise, with the company, its associated companies, subsidiaries, holding company or directors; and he can be reasonably perceived as being able to exercise independent business judgment without being subservient to any form of conflict of interest:



Directors – 3

Executive Director

• Executive director means a director who devotes the whole or substantially the whole of his time (whether paid or not) to the operations of the company.

Non-Executive Director

• A director who is not an executive director



Directors Training

• All listed companies shall make appropriate arrangements to carry out orientation courses for their directors to acquaint them with these Regulations, applicable laws, their duties and responsibilities to enable them to effectively govern the affairs of the listed companies for and on behalf of shareholders.

• Provided that director having a minimum of 14 years of education and 15 years of experience on the board of a listed company, local and/or foreign, shall be exempt from the directors training program.



Directors Protection

181. Protection to independent and non-executive directors.— (1) Notwithstanding anything contained in this Act—

(a) an independent director; and

(b) a non-executive director;

shall be held liable, only in respect of such acts of omission or commission by a listed company or a public sector company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.



Chairman – 1

192. Chairman in a listed company.

(1) The board of a listed company shall within fourteen days from the date of election of directors, appoint a chairman from among the non-executive directors who shall hold office for a period of three years unless he earlier resigns, becomes ineligible or disqualified under any provision of this Act or removed by the directors.

(2) The board shall clearly define the respective roles and responsibilities of the chairman and chief executive:



Chairman – 2

Provided that the Commission may specify the classes of companies for which the chairman and chief executive shall not be the same individual. (Draft code separates the two positions)

(3) The chairman shall be responsible for leadership of the board and ensure that the board plays an effective role in fulfilling its responsibilities.

(4) Every financial statements circulated under section 223 of this Act shall contain a review report by the chairman on the overall performance of the board and effectiveness of the role played by the board in achieving the company’s objectives.



Chief Executive Officer

Appointment• First CEO to be named by subscriber to the memorandum and articles of

association – Section 186(2)Subsequent CEO • Within fourteen days from the date of election of directors under section

159 or the office of the chief executive falling vacant, as the case may be, the board shall appoint any person, including an elected director, to be the chief executive, but such appointment shall not be for a period exceeding three years from the date of appointment:

• Provided that the chief executive appointed against a casual vacancy shall hold office till the directors elected in the next election appoint a chief executive.



Chief Executive Officer

190. Removal of chief executive.

• (1) The board by resolution passed by not less than three-fourths of the total number of directors for the time being, or the company by a special resolution, may remove a chief executive before the expiration of his term of office…

Powers and responsibilities

• To place all significant matters before the board.

• To sign directors report

• To sign financial statements



CFO, HIA and Company SecretaryAppointment

The board of directors shall determine appointment, remuneration, terms and conditions of employment of chief financial officer, company secretary and head of internal audit of listed companies.



CFO, HIA and Company SecretaryRemoval

The removal of the chief financial officer, company secretary and head of internal audit of a listed company shall be made with the approval of the board of directors:

Provided that the head of internal audit may be removed upon recommendation of the audit committee.



Qualification of CFO

No person shall be appointed as the chief financial officer of a listed company unless he has at least five years of managerial experience in fields of audit or accounting or in managing financial or corporate affairs functions of a company and is:

a) a Member of a “recognized body of professional accountants”; or

b) has a postgraduate degree in finance from a university in Pakistan or equivalent recognized and approved by the Higher Education Commission of Pakistan (HEC).



Qualification of HIA

No person shall be appointed as the head of internal audit unless he/she has three years of relevant experience in audit or finance or and is:

a) a member of a recognized body of professional accountants; or

b) a Certified Internal Auditor; or

c) a Certified Fraud Examiner; or

d) a Certified Internal Control Auditor; or

e) has a post graduate degree in business, finance, law or engineering from a university or equivalent recognized and approved by the Higher Education Commission of Pakistan (HEC) and is a member of a recognized body relevant to such qualification, where applicable.



Recognized body of professional accountants

1) established in Pakistan means a body of professional accountants in Pakistan governed under a special enactment of the Federal Government as a self-regulatory organization managed by a representative National Council, and has a prescribed minimum criterion of examination and entitlement of membership of such body; or

2) established outside Pakistan means a body of professional accountants recognized and established under a special enactment in the country of its origin and which is a member of the International Federation of Accountants



Qualification of Company Secretary

Not defined.

?



Internal Audit

• The head of internal audit shall functionally report to the audit committee and administratively to the chief executive officer and his performance appraisal shall be done jointly by the Chairman of the audit committee and the chief executive officer.

• A director cannot be appointed, in any capacity, in the internal audit function to ensure independence of the internal audit function.



Internal AuditOutsourcing

• The internal audit function, wholly or partially, may be outsourced by the company to a professional services firm or be performed by the internal audit staff of holding company. In lieu of outsourcing, the company shall appoint or designate a fulltime employee other than chief financial officer, as head of internal audit holding equivalent qualification prescribed under these Regulations, to act as coordinator between firm providing internal audit services and the board.

• Provided that while outsourcing the function, the company shall not appoint its existing external auditors as internal auditors.



Committees of Board of Directors



Audit CommitteeComposition

• At leas three members – non executive directors and at least one independent director

• Chairman – not to be Chairman of the company, and preferably the independent director

• At leas one director should be financially literate shall mean a person who is a member of a recognized body of professional accountants or has a post graduate degree in finance from a university or equivalent institution, either in Pakistan or abroad recognized by the Higher Education Commission of Pakistan.

• Secretary to the committee: Company secretary or HIA



Audit CommitteeMeetings – 1

a) The audit committee of a listed company shall meet at least once every quarter of the financial year. These meetings shall be held prior to the approval of interim results of the listed company by its board of directors and after completion of external audit.

b) A meeting of the audit committee shall also be held, if requested by the external auditors or the head of internal audit.

c) The chief financial officer, the head of internal audit and external auditors represented by engagement partner or in his absence any other partner designated by the audit firm shall attend meetings of the audit committee at which issues, if any, relating to accounts and audit are discussed:



Audit CommitteeMeetings – 2

• Provided that chief executive officer and the chief financial officer shall not attend any meeting of the audit committee except by invitation only.

• Provided further that at least once a year, the audit committee shall meet the external auditors without the chief financial officer and the head of internal audit being present.

• Provided further that at least once a year, the audit committee shall meet the head of internal audit and other members of the internal audit function without the chief financial officer and the external auditors being present.



Audit CommitteeTerms of Reference – 1

• To be determined by the board of directors

• Providing adequate resources to Audit Committee by the board of directors mandatory

• Determination of appropriate safeguards to the assets

• Review periodical financial statements before presentation to the board of directors for approval

• Review preliminary announcement of results



Audit CommitteeTerms of Reference – 2

• Facilitate external audit

• Review management letter issued by external auditors

• Ensuring coordination between internal and external auditors

• Review scope of internal audit



Human Resource CommitteeComposition

• There shall be a human resource and remuneration committee of at least of three members comprising a majority of non-executive directors of whom atleast one member shall be an independent director. The chairman of the committee shall be an independent director. The chief executive officer may be included as a member of the committee.



Human Resource CommitteeMeetings

• At least once in every six months of the financial year and may meet more often if requested by a member of the board, or committee itself or the chief executive officer.

• The head of human resource or any other person appointed by the board of directors may act as the secretary of the committee.

• The chief executive officer (if not a member of the committee), head of human resource (if not the secretary to committee) or any other advisor or person may attend the meeting only by invitation.

• at least once in every six months of the financial year and may meet more often if requested by a member of the board, or committee itself or the chief executive officer. A member of committee shall not participate in the proceedings of the committee when an agenda item relating to his performance or review or renewal of the terms and conditions of his service comes up for consideration



Human Resource CommitteeTerms of Reference – 1

To be determined by the board of directors including:

i. leading the process for board appointments, identifying and assessing candidates who are qualified for election of directors (in particular, independent directors) after invoking necessary procedures for making recommendations to the board prior to publishing names of nominees for election of directors by the general meeting;

ii. recommend to the board for consideration and approval a policy framework for determining remuneration of directors (both executive and non-executive directors and members of senior management). The definition of senior management will be determined by the board which shall normally include the first layer of management below the chief executive officer level;




iii. undertaking annually a formal process of evaluation of performance of the board as a whole and its committees either directly or by engaging external independent consultant and if so appointed, a statement to that effect shall be made in the directors’ report disclosing name, qualifications and major terms of appointment;

iv. recommending human resource management policies to the board;

v. recommending to the board the selection, evaluation, development, compensation (including retirement benefits) and succession planning of the chief executive officer;




vi. recommending to the board the selection, evaluation, development, compensation (including retirement benefits) of chief operating officer, chief financial officer, company secretary and head of internal audit;

vii. consideration and approval on recommendations of chief executive officer on such matters for key management positions who report directly to chief executive officer or chief operating officer; and

viii. where human resource and remuneration consultants are appointed, their credentials shall be known by the committee and a statement shall be made by them as to whether they have any other connection with the company.



Nomination Committee

• Optional. If formed then matters related to directors to be separated from HR Committee.

• For considering and making recommendations to the Board in respect of appointments to the Board, the Board committees and the chairmanship of the Board committees.

• It is also responsible for keeping the structure, size and composition of the Board under regular review and for making recommendations to the Board with regard to any changes necessary.



Risk Management Committee

• Optional. To carry out a review of effectiveness of risk management procedures and present a report to the Board.

The terms of reference of the committee shall include the following:

• a) Monitoring and review of all material controls (financial, operational, compliance);

• b) Risk mitigation measures are robust and integrity of financial information is ensured; and

• c) Appropriate extent of disclosure of company’s risk framework and internal control system in Directors report.



Proceeding of Directors



Powers of the Board

Section 183

Earlier it was section 196 with limitation of meeting)

(1) The business of a company shall be managed by the board, who may exercise all such powers of the company as are not by this Act, or by the articles, or by a special resolution, required to be exercised by the company in general meeting.



Decision Making – 1

Meetings/Proceedings Section 176

• Quorum: The quorum for a meeting of board of a listed company shall not be less than one-third of number of directors or four, whichever is greater…

Electronic meetings

• The participation of the directors by video conferencing or by other audio visual means shall also be counted for the purposes of quorum

Frequency

• The board of a public company shall meet at least once in each quarter of a year.




Resolution by circulation: 179. Passing of resolution by the directors through circulation.—

(1) A resolution in writing signed by all the directors or the committee of directors for the time being entitled to receive notice of a meeting of the directors or committee of directors shall be as valid and effectual as if it had been passed at a meeting of the directors or the committee of directors duly convened and held.




(2) A resolution shall not be deemed to have been duly passed, unless the resolution has been circulated, together with the necessary papers, if any, to all the directors.

(3) A resolution under sub-section (1) shall be noted at a subsequent meeting of the board or the committee thereof, as the case may be, and made part of the minutes of such meeting.

(4) A directors’ agreement to a written resolution, passed by circulation, once signified, may not be revoked.



Responsibility for Financial Reporting and Corporate Compliance



Responsibility for Financial Reporting

Section 232 of Companies Act, 2017

Approval and authentication of Financial Statements.— (1) The financial statements, including consolidated financial statement, if any, must be approved by the board of the company and signed on behalf of the board by the chief executive and at least one director of the company, and in case of a listed company also by the chief financial officer:

Draft CCG

The chief executive officer and the chief financial officer shall duly endorse the quarterly, half-yearly and annual financial statements under their respective signatures prior to placing and circulating the same for consideration and approval of the board of directors.



Responsibility for Corporate Compliance

Chapter IX of Draft CCG

• Not specifically defined

• Responsibility for ensuring compliance by Audit Committee is defined in Draft CCCG



External Audit



External Auditors Appointment

• First auditors by Board of Directors after incorporation

• Subsequent auditors are appointed in General Meeting

• Recommended by Board as suggested by Audit Committee

• Condition of QCR Rated firm

• No listed company shall appoint as external auditors, a firm of auditors which or a partner of which is non- compliant with the International Federation of Accountants' Guidelines on Code of Ethics, as adopted by the Institute of Chartered Accountants of Pakistan.



External Auditors Rotation

(1) All listed companies in the financial sector shall change their external auditors every five years.

Provided further that all inter related companies/ institutions, engaged in business of providing financial services shall appoint the same firm of auditors to conduct the audit of their accounts.

Explanation: Financial sector, for this purpose, means banks, non-banking financial companies (NBFCs), modarabas and insurance/takaful companies.

(2) All listed companies other than those in the financial sector shall, at the minimum, rotate the engagement partner after every five years.



Directors Report and Disclosures



Directors Report – 1

• The quarterly unaudited financial statements of listed companies shall be published and circulated along with directors’ review on the affairs of the listed company and in accordance with the requirements of Section 227 of the Companies Act, 2017.



Directors Report – 2

Closed period.-

(1) Each listed company shall determine a closed period prior to the announcement of interim/final results and any business decision, which may materially affect the market price of its shares.

(4) No director, chief executive officer or executive shall, directly or indirectly, deal in the shares of the listed company or that of its holding company, in any manner during closed period.



Disclosures

• Composition of Board

(i) Independent Directors

(ii) Other Nonexecutive Director

(iii) Executive Directors

(iv) Female director (s)

• Director’s remuneration

• Committees of the Board

• Compliance Statement and Auditor Review



Recommendations



Recommendations

• Qualification of Company Secretary for a listed company should be defined as a person holding the qualifications from ICSP or ICSA of UK with minimum 3 years experience as a Company Secretary of any company.

• Company Secretary should be made responsible for Corporate Compliance.

• Experience requirements for the position of Head of Internal Audit should be increased to at least 5 years at managing finance and/or accounts.

• Persons holding professional accounting and corporate qualifications and having at least 5 years experience as CFO, HIA and Company Secretary should be exempt from mandatory Directors Training Program.

Law

Corporate Governance under Companies Act, 2017 of Pakistan