Listed Companies (Code of Corporate Governance) Regulations, 2017, have been approved for notification by the Securities and Exchange Commission of Pakistan (SECP). They replace the Code of Corporate Governance, 2012 (CCG 2012) issued under the PSX listing regulation and are seen as a stride towards aligning corporate governance practices in Pakistan with best international standards. They shall come into effect for period beginning on January 1, 2018.
The regulations are aimed at strengthening governance structures, bringing consistency in the corporate practices and promoting transparency through enhanced disclosure requirements. Furthermore, the role and responsibilities of directors have been made clearer and enhanced, independent decision-making is encouraged, gender diversity is supported and mechanism for transparency and accountability is strengthened.
They have been finalized after rigorous in-house debate and extensive public consultations. The task force formed to suggest changes to the CCG 2012 was led by Mr. Ebrahim Sidat. It included representative of the SECP, PICG, Central Depository Company, Pakistan Stock Exchange, corporate practitioners and industry representatives.
Meanwhile, the Companies Act, 2017, was promulgated, which included the enabling provision to provide for framework of corporate governance, hence, regulations were framed. It was ensured that the said regulations are concise, avoid duplication of requirements of Act or any other statutory requirements and retained the best corporate principles as also endorsed by the 2012 Code and task force.
The draft regulations was placed on the SECP’s website in August 2017 to solicit public opinion. In view of request from stakeholders, the deadline of providing comments was extended by a month. Further, consultative session with stakeholders was held in October to deliberate on the stakeholders’ views.
Noteworthy requirements of the regulations, among others, include decreasing the limit of permissible directorship in listed companies of a director from seven to five. Further, the regulations aims at strengthening presence and role of independent directors therefore, board of directors are mandated to have at least two or one third of number of directors, whichever is higher, as independent directors. The independent directors shall be required to file a declaration confirming that statutory criteria for independence has been duly complied.
One of significant requirements of the Act is to prescribe female directors has been incorporated in the regulations by mandating one female director within one year of notification of regulations or reconstitution of board whichever is later. This shall strengthen gender balance on boards. Moreover, in order to encourage inclusion of competent female directorship, companies are required to train at least one female executive under the directors’ training program.
The Companies Act gives extensive powers, responsibilities and duties to directors. In addition, the regulations provides additional responsibilities, i.e. overall review of risk, code of conduct, internal controls, whistleblowing mechanism, sustainable business practices, grievance handling and maintaining record of significant policies. Moreover, directors’ have been mandated to attend general meetings and participate in framing and considering significant policies.
In order to promote accountability, formal and effective mechanism for annual evaluation of the board’s own performance and of its committees is mandatory. Formal policy and procedures to determine directors’ remuneration are also mandatory and companies are encouraged to post key features of same on their website. The regulations have also added stringent quorum requirements for board meetings in case of conflict of interest.
The effectiveness of Audit and HR committees has been strengthened by mandating chair of both the committees to be an independent director. Further, audit committee is to include at least one member who is “financially literate” defined as a person who is a member of a recognized body of professional accountants or has a postgraduate degree in finance from a university or equivalent institution. The formation of two separate committees, i.e. nomination committee and risk committee are encouraged and their terms of reference also recommended. It is foreseen that in addition to banks, other companies also embrace role of risk committee in assessing and reviewing risk.
The provision pertaining to directors’ training program have been revised in a manner that data bank of trained individuals is strengthened. The requirement of minimum number of directors obtaining training has been accelerated to be 100% by 2021. In addition to mandatory training of one female executive each year from 2019, companies are mandated that at least one senior executive undergo directors’ training program after 2021.
Companies are required to publish and circulate a statement of compliance with these regulations, the format of which has been provided. In addition, penal provision for non-compliance with the regulations has been added. However, where it is impractical for any company to comply with the requirements of regulations, the SECP is empowered to relax such requirement.
In view of the dynamic nature of governance standards and constantly evolving corporate sector, and financial markets, governance frameworks are consistently reviewed to keep pace with globally set benchmarks. These regulations have been framed keeping in view the dynamic governance standards, local and international best practices and need for making such governance practices relevant and effective in a structured manner.
The SECP believes that the regulations will strengthen governance practices, result in availability of enhanced information to markets participants and hence will provide better protection of the rights of all investors, particularly minority shareholders.