The proportion of independent directors on the boards of public sector companies is being changed from a majority to a minimum of one-third of the total board under the Securities and Exchange Commission of Pakistan (SECP) proposed rules. Sources told Business Recorder here on Saturday that the amendments are being made in the Public Sector Companies (Corporate Governance) Rules, 2013.
About the status of independent members on the boards, sources said that presently the Rules require a majority of independent members on the boards. The proportion of independent directors on the boards of public sector companies is being changed from a majority as at present to a minimum of one-third of the total board. The amendments proposed in the Rules are aimed at rationalising the provisions relating to composition of board of directors, streamlining the criteria and specifying the circumstances for removal of directors, incorporating changes pursuant to the promulgation of the Companies Ordinance, 2016, ensuring effective accountability, and providing for sound and prudent management of public sector companies, etc.
The concept of independent directors has not been introduced recently but was done when the Rules were originally issued in 2013. It was aimed to include professional expertise on the board and avoid conflict of interest situations in board processes and decision-making.
Based on the implementation experience as well as feedback received from the line ministries of public sector companies and other stakeholders, it was deemed necessary to introduce certain amendments to the rules to facilitate compliance and ensure to good corporate governance principles.
They said that the public sector companies are significant economic players delivering critical services in important economic sectors. With the approval of the federal government, the SECP issued these rules in 2013. The rules were aimed at improving the governance of PSCs through a range of measures, including empowering the board of directors, facilitating the government to exercise its ownership function, and strengthening the internal control mechanism, etc.
The provisions which have been proposed to be amended or added to the rules include introduction of criteria for sound and prudent management of public sector companies, change in the proportion of independent directors on the boards from a majority to a minimum of one-third, specifying additional grounds for removal of non-performing directors, revision of criteria for appointment of chairman and chief executive, requirement for the government to enter into performance contracts with directors at the time of their appointment, and optimisation of fit and proper criteria for the directors, etc.
Sources added that the proposed amendments will improve standards of good corporate governance in public sector companies by facilitating them in improving their performance, minimising political interference in the management, ensuring proper and effective use of public assets and resources, and maintaining a balance between public service delivery and profitability.
It is worth mentioning that the repealed Companies Ordinance, 2016 had given powers to the federal government to appoint and remove chief executives of public sector companies and the same is applicable as per relevant rules made under the Companies Ordinance, 1984.
The right of appointment and removal of chief executive of public sector companies vests with the government as per the Companies Ordinance, 1984 and Public Sector Companies (Corporate Governance) Rules, 2013 (the Rules). The right to appoint or remove directors/CEO in public sector companies where the majority shareholders as well as voting power is held by the government, has always been with the government by virtue of section 183 of the Ordinance of 1984 and the same position has been retained except a minor correction to remove the ambiguity/clarification created by virtue of PSC Rule, which is a subordinate legislation.
Under section 187 of the Companies Ordinance, 1984, the directors nominated by the federal government need not be the members of the company (qualification share) so this makes it abundantly clear that said directors are simply agents of the government (principal). Once any such director, if also holding the position of chief executive, is removed by the government under section 183 of the Companies Ordinance, 1984, he/she shall also cease to hold that position.