A little more than a month ago, the Securities and Exchange Commission of Pakistan issued the draft code of corporate governance for listed companies. That is indeed an appreciable step; Enron’s bankruptcy story and Japan’s Fukushima Dai-Ichi nuclear station disaster in 2011 are prime examples for the need to have solid corporate governance in place. However, there are a few areas this column would like to flag in hopes that the SECP would consider before finalizing these regulations.
The major set of observations revolves around directorships. For instance, the draft maintains that each listed company shall have independent directors, which shall not be less than two members or one third of the total board members, whichever is higher. However, the draft is rather silent about the status of decisions taken by a board that does not have the independent directors. Should the absence of independent directors be construed as if the board is incomplete? Likewise is the question of the board’s quorum. For the purpose of clarity, the SECP needs to tweak its relevant provisions.
Sticking to the subject of independent directors, one of Karachi’s senior corporate counsels Mr. Qaisar Mufti makes another pertinent point. He asserts that independent directors should not hold independent directorships in more than three companies.
Failure to limit the number of board’s independent directors can increase the risk of creating independent directors as a pressure group. At the same time, it would also mean that the culture and professional talent for independent directorships would not grow at a desired pace because a select group of people may hold independent directorships in too many companies. The bottom-line is that the market of independent directorships needs to be developed to promote this culture. If the usual faces end up being independent directors at umpteen boards, how independent would they really be?
Similarly, while this column agrees with the proposed bar on simultaneous directorship in not more five listed companies, the proposal to exclude listed subsidiaries need to be reconsidered if diversity is indeed one of the overarching principle of these regulations. Imagine a listed company XYZ, that has eight listed subsidiaries in eight various business sectors – from coal, food, fertilizer, terminal, ICT etc. Can a director dedicate her time and efforts to so many diverse companies especially if she is a non-executive director who – as per international best practices – ought to be cherry picked for their personal qualities, experience and specialist knowledge?
It is good to note that the SECP is taking steps to break the glass ceiling for female professionals by proposing regulations that the board of directors shall have at least one female director. However, clarity is needed whether or not female directors shall be a category of directors by itself. If it is a separate category, then the process of elections of directors will also need to be changed accordingly; whereas it will also affect the completeness or incompleteness of the board. The SECP needs to make clarifications to this end.
While in today’s column we have discussed some of the issues regarding directorships, in the ensuing pieces, we would flag some of concerns about role of CFO, and the issue of necessary qualifications needed in key company positions. (PS: Instead of making multiple citations, BR Research would like to make a blanket acknowledgement that this article draws heavily on conversations with Mr. Mufti).
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