Aug 26 - Sep 01, 2002


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 of Directors.

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:

a. Introducing the directors to company operations by providing them an Information Memorandum.

b. The directors meet the senior executives to get clarifications on issues and points from the Memorandum.

c. The directors and the senior management review status of matters requiring approval by the Board of Directors.

d. The directors to acquaint themselves with operational, financial and other problems faced by the company or company lapses through discussions with the senior management.

e. 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 international factors.

INFORMATION MEMORANDUM: To start orientation process, each listed company should prepare for the each director an information memorandum, containing copies of documents as under:

a. Memorandum and Articles of Association (up-dated) and the Certificates of Incorporation and of Commencement of Business.

b. Audited published annual accounts for the last five years.

c. Listing Regulation containing the Code specifying duties and responsibilities of the Directors; and extracts from the Companies Ordinance 1984 regarding directors and their powers.

d. Policies actually followed by the company.

e. Production plant and other facilities, with details as to capacity, year installed, origin, financing, present condition and areas needing revamp.

f. Process flow chart for each item manufactured and marketed, with capacities and bottlenecks of each station.

g. Organisation chart, showing names of key personnel with brief functional responsibilities of each.

h. 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.

i. Undertakings given to the Stock Exchanges, the creditors, government departments, suppliers, customers, consultants / advisors and compliance status.

j. Assessment of existing physical production, profitability, liquidity followed by problems, challenges, and plans to cash in the opportunities.

k. Summary of litigation, for and against the company, with government departments, creditors, customers, suppliers, debtors, employees and others.

l. 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 property.

RESOLUTION OF PROBLEMS AND LAPSES: This phase of orientation should be more focused and more time on exploring selected important issues, such as:

a. Production, profitability 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.

b. Effectiveness of the existing internal controls and how to strengthen the same.

c. Issues with the government authorities, utilities, Stock Exchanges, creditors, suppliers, customers, etc and how to cope with each.

d. 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:

a. Preparation and interpretation of the financial statements and the ratio analysis.

b. Capital budgeting techniques and preparation of projected financial statements.

c. Introduction to the Companies Ordinance 1984, Sales Tax, CED and Income Tax.

d. Introduction to the major local and foreign financial institutions.

e. Introduction to the International Trade and trade practices.

f. Introduction to the WTO and the likely impact on Pakistani companies when the arrangements under WTO are fully implemented.

g. Introduction to modern marketing and the managerial accounting practices.

h. Fiscal policies of the government affecting the business and industry.

i. Negotiation 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:

a. 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.

b. 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 orientation.

c. 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 arrangements.

d. 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.

e. 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 companies.

f. 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.