Proposed amendments to Code of Corporate Governance: Senate body directs SECP to drop impracticable provisions

The Senate standing committee on finance on Wednesday directed the Securities and Exchange Commission of Pakistan (SECP) to withdraw some impracticable amendments in the Code of Corporate Governance-2002 for listed companies, including a proposal to appoint at least three independent directors on the board.
While discussing the changes in the Code of Corporate Governance-2002, SECP Chairman Muhammad Ali Ghulam Muhammad informed the committee that the independent directors should represent not less than 1/3rd or 3, whichever is higher, of the total members on the board. The percentage of independent directors needs to be increased and their names disclosed in the Annual Report.
He said that the SECP is facing resistance from companies regarding the proposal on the appointment of at least three independent directors on the board of directors of the listed companies. It would be difficult for the companies to comply with this new proposal for bringing three independent directors. The SECP would revisit the proposal in the light of recommendations of the committee.
Some members of the committee inquired about the rationale behind the introduction of revised Code of Corporate Governance. Haroon Akhtar asked the SECP chairman to specify the problems associated with the existing code on corporate governance. He said that the chambers and federations should be included in the consultative process before finalisation of the code. Some of the proposed amendments in the code would discourage companies from making investment in corporate sector.
Ishaq Dar informed the committee that the SECP should have consulted the professional bodies of chartered accountants for obtaining comments on the proposed amendments in the code. When SECP Chairman said that the committee had not received a single complaint against the existing code during last eight years, Haroon said that this committee is not a complaint cell, "but we have received reservations of companies on the proposed amendments in the code".
Endorsing the viewpoint of the committee, SECP chairman requested the committee members to submit recommendations for incorporation in the revised code. SECP Chairman responded that a lenient code was introduced in 2002, which was made part of the listed regulations. Some small size companies were unable to comply with the Code of Corporate Governance-2002. The Task Force representing all stakeholders reviewed suggestions in the existing code. The SECP had reviewed the Task Force's recommendations taking into account lessons learnt from the practical issues related to the companies and issued the revised draft for public consultation.
SECP Chairman said that the SECP is introducing the concept of annual evaluation on the board. According to the proposal, the recommendation for undertaking annual board evaluations is a positive step forward since it provides a forum for assessing its own performance, responsibilities and also aims to improve accountability.
The SECP has also proposed separation of the offices of the Chairman and CEO with the Chairman being a non-executive director of the listed company. The role of the Chairman is quite distinct from that of a CEO. The prime responsibility of a Chairman is to provide leadership to the board whilst serving as a link between the board and the CEO.
He said that a number of changes have also been proposed to the board committees and their composition. Under the recommendations, it is proposed that the Audit Committee has a majority of independent directors and that its chairman should be from among the independent directors. Also, it has been made mandatory to have a board's Human Resources and Remuneration Committee of not less than three members, including at least one independent director, and if so invited by the Board, the CEO (who shall not participate in proceedings relating to his own pay and performance). The chairman of the committee is proposed to be from among the non-executive directors. A Human Resources and Remuneration Committee plays a pivotal role in bringing more transparency to the compensation structure of senior management and puts in place a succession plan to ensure achievement of corporate objectives/goals.
This amendment has been proposed to ensure independence of the internal audit function and also to bring more clarity in case the internal audit function is outsourced. Secretary Finance Dr Waqar Masood said that there should be limit on the number of subcommittees as there is cost of running such large number of committees. If there are more committees, the expenses of the companies would be increased.
SECP Chairman said that so far the commission has received around 80 suggestions from different stakeholders. The SECP has planned to implement the revised code by March 2011. The date for the implementation of the code needs to be extended for another three months to incorporate the recommendations of the Senate Standing Committee on Finance. Once the fresh recommendations of the committee are received, the new code is expected to be implemented by June 2011.
SECP Chairman further said that the amendments proposed recognise that there must be a balance of executive and non-executive directors on the board; in particular, emphasis is placed on the representation of independent directors and those representing minority interests. This is to ensure that the board includes directors who can exercise independent judgement.
In accordance with the above recommendation, the proportion of the executive directors (including the CEO) should not be less than 2, not more than 1/3rd of the elected directors. This is to ensure effective representation of executive directors and non-executive directors including independent directors on the board.
An increased time commitment by the directors is essential for the proper functioning of the board. For this reason, the SECP has proposed to limit at 5 the number of directorships that an individual can hold in listed companies. Directorships of listed subsidiary companies of a Group Holding Company are not to be included in this limit given certain conditions.
In addition to the existing requirement for attending Orientation Courses and to ensure that the individual directors possess core competencies, it is made mandatory for directors of listed companied to attain certification from any such other organisation or director education program as may be accredited by SECP rather than just from PICG.
The SECP has proposed to add the Head of Internal Audit' (previously just the CFO and Company Secretary), in respect of removal by the CEO with the approval of the board of directors. Since the appointment of the Head of Internal Audit is to be made with the approval of the board of directors, this seeks to protect the removal of the same.
The proposed draft also prescribes the qualifications of head of Internal Audit. This provision has been added to bring more transparency in to director remuneration matters. This is also done as part of international best practices, the SECP Chairman added.