Listing Regulations of Stock Exchanges in Pakistan
have been amended by inserting the Code of Corporate Governance (the
Code), issued by the Securities and Exchange Commission of Pakistan (SECP)
through a directive dated March 28, 2002. KSE Regulation 37(xiv)
requires all listed companies to make appropriate arrangements to carry
out orientation courses for their directors to acquaint them with their
duties and responsibilities and enable them to manage the affairs of the
listed companies on behalf of shareholders. It may be mentioned that
SECP directive has been issued for the purpose of establishing a
framework of good corporate governance whereby a listed company is
managed in compliance with the best practices. Effective July 1, 2002
compliance of the Orientation Course is mandatory.
WHAT IS THERE FOR LISTED COMPANIES?
Company directors are generally capable people with varied background
and experience. In order to benefit most from them, the listed companies
would better secure more of their time and attention. Conducting of
Orientation Course provides a golden opportunity to the companies to
inform the directors about company affairs and challenges. Some of the
companies may already have started orientation from July 1, 2002, while
the rest may be in the planning process. This paper attempts to assist
the listed companies develop proper orientation courses for their Board
SCOPE OF ORIENTATION COURSES:
The orientation aims at acquainting the directors with their duties and
responsibilities to enable them manage the company affairs well. A
systematic approach would yield better results. The directors have
multifarious responsibilities, to cope which they need orientation in
diverse areas. Proper orientation might be handled in phases as under:
Introducing the directors to company operations by providing them an
The directors meet the senior executives to get clarifications on issues
and points from the Memorandum.
The directors and the senior management review status of matters
requiring approval by the Board of Directors.
The directors to acquaint themselves with operational, financial and
other problems faced by the company or company lapses through
discussions with the senior management.
The directors to attend formal training workshops at specialized
professional institutes on: higher decision making skills enabling them
devise plans for improving corporate governance; critical analysis /
decisions techniques to control costs and to improve profits; and
devising strategies to save the company from adverse local and
To start orientation
process, each listed company should prepare for the each director an
information memorandum, containing copies of documents as under:
Memorandum and Articles of Association (up-dated) and the Certificates
of Incorporation and of Commencement of Business.
Audited published annual accounts for the last five years.
Listing Regulation containing the Code specifying duties and
responsibilities of the Directors; and extracts from the Companies
Ordinance 1984 regarding directors and their powers.
Policies actually followed by the company.
Production plant and other facilities, with details as to capacity, year
installed, origin, financing, present condition and areas needing
Process flow chart for each item manufactured and marketed, with
capacities and bottlenecks of each station.
Organisation chart, showing names of key personnel with brief functional
responsibilities of each.
Summary of all borrowings with credit agreement details such as amount
borrowed, time, currency, interest / mark-up rate, loan servicing
status, restrictive clauses from each creditor, etc.
Undertakings given to the Stock Exchanges, the creditors, government
departments, suppliers, customers, consultants / advisors and compliance
Assessment of existing physical production, profitability, liquidity
followed by problems, challenges, and plans to cash in the
Summary of litigation, for and against the company, with government
departments, creditors, customers, suppliers, debtors, employees and
CED and Sales Tax matters including, rates at which levied, stage of
levy, time of levy, refund claims practice, funds stuck up as claims and
reasons for delay.
FOLLOW-UP ON INFORMATION MEMORANDUM:
The directors may be given
about two weeks to review the information folder before orientation
meetings start with the company executives. The directors may have a
number of questions about different aspects of company operations. The
company executives may provide details or additional documents required
by the directors who may also visit the production facilities and meet
the senior executives there. The company executives must keep in view
that the directors can better help the company and the shareholders if
they have authentic details about critical matters. The information
suggested above and the orientation approach proposed here is more
relevant and useful for the new directors, although the existing
directors shall also benefit from the planned orientation.
MATTERS WITHIN COMPETENCY OF BOARD OF DIRECTORS:
The senior management team
of the company to review status, problems and prospects about issues
including investment and disinvestments of funds; determination of the
nature of loans and advances and fixing a monetary limit thereof;
write-off of bad debts, advances and receivables and determination of a
reasonable provision for doubtful debts; write-off of inventories and
other assets; and determination of the terms of and the circumstances in
which a law suit may be compromised and a claim/ right in favour of the
company may be waived, released, extinguished or relinquished; and
appointment, remuneration and terms and conditions of employment of the
CEO and other executive directors.
POLICIES AND THEIR APPROVAL BY THE BOARD: The
management team of the company to review with the directors the set of
significant policies that may include: risk management; human resource
management; procurement of goods and services; marketing; determination
of terms of credit and discount to customers; write-off of bad/ doubtful
debts, advances and receivables; acquisition/ disposal of fixed assets;
investments; borrowing of moneys; donations, charities, contributions
and other payments of a similar nature; determination and delegation of
financial powers; transactions or contracts with associated companies
and related parties ; and health, safety and environment.
SIGNIFICANT MATTERS FOR THE BOARD:
The senior management of
the company should review with the directors the status of annual
business plans, cash flow projections, forecasts and long term plans;
budgets including capital, manpower and overhead budgets; quarterly
operating results; internal audit reports; management letter issued by
the external auditors; details of different agreements; any law, rule or
regulation as may affect the company; status and implications of any law
suits; default in payment of principal and/or interest, including
penalties; failure to recover material amounts of loans, advances, and
deposits; any significant accidents, dangerous occurrences and instances
of pollution problems; significant public or product liability claims;
adverse judgement; disputes with labour and any agreement with the
labour union; and payment for goodwill, brand equity or intellectual
RESOLUTION OF PROBLEMS AND LAPSES:
This phase of orientation
should be more focused and more time on exploring selected important
issues, such as:
and liquidity issues; company's performance compared with the industry
leaders; and the significant risks to which the company is exposed and
how the risks are to be avoided or hedged.
Effectiveness of the existing internal controls and how to strengthen
Issues with the government authorities, utilities, Stock Exchanges,
creditors, suppliers, customers, etc and how to cope with each.
Compliance status of the requirements agreed to with various counter
parties and how soon to cure the violations, if any.
CRITICAL DECISION MAKING AND ANALYTICAL SKILLS:
The directors of listed
companies are required to exercise their powers and carry out their
fiduciary duties with a sense of objective judgement and independence,
in the best interests of the listed company. This phase of orientation
should polish skills of the directors to ably discharge their duties.
This part of orientation may preferably be held outside the listed
companies, preferably in a training institute where directors from other
companies are also attending the specially designed workshop. This
should present broader picture to the directors. They would be getting
independent views on corporate challenges and policies from experts.
Most directors may possibly already have those skills and the workshop
may be a means to polish and refine them. The areas to be covered in the
workshop may include topics such as:
Preparation and interpretation of the financial statements and the ratio
Capital budgeting techniques and preparation of projected financial
Introduction to the Companies Ordinance 1984, Sales Tax, CED and Income
Introduction to the major local and foreign financial institutions.
Introduction to the International Trade and trade practices.
to the WTO and the likely impact on Pakistani companies when the
arrangements under WTO are fully implemented.
Introduction to modern marketing and the managerial accounting
Fiscal policies of the government affecting the business and industry.
of contracts and agreements.
OTHER ALLIED MATTERS:
The scope of the
orientation is very wide. Individual directors might also advise their
preferences in this regard. The listed companies during orientation may
keep the following aspects in view:
Listing regulations require every company to ensure that a 'Statement of
Ethics and Business Practices' is prepared and circulated annually by
its Board of Directors to establish a standard of conduct for directors
and employees, which Statement shall be signed by each director and
employee in acknowledgement of his understanding and acceptance of the
standard of conduct; adoption of a vision/ mission statement and overall
corporate strategy. The senior management might consult the directors
and the employees on the topic.
The orientation needs of all the directors will not be the same. There
may be disagreements or serious objection as to how the orientation is
carried out. The companies may consult their respective Boards on the
Responsibilities of the directors are diverse. The companies may
consider joining hands with other companies to arrange part of
orientation through professional Training Institutes, under special
In case a director is chosen on the Audit Committee or is elected as the
Chairman of the Board of Directors, then he / she will need additional
orientation in these areas.
In Pakistan, single-business families have controlling shares in large
number of listed companies, though there is substantial shareholding
with the institutional investors and the general public. Compliance with
the Code is expected to start the transformation to multi-family
Mergers are taking place in the corporate sectors. For example, cement
plant merges with a paper bag manufacturing company and a power
generation company merges with a textile or a cement unit. The new
company might require more attention from the directors.
A WORD OF CAUTION:
The directors would wish to
be fully conversant with the internal controls and ultimately they would
get an assurance from the management that the controls are not being
violated. Through this orientation they would want to be able to perform
their duties better. The senior management, as part of the orientation
process, should be ready and able to confidently discuss issues with the
directors and to provide them relevant details / documents. The
directors may quiz the senior executives about possible solutions or on
the rationale for proposing one particular solution while discarding
other solutions. The directors, in the process, most probably would also
be assessing the capabilities of the senior executives.
Orientation, if carried out properly would improve
corporate governance. This should be developed as a full-fledged regular
training seminar. In developed countries there are specialized training
institutes and handbooks for the purpose. Books on similar lines should
be developed, keeping in view the special circumstances in Pakistan. The
corporate sector has to deal with government authorities, creditors and
numerous other counter parties. The corporate governance and overall
operational results of the listed companies would improve substantially
if all the counter parties are given similar Code of Governance to guide
them in their workings.