Federal Finance Minister Finance Saleem H Mandviwala asked the Securities and Exchange Commission of Pakistan (SECP) and Economic Reforms Unit (ERU) of the finance ministry to formulate a strategy to ensure the successful implementation of these rules to bring more transparency in the functioning of these state-run entities.

“The government took the initiative to turn around the PSEs and constituted a cabinet committee on restructuring them,” he said. “It has also constituted a new board of directors for PSEs. The appointment of chief executive officers on merit has already minimised political interference in the management of such companies,” he said.

SECP Chairman Muhammad Ali, said, “According to official estimates, eight major PSEs are receiving more than Rs300 billion in annual support and bailouts from the federal government, thereby draining fiscal resources which may otherwise be used to improve public services.”

He said that the fact that Public Sector Companies (PSCs) operate in various legal forms presents a big challenge. “The companies and entities governed under special enactments, statutory corporations, directorates, departmental undertakings, cooperatives and trusts shall be incorporated first as limited liability companies under the Ordinance since the company law framework itself takes care of most of the governance issues faced by such entities,” he said.

Ali also recommended establishing a PSEs Monitoring Unit and database for potential independent directors on the Board of PSEs.

The corporatisation process of state-owned enterprises or state-controlled entities created by special statutes also needs to be considered on a priority basis. This harmonisation of legal status would allow a leveling of the playing field with private competitors. Further, the fragmented ownership of the government in various PSCs also needs to be controlled through a centralised mechanism.

Ali said that the board of directors (BOD) shall comprise at least 40 percent independent directors within two years of the notification of the rules and thereafter a majority will be independent directors. Furthermore, to ensure the tenure of the BOD, a director, once appointed or elected, shall hold office for a period of three years in accordance with the provisions of the Companies Ordinance, 1984 – unless he resigns or is removed in accordance with the provisions of the Companies Ordinance.

The rules also specify that the chairman of the BOD shall be elected by the board from among the independent directors. Finally, the BOD has been empowered to recommend at least three individuals to the government for appointment as chief executive, and shall appoint the chief executive after reaching consensus, in line with the provisions of the Companies Ordinance.

These rules have laid down specific requirements pertaining to corporate, financial reporting and accounting framework. All PSCs are required to adopt International Financial Reporting Standards (IFRS) and the directors’ report to the members shall also include detailed disclosures specific to the PSC operations based on its social mandate. This includes preparing a profit and loss account and balance-sheet on a quarterly basis for the board’s approval.

Annual report, including annual financial statements, shall be placed on the PSC’s website, while all PSCs are required to prepare monthly accounts, for circulation among the board members. The annual report to the shareholders will also disclose the remuneration of the members of the BOD along with a statement on the remuneration policy.

“The rules lay down specific requirements with regard to creation of the BOD’s audit committee, internal and external audit for all PSCs,” said Ali. Further, they lay down criteria for the appointment and removal of the Chief Internal Auditor as well as separating the position of the chairman and CEO to achieve an appropriate balance of power, increasing accountability and improving the BOD’s capacity for decision making, independent of management, he said.

Finally, they introduce the concept of performance evaluation of members of the BOD, including the chairman and the chief executive. The committees of the BOD will also carry out their evaluation on an annual basis, while the BOD is required to monitor and assess the performance of senior management at least once a year, and hold them accountable for accomplishing objectives and goals.

Country Director, Center for International Enterprise (CIPE) Moin Fudda said that the task force held a number of group meetings and three roundtables in Islamabad, Lahore and Karachi for consultation.

“More than 500 stakeholders participated in the deliberations and thereafter the draft rules were placed on the SECP official website for 60 days for feedback,” he said. After incorporating necessary input received from the stakeholders, the taskforce presented a consensus report in the SECP policy board for approval. The SECP policy board approved the Corporate Governance Rules Draft report, 2013, and presented it for the approval of federal government, he said.

The World Bank and Asian Development Bank appreciated the government’s effort in launching the rules. The World Bank pledged to extend support to ensure compliance with them through its capacity development initiatives.

Country directors of these two major multilateral donor agencies said that the corporatisation approach involves improving managerial incentives and clarifying budget constraints on public enterprises so their performance improves without the government relinquishing ownership. They expressed the hope that these rules would help improve state of affairs in PSEs.