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  • May 26th, 2017
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Improving standards of good Corporate governance in respect of corporate entities has always remain a priority regulatory objective of the Commission. The Companies Bill, 2017 contains a lot of measures that will transform the corporate governance landscape of the country in the years to come.

THE DRAFT LAW WOULD BE ENACTED AS SOON AS IT IS SIGNED BY THE PRESIDENT Although a number of regulatory initiatives to enhance standards of good Corporate governance were taken by the Commission ever-since its establishment, such measures have remained confined to the administered legislation for certain classes of companies for which it was deemed essential to introduce governance reforms for the protection of interests of investors and other stakeholders. Needless to mention that investor protection has always remained to be a primary objective of the Commission, as enshrined in the preamble to the Companies Ordinance, 1984 as well as other primary legislations entrusted to it. However, introduction of corporate governance reforms through the primary legislation, ie company law is unprecedented and the Companies Bill 2017 is the first piece of legislation that will enable full-fledged and effective enforcement of Corporate governance principles in the country. This regulatory intention is evident from the revised preamble to the Bill which mentions, inter-alia, the objective of inculcating principles of good governance and safeguarding minority interests in corporate entities.

The first regulatory initiative in the corporate governance arena was taken as far back as 2002 when the Commission issued the Code of Corporate Governance for listed companies. The Code was issued through the listing regulations of the stock exchanges and its enforcement powers stood vested with them. Keeping in view the international best practices and the implementation experience based on a decade of history, the Commission undertook a review of the Code which was revamped and finally issued in 2012. Successful implementation of the Code led the Commission to expand the scope of corporate governance provisions on other classes of companies, including the companies owned and controlled by the government.

There was a realization that the Government has to follow good corporate governance while exercising the ownership of public sector enterprises (PSEs) to achieve transparency, disclosure and accountability in the public sector as the government represents and is accountable to millions of taxpayers and citizens for the appropriate and efficient use of public assets. Internationally, as well as, in Pakistan, PSEs are key players in strategic sectors of the economy and their performance has strong consequences for the broad segments of the population and other parts of business sector. In line with this objective, the Commission issued the Public Sector Companies (Corporate Governance) Rules, 2013 after the same were approved by a task force formed by the Federal Government on corporate governance of public sector enterprises.

However, there had been an imminent recognition of the need to include the underlying principles of corporate governance within the primary law itself. Accordingly, the Concept Paper for the Regulation and Development of the Corporate Sector prepared by the Corporate Laws Review Commission (CLRC) established by SECP strongly recommended adoption of corporate governance principles in the new law. Members of CLRC agreed that the conceptual approach to be adopted in the formulation of the new law shall include promotion of a framework of strong corporate governance to effectively balance the interests of the different stakeholders in a company. Additionally, it was suggested that the recommendations contained in the Code of Corporate Governance may be considered for inclusion within the law itself. Particularly the law may provide for independent and non-executive directors to be included in the Board to perform its oversight role impartially and objectively, the paper says.

The concept paper also strongly recommended incorporation of the concept of directors' fiduciary duty as well as the business judgment rule, which would allow directors to enjoy immunity from court intervention in respect of decisions which they have taken in the best interests of the company. In line with these objectives, Companies Bill 2017 has introduced the following provisions to ensure better corporate governance and CSR practices in the corporate sector of the country:

-- The overarching objective of inculcating principles of good governance and safeguarding minority interests in corporate entities has been included in the Preamble to the Companies Bill. -The Commission has been empowered to specify the framework to ensure good corporate governance practices, compliance and matters incidental and axillary for companies or class of companies.

-- The Commission has been empowered to specify the maximum number of directorships a person may hold on the boards of companies, which would contribute towards improving the decision making capacity of the board members.

-- Every public company is now required to have a company secretary to ensure the corporate affairs are dealt with diligently and professionally.

-- The manner of selection of independent directors for certain classes of companies as required under the relevant framework has been provided through creation and maintenance of a databank of such directors by any institute, body or association as may be notified by the Commission.

-- It has been proposed to ensure representation of female directors on the boards of public interest companies in such manner as may be specified by the Commission.

-- To avoid potential conflict of interests between the two positions, the offices of the chairman and chief executive have been proposed to be separated for such classes of companies as may be specified by the Commission.

-- To ensure protection of the interests of all the stakeholders, the provision for duties of directors has been expanded to require them keep the interests of company, its shareholders, employees, community and the protection of environment in view.

-- A quota of two percent has been proposed to be kept for disabled persons in the public interest companies employing fifty persons or more, and the same needs to be provided in the human resource policies of such companies.

-- A provision has been proposed for indemnification of directors and officers of companies in respect of their liabilities arising otherwise than in respect of negligence, default, breach of duty or breach of trust of which such directors and officers may be guilty. However, the company shall be able to ratify the acts of directors constituting breach of duty, default or negligence.

The aforesaid provisions have set out a new approach to strengthen the public interest companies including listed companies, public sector companies, insurance companies, and such classes of companies as may be notified by the Commission, through better corporate governance and sustainable business practices in the country.

Copyright Business Recorder, 2017


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