CODE OF CORPORATE GOVERNANCE REGULATION 2019

CHAPTER II
NUMBER OF DIRECTORSHIP AND COMPOSITION OF BOARD
1. Number of Directorship
No person shall be elected or nominated or hold office as a director of a listed company
including as an alternate director of more than seven listed companies simultaneously.

2. Diversity in the Board

The Board shall comprise of members having appropriate mix of core competencies,
diversity, requisite skills, knowledge, experience and fulfils any other criteria as deem
relevant in the context of the company’s operations.

3. Representation of Minority shareholders:

The minority members shall be facilitated by the Board to contest election of directors by
proxy, for which purpose, the listed companies shall:

1. Annex notice issued.

2. A statement of candidates who seek to contest election to the Board, including their
profiles.
3. Information regarding members and shareholding structure.
4. On request of the candidate, an additional copy of proxy form duly filled by such
candidate.

4. Independent Director:
At least 2 or one third of the board, whichever is higher.

5. Female Director
Atleast one female director.

6. Executive Director
Executive director, including chief executive officer not more than one third of the Board.

 Fraction never rounded as one

 Executive director: Devotes whole or substantially of his time to the operations of
the company

7. Chairman of the Board

Chairman and CEO shall not be the same person.
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

CHAPTER III
BOARD OF DIRECTORS, ITS MEMBERS AND MEETING OF BOARD
8. Responsibilities of the Board and its members
Company Related Matters
 Company’s Vision or Mission Statement
 Code of Conduct
 Adequate Systems and Controls

Internal Controls
 Sound internal control system

Accounts / Finance / Audit

 Terms of Credit and Discounts offered to the customer
 Bad debts/ advances/ receivables
 Lease Assets
 Capital Expenditure
 Investment and disinvestment policies
 Associated companies and related party transactions

HRM
 Human Resource Management
 Investors Related Policies
 Shareholders Related Policies
 Marketing Related Policies
 Environmental Issues
 Social Issues
 Whistle Blowing Policy
 Issue Letters to all directors at the time of Appointment, including theirs
responsibilities and obligations.

SCM
 Procurement of Goods and Services

Risk Management
 Governance of Risk
 Determine risk tolerance
 Maintain sound system of Risk identification, risk management, and related
systematic controls.

Directors Related Matters

 Permission fees of non-executive directors and independent directors
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

9. Agenda and Discussion in Meetings

 The Chairman shall set agenda of the meeting of the board
 All written notices and relevant material, including the agenda of the meeting shall
be circulated atleast 7 days prior to the meeting. In case of emergency notice period
may be reduced or waived.

10. Minutes of the Meeting:

 The chairman of the Board shall ensure that the minutes of the meeting are kept in
accordance with the companies act 2017.
 The company secretary shall be the secretary of the board.
 Where director feels that his dissenting note has not been satisfactory recorded in
the minutes of the meeting, the matter may be referred to the company secretary,
and if company secretary fails to do so, the director may file objection with the
commission within 30 days of the date of confirmation of the minutes of the
meeting.

11. Attendance at Meeting:

 The chief financial officer and company secretary or in their absence, the
nominee appointed by the Board, shall attend all meetings of the Board:
 The chief financial officer and company secretary shall not attend such meeting
where agenda of the meeting relates to their performance or terms of the
conditions.

CHAPTER IV
ISSUES TO BE PLACED FOR DECISION OF THE BOARD OF DIRECTORS

12. Significant Issues

The chief financial officer of the company shall place significant issues of the Board. Some of
them are listed below:
 If Foresees risk
 Annual business plan
 Cash flow projections
 Forecasts and strategic plan
 Budgets
 Variance analysis
 Quarterly accounts
 Quarterly operational results
 Details of joint ventures
 Related Party Transactions
 Failure to recover material amount of loans
 Any significant accident or incident
 Environmental and social issues
 Financial Issues

13. Related Party Transactions

 CODE OF CORPORATE GOVERNANCE REGULATION 2019

 The details of related party transaction shall be placed periodically to the board for
review and approval.
 In case of directors wish, such matter shall be placed to the general meeting for
approval.

CHAPTER V
REMUNERATION OF DIRECTORS
14. Remuneration of Director
 Formal policy and transparent procedure for fixing remuneration of individual
directors for attending meeting of the board.

15. Determination of Remuneration

 No director shall determine his own remuneration
 Remuneration shall appropriate with the level of responsibility and expertise
 Shall attract to retain directors
 Procedure of determination of director’s remuneration shall in accordance with the
act.

CHAPTER VI
DIRECTORS’ TRAINING PROGRAM
16. Directors’ Orientation Program:
 Companies shall make appropriate arrangement to carry out director’s
orientation

17. Directors Training

It is encouraged that;
 by June 30, 2020 at least half of the directors on their Boards;
 by June 30, 2021 at least 75% of the directors on their Boards; and
 by June 30, 2022 all the directors on their Boards have acquired the prescribed
certification

A new Director shall acquire director’s training program certificate within the period
of one year form the date of appointment.

Directors having 14 years of education and 15 years of experience on the Board of a

listed company shall be exempted from Directors Training Program Certificate.

Companies also encouraged to arrange training for:

 at least one female executive every year under the Directors’ Training program
from year July 2020; and
 at least one head of department every year under the Directors’ Training
program from July 2022.

CHAPTER VII
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

CHIEF FINANCIAL OFFICER, COMPANY SECRETARY AND HEAD OF INTERNAL AUDIT

18. Approval:
The Board Shall;
 Appoint
 Determine Remuneration
 Renew Contract; and
 Terms of Condition of Employment
of CFO, Company Secretary and head of Internal Audit of the company

19. Removal:
 Removal of CFO, Company Secretary and Head of Internal Auditor shall be
made with the approval of the Board.
 Head of Internal Audit may be removed only upon recommendation of audit
committee.

20. Qualification of Chief Financial Officer / Internal Auditor / Company Secretary

Description

CFO Head of Internal Audit Company Secretary

CFO of a company unless; Head of Internal Audit of a company Company Secretary unless;
unless;

At least 3 years of managerial At least 3 years of experience in the field Hold qualification as
experience in the field of audit and of audit and finance and member of ICAP specified by regulation of the
accounting and member of ICAP or or ICMAP; or Commission.
No person shall be appointed as

ICMAP; or
At least 5 years of managerial
experience in the field of audit and
accounting and member of professional
body of accountants whose
qualification is recognized by HEC; or
At least 7 years of managerial
experience in the field of audit and
accounting and has a degree recognized
by HEC
Existing CFO having atleast 15 years of
experience on the same position in a
listed company shall be exempted.
At least 5 years of experience in the field CFO and company secretary
of audit and finance and shall not be the same person
 Is a CIA of a listed company.
 Is a CFE
 Is a CICA
 Post Graduate degree recognized
by HEC; or
At least 7 years of managerial experience
in the field of audit and accounting and
has a degree recognized by HEC
Existing head of internal auditor having
atleast 15 years of experience on the
same position in a listed company shall
be exempted.
CHAPTER VIII
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

RESPONSIBILITY FOR FINANCIAL REPORTING AND CORPORATE COMPLIANCE

21. Financial statement endorsed by chief financial officer and chief executive officer:
The CEO and the CFO shall duly endorse and sign the quarterly, half-yearly and annual
financial statements prior to placing and circulating the same for approval of the Board.

22. External Auditor

The CEO and the CFO shall have the annual and interim financial statement initiated by
the external auditors before presenting it to the audit committee and the Board for
approval.

CHAPTER IX
COMMITTEES OF THE BOARD

HR & Remuneration
Audit Committee Nomination Committee
Committee

Atleast 3, including atleast 1 Atleast 3, including atleast 1

Board Constitute
independent director. independent director.
nomination committee.
Chairman = Independent Director Chairman = Independent Director
Chairman ≠ Chairman of the Board
Responsible for;
Atleast 1 member = Finance Literate
Making recommendation of
Finance Literate = member of
the board
Professional Body, Post Graduate Member of the committee shall
Structure, size and
Degree, atleast 10 audit committee not participate in the meeting if
composition of the board.
experience, atleast 20 management agenda relates to him/her.
experience.
Secretary of the Committee =
Risk Management
 Company Secretary, or
Committee
 Head of Internal Audit
Meetings Board Constitute RM
 atleast 1 in a year committee;
Meetings  More if request by  To carry out
 atleast 1 every quarter member of board, effectiveness of risk
 in case of request by external committee, CEO, Head of management
auditor, head of internal audit, HR procedures.
or chairman of the committee  CEO if not member of Responsibilities
 atleast 1 with external auditor committee or head of HR,  Managing,
 atleast 1 with head of internal if not secretary of the Monitoring, review
auditor committee may attend controls, risk
the meeting mitigation, integrity
of financial
CFO and CEO ≠ member of committee CEO = member of committee information,
Secretary of the committee circulate appropriate extent
minutes of the meeting. of disclosures.

CHAPTER X
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

INTERNAL AUDIT
23. Composition of Internal Audit Function
 Every listed company must have internal audit function.
 The head of internal audit shall report to Audit Committee and CEO.
 CEO and Chairman of Audit Committee perform Head of Internal Audit Performance
appraisal.
 Internal audit function shall not have any director.
 Internal Audit team shall have expertise and competencies.
 Head of Internal Audit must be qualified
 Internal Audit Function may be outsourced to a professional services firm.

CHAPTER XI
EXTERNAL AUDIT
24. Terms of Appointment of External Auditor
 Only good rating audit firm appointed as an external auditor.
 An audit firm which is non-compliant with the international federation of
accountant’s guidelines shall not be appointed as an external auditor of a company.
 Board of a company shall recommend external auditor for a year and its
remuneration and the same shall be included in the Director’s Report.
 External auditor shall not provide any other services to the company as per the
guidelines of International federation of accountant’s guidelines.
 External auditor shall not perform any management functions or making any
management decisions.
 Close relative of CEO, CFO, Head of Internal Audit, Director, and company secretary
shall not be appointed as an external auditor.
 Every company requires the external auditors to furnish a management letter to
its Board within 45 days of the date of audit report

25. Rotation of Auditors:

 External auditor shall be changed every five year.

CHAPTER XII
REPORTING AND DISCLOSURE

26. Director’s Report

 Quarterly financial report shall be published and circulated along with director’s
review on the affairs of the company.
 The Director’s report shall include the following:
 Total numbers of directors, including male and female.
 Composition including independent, non-executive, executive and female
director.
 The names of member of Board Committee.
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

 Remuneration policy of non-executive directors including independent

directors.
 Company’s annual report shall contain:
 Remuneration of executive and non-executive director, including;
o Salary/fee
o Perquisite
o Benefits
o Performance linked incentives, etc
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

CHAPTER 1
CORPORATE GOVERNANCE MAKES HEADLINES
WHAT IS CORPORATE GOVERNANCE

Governance refers to the act or process of governing.

Corporate governance is the system by which companies are directed and controlled. Boards of
directors are responsible for the governance of their companies. The shareholders’ role in
governance is to appoint the directors and the auditors

WHY CORPORATE GOVERNANCE

 Better excess to external finance
 Lower Cost of Capital
 Improved company performance
 Sustainability
 Higher firm valuation
 Share performance
 Reduce risk

CORPORATE GOVERNANCE PARTIES

 Share Holder
 Director
 Manager

CORPORATE GOVERNANCE DISTINCTIVE FEATURES

 Legal entity of a business
 Unlimited Life
 Limited Liability
 Divisibility of ownership

GOVERNANCE MAKES A DIFFERENCE

The effectiveness of corporate governance is depends on the performance of business operations.
Similarly, those companies who have not performed well, just because of board ineffectiveness to
addressed issues related to business.

Good governance includes the following characteristics:

 Integrity and competence

 Competent CEO
 Valid business concept created by CEO
 Appropriate implementation of systems, controls
 Performance evaluation

CORPORATE GOVERNANCE PILLERS

 Accountability
 Fairness
 Transparency
 Independence

CHAPTER 2
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

THE LEGAL OBLIGATION OF DIRECTORS

THE NEED FOR RULES

 Directors have several obligations and fiduciary responsibilities in order the safeguard the
interest of the shareholders of the company.
 Directors shall have sufficient integrity, competencies, knowledge and experience to make
sound decisions.
 Good directors know their limits and provide more expert advice because they have vast
experience and effective judgemental skills.
 Directors who are ignorant but honest fail to fulfil their obligations
 In competencies can be as dangerous as dishonesty.
 There is also a possibility that the director is competent and act at his best but organization
face several failures.
 Shareholders have right to scrutinize the performance of directors and evaluate directors
performance.

WHO MAKES THE RULES?

Government and governmental authorities have right to write, approve and interpret the laws and
regulations for businesses. Further stock exchange and relevant industry authorities also right to
make relevant industry rules and regulations.

The laws related to corporations have seven main goals that are listed below:
 To maintain competitive market
 To regulate non-competitive market
 To maintain a balance between capital and labour
 To ensure orderly capital markets
 To protect consumers interest in the market
 To ensure equal access to employment, education, housing and accommodations
 To protect the environment

WHO IS RESPONSIBLE FOR GOVERNING THE AFFAIRS OF A PUBLIC CORPORATION?

Board of directors is responsible for governing the affairs of a public corporations. Board powers are
defined in the;
 Articles of Association of the company
 The bylaws
 Shareholders agreement

In case of facing a corporate governance legal issues, directors should first check the corporation’s
governing documents and subsequently applicable state laws and any previous case precedents.

State law dictates the business and affairs of corporations shall be managed under the direction of
board of directors.

Shareholders ultimately control the affairs of the corporations because they can elect and replace
the Board of directors.

Shareholders elect directors at an annual general meeting of the company either by vote or by
proxy.
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

The nomination of director may come from shareholders but nominated by the Board of Directors.

The shareholder of a corporation also have the statutory right in most state of the world to approve
major transactions and decisions such as mergers, sale of an asset, dissolution of a company etc.

RELATIONSHIP BETMENT BOD AND MANAGEMENT

Board of directors delegates most decision to management, either formally or informally.

Consequently senior management has authority to take day to day decisions in order to run the
business effectively and efficiently.

WHAT ARE THE RESPONSIBILITIES OF DIRECTORS?

The legal obligations and responsibilities of directors can be categorized in the following headings;

 The fiduciary duty

Directors must play fiduciary role for the corporations. They must have trustworthy,
competent. They must have define objective to run the business and maximize the wealth of
the shareholders. Board must have following attributes;
 competent
 well experienced
 sound knowledge
 honest and trustworthy
 ethical consideration
 devote reasonable amount of resources to public welfare and educational purposes

 The duty of loyalty and the duty of fair dealing

 Loyal with his responsibilities.
 Must ensure that all transactions of the business must represent fair view.
 Must take those decisions that are fair to the interest of the company.
 Directors and senior executive shall not take any personal advantage even if
opportunity is available.

 The duty of care

 Directors are also responsible to take care of the company;
 Directors has duty to be informed and to make necessary inquiries if required;
 Corporate governance allows director to delegates others including other directors,
employees, officers, board committees.
 Such delegation do not eliminate the responsibility for oversight and take care the
interest of shareholder.

 The duty not to entrench

 Directors another duty to not to entrench
 Directors must perform his duties within their allowed terms
 If directors do not perform well, shareholders right to change the directors through
annual general meeting or special general meeting.

 The duty of supervision

 The duty of supervision is a subset of a duty of care
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

 It deals with the effectiveness of directors while performing their responsibilities and
obligations
 Directors should know about the operations of management in order to supervise
effectively and efficiently.
 The board should established policies and regulations and set standards for better
operations of the company.
 The board ensure that whether internal controls of the company is performing well
or not

DEALING WITH HOSTILE TAKEOVER OFFERS

 Hostile takeover is very common practice in the corporate world. Therefore, dealing with
hostile offers for the company is very important.
 Directors are often not well experience or well informed to handle this matter
 Sometimes complicating factors for hostile takeover to end up with litigation
 Board of directors are responsible to block hostile takeover offers and take care of
shareholders best interest.

WHAT STANDARD DETERMINES IF DIRECTORS HAVE MET THEIR RESPONSIBILITIES?

Governmental authorities and agencies establish the standards for evaluating the performance of
directors. By large, shareholders put complain when they feel that board of directors not performing
well or failed to maintain the interest of shareholder or performing his duties. Corporate governance
play vital role to limit board of directors to act unethically.

INTERPRETATION OF THE DUTY OF CARE

Board of directors are responsible to take care of the company in good faith and make informed
decisions. For this purpose board of directors should follow the below listed guidelines;

 Involved experienced legal personnel to design and manage governance and maintain
appropriate record of the proceedings.
 Does not rush important decisions
 For important business decisions, conduct meeting and give prior notice to board members
 Distributes major highlights related to the business decision adequate time before the
meeting
 Provide adequate information to board members in order take informed decisions;
 Sufficient information related to the decisions
 Management analysis and recommendations
 Define appropriate alternatives, if available
 Fairness of opinion

THE DUTY OF LOYALTY IN PRACTICE

The consequences of breaching the duty of loyalty are also severe. Board of directors must be loyal
with the company during his/her tenure of directorship. For this purpose board of directors should
follow the below listed guidelines;

 Interested Director must disclose any conflict of interest, if arisen;

 Interested Director shall not provide unduly influence of the transaction
 He should abstain from voting on that issue
 The proposed issue must be resolved by uninvolved directors
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

INDEMNIFICATION OF DIRECTORS

 Directors are not personally liable for any damages that might result from legal acts of the
board.
 Certain behaviour such as fraudulent activities by the directors are excluded from
indemnification.

CHAPTER 3
GETTING AND KEEPING AN EFFECTIVE BOARD
SIZE OF THE BOARD

 Size of the board determine by existing director in accordance with the laws and bylaws.
 Subsequent board may change the bylaws
 Typically corporate board is composed of 8 to 16 directors.
 Mature companies have larger board.
 Growing companies have smaller board.

TERMS OF DIRECTORS

 Raiders who want to take control from current management can get by taking simple
majority of 51 percent of the outstanding shares.
 In order to make it more difficult for anyone or any group to gain control of the Board, public
corporations now employ staggered terms of directors.
 Board members split into classes and elected for different terms like one group have 3 years
term and other one have 4 years term.
 In this way, corporations make it difficult for hostile takeover.

WHO SELECTS DIRECTORS IN A PUBLIC COMPANY

 Initially founders select the directors.

 Subsequently, existing board looking for new members with the approval of the
shareholder.

SELECTION PROCESS FOR NEW DIRECTORS

 Nominating committee is responsible for the identification and selection of prospective

board nominees.
 Number of Openings
 Openings on board created when existing directors resign, retire, or die.
 Opening also occur when board decided to expend its size.
 Nominating committee calculate the open positions it must fill on the board.
 Board profile
 Distribution of Inside verses outside directors
 Retired CEOs and other Retired Executives
o Do not remain beyond a one year transition period after retirement.
 Major shareholders
 Companies layers, consultants, suppliers, customers.
 Expertise
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

 The search and selection process

 May use professional search firms
 Board members may recommend potential candidates.
 Due Diligence and Recruitment
 Willing and able
 Have integrity
 Function effectively in a group
 Mutual Agreement
 Board finally decide for a member to elect
 The board than offer to the individual
 After receiving acknowledgment, the board elects the individual.
 The nominees decision to serve
 The election of directors
 Maintaining board effectiveness.

CHAPTER 4
HOW AN EFFECIVE BOARD ORGANIZED ITS WORK
ORGANIZATION’S BYLAWS

 Fist task for a newly firm is to write its bylaws.

 Company’s layers usually draft bylaws
 By laws usually address the following:

THE ANNUAL MEETING OF THE SHAREHOLDERS

According to section 132 of the companies act, 2017, details of AGM are listed below:
 1ST AGM within 16 month of incorporation
 Subsequent AGM:
 Once in every year
 Within 120 days of close of its financial year
 In the case of a listed company, the Commission, and, in any other case, the registrar, may
for any special reason extend the time within which any annual general meeting, shall be
held by a period not exceeding thirty days
 AGM of listed company shall be held in the town of registered office or in nearest city
 In a listed company, members residing in a city at least 10% of paid up capital, or such other
percentage as may be specified, may demand at least 7 days before meeting, a facility of
video-link to participate in its AGM.
 Notice of AGM shall be given to members, and all other entitled, 21 days before meeting.
 For listed company; notice shall also be
 Sent to SECP, in addition to its being dispatched in normal course to members
 Published in English and Urdu languages at least in one issue each of a daily
newspaper of respective language having nationwide circulation.

DEFENSIVE MEASURES
 Poison pill
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

Poison pill used by a target company in order to discourage a hostile takeover from acquiring
company. In this strategy Target Company make share unfavourable to the acquiring
company which results in increasing the cost of acquisition.

 Staggered terms
Staggered term used by a target company. In this strategy, directors are selected for
multiple years. Directors are divided in to classes, and one of these class reappointed each
year. In that way acquirer is not able to take over the board immediately .

 Ability to change the bylaws

There is also possible that, subsequently bylaws need some amendments.

THE ELECTION OF CORPORATE OFFICERS

 CHAIRMAN OR LEAD DIRECTOR

The major decision is to decide whether CEO and Chairman of the board are same person or
both are different person. As per code of corporate governance 2019, CEO and Chairman
shall not be the same person.

 OTHER OFFICERS
After making the decision regarding CEO and Chairman of the board, the next decision is to
decide how many insiders and outsiders of the company. Usually outside directors have
great vision and broad experience for management of the company.

THE BOARD MEETING

Board meeting effectiveness a challenge

 Time limitation
 Spend few hours together
 Make wise choice
 Asymmetry of information
 Directors have limited information
 Perspective
 Spend time in substance of issue.

POINTS TO BE DISCUSS IN THE MEETING

 Quorum
 Approval of the Agenda
 Approval of the Minutes of prior meeting
 Consent items
 Committee reports and actions
 Current operations report
 Briefings or proposals
 Executive session
 Adjournment

CHAPTER 5
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

THE BOARD-CEO RELATIONSHIP

CEO SUCCESSION AND SELECTION
Reason for the change, except start-up

 Change in leadership
 Time interval
 Current business condition

Other reason

Business Situation Business Situation

Reasons for Change Notice Timing
Condition Trajectory
Normal Retirement Long term anticipation Strong Positive; Improving
Results
Death or Disability Short term anticipation Stable Stable Constant Results
Resignation Unexpected Weak Negative Declining
Results
Termination Crisis

Scenarios

Scenario 1: An ordinary transition

 Board assign responsibility to the nominating committee or form a special committee.
 Have proper succession plan
 The role of the CEO
 Inside Candidates
 Going outside
 Communication
 Transition to a new CEO

Scenario 2: An unexpected transition

 Urgency of finding replacement
 No succession plan

Scenario 3: A termination
 Urgency of finding replacement
 No succession plan

THE WORKING RELATIONSHIP BETWEEN THE BOARD AND CEO

 Hiring an appropriate CEO

 Developing Mutual Goal
 Aligning the interest
 Agreeing on the decision
 Remain knowledgeable
 React appropriately

CHAPTER 6
 CODE OF CORPORATE GOVERNANCE REGULATION 2019

CEO COMPENSATION

 Listed company must have compensation committee.

 Committees responsibility includes:
 Review and approval
 Evaluation
 Making recommendation
 Annual performance

 Pay for performance

 Give pay according to their performance

CONSIDERATION IN SETTING COMPENSATION

 Value of the CEO

 Company’s capacity to compensate
 Absolute performance
 Relative performance
 Achievements

CEO COMPENSATION PACKAGE

 Basic salary
 Short term incentives
 Profits and EPS
 Revenue growth
 Return on investment
 Cash flow
 Strategic measures

 Long term incentives

 Stock options
 Restricted shares
 Required stock purchases
 Stock appreciation rights
 Cash

 Fringe benefits
 Perquisites