Draft Listed Companies: (Code of Corporate Governance) Regulations - 2019

The number of companies of which one could be a director of is five in the present code. There is no restriction on the number of directorships in subsidiaries of listed companies. The draft Listed Companies (Code of Corporate Governance) Regulations - 2019 seeks to increase the number of listed companies in which one can be a director by two, as the number of listed companies in which one can be a director is proposed to be increased to seven.
"Provided that while calculating this limit, the directorship in the listed subsidiaries of a listed holding company shall be excluded," the fading code of corporate governance provides. This has to be viewed in the background of dropping the following provision relating to number of directors in the existing regulations.
"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."
Thus according to the change suggested, limit on an individual to be a director would be seven companies as against five at present. The number of seven companies would include listed subsidiaries of the concerned parent company(ies). The new arrangement proposes to do away with the separate/independent classification of listed subsidiaries of companies' for the purpose. The listed subsidiaries of (listed) companies are proposed to be dealt with as independent companies, without peeping into their genes, being a subsidiary.
Down the line, availability of persons eligible for directorship of companies has tremendously increased. Pegged-up training avenues and availability of literature to guide the directors have substantially moved up the number of persons to act as directors of companies. A significant contribution to increase the availability of persons eligible to become directors and upping the capacity of directors have been mainly due to judiciary-supported literature and media, which carried judgments of superior courts and write-ups by law luminaries. These provided fresh looks, unfolding new dimensions as also retinues to amend the existing texts and lead to new pastures in law.
For improved expertise to function as a director, to be reckoned are many organisations conducting courses on the company directors' culture and training of directors. Thanks for adding to the number of trained may be due to:
• Institute of Chartered Accountants of Pakistan (ICAP),
• Institute of Cost & Management Accountants of Pakistan (ICMAP),
• Institute of Corporate Governance,
• Business Schools viz. IBA, LUMS, IoBM, ZABIST,
• Voluntary organizations holding seminars and conferences on corporate governance,
Need has arisen for clearing companies corridors to the increased number of incumbents available to serve as directors of companies. This has corresponded growth in various complexities. Accordingly, the situation underscores the need for a reduction in the number of directorships of companies which a director may have. One way of putting this statement is that with increased intensity of business problems and stiffening of corporate laws more time and higher level of expertise is required to be invested by the directors. This has increased the need for directors' capacity to peep into and digest the corporate affairs. Consequent has been the requirement of greater time investing in affairs of companies by the directors. The increased availability of hands to act as directors and rise in expertise level required to dovetail the corporates calls for a reduction in the number of companies one can be director of.
Doing away with the separate specie of directors holding directorship in listed subsidiaries of listed holding companies in the new code of corporate governance is a welcome proposal. Similarly, auguring well is the proposition of doing away of engagement of an independent consultant to recommend appropriate level of remunerations for consideration and approval of the board.
Comforting to note is also that no person shall be appointed as a Company Secretary unless he holds qualification specified under the relevant regulations. Traditionally, the qualification of a company secretary is holding membership of a professional Institute of Company Secretaries. Such a professional body exists in Pakistan under the name of Institute of Corporate Secretaries of Pakistan (ICSP). ICSP is registered as Guarantee Company with SECP, which has not been active for the last few years. SECP would do well to look into the case and revive ICSP, ideally shaping it under a legislation to be brought in line with the Institute of Chartered Accountants of Pakistan and the Institute of Cost & Management Accountants of Pakistan.
A company is required to post the element of its significant policies on its website, including but not limited communication and disclosure of policies of communication and disclosure, code of ethics, risk management policy, internal control and whistle blowing in addition to corporate social responsibility, sustainability, environmental and social governance policies. Redeeming on this account is insertion of the following in the draft:
"...nothing in these regulations shall affect or deemed to effect any action taken, orders issued, relaxation granted unless withdrawn, fee paid or accrued, resolution passed, direction given under the repealed instruments shall, if in force at the effective date of these regulations and not inconsistent with provision of these regulations, shall continue to be in force and have effect as if it were respectively taken, made, directed, passed, given, executed or issued under these regulations."
Significant is to require a company auditors giving a satisfactory rating under the quality control review program of the ICAP and registration with Audit Oversight Board. It is encouraging to note the provision for having in place and documentation of Audit, H.R. & Remuneration, Nomination and Risk Management Committees in the code.
Welcome is the requirement on companies posting on their websites key elements of their policies including:
(i). communication and disclosure policy;
(ii). code of ethics;
(iii). risk management policy;
(iv). internal control policy;
(v). whistle blowing policy;
(vi). corporate social responsibility/sustainability/environmental, social and governance (ESG) related policy.
Rule-27 of the proposed regulations calls for holding, at least, quarterly meetings by an Audit Committee. This suggests virtual 'hands off' by the committee from accounts of the company.
To have due functioning it should be a must for the committee to have monthly meetings.
The provision regarding the head of internal audit functionally reporting to the audit committee and administratively to the chief executive officer is tricky, forcing the internal audit head to always look to the chief executive officer. There is, therefore, a need to put the head of internal audit within the jurisdiction of the audit committees - both functionally and administratively.
Not permitting one to simultaneously hold offices of CFO and company secretary is a welcome move. The determination of qualification for a company secretary appears to have been left to the commission. The issue could better be tackled through recognition to ICSP, consequent upon reorganization of the Institute of Corporate Secretaries of Pakistan (ICSP), now a company registered by guarantee, which through the years appears to have gone dysfunctional. What is needed is reorganisation of ICSP under a specific law like ICAP & ICMAP.
Provision to the effect that same person shall not hold the office of CFO and Company Secretary has a healthy incoming.
The code permits appointment of a company secretary as secretary of the audit committee. This proposition compromises the position of company secretary as also of the audit committee. Functioning of the company is through the company secretary. He knows 'ins' and 'outs' of the company. Is privy to all activities of the board. Because of being in know of, also background of the Board's decisions, a company secretary's sitting as secretary of the audit committee will compromise his position. Knowing relevant happening in the company, he may not be comfortable before the audit committee which, during its meetings, may force him to come out with his version on the Board's decisions. This would turn him being not trustworthy as far as the Board is concerned, with the Audit Committee following suit. The secretary shall lose the
Board's confidence, which will have adverse effects on working of the company secretary. Being appointed secretary of the audit committee he may be charged by the Board for the wrongs cited by the committee. Taking him for the 'establishment's' man, the audit committee should also not be comfortable with his occupying the position of company secretary. Accordingly, required would be repeal of the provision for secretary of the company being permitted to be secretary of the audit committee.
In view of the complexities of business, onerous regulations, continuing beef-up of issues and related guidance, literature availability, what should have been done is effecting reduction in the number of companies one can be a director of. It would be in fitness of the things if the number is brought down to three, a reduction of two in comparison with what was allowed earlier. This is a number, issues related with which a director can be expected to really and meaningfully attend, contributing to chartering of the companies.
(The writer is a former Chairman of Joint Committee of ICAP & ICMAP and a Corporate Counsel. E-mail: [email protected])