Corporate Law and

Corporate Governance
Lecture 10
Ummar Ziauddin
LLM Berkeley, Barrister of Lincoln’s Inn
Relevant Reading
• These lecture slides
• And shared material on listed and public sector companies
Agenda

• Listed Companies (Code of Corporate Governance) Regulations, 2017

• PUBLIC SECTOR COMPANIES (CORPORATE GOVERNANCE) RULES,
2013
Number of Directorship and Composition of
Board
• 3. Number of Directorship.- No person shall be elected or nominated
or hold office as a director of a listed company including as an
alternate director of more than five listed companies simultaneously:
Provided that while calculating this limit, the directorship in the
listed subsidiaries of a listed holding company shall be excluded.
The limit on the number of directorships a person can hold will
become effective when the board is restructured, either by the end of
its current term or within one year from the effective date of these
Regulations, whichever comes first.
Diversity on the board
4. Diversity in Board.- The board of directors shall comprises of
members having the core competencies, diversity, requisite skills,
knowledge, experience and fulfils any other criteria relevant in the
context of the company’s operations.
Independent Directors
• 6. Independent Director.- (1) The independent directors of each listed
company shall not be less than two members or one third of the total
members of the board, whichever is higher:
• To elect independent directors, the board must be restructured by
the end of its current term in accordance with the effective date of
these Regulations.
Female Director
• 7. Female Director.- The board of directors shall have at least one
female director when it is next reconstituted not later than expiry of
its current term or within the next one years from the effective date
of these Regulations, whichever is later.
Executive Director
• 8. Executive Director.- The executive directors, including the chief
executive officer, shall not be more than one third of its board of
directors.
• Explanation: 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.
Office of Chairman
9. Chairman of Board.- The Chairman and the chief executive officer of
a company, by whatever name called, shall not be the same person.
The chairman shall be elected subject to such terms and conditions and
responsibilities as provided under Section 192 of the Act and these
Regulations.
Responsibilities of Board of Directors and its
members
• (3) The board of directors of a company shall ensure that:
• (i) a vision and/or mission statement and overall corporate strategy for the
company is prepared, adopted and reviewed as and when deemed appropriate
by the board.
• (ii) a formal code of conduct is in place that promotes ethical culture in the
company and prevents conflict of interest in their capacity as member of the
board, senior management and other employees. The board shall take
appropriate steps to disseminate code of conduct throughout the company along
with supporting policies and procedures and these shall be put on the company’s
website;
• (iii) adequate systems and controls are in place for identification and redressal of
grievances arising from unethical practices;
• (v) a formal and effective mechanism is put in place for an annual evaluation of
the board’s own performance, members of board and of its committees;
4) The board of directors shall maintain a complete record of particulars of
the significant policies along with their date of approval or updating. The
significant policies may include but are not limited to the following:

a) governance of risks and internal control measures;

b) human resource management including preparation of a succession plan;
c) permissible fee for non-executive directors including independent
directors
d) procurement of goods and services
e) communication policy and investors’/shareholders’ relations
f) marketing
g) determination of terms of credit and discount to customers
h) write-off of bad/doubtful debts, advances and receivables
i) sale and lease of assets, undertaking, capital expenditure, planning
and control
j) investments and disinvestment of funds
k) debt coverage
l) determination and delegation of financial powers
m) transactions or contracts with associated companies and related
parties
n) environmental, social and governance (ESG) including health and
safety aspects in business strategies that promote sustainability. This
includes but is not limited to corporate social responsibility (CSR)
initiatives and other philanthropic activities, donations / contributions
to charities and other social causes; and
o) whistle blowing policy, by establishing a mechanism to receive,
handle complaints in a fair and transparent manner while providing
protection to the complainant against victimization.
Board Meetings
• 11. Agenda and discussion in meetings.- The chairman shall set the
agenda of the meeting of the board and ensure that reasonable time
is available for discussion of the same. All written notices and relevant
material, including the agenda, of meetings shall be circulated at least
seven days prior to the meetings, except in the case of emergency
meetings, where the notice period may be reduced or waived.
• 12. Minutes of meeting;- The chairman shall ensure that the minutes
of meetings of the board of directors are kept in accordance with the
requirements of Section 178 and 179 of the Act. The company
secretary shall be secretary to the board.
Conflict of interest
• 16. Conflict of Interest.- If a director has a conflict of interest in a
matter being discussed by the board of directors, at least two
independent directors must be present in person or through video
link at the meeting when the matter is first being considered. This
ensures that there is a proper quorum for the meeting and that there
is a balance of independent and non-independent directors present
for the discussion. This requirement applies even if the company's
articles of association say otherwise and is in addition to the
provisions of section 207 of the Act.
Remuneration of Directors
• 17. Formal Policy.- The board of directors shall have in place a formal
policy and transparent procedure for fixing the remuneration
packages of individual directors for attending meetings of the board
and its committees.
• 18. Determination of remuneration.- (1) No director shall determine
his own remuneration. Levels of remuneration shall be appropriate
and commensurate with the level of responsibility and expertise, to
attract and retain directors needed to govern the company
successfully and to encourage value addition. However, it shall not be
at a level that could be perceived to compromise their independence.
• (2) The process adopted for determination of director’s remuneration
shall comply with the provisions of the Act and the Company’s articles
of association:
• Provided that if the company’s articles of association authorizes the
board to determine director’s remuneration, an independent
consultant may be engaged to recommend an appropriate level of
remuneration for consideration and approval of the board.
Directors’ Training
19. Directors’ Orientation Program.- All 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
company for and on behalf of shareholders.
20. Directors’ Training.- (1) It shall be mandatory for all companies to ensure
that:
a) by June 30, 2019, at least half of the directors on their boards;
b) by June 30, 2020 at least 75% of the directors on their boards; and c) by
June 30, 2021 all the directors on their boards have acquired the prescribed
certification under any director training program offered by institutions, local
or foreign, that meet the criteria specified by the Commission and approved
by it.
Committees of the Board

• 28. Audit Committee.- (1) Composition: The audit committee shall be

constituted by board of directors keeping in view the following
requirements:

a) The board of directors of every company shall establish an audit

committee of at least of three members comprising of non-executive
directors and at least one independent director.
b) Chairman of the committee shall be an independent director, who
shall not be the chairman of the board.
• c) The board shall satisfy itself such that at least one member of the
audit committee qualifies as “financially literate”.
• Explanation: Expression “financial 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.
d) The Audit Committee of a company shall appoint a secretary of the
committee who shall either be the company secretary or head of
internal audit.
Terms of reference

3) Terms of Reference: The board of directors of every company shall

determine the terms of reference of the audit committee. The board of
directors shall provide adequate resources and authority to enable the audit
committee to carry out its responsibilities effectively. The terms of reference
of the audit committee shall be explicitly documented and shall also include
the following:
a) determination of appropriate measures to safeguard the company’s
assets;
b) review of annual and interim financial statements of the company, prior to
their approval by the Board of Directors, focusing on:
(i) major judgmental areas;
(ii) significant adjustments resulting from the audit;
(iii) going concern assumption;
(iv) any changes in accounting policies and practices;
(v) compliance with applicable accounting standards;
(vi) compliance with these regulations and other statutory and
regulatory requirements; and
(vii) all related party transactions.
Human Resource and Remuneration
Committee

• 29. Human Resource and Remuneration Committee: (1)

Composition: 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.
(3) Terms of Reference: The Terms of reference of committee shall be determined by the board of
directors which may include the following:
(i)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;
ii. 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;
iii. recommending human resource management policies to the board
Compliance with regulations
• 41. Penalty for contravention of Regulations: Whoever fails or
refused to comply with, or contravenes any requirements of the
Regulations, knowingly or willfully authorizes or permits such failure,
refusal or contravention, in addition to any other liability under the
Act, be punishable with penalty and in case of continuing failure, to a
further penalty as provided under sub-section (2) of section 512 of
the Act.
• 42. Relaxation from requirements of Regulations.-Where the
Commission is satisfied that it is not practicable to comply with any of
the requirements of the Regulations, it may, for reasons to be
recorded, on the application of the company along with prescribed
fee, relax the same subject to such conditions as it may deem fit.
512(2) of the Companies Act , 2017
• (2) Any regulation made under sub-section (1) may provide that a
contravention thereof shall be punishable with a penalty which may
extend to five million rupees and, where the contravention is a
continuing one, with a further penalty which may extend to one
hundred thousand rupees for every day after the first during which
such contravention continues.
PUBLIC SECTOR COMPANIES (CORPORATE GOVERNANCE) RULES, 2013
Amended vide S.R.O. No. 275(I)/2017 dated April 21, 2017
• “Executive” means an employee of a Public Sector Company, who is
entrusted with responsibilities of an administrative or managerial
nature, including the Chief Executive and Executive Director;
• “Independent Director” means a Non-Executive Director who is not in
the service of Pakistan or of any statutory body or any body or
institution owned or controlled by the Government and who is not
connected or does not have any other relationship, whether
pecuniary or otherwise, with the Public Sector Company, its
associated companies, subsidiaries, holding company or directors.
Test of independence
• The test of independence principally emanates from the fact whether such
person can be reasonably perceived as being able to exercise independent
judgment without being subservient to any form of conflict of interest. A director
shall not be considered independent if one or more of the following
circumstances exist,-
• (i) he has been an employee of the Public Sector Company, any of its subsidiaries,
or holding company during the last two years;
• (ii) he has, or has had within the last two years, a material business relationship
with the Public Sector Company either directly or indirectly, or director of a body
that has such a relationship with the Public Sector Company;
• (iii) he has received remuneration in the two years preceding his appointment as
a director or has received additional remuneration excluding retirement benefits
from the Public Sector Company apart from director’s fee or has participated in
the Public Sector Company’s share option or a performance-related pay scheme;
• (iv) he is a close relative (spouse, lineal ascendants and descendants
and brothers and sisters) of the company’s promoters, directors or
major shareholders;
• (v) he holds cross-directorships or has significant links with other
directors through involvement in other companies or bodies; or
• (vi) he has served on the Board for more than two consecutive terms
from the date of his first appointment provided that such person shall
be deemed independent director after a lapse of one term;
NEDs
• “Non-Executive Director” means a director of a Public Sector
Company who is not entrusted with responsibilities of an
administrative or managerial nature;
• (g) “Public Sector Company” means a company, whether public or
private, which is directly or indirectly controlled, beneficially owned
or not less than fifty one percent of the voting securities or voting
power of which are held by the Government or any instrumentality or
agency of the Government or a statutory body, or in respect of which
the Government or any instrumentality or agency of the Government
or a statutory body, has otherwise power to elect, nominate or
appoint majority of its directors, and includes a public sector
association not for profit, licensed under section 42 of the Ordinance.
Fiduciary roles
• 2A. Criteria for sound and prudent management. - (1) For the purposes of these rules,
the following shall be the criteria for sound and prudent management of a Public Sector
Company, which shall be bound to comply with it at all times namely: -
• (a) the business of the Public Sector Company is carried on with integrity, objectivity, due
care and the professional skills appropriate to the nature and scale of its activities;
• (b) each director and chief executive officer, by whatever name called, of the Public
Sector Company complies with the fit and proper criteria specified under these rules;
• (c) the Public Sector Company is directed and managed by a sufficient number of persons
who are fit and proper persons to hold the positions which they hold; and
• (d) the Public Sector Company maintains adequate accounting and other records of its
business.
• 3. Composition of the Board. (1) The Board shall consists of executive
and non-executive directors, including independent directors and
those representing minority interests with the requisite range of
skills, competence, knowledge, experience and 5 approach so that
the Board as a group includes core competencies and diversity
considered relevant in the context of the Public Sector Company’s
operations. (2) The Board shall have at least one-third of its total
members as independent directors. The Public Sector Company shall
disclose in the annual report non-executive, executive and
independent directors
• 4. Role of the chairman and chief executive and separation of the two
positions.- (1) The office of the chairman shall be separate, and his
responsibilities distinct, from those of the chief executive. (2) The
chairman of the Board shall,- (a) ensure that the Board is properly
working and all matters relevant to the governance of the Public
Sector Company are placed on the agenda of Board meetings; (b)
conduct the Board meeting including fixing the agenda; and (c)
ensure that all the directors are enabled and encouraged to fully
participate in the deliberations and decisions of the Board. The
chairman has a responsibility to lead the Board and ensure its
effective functioning and continuous development, he shall not be
involved in day to day operations of the Public Sector Company.
• (3) The chief executive is responsible for the management of the
Public Sector Company and for its procedures in financial and other
matters, subject to the oversight and directions of the Board, in
accordance with the Ordinance and these rules. His responsibilities
include implementation of strategies and policies approved by the
Board, making appropriate arrangements to ensure that funds and
resources are properly safeguarded and are used economically,
efficiently and effectively and in accordance with all statutory
obligations. (4) The chairman of the Board shall be elected by the
Board of Directors of the Public Sector Company. However, this
provision shall not apply where chairman of the Board is appointed by
the Governmen
• 5. Responsibilities, powers and functions of the Board.
• - (1)The directors of a Board shall be persons who, in opinion of the Government, shall assist the
Public Sector Company to achieve its principal objective and the Board shall accordingly exercise
its powers and carry out its fiduciary duties with a sense of objective judgment and in the best
interest of the company. This provision shall apply to all directors, including ex officio directors.
• (2) The Board shall evaluate the candidates based on the fit and proper criteria and the
guidelines specified by the Commission for appointment to the position of the chief executive and
recommend at least three candidates to the Government for its concurrence for appointment of
one of them as chief executive of the Public Sector Company, except where the chief executive is
nominated by the Government. On receiving concurrence or nomination of the Government, as
the case may be, the Board shall appoint the chief executive in accordance with the provisions of
the Ordinance. The Board shall also be responsible for development and succession planning of
the chief executive.
• (3) The Board shall ensure that 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 as are considered necessary
• (4) The Board shall ensure that professional standards and corporate values are in
place that promotes integrity for the Board, senior management and other
employees in the form of a “Code of Conduct”. The code of conduct shall
articulate acceptable and unacceptable behaviors. The Board shall ensure that
appropriate steps are taken to communicate throughout the company the code of
conduct it sets together with supporting policies and procedures, including
posting the same on the company’s website.
• The Board shall also ensure that adequate systems and controls are in place for
the identification and redressal of grievances arising from unethical practices.
• (5) The Board shall establish a system of sound internal control, which shall be
effectively implemented at all levels within the Public Sector Company, to ensure
compliance with the fundamental principles of probity and propriety; objectivity,
integrity and honesty and relationship with the stakeholders, in the following
manner
Director’s remuneration
• 19. Directors’ Remuneration. – (1) There shall be a formal and transparent
procedure for fixing the remuneration packages of individual directors. No
director shall be involved in deciding his own remuneration.
• (2) Directors’ remuneration packages shall encourage value creation within the
company, and shall align their interests with those of the company. These shall be
subject to prior approval of shareholders or Board as required by company’s
Articles of Association. Levels of remuneration shall be sufficient to attract and
retain the directors needed to run the company successfully.
• (3) Subject to the provisions of the company’s Articles of Association, the
shareholders or Board shall determine the scale of remuneration for non-
executive directors. However, it shall not be at a level that could be perceived to
compromise their independence.
• (4) The Public Sector Company’s annual report shall contain criteria and details of
the remuneration of each director, including salary, benefits and performance
linked incentives.
CRITERIA FOR DETERMINING A ‘FIT AND
PROPER PERSON’
• (1) For the purpose of determining as to whether a person proposed to be
appointed as director is a ‘fit and proper person’, the appointing authorities
shall take into account any consideration as it deems fit, including but not
limited to the following criteria, namely:- The person proposed for the said
position – (a) is at least graduate; (b) is a reputed businessman or a
recognised professional with relevant sectoral experience; (c) has financial
integrity; has no convictions or civil liabilities; (e) is known to have
competence; (f) has good reputation and character; (g) has the traits of
efficiency and honesty; (h) does not suffer from any disqualification to act
as a director stipulated in the Ordinance; (i) has not been subject to an
order passed by the Commission cancelling the certificate of registration
granted to the person individually or collectively with others on the ground
of its indulging in insider trading, fraudulent and unfair trade practices or
market manipulation, illegal banking, forex or deposit taking business;
• (j) has not been subject to an order passed by the Commission or any
other regulatory authority, withdrawing or refusing to grant any
license or approval to him which has a bearing on the capital market;
(k) is not a stock broker or agent of a broker; and(l) does not suffer
from a conflict of interest; this includes political office holders
whether or not in a legislative role.
• (2) A director shall cease to be considered as a “fit and proper person” for
the purpose, if he incurs any of the following disqualifications, namely:- (a)
he is convicted by a court for any offence involving moral turpitude,
economic offence, disregard of securities and company laws or fraud; (b)
an order for winding up has been passed against a company of which he
was the officer as defined under section 305 of the Ordinance; (c) he or his
close relatives have been engaged in a business which is of the same
nature as and directly competes with the business carried on by the Public
Sector Company of which he is the director; (d) he does not conduct his
duties with due diligence and skill; or (e) his association with the Public
Sector Company is likely, for whatever reason, to be detrimental to the
interest of the Public Sector Company, or be otherwise undesirable
CHEERS