DIRECTOR APPOINTMENTS ON PUBLIC SECTOR BOARDS
by Zaffar A. Khan ( s.i )
Former Chief Executive Officer, Engro Chemicals
Public Sector Corporations make up a sizable portion of our country's business enterprises in spite of the significant privatization that successive governments have undertaken over the past two decades. The Government even today is by far the biggest equity holder of companies listed on our stock exchanges. In addition, the government owns several other business enterprises that are not even listed on the stock exchanges. All together these assets are sizable and of huge public interest. The owner of these assets is the public of Pakistan who through their representatives in parliament empower the government of the day to take care of these assets in an efficient and responsible manner.
Big corporations such as OGDC, NBP, PTCL, PIA, the SUI Co's, etc,. are all substantially owned by the government whereas entities such as Pakistan Steel are examples with 100% government ownership. To full fill fulfill its obligation as a trustee, the government appoints directors to the Boards of these enterprises who under company law, other statutes and the code of corporate governance are charged to govern these enterprises.
Going back some years, the government mostly appointed serving bureaucrats and executives of the concerned enterprise on the boards of these public sector companies. As time progressed, the government started to appoint people belonging to different walks of life to represent their share holding on these boards. These people are mostly from the private corporate sector of Pakistan but also include other professionals. The idea is to bring a diverse group of people with business experience and other relevant backgrounds to team up with with serving bureaucrats to govern these enterprises. This arrangement is fine provided that the process of director appointments is well considered.
My purpose for writing this article is to make some observations on the practice of board appointments which has been in vogue for some years and to make recommendations to improve the governance process of our public sector enterprises. I am drawing from my experience of having served on several public sector boards.
The principal task of governing an enterprise rests with the Board of Directors and not with the shareholder - big or small. The shareholder is, however, fully empowered to appoint and under certain conditions remove the appointed director. The appointment may take place through voting of shares or through a process of nomination. In either case, this is the most crucial role of the share holder in influencing the enterprise in which it holds an investment. Shareholders who do not take the responsibility of nominating their directors diligently, but instead interfere in the running of the company, or in by second guessing the Board usually cause serious governance issues and that tend to make a mess of the enterprise. This phenomenon is often seen happening in the public sector corporations of Pakistan.
In this article I am making a few suggestions for the consideration of the government on how it should, as a major shareholder, appoint its quota of directors on the Board of public sector enterprises. My thoughts are as follows;
The process of appointments should be institutionalized and undertaken in a manner that is based on collective judgment of a carefully constituted panel. Director appointments are not to be considered as a dole out to friends, interest groups, etc. without due regard either for to the suitability of the person being nominated or the skill set / experience required to run the enterprise. Appointments should not be the prerogative of one person be he/she be it if they are the Prime Minister, the President, or the Chairman of the ruling party. This is extremely important for we as a society are so vulnerable to sifarish. Further, the temptation to use these institutions to pursue narrow political interests is a real threat to the long term viability and effectiveness of these entities. Crony appointments especially make these institutions vulnerable to such exploitation.
It is proposed that the Government should constitute a panel of eminent citizens with a requisite background of business & public service to make director appointment recommendations. If the Government is confident, it should make the Selection Panel as bipartisan as possible to create a better buy-in across the political divide. The Selectors should be tasked to consult with the key stakeholders of the public sector enterprise which should include the Ministry, holding majority shareholder rights of the concerned entity, with a view to understand the Corporation's issues and opportunities. This interaction should be aimed to bring clarity on the type of person who could best add value on the Board of the enterprise. The Selection Panel could be set up as a Commission but it should not be turned into a bureaucratic organization. This is exceedingly important. It must have the ability to move fast, be independent, discreet and welcoming to potential Director candidates.
The Selectors may articulate a " fit & proper " criterion to guide them in their selection of candidates. Their I integrity, business and professional track record, time availability, mental fitness, etc. are all important considerations. Further, the skill sets required by the Board needs to be carefully considered by the Selectors and matched.
The Directors once appointed should not be removed with a change in government. Changes may be made upon completion of the normal term. In exceptional cases, where premature removal is required (such as a breach of trust) on grounds of say a serious breach of trust etc a predetermined procedure should be followed. Uncertainty of tenure can influence the Director's behavior and may result in decisions that are not in the best interest of the corporation. Forcing or causing change during the term is not only disruptive for the organization but it also undermines accountability of the Board. Dramatic dismissals should be avoided unless there are sufficient grounds of impropriety.
The Directors upon selection should receive a briefing on the issues and opportunities what are the issues and opportunities that the Ministry expects them to deal with as a member of the Board. It should be borne in mind that once the Director assumes responsibility, he /or she will need to mind the interest of the Corporation first before that of the nominating shareholder. Be that as it may, the Ministry should set up mechanisms to gauge the performance of its the nominee Directors to gauge to measure their contribution. Certain essentials such as Certain essentials of: attendance of Board meetings,; grasp of the issues,; quality of participation in the meetings; etc. would be factors to gauge the contribution of its nominee directors. This assessment would be useful to determine renewal of term of the Director. the Director's term.
The Directors should receive reasonable compensation for their services as they are expected to devote time, due care and bear responsibility for the enterprise. The compensation must not be excessive and in any case it must be disclosed in it's its entirety. The Directors should also be provided insurance cover to defray any litigation cost connected with their duties. This would of course exclude protection against cases of willful neglect or fraud. Such measures would increase the pool of quality people to select from.
The appointment of the CEO should be the prerogative of the Board. This is a fundamental to for good governance and thus exceedingly important. The CEO should look up to the Board for guidance and as the source of ultimate authority with regards for the Corporation. Direct appointment of CEO by the Government, which at best requires the Board to rubber stamp the nomination, undermines the Board. In such situations the CEO knows that he/ or she is there at the pleasure of the Government and as such may not take the Board too seriously. Splitting the position of the Chairman cum CEO is also highly desirable as these are two distinct responsibilities and the separation would be in keeping with basic principles of good governance.
A clean and well thought-out appointment system at the Board level is the first important step to good corporate governance of institutions in the public sector. Believe me, we need to reform this area and it is not difficult to do. We must move quickly for too much time and enterprise value has already been eroded.
The Author is one of Pakistan’s eminent business executives and is the former CEO of Engro. He has held the senior positions of Chairman at Pakistan Telecommunication Company Limited, Karachi Stock Exchange and Pakistan International Airlines. The Author may be contacted at firstname.lastname@example.org.
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