The government has recently appointed a new Chairman of the SECP. The appointment has received positive reaction from capital markets and investors. There are several reasons that the SECP required a Chairman, who should be familiar with the capital markets issues.
The capital markets view seems to be that he is fully aware of the issues affecting the smooth operations of the bourses and has all the professional capabilities to resolve the long outstanding issues so that a clear direction is given to these institutions to move ahead and attract additional investments from within and outside Pakistan in line with other regional bourses. The resolution of these should certainly enhance the confidence over the functioning of these bourses.
The general impression so far is that the SECP is not responding to the needs of the stakeholders. The Board of Directors of KSE has approved the product of "Margin Trading System" (MTS) sometimes ago which was sent to the SECP for final approval. The decision is still awaited. Similarly, there has been no progress over the issue of demutualization of bourses.
In the past, SECP's performance for developing capital markets has not been up to the desired standard. This is evident from an ongoing tussle between the bourses and the SECP on the appointment of nominated directors and the board's chairman. The tussle has weakened mutual trust and confidence among the member and non member directors. The present stalemate in resolving these issues has damaged the functioning of the capital markets. This aspect requires an urgent confidence building measures by the new Chairman.
The directors nominations are being made to accommodate, inexperienced, non-qualified and non-professionals who have absolutely no knowledge of stock exchange functioning. Despite this criticism, the SECP has not framed any rules that ensure transparency in the system of director's nomination. The SECP, by using its vast discretionary powers, has violated the procedure of nomination of directors as laid down in the Articles and Memorandum of Association of the exchanges. This desires prior consultation with the professional bodies before their nomination is finalised.
Adopting a transparent policy for nominating directors in future should strengthen the independence of the KSE Board. This is essential for KSE's independence and transparent functioning. The SECP should come out with a positive statement that the nominated directors would henceforth be independent in real sense. Once nominated, the SECP should not, in any way, influence them. Their fiduciary role should be as per the law. They should be equally held responsible for any negligence as elected directors. The SECP should not provide any protection to its nominated directors in case they are negligent in their role as independent directors. This would put sufficient pressure on the nominated directors to take the appointment seriously and become participative and productive in the board meetings.
It has been observed that the nominee directors have always been from a group of people, who are already directors on other companies and generally, there have been complaints that they do not have enough time to concentrate on capital market issues. They attend meetings without any preparations and normally act as rubber stamp of the SECP. The impression that they are just rubber stamp of the SECP does not give an impression of impartiality among equals. They deserve to be respected as impartial and that is the only way they would be able to demonstrate their effectiveness. The SECP should allow them free and independent exercise of discretion in the interest of capital markets.
The perception that non-executive director's appointment on board improves corporate governance is not always right. There are instances where big and reputable companies, having adequate number of non-executive directors on its boards, went bust or performed poorly.
The case of Hollinger International, owner of several reputable daily newspapers throughout the world is one example where "non-compete" payments were made to the chairman out of books for several years, but the non-executive directors were neither aware nor objected to these payments. In the case of Shell, a Dutch company that has been overstating its oil reserves for several years and boosting its profits and share value despite the company being managed by a two-tier board structure out of which one was composed of non-executive directors. The non-executive directors did not detect this.
In our own country also, where nominated directors are appointed by the financial institutions to safeguard their interest in a board whom financing has been provided, our experience shows that those companies are the worst performers and remained defaulted compared with those where there were no outsider as nominated directors. This shows that non-executive directors, though they may have the requisite experience and knowledge, may not be in a position to act as whistleblowers in our culture as is expected from them.
Similarly, the KSE board has also not performed to the satisfaction of the stakeholders and its members since the process of nomination has been put in place. Just to quote one recent example, The Board of KSE allowed a substantial heavy remuneration package to its outgoing managing director, who has recently completed his tenure of three years. It amounted to approximately over 65 million rupees per annum. This includes his salary, perquisites, reimbursed expenses, annual performance bonuses personal security and travel cost. The stakeholders fail to understand how a small organisation like the KSE, whose income is on the decline due to consistent lower volumes since 2008 debacle, could have afforded this expensive position.
The SECP should have taken note of this situation seriously as it was members' money that has been thrown away in this manner. The remuneration package should have been compared with other parallel positions within the country and linked with performance. Whether these payments were approved by the board remains questionable. If these were, then certainly there was some negligence on the part of the chairman and the board. These huge payments are not even offered to the top executives of multinational companies or to leading banking institutions where the branch network is spread all over Pakistan with definitely greater responsibility than this position.
The KSE Chairman's differences with the rest of the board members on several issues are quite visible, reflecting a divided body, which is hindering the official business of the KSE. That is why the since the election of this Board in 2010, no visible progress has been visible to revive the activities of capital markets through introducing new products to improve volumes and price discovery. The SECP will have to resolve the thorny issue of appointing an independent chairman of the board from among the members or non-member. This would ensure an amicable resolution of the issue without any judicial recourse. As there seems to be little hope of early demutualization of the bourses, the structure of the board should be reviewed again and anomalies, if any, in the nominee directors, must be removed.
It is being proposed that the Board should consist of all member directors. The SECP should nominate four directors from amongst the members as opposed to outsiders. The remaining five should be elected from amongst the members as is the case now. This structure would ensure the necessary expertise available to make sound decisions and is expected to work like a co-ordinated body. It is also suggested that the chairman should be from amongst the elected directors due its impartial role to supervise the meetings of the board. These structural changes are essential as nominated directors have normally no capital market experience, are not related to this investment sector and represent the regulator without taking any interest for stakeholders. They are also expensive due to their perquisites paid to them.
The present proposal to reverse the mode of selection for the chairman of the board has also several merits. It is argued that non elected chairman has several shortcomings. Firstly, he is not an expert of capital market. Secondly, being a non-stakeholder, his performance remains below standard. Thirdly, as he represents the SECP, he awaits signals from Islamabad to act. It amounts to conflict of interest situation in favour of the SECP? The decisions are not made with impartial mind. The element of conflict of interest in any composition cannot be ruled out completely whichever way the chairman is selected. It needs only to be managed and balanced properly among the stakeholders.
It is hoped that the new chairman would speed up the resolution of these issues to bring out the capital markets from stagnation to a more active, viable and fast moving markets of the region.
(The writer is a fellow member of Chartered Institute of Management Accountant (UK) and also holds LLM. (Commercial law) from United Kingdom)