Regulation is a key instrument through which governments achieve their social and economic policy objectives.

The Securities and Exchange Commission of Pakistan (SECP) notified on 31 August for public comments a draft Listed Companies (Code of Corporate Governance) 2017, under the newly promulgated Companies Act, 2017.

Through these regulations, the regulator has attempted to align the code with emerging challenges; however, the proposed draft compromises the principles of Code of Corporate Governance, 2012 and maintains the status quo in the area of corporate governance.

It may be noted that draft CCG regulations were to become effective within 14 days from date of notification; however the SECP extended the deadline up to September 30. Sufficient time was not provided by the SECP to elicit the views of all stakeholders, especially the professional accounting bodies.

The draft rules seemed ambiguous and unclear in many places. Proper references of the Companies Act, 2017— the main source of corporate law — were also not provided. It contained provisions against the interests of stakeholders, including minority shareholders.

Specifically, Section 24 of the said regulation is quite adverse through which foreign qualified accountants have been allowed to become the head of internal audit of listed companies in Pakistan. Such a provision limits employment opportunities for qualified Pakistan professionals.

Let us analyse some of the major provisions of the draft regulations which require a revisit by the regulator in terms of its relevancy, rephrasing, referencing and applicability.

Chapter II of draft CCG Regulations deals with the composition of the board. The number of directors is confined to five, whereas the Companies Act, 2017 under Section 154 says that a listed company shall have not less than seven Directors. This is a flaw and needs to be reconciled with Companies Act, 2017.

Further, the provision related to listed subsidiaries must be deleted. If a Director is on the Board of a listed company, he has to attend at least two meetings in general on a quarterly and three meetings per quarter, if he is a member of the HR Committee as well. This comes to 15 meetings per quarter (5 Committees x 3) for a director.

If we exclude listed subsidiaries from the count then this figure will be on the higher side, and one may not be able to concentrate on agenda and working papers of meetings as required by the Code under directors’ role and responsibilities.

The inclusion of two Independent directors on the board is a welcome step; however, it needs to be referenced with Section 166 of Companies Act, 2017 which outlines the selection criteria and maintenance of data bank of independent directors.

Until the databank is notified by SECP, listed companies may be allowed to appoint those professionals as independent directors who are ‘Certified Directors’ under any SECP-approved directors training programme. The procedure to fill up casual vacancy of independent directors needs to be provided.

The mandatory provision for having one female director on boards of listed companies is also an appreciable initiative to synchronise with global practice of gender diversity on boards. However, there is an element of concern that companies will comply by appointing female relatives of incumbent board members. It is suggested that qualification criteria and appointment procedure for female directors should be defined in draft regulations.

In line with CG Code 2012, the Section 20 of Listed Companies CCG Regulations, 2017 also requires for all directors of listed companies to have certification by June 30, 2020 under any director training programme offered by any local or foreign institution.

Through Section 23 of draft regulations, in addition to qualified professional accountants, post-graduate degree holders with five years’ experience have been allowed to become the CFO of listed companies. It is suggested that since the position of CFO is of a specialised nature, only those persons having professional qualification like CAs and CMAs from any recognised body of professional accountants in Pakistan should be allowed to hold it.

Foreign qualified accountants may be considered if they have completed their qualification through Pakistan Tax and corporate laws. In case of any code of conduct issue, they should be subject to Pakistani legal framework for disciplinary action as per applicable code of conduct.

Another flaw in draft legislation is that under Section 24 the experience requirement for an Internal Auditor has been proposed to be three years, whereas for CFO the required experience is five years. As such, the experience requirement for Head of Internal Audit should be increased to at least 5 years.

The draft rules, in Chapter VIII, do not define the required qualification for a ‘Company Secretary’, whereas the required qualifications of CFO and Head of Internal Audit have been duly mentioned. This omission needs to be addressed.

It is proposed that a Company Secretary should be a person holding the qualification from any recognised body of professional accountants or the Institute of Corporate Secretaries of Pakistan (ICSP) with minimum 3 years’ experience as a Company Secretary of any other company. The Company Secretary should also be made responsible for Corporate Compliance of the listed company.

It is further proposed that a Risk Management Committee and Procurement Committee may also be formed by the Board in view of its significance for the listed companies. Accordingly, a new Section on Procurement Committee may be added in Chapter X of the said Regulations.

One important provision is External Audit under Section 32 which says that every listed company shall appoint only those audit firms which have satisfactory QCR rating from ICAP and registered with Audit Oversight Board (AOB) of Pakistan.

The conventional rights of statutory audit need to be reviewed in a more transparent manner and equal opportunity may be provided to professionals from other recognised professional accounting bodies who study audit and assurance.

In the perspective of external audit provision, it is to be pointed out that the existing Audit Oversight Board lacks independence. An Independent Financial Reporting Council (FRC) may be established in its place, as per global practice, having representation from all recognised bodies of professional accountants, academia, law, industry and other stakeholders.

Section 33 under Chapter XII on External Audit is missing. It needs to be clarified by the Commission if this is a typographical error or omission of a complete Section, which inadvertently is not part of circulated draft.

Section 34 refers to the rotation of external auditors after every five years in all listed companies in the financial sector. In proviso to this section it is stated that all inter-related companies/ institutions, engaged in business of providing financial services shall appoint the same firm of auditors to conduct the audit of their account.

As per Internal Control principles, rotation of five years is on the higher side and it must be lowered to three years to provide opportunity to other firm to review/ audit financial statements from different aspects.

—The writer is president of ICMA Pakistan

Published in Dawn, The Business and Finance Weekly, November 13th, 2017