KARACHI, June 14: The State Bank on Friday issued a set of fresh guidelines for the boards of directors of the banks and the financial institutions to improve the prevailing corporate governance and make the board more effective.

Issued under the Banking Companies Ordinance 1962, the banks and DFIs have been advised by the SBP to follow the code of good governance issued by the Security and Exchange Commission of Pakistan (SECP) “so long as any provision hereof does not conflict with any provision of the Banking Companies Ordinance 1962.

In a circular addressed to the presidents, chief executives and country managers of all the local and foreign banks operating in Pakistan, the State Bank said that to promote sound banking practices, it was imperative that the board of directors assumed its role independent of the influence of the management.

Members of the board should know their responsibilities and power in clear terms, the SBP circular emphasises while pointing out that the board should focus on policymaking and general direction, oversight and supervision of the affairs and the business of the banks and DFIs, and does not play any role in the day to day operations.

The board of directors has been given the authority to approve and monitor the objectives/strategies and oversee business plans of the institutions and make it sure that the affairs of the institutions are carried out within the framework of existing laws and regulations and high business ethics.

All directors on the board should undertake and fulfil their duties and responsibilities keeping in view their legal obligations under all the applicable laws and regulations.

The board shall clearly define the authorities and key responsibilities of both the directors and the senior management without delegating its policymaking powers to the management and shall ensure that the management is in the hands of qualified personnel.

The board shall approve and ensure implementation of policies, including but not limited to, in areas of internal audit and control, complaints, risk management, human resources, credit, write-offs, recoveries, rescheduling and restructuring of debt, treasury management, investments, acquisition and disposal of fixed assets, donations and charities, prevention of frauds and forgeries and other operational area which the board and the management may deem appropriate from time to time. The Board shall also be responsible to review and update existing policies periodically and whenever circumstances justify.

The State Bank has reminded the directors of the banks and the DFIs that markets are ever-changing and so are their requirements. The board, therefore, is required to ensure existence of an effective Management Information System to remain fully informed of the activities operating performance and financial condition of the institution, the environment in which it operates, the various risks it is exposed to and to evaluate performance of the management at regular intervals.

The board of directors has been asked to meet frequently, preferably on monthly basis and at least once in a quarter, and the individual director should at least attend half of the board meetings in a financial year. The board shall ensure that it received sufficient information from the management on the agenda of the items well in advance of each meeting. The board should carry out its responsibilities in such a way that the external auditors and supervisors can see and form judgment on the quality of board’s work and its contributions through proper and detailed minutes of the deliberations held and decisions taken during the board meeting.

The board has been advised to form specialized committees with well defined objectives, authorities and tenure. These committees should preferably comprise ‘non executive’ board members shall cover areas like audit, risk management, recruitment, compensation, credit without indulging in day to day operations in these areas.

The board has been asked to ensure that it receives management letter from the external auditors without delay. It should also be ensured that appropriate action is taken in consultation with audit committee of the board to deal with control or other weaknesses identified in the management letter. The SBP has asked for a copy of the letter so that the central bank could also monitor the actions.

The State Bank has instructed the branches of foreign banks operating in Pakistan to intimate the central bank within 30 days regarding any similar measures taken or policies introduced by their head offices.

However, they need not necessarily seek approval of their board of directors, as stipulated in case of local banks and DFIs.

Pakistani banks and DFIs have been instructed to place the SBP circular before the board of directors for meticulous compliance within 30 days.