By Naveed Iftikhar Published: January 25, 2016
DELAWARE: Improvements in corporate
governance of public sector companies (PSCs) are much talked about
these days and unsurprisingly, the quality of corporate boards is at the
centre of this conversation.
In this context, one would expect
that a formal policy and process or mechanism for appointment, removal
and evaluation of board members of PSCs would be in place to deliver
good outcomes. Ironically, this is not the case.
What is alarming
is that this omission has far reaching implications for the management
of public money at the disposal of about 200 PSCs in the federal
government.
The public sector landscape is now dotted with a
variety of companies performing commercial and social functions,
supposedly through professional and modern organisational structures.
But the country has been suffering due to fiscal burden, poor service
delivery and weak governance in sectors dominated by PSCs.
Reasons
of underperformance of these PSCs are discussed in the authors study,
State-owned enterprises in Pakistan. One of the findings is, in order
to improve performance, the way boards are formed, treated, evaluated
and removed by the government needs to be reshaped.
Following good
practices in corporate governance, the Securities and Exchange
Commission of Pakistan has issued Public Sector Companies (Corporate
Governance) Rules. These are applicable to PSCs registered under the
Companies Ordinance 1984 and provide a framework for the role and
appointment of board members.
This is a regulatory function and
may not be confused with the ownership function of the government
through a policy framework. In the absence of such ownership policy,
even implementation of corporate governance rules is difficult.
Poor selection
The
boards of PSCs are appointed by the prime minister on the proposal of
the line ministry. No central database exists for potential independent
directors that leads to poor and arbitrary selection of directors who
are often not capable of holding such positions.
Astonishingly,
the government does not document performance of the ex-officio and
independent board members. It often happens that a member is appointed
again on the same or other boards even if he had not performed well or
did not serve the public interest on previous assignments.
Another
serious loophole is ambiguity in jurisdictions of the board as agent
and line ministry as principal, leading to principal-agent problem.
The companies ordinance gives complete authority to the board for
governing the respective PSC but this is not allowed by the line
ministries.
Contrary to the perception that boards are
independently acting only in the interest of entities that they
represent, they more often than not serve as instruments for endorsement
and implementation of government initiatives.
Those board members
who continue to believe in the independence of their roles and remain
defiant in the face of external pressure, face the wrath in the form of
removal and sometimes leading to dissolution of the entire board.
Perks beyond entitlement
Ministries
are generally considered as creating hurdles in the way of boards.
However, it is also true that some of the board members try to benefit
themselves from perks beyond their entitlement and derive advantages
through exerting influence unlawfully.
A few view themselves as
executive supervisors rather than overseeing the organisation at the
strategic level. There is always a long queue of such potential
directors and they use all forms of influential connections to get
appointed on boards.
However, honest and capable professionals
avoid serving on the boards on account of unlimited liability, lower
remuneration and often disrespectful treatment by the government as a
shareholder.
Resultantly, boards of PSCs are full of senior
citizens and friends of politicians and bureaucrats. They lack diversity
and professional capability. Women and young professionals rarely get
seats in the board rooms.
Internationally, Bhutan, Norway and
Sweden have developed ownership policies, while Finland, Hungary, New
Zealand and the Philippines have developed robust legal frameworks to
clarify roles and authorities of stakeholders, separation of regulatory
and operational functions and illustration of decision-making process in
case of PSCs.
Many countries have evolved institutions and mechanisms for board nomination in a transparent and professional manner.
Steps required
A good beginning for strengthening board governance in Pakistan can be made with following steps.
Firstly,
a central database of qualified professionals be developed and board
members may only be picked from them. Secondly, this process needs to be
overseen by a high-level commission supported by a professional
secretariat. Thirdly, the performance of board members needs to be
documented. Fourthly, training of board members and corporate governance
assessment of PSCs be carried out periodically. Lastly, the
relationship between boards and ministries should be clarified via an
ownership policy or legislation.
The writer is a doctoral student
in public policy at the University of Delaware, USA and has served as a
governance specialist in the Ministry of Finance
Article originally published by The Express Tribune.
