THE Public Sector Companies (Corporate Governance) Rules 2013 make it mandatory for state companies to have over 50pc independent directors.
But the government has appointed more than 70pc (90pc in some cases) independent directors on the boards of state-owned enterprises.However, in the present era of rising risks, autonomy is getting more importance at the cost of sector’s knowledge.
The focus on independent directors and the borrowing of business wisdom from the private sector are part of the new code of corporate governance rules. The government tries to bring in professionals with high business acumen endowed with knowledge of best business practices, but these professionals probably do not have an in-depth understanding of the dynamics of the public sector’s specialised working and services.
Despite the tilt towards independent directors, there is no strong system of accountability, and an immature regulatory mechanism would not help a neutral person on the board meritoriously deliver results. Loss-making public sector companies are sucking a significant portion of the budget and stifling development and social growth. The rehabilitation efforts of public sector enterprises (PSEs) has failed on numerous occasions and the situation has not changed as yet.
Despite the tilt towards independent directors, there is no strong system of accountability, and an immature regulatory mechanism would not help a neutral person on the board meritoriously deliver results
To reverse the process, there is a need for updated board reforms to safeguard the interest of all stakeholders. It is pivotal to control conflicts of interest, including in major company transactions. After the worldwide evaluation of corporatisation, good governance is now the preference of all stakeholders, including creditors, regulators, governments and shareholders etc.
Globally, corporate investment is more vigilant, and the reporting, transparency, autonomous board and good governance standards take precedence over higher rates of return. The independent directors are expected to bring objectivity, different outlook and new perspectives to boardroom discussions.The independence brings external insight and views into a board’s decision-making process.
No doubt, the concept of independent directors, especially in PSEs, is to protect the interest of all stakeholders. The number of stakeholders in public utility companies is very large, and in some cases, comprises the country’s entire population.
However, the independence of directors is compromised if a person, for example, is a close relative of the company’s promoters, directors or major shareholders or is a major supplier, customer, service provider, lessor or lessee of the company.
Independent directors do bring autonomy, business acumen and neutrality. But their limited knowledge about the operations and stakes in the companies make their presence and experience meaningless due to: uninformed board of directors; politically-motivated references on the board; political influence; lack of professional expertise; uncertain attendance in meetings due to preoccupations; and managerial autonomy affected due to political influence.
The independent directors’ role is important to set the direction and ensure the resolution of strategic issues faced by the company. It does not mean that autonomy should get more importance at the cost of sectoral knowledge.
A tug of war has commenced on various fronts and the sector is badly hampered due to the overlapping of authority in one area and the lack of ownership in other areas. Recently, chairman of the board of directors of the NTDC filed a writ petition against the Ministry of Water and Power (MoWP) to keep it away from the firm’s operational matters.
As a matter of fact, Wapda was unbundled to incorporate nine discos, four gencos and the NTDC. The composition of the board was very balanced due to the presence of Wapda, Pepco and MoWP representatives and three to four members from the private sector. The chairmen of almost all the boards were elected from the independent members.
The directors from Wapda, Pepco and the MoWP participated in the meetings will full preparation under the policy guidelines of Wapda and Pepco. The members from the private sector were also independently contributing, while getting insights about the sector from sectoral experts at the same time.
Then suddenly, in 2009, the MoWP constituted new boards that were more politically-oriented. Since then, we have witnessed the fall of the power sector. The current government has reshuffled the PSE boards as shown in the table.
There is no mechanism available to issue government’s policy guidelines to the independent directors as to how to contribute and what to ensure.
Furthermore, the following factors are also aggravating the crisis: the boards are not aligned with the government’s vision; missing predefined parameters for the board’s composition; the boards have failed to develop their own business plans, performance contracts and key performance indicators; the CEOs influence the boards because there are lot of transactions where the accommodated businessmen are sitting on the boards; the independent directors take up their personal problems with utilities in board meetings; the missing of an accountability mechanism for these directors; and the regulators’ failure to develop a sound performance monitoring system.
There is a dire need to balance all boards. We should bring government employees with sectoral backgrounds on the boards to give simultaneously business insights and independence. A holding company should be established to look after all PSEs and develop sector-wise pools from the private and public sectors.
The specialist directors should be accredited professionals from the finance, accounting, legal, HR and technical bodies.
The writer is CFO and Director Strategic Planning, Sadaqat Ltd
Published in Dawn, Economic & Business, August 24th, 2015