The state-owned enterprises (SOE) bill cleared by the federal cabinet seeks to address issues facing their governance and operations. Its apparent objective is to improve service quality and decrease the economic burden of SOE’s staggering losses and debts. Let’s evaluate the bill’s salient elements, particularly those that pertain to the board of directors.
First and foremost, the bill places the responsibility of running SOEs to where it belongs: the board of directors. One can only welcome when the bill says that the board of directors of SOEs “shall be given autonomy and independence in the discharge of its functions” and the boards, not the federal government, will appoint the CEOs. The bill goes on to state that the federal government shall not require a commercial SOE to undertake a public service obligation that deviates from the SOE’s primary objective but leaves room for the same through some ifs and buts. The ifs and buts may prove problematic because “more than 98 per cent of the government’s assets and almost 100pc of the losses” pertain to 85 commercial SOEs, as stated in a report on SOE, dated March 3, 2021, by the Ministry of Finance.
A burning issue facing state-owned enterprises is that many directors are not appointed year after year with terrible consequences on performance
Second, the bill does the right thing by establishing a nomination committee for recommending individuals to the federal government for their appointment as directors. Indeed, a burning issue facing SOEs is that many directors are not appointed year after year with terrible consequences on performance. The members of the nominating committee will be the line minister, secretary of the line ministry, and secretary finance, which is understandable. The bill, however, overlooks that the committee would require a permanent secretariat. There are 212 SOEs established by the federal government according to the said report and if we assume an average of seven directors per entity, that’s well over a thousand positions to manage on an ongoing basis, which is simply not possible without a dedicated secretariat.
Third, another useful element in the bill is the establishment of a central monitoring unit in the finance division to analyse the performance of SOEs. The bill is silent on how the unit would operate. It would be appropriate that it is headed by a dedicated senior officer, such as an additional secretary, and its workings leave room for involving private sector specialists who can help develop the unit and provide policy advice to the government. This unit should also serve as the human resource secretariat for the nominations committee and be made the central directors and performance monitoring unit. Common interest demands that the data collected by the monitoring unit should be publicly disclosed in a manner that facilitates analysis by independent observers and researchers.
Fourth, there is excessive paperwork imposed on SOEs. Each SOE is already required to submit an annual report, half-yearly report, and prepare an annual budget, which is sufficient for planning, reporting and control. Annual corporate intent statements and business plans are quite unnecessary and the management time these would consume is far better spent on running the business.
The SOEs listed on Pakistan Stock Exchange, such as Oil & Gas Development Company, Pakistan State Oil, Pakistan Telecommunication Company Ltd are already subject to higher reporting standards and undertake quarterly reporting. If the intent is to strengthen checks and balances, a far more useful measure is that the external auditor should be appointed completely independently of the SOE.
Instead of asking for additional paperwork, SOEs should be required to disclose what’s relevant in detail within their annual report, such as their debt profile and how they intend to rationalise it. There is also no point in asking a non-executive director to annually submit details of personal assets to SOE, which is a recipe for breach of privacy.
Fifth, there is a need for tightening the director’s appointment criteria and the role of boards. We should be mindful of the grim conclusion of a data-driven study of listed companies by the Pakistan Institute of Development Economics: “A small, well-connected male club is in charge of corporate governance and the stock market.”
To change things for the better, an age limit, say 65 years, is a must. At the very least, it will keep out the retired members of the elite who want to live off the state till the last breath. A director must be a ‘filer’ for income tax purposes and there should be no compromise on it. The maximum number of boards one can serve should be no more than three unless there are more than three companies in a group.
Ex-officio directors should be as few as possible. Two terms as a director are more than enough and the door left open for a third term must be closed. The cool-off period should be at least three years and each director must annually submit a declaration, preferably digitally, to the central unit that he/she does not face a conflict of interest in the role or bring the conflict on record. All directors except the CEO should be non-executive and failure of a board to appoint a CEO within six months should be grounds for its termination.
Lastly, the bill has to clearly specify remuneration for non-executive directors. A detailed schedule should be added to the bill where the meeting fee is specified and eligible expenses, such as travelling and lodging, are identified. A tiered scheme may be allowed keeping in view relevant factors including SOE size and profitability with an annual increase tied to the official inflation rate. This black and white approach in the primary law approved by the parliament will bring some much-needed transparency and curb the abuse of SOE resources by the directors. Together with other measures in the bill, this will encourage serious professionals to consider serving on the boards, which is what the SOEs and the taxpayers need.
The writer is a former CEO of the Audit Oversight Board, Executive Director at the Securities and Exchange Commission and content director at CFA Institute (London)
He tweets @Usman_Hayat
Published in Dawn, The Business and Finance Weekly, August 23rd, 2021