Journal of Law & Social Studies 2020

Journal of Law & Social Studies (JLSS)

Volume 2, Issue 2, pp 51-56, 2020
www.advancelrf.org

Corporate Governance Codes in Pakistan: A Review

Tayyaba Noor Asghar

University Gillani Law College,
Bahauddin Zkariya University Multan
Email: tayyabanoor506@gmail.com

Tom Mortimer
Former Head of School of Law, University of Bedfordshire, Luton, UK
Former Senior Lecturer, Canterbury Christ Church University, UK
Email: trmortimer@btinternet.com

Abstract
This paper aims to analyse the current regulation of Pakistan in the field of corporate governance. The role of effective
corporate governance in any developed or developing countries cannot be denied in terms of confident investment and
market stability. Pakistan first developed a Code of Corporate Governance in 2002 as revised in 2012, then 2017 and
finally in 2019. Although the principles and practices of corporate governance are well developed in most parts of the
world, the available literature on corporate governance issues in Pakistan is still limited and there is a dearth of
commentaries or analysis on the current regulation as introduced in October 2019. Therefore, this paper aims to fill
this gap through taking a comparative approach and documentary analysis of the revisions to demonstrate the
development process of Corporate Governance in Pakistan and to contribute to the ongoing debate on the effectiveness
of the new regulations.
Key words: Corporate governance, Code, Pakistan

1. Introduction
The issue of corporate governance and corporate accountability has become a centre of attention for last two decades
primarily as a global challenge. However, in some emerging economies such as Pakistan this concept is not as
developed as in other parts of the world like UK, USA, South Africa and the Organization for Economic Co-operation
and Development (OECD) principles of Corporate Governance. Although, attempts have been made for the
development of the code of corporate governance by the regulators and legislators with the aim of attracting more
foreign investment to support Pakistan’s economy and to meet global governance standards, it is fair to say that
Pakistan still needs to be more competitive in these standards.
Primarily derived from UK, USA and South African Corporate Governance Codes and OECD principles of Corporate
Governance, the Code of Corporate Governance 2002 was enacted by Securities and Exchange Commission of
Pakistan which was revised as Code of Corporate Governance in 2012 and 2017 and then subsequently revised by
Securities and Exchange Commission of Pakistan as the Listed Companies Regulations 2019.
The review of the Code 2017 will adopt the comparative approach with the previous codes of corporate governance
in Pakistan to elaborate the journey of reform in this field. This will contribute to developing literary arguments for
new regulation along with the new enactment of the Act 2017. Moreover, will present a comprehensive view of the
code for researchers and academics.
The 2019 Code is based on a new governance regime in Pakistan that is the ‘comply or explain’ approach. This new
Code is governed more by principles than by rules, which illustrates the decision-making process of the organisation.
Boards shall be responsible for the prudent and clear implementation of the ‘comply or explain’ concept and investors
for a judicious and careful assessment of alternative management arrangements.

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3. Corporate Governance Code, 2017

The Code 2017 is applicable to all listed companies or the companies which are required to comply with the code
through their constitutions or licensing requirements. Moreover, this code, added some new ideas to the code 2012
instead of presenting a whole new regulation. The Code 2017 is divided into fourteen chapters establishing rules
mainly related to board of directors, their responsibilities, functioning and committees. Furthermore, emphasis is given
to the role and responsibilities of directors along with their capabilities and professional development. The Code also
outlined the rules regarding main executive offices like Chief Financial officer, Chief Executive Officer and the
Company Secretary.
3.1. Board of Directors Composition
The Code 2017 has reduced the number of directorships from seven to five (the code 2012) excluding the directorship
in listed subsidiaries. This section is coinciding with the Companies Act 2017 which states that no person shall hold
office as a director at the same time in more than such number of companies as may be specified. Further, section 155
requires that a person holding the position of director in more than seven companies on the commencement of the
Companies Act, 2017 shall ensure the compliance of this section within one year of such commencement.
Independence of directors is being given more importance as compared to the code 2012; hence, it is obligatory for
the companies to have at least two or one-third members as independent directors as compared to mandatory
requirement of one independent director.
Moreover, they are required to submit a declaration of their independence as explained in the Act, in annual general
meeting of every financial year. The cross holding in case of links with other directors of charitable and not for profit
organizations are being excluded to have any impact on independence of the directors.
The introduction of at least one female director on the board is another positive step to bring gender balance to the
board of directors. Moreover, the code has changed the maximum number of executive directors from one-third of the
elected directors to one-third of the elected board of directors. Separation of ownership and control in the form of two
separate offices of chief executive officer and chairman of the board is continued in the code 2017 as it was in 2012.
However, the requirement from chief executive officer to inform all the other directors about their role,
responsibilities, power, remuneration, and entitlements, in the beginning of each director’s new term is an addition to
the Code.
3.2. Board of Directors Functions
The Code 2017 imposes fiduciary duties on board of directors in more inclusive way that is not only towards the
company and the shareholders but also to the stake holders. These responsibilities include:

• Identification, management, policies, and implementation of effective internal controls for

governance of risk.
• Placement of effective, annual performance evaluation system for directors as well as for boards of
directors itself.
• Implementation of a formal code of conduct to promote ethical culture and to avoid any conflict of
interest with the company.
• To maintain complete record of key policies like human resource policies, risk management,
fee/remuneration of executive or independent directors or whistle blowing.
The related party transactions need to be presented to the audit committee and to the board of directors for review or
approval according to the Act in special resolution. Directors training programme from Securities and Exchange
Commission of Pakistan approved institutes is continued with addition of 100% directors training up to 2021 with a
new mandatory requirement of directors training programme for at least one female executive and one head of
department every year from June 2019. All the directors are required to attend the annual general meeting and for the
meeting called for the conflict of interest of any directors the presence of at least two independent directors is
mandatory.
3.3. Board of Directors Committees
For the assistance and efficient use of board of directors’ time two mandatory i.e. audit committee, and human resource
committee along with two non-mandatory committees i.e. nomination and risk management committees are required
by the code 2017. The audit committee is required to be composed of at least three members including non-executive
directors and at least one independent director and should be chaired by independent director. “Financial Literacy” is
a new condition introduced regarding the qualification of at least one member of the board. The Code 2017 requires

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the chief financial officer and the chairman not to attend the audit committees meeting except when requested.
Contrary to the code 2012 the new code requires the circulation of meeting minutes to chief financial officer only if
required not as compulsion as is the previous code.
Human resource and remuneration committee which was encouraged in the code 2012 is now mandatory in the code
2017 which is required to meet at least once in a year and chaired by an independent director. Like the audit committee,
the chief executive officer and the Chairman are excluded from human resource and remuneration meeting except
when required. The terms of reference are to be determined by the board of directors.
Nomination and risk management committees are non-mandatory and are new requirements of the Code 2017. The
composition and terms of reference are left for the board of directors to determine and decide for these committees
except some for risk management committee like internal control monitoring, risk mitigation and disclosure of the
company’s risk policies.
3.4. Chief Offices of a company
Moreover, the code 2017 explained the function and requirements of the main executive offices of a company such as
the chief financial officer, company secretary, and head of internal audit. The board of directors are responsible for
the appointment and removal of these executive officers. The exception is the head of internal audit that can only be
removed by recommendation of the audit committee. The eligibility criteria for appointment as chief financial officer
and head of internal audit have been amended in the new code which now requires experience from three to seven
years depending upon the membership of any professional body of accountants established, managed or recognised
by Pakistan. Likewise, no person shall be appointed as the Company Secretary unless he holds the qualification as
specified under the relevant regulations by the Securities and Exchange Commission of Pakistan. Hence, this code is
based on ‘comply or explain ‘principle, thus; it gives the right to companies to apply for relaxation of the rules to
Securities and Exchange Commission of Pakistan in case of non-compliance subject to a fee and reasons for such non-
compliance. If deemed fit, the Securities and Exchange Commission of Pakistan can relax the rules. The code 2017
states that for non-compliance of this code the penalties will be determined according to the Act 2017 which states
that a contravention of any regulation shall be punishable with a penalty which may extend to rupees five million and,
where the contravention is a continuing one, with a further penalty which may extend to rupees one lack for every day
after the first during which such contravention continues.
4. Corporate Governance Code 2019
This Corporate Governance Code defines ‘comply or explain’ concept except for some mandatory provisions. The
obligatory provisions include: the need for independent directors to be appointed, consistent directorship of no more
than seven firms, presence of woman director, maximization of executive directors, the appointment of auditors who
are registered with the audit board, formation of audit committee, the rotation of auditors to financial sector companies,
publication by external auditors of the declaration of compliance with the code and their review.
The major non-obligatory provisions are based on comply or explain principle in this Code include the annual
examination of the board, its Members and committees, the division of office of Chairman and chief executive officer,
the training of directors, qualifications of chief financial officer, the placing of the related party transactions with a
board of auditors, internal audits and internal auditing boards, the internal auditor and corporate secretary, etc.
This code also includes the mandatory establishment of an audit committee. However, the practical aspects of the
listed company activities may include a separate committee of audit committee, internal control committee and
business and strategic analysis committee to provide concentrated functional attention to each issue.
4.1. Comply or Explain Approach
The idea that the 2019 Code is not a static set of rules is largely based upon 'comply or explain' strategy. It contains
such non-obligatory clauses and thus the listed companies are required to disclose whether the non-obligatory
conditions have been met in a declaration of compliance; and if it is not, it shall include an adequate description as to
any impediment. Our view is that the non-mandatory clauses are at the heart of the Code of 2019 and should be the
key issue for the board of directors in their application.
By this 'comply or justify' strategy, an alternative means of complying with a non-obligatory rule is recognised if good
governance is to be attained. It is a requirement for this to be explicitly and attentively stated in the statement of
conformity. To clarify how the actual activities, relate to good governance should be communicated to the listed

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companies. Its history should preferably be laid, and any attendant action taken should be transparent. Where there
may be a time limit to deviate from a non-obligatory provision, the reason can provide when the listed company
intends to fulfil the non-obligatory provision.
4.2. Composition of Board of Directors
It is necessary that no person shall be elected or nominated or holds office as a director of a listed company including
as an alternate director of more than seven listed companies. As independent directors, it is obligatory that any listed
undertaking, whichever is higher, has at least two or one third members of the board. The Board is reconstituted not
later than expiry of its current term in order to elect an independent Chairman. It is mandatory that the independent
director give his consent to serve as director and announce that he qualifies for the independence requirements notified
by the Companies Act of 2017 and that such a declaration is submitted at the first meeting of the Board of Directors,
held following elections of the directors, as well as in the event of any changes to its independent director. It is
necessary that the board shall have at least one-woman director and the executive directors, including the chief
executive officer, shall not be more than one third of the board. This is required for the purpose of compliance.
4.3. Audit Committee
An audit committee comprising at least three members of non-executive directors and at least one independent director
shall be formed by the board. The chairman of the committee of the audit committee shall be an independent head
who shall not be chairman of the board, and the board of directors shall be satisfied that at least one member of the
audit committee shall be constituted by the board of auditors. A company audit committee shall designate a committee
secretary who shall either be company secretary or an internal audit director.
Meetings shall be obligatory at least once every quarter of the financial year. The meetings are often held until their
board accepts interim reports and after external audits have taken place a meeting of the audit board where the external
auditors, the internal audit heads or the chairman of the audit board, the Head of internal auditors and external auditors
are represented by a member of the member's engagement or in his absence any other member of the board are
expected to hold a meeting.
The board of each company is obligated to decide the audit committee's terms of reference. It is mandatory for the
secretary of the audit committee to circulate to the members, directors, head of internal audit, and when necessary,
head of finance before the next meeting of the Audit committee minutes.
4.4. Rotation of auditors
It is necessary for all financially listed companies to change their external auditors every five years. The engagement
partner must at a minimum, be rotated every five years, by all listed companies other than those in the financial sector.
4.5. Auditor Review and Compliance Statement
It is obligatory that the company publish and distribute a statement as provided for in the provisions of Annex A to
those Regulations, together with its annual reports to determine whether they have complied with the requirements of
these regulations and the declaration shall be specific and shall be supported by the necessary explanations.
5. Code of Corporate Governance Regulations 2019 as compared with 2017
1. No person can be a director of a listed company (including as an alternate director) in more than 7 listed
companies (previously it had been 5). The directorship in listed subsidiaries of a listed company was previously
excluded. But, as this provision is now deleted from the new code, we believe that directorships in listed subsidiaries
of a listed parent will now be counted while calculating the said limit.
2. Executive directors should not account for more than 1/3 with explanation of fraction rounded up as one and
Independent director at least two or 1/3 with explanation of fraction not rounded up as one. An explanation has been
provided in sub-regulation(1) which provides that while calculating one-third number, if there's any fraction available,
which has not been rounded up together, in such case, a corporation is required to elucidate the explanations of it, in
its compliance report. Again, in the previous regulations there was no such requirement.
3. The provisions concerning investment and divestment of funds, nature of loans, and level of determination
of materiality, as provided in regulation 10(3)(vi)(vii) of the previous regulations has been excluded from the
responsibilities of board of directors.

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4. The decisions of the board on the fabric transactions or significant matters relating to: investment and
disinvestment of funds where the maturity period of such investments is six months or more, determination of the
character of loans and advances made by the company; and that board of director shall define the extent of materiality,
keeping in sight the precise circumstances of the corporate.
5. The previous regulations required that in case a director has any conflict of interest on any transaction
additional to the needs of section 207 and articles of association of the corporate, the administrators were to make sure
that the quorum should have a minimum of two independent directors – in absence quorum of the meeting shall not
be considered as present. It transpires that in wake of difficulties being faced by companies this provision has now
been excluded.
6. It transpires that the previous regulations handling transaction not administered on arm’s length basis has
also been excluded. It transpires that section 166(1)(f) is exhaustive because it provides that where a director or number
of directors have an interest in any transaction, the matter is required to be approved by the general meeting.
7. The previous regulations permitted for the determination of director’s remuneration to retain a consultant to
recommend appropriate level of remuneration for approval of the board. This provision has now been excluded.
8. In the previous Regulations directors’ training was mandatory. However, in these Regulations directors are
being encouraged to undertake the said training. It however requires that fifty of the administrators are required to
finish the training by or before 30 June 2020; 75% by 30 June 2021 and 100% by 30 June 2022.
9. The following are added within the explanation of “financial literate” c) has a minimum of 10 years of
experience as audit committee member; or d) at least 20 years of senior management experience in overseeing of
monetary, audit related matters.
10. In these Regulations outsourcing of internal audit function to any associated company or associated
undertaking of external auditors is restricted. This is a positive change because it will enhance the independence of
external auditors which is required as per auditing standards.
11. In these Regulations, if a sole proprietorship audit firm has completed five years acting as the external
auditors of a listed company, such audit firm should be changed.
12. The composition of directors appearing in Directors’ Report now also includes the category of Female
director. Also, in sub-regulation 3 of the aforesaid regulation companies are encouraged to supply details of
remuneration of individual directors in annual report. In previous regulations there was no such requirement.
13. Contravention of any of mandatory provisions namely: regulations 3, 6, 7, 8, 27, 32, 33 and 36 of those
Regulations, are punishable with a penalty of Rs.5 million and if the contravention is a continuing one Rs.100,000 per
day (section 512(2) of the Act). Previously the penalty was for non-compliance of all the requirements of the Listed
Companies (Code of Corporate Governance) Regulations, 2017.
6. Conclusion
In conclusion, the corporate governance regulation in Pakistan is still in its developing stage and is not yet fully mature.
This is evident from the reforms carried out in the last sixteen years. No doubt efforts have been made for improving
the element of independence in board with focus on board diversity and competence of directors. However, the
development in regulations and legislation will be of less use if will a commitment is not exhibited for its
implementation by rejecting a simple ‘box ticking’ approach by companies. Moreover, the convergence of corporate
governance rules if genuinely completed in the context of the social and business environment of Pakistan will allow
Pakistan to be more competitive globally.

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