Page 1 Corporate Governance PICG’S Recommendations CODE OF CORPORATE GOVERNANCE – WAY FORWARD Presentation by: EBRAHIM SIDAT COUNTRY MANAGING PARTNER

Page 1 Corporate Governance PICG’SRecommendations

CODE OF CORPORATE GOVERNANCE – WAY CODE OF CORPORATE GOVERNANCE – WAY FORWARDFORWARD

Presentation by:EBRAHIM SIDATCOUNTRY MANAGING PARTNER / CEO

Ernst & Young Ford Rhodes Sidat HyderA member firm of Ernst & Young Global

Limited

September 22, 2010

Southern Regional CommitteeThe Institute of Chartered Accountants of

Pakistan


PRESENTATION AT A GLANCE

► BOARD COMPOSTION AND STRUCTUREBOARD COMPOSTION AND STRUCTURE

► INDEPENDENT DIRECTORS

► THOSE NOT TO BE DEEMED AS AN “INDEPENDENT DIRECTOR”

► GOVERNANCE STRUCTURE

► MAXIMUM NUMBER OF DIRECTORSHIPSMAXIMUM NUMBER OF DIRECTORSHIPS

► INTERNAL AUDITINTERNAL AUDIT

► COMPOSITION OF AUDIT COMMITTEECOMPOSITION OF AUDIT COMMITTEE

► ROLE OF AUDIT COMMITTEEROLE OF AUDIT COMMITTEE

► MINUTES OF THE AUDIT COMMITTEEMINUTES OF THE AUDIT COMMITTEE

► HR & REMUNERATION COMMITTEEHR & REMUNERATION COMMITTEE

► BOARD DEVELOPMENT AND EFFECTIVENESSBOARD DEVELOPMENT AND EFFECTIVENESS

► EXTERNAL AUDITEXTERNAL AUDIT

► OTHER GOVERANCE REFORM RECOMMENDATIONSOTHER GOVERANCE REFORM RECOMMENDATIONS


BOARD COMPOSTION AND STRUCTUREBOARD COMPOSTION AND STRUCTURE

Current provisions under the CCG 2002Current provisions under the CCG 2002

• Executive Directors (including the CEO) shall not be more than 75% of the Executive Directors (including the CEO) shall not be more than 75% of the elected directorselected directors

Current provisions applicable to banks and DFIsCurrent provisions applicable to banks and DFIs

• Under SBP’s Prudential Regulations, maximum number of Executive Directors Under SBP’s Prudential Regulations, maximum number of Executive Directors (including the CEO) shall not exceed two(including the CEO) shall not exceed two

Task Force RecommendationsTask Force Recommendations

• Executive Directors be not less than two and not more than 1/3Executive Directors be not less than two and not more than 1/3rdrd of the elected of the elected directors (including the CEO)directors (including the CEO)

• Compliance with the above shall become effective when the Board is next Compliance with the above shall become effective when the Board is next reconstituted on the expiry of its current termreconstituted on the expiry of its current term



• There should be at least one Independent DirectorThere should be at least one Independent Director

INDEPENDENT DIRECTORS


• Minimum of 25% members of the Board shall be Independent DirectorsMinimum of 25% members of the Board shall be Independent Directors


• Board shall have a balance of Executive and Non-Executive Directors (and Board shall have a balance of Executive and Non-Executive Directors (and in particular, Independent Directors)in particular, Independent Directors)

• Board shall have not less than 1/3Board shall have not less than 1/3rdrd or 3, whichever is higher, of its total or 3, whichever is higher, of its total members as Independent Directorsmembers as Independent Directors



a) An employee of the company or group within the last two years;

b) Has or had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior executive of a body that has such a relationship with the company;

c) Received in the year preceding his appointment as a director or receives additional remuneration excluding retirement benefits apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme;

d) A close relative of the company’s directors or senior executives;

e) Holds cross-directorships or has significant links with other directors through involvement in other companies or bodies;

f) Is a shareholder holding 5% or more of the total voting shares of the company;

g) Is an employee of an institutional investor including a banking company, DFI, NBFI, pension fund or insurance company or a person nominated by such institutional investor subject to restraint in the exercise of his independent judgment as directors;

h) Has served on the Board for more than three consecutive terms from the date of his first election; eligible as “independent director” if re-elected after a lapse of one term.

THOSE NOT TO BE DEEMED AS AN “INDEPENDENT DIRECTOR”



• Chairman shall preferably be a Non-Executive DirectorChairman shall preferably be a Non-Executive Director

GOVERNANCE STRUCTURE


• Under SBP’s Prudential Regulations, CEO and Chairman of the Board shall Under SBP’s Prudential Regulations, CEO and Chairman of the Board shall be two separate personsbe two separate persons


• Chairman and CEO shall not be the same personChairman and CEO shall not be the same person

• Chairman shall be a Non-Executive DirectorChairman shall be a Non-Executive Director

• Role of Chairman and CEO to be determined by the BoardRole of Chairman and CEO to be determined by the Board

• Separation of the two offices aforesaid shall become effective when the Separation of the two offices aforesaid shall become effective when the Board is next reconstituted on the expiry of its current termBoard is next reconstituted on the expiry of its current term



• Maximum directorship of 10 listed companiesMaximum directorship of 10 listed companies

MAXIMUM NUMBER OF DIRETORSHIPS


• Maximum directorship of 05 listed companiesMaximum directorship of 05 listed companies

• Directorship of listed subsidiary companies of a Group holding company not to be Directorship of listed subsidiary companies of a Group holding company not to be included in the above limitincluded in the above limit



INTERNAL AUDIT


• The appointment, remuneration and terms and conditions of employment of The appointment, remuneration and terms and conditions of employment of the Chief Finance Officer (CFO), the Company Secretary and the Head of the Chief Finance Officer (CFO), the Company Secretary and the Head of Internal Audit of listed companies shall be determined by the CEO with the Internal Audit of listed companies shall be determined by the CEO with the approval of the Board of Directors.approval of the Board of Directors.

• The CFO or the Company Secretary of a listed company shall not be The CFO or the Company Secretary of a listed company shall not be removed except by the CEO with the approval of the Board of Directors.removed except by the CEO with the approval of the Board of Directors.


• Appointment provisions remain unchanged.Appointment provisions remain unchanged.

• The Head of Internal Audit of listed company shall also not be removed The Head of Internal Audit of listed company shall also not be removed except by the CEO with the approval of Board.except by the CEO with the approval of Board.


CompositionComposition

Current provisions under the CCG 2002Current provisions under the CCG 2002• The Audit Committee shall comprise not less than three members including The Audit Committee shall comprise not less than three members including

the Chairman. Majority of the members of the Committee shall be from the Chairman. Majority of the members of the Committee shall be from among the Non-Executive Directors.among the Non-Executive Directors.

COMPOSITION OF AUDIT COMMITTEE

Task Force RecommendationsTask Force Recommendations• The Committee shall only comprise of non-executive directors majority of The Committee shall only comprise of non-executive directors majority of

whom shall be Independent Directors.whom shall be Independent Directors.• The Board should satisfy itself that at least one member of the Committee The Board should satisfy itself that at least one member of the Committee

has relevant financial experience.has relevant financial experience.• The Chairman of the Committee shall be an Independent Director.The Chairman of the Committee shall be an Independent Director.

SECRETARYSECRETARY

Current provisions under the CCG 2002Current provisions under the CCG 2002• The Audit Committee shall appoint a secretary of the committee.The Audit Committee shall appoint a secretary of the committee.

Task Force RecommendationsTask Force Recommendations• The CFO of a company shall not be appointed as the Secretary so as to The CFO of a company shall not be appointed as the Secretary so as to

achieve desired independence from executive management.achieve desired independence from executive management.


ROLE OF AUDIT COMMITTEE


The Code contains a detailed terms of reference of the Committee.The Code contains a detailed terms of reference of the Committee.

• The role does include recommendation to the Board about the appointment, The role does include recommendation to the Board about the appointment, resignation or removal of External Auditors, audit fee and provision of any resignation or removal of External Auditors, audit fee and provision of any services in addition to audit of financial statements.services in addition to audit of financial statements.

• The Board is required to act in accordance with the recommendations of the The Board is required to act in accordance with the recommendations of the Audit Committee unless strong grounds exist to proceed otherwise.Audit Committee unless strong grounds exist to proceed otherwise.


• Audit Committee to have comprehensive responsibility for the Audit Committee to have comprehensive responsibility for the recommendation for appointment, recommendation for appointment, removalremoval determination of audit fee and determination of audit fee and provision of non-audit services by External Auditors. The Board is required provision of non-audit services by External Auditors. The Board is required to follow these recommendations and if it proceeds otherwise, then the to follow these recommendations and if it proceeds otherwise, then the Board shall record reasons for not acting on the recommendations of the Board shall record reasons for not acting on the recommendations of the Audit Committee.Audit Committee.


MINUTES OF THE AUDIT COMMITTEE


• The Secretary of the Audit Committee is required to circulate minutes of The Secretary of the Audit Committee is required to circulate minutes of meeting of the Audit Committee to all members, directors and the CFO meeting of the Audit Committee to all members, directors and the CFO within a fortnight.within a fortnight.


• The circulation of the minutes is required prior to the next Board meeting The circulation of the minutes is required prior to the next Board meeting and where it is not practical, the Chairman of the Audit Committee shall and where it is not practical, the Chairman of the Audit Committee shall circulate a written synopsis of the proceedings to the Board and the minutes circulate a written synopsis of the proceedings to the Board and the minutes are to be circulated immediately after the meeting of the Board.are to be circulated immediately after the meeting of the Board.


HR & REMUNERATION COMMITTEE

Current provisions under the CCG 2002Current provisions under the CCG 2002• NoneNone


• There shall also be a Board’s Human Resources and Remuneration There shall also be a Board’s Human Resources and Remuneration committee of not less than three members comprising Non-Executive committee of not less than three members comprising Non-Executive Directors including at least one Independent Director. CEO(who shall be the Directors including at least one Independent Director. CEO(who shall be the only Executive Director) may also be included. The Chairman of the only Executive Director) may also be included. The Chairman of the committee shall be a Non-Executive Director.committee shall be a Non-Executive Director.

• The committee shall be responsible for recommending human resource The committee shall be responsible for recommending human resource management policies to the Board including succession planning.management policies to the Board including succession planning.

• The committee shall specifically be responsible for recommending to the The committee shall specifically be responsible for recommending to the Board the selection, evaluation, compensation (including retirement Board the selection, evaluation, compensation (including retirement benefits) and succession planning of the CEO and his recommendations on benefits) and succession planning of the CEO and his recommendations on such matters for key management positions who report directly to him.such matters for key management positions who report directly to him.

• The CEO shall not participate in the proceedings of the committee on The CEO shall not participate in the proceedings of the committee on maters that directly relate to his performance and compensation.maters that directly relate to his performance and compensation.



• A mechanism be put in place whereby the Board shall undertake an evaluation of its A mechanism be put in place whereby the Board shall undertake an evaluation of its own performance and of its committees to enhance Board’s performance.own performance and of its committees to enhance Board’s performance.

• Compliance with the aforesaid shall be done within two years of the provision Compliance with the aforesaid shall be done within two years of the provision becoming effective.becoming effective.

• Directors shall acquire certification of orientation of director’s education program from Directors shall acquire certification of orientation of director’s education program from PICG or such other institution as may be accredited by the SECP.PICG or such other institution as may be accredited by the SECP.

• By 30 June 2011, at least one director shall be required to obtain the above By 30 June 2011, at least one director shall be required to obtain the above certification. Thereafter, every following year, minimum one director shall procure the certification. Thereafter, every following year, minimum one director shall procure the said certification.said certification.

BOARD DEVELOPMENT AND EFFECTIVENESS


• Auditors shall furnish a Management Letter to the Board within 45 days (currently 30 Auditors shall furnish a Management Letter to the Board within 45 days (currently 30 days) from the date of the audit report.days) from the date of the audit report.

• Any matter deemed significant by the auditor shall be communicated in writing to the Any matter deemed significant by the auditor shall be communicated in writing to the Board prior to the approval of accounts.Board prior to the approval of accounts.

• Engagement Partner of the Firm shall attend the AGMEngagement Partner of the Firm shall attend the AGM

• Engagement Partner of the Firm shall not attend that part of the AGM when Engagement Partner of the Firm shall not attend that part of the AGM when appointment or removal of auditors is discussed, so as to avoid perceived conflict of appointment or removal of auditors is discussed, so as to avoid perceived conflict of interest.interest.

EXTERNAL AUDIT


• Appropriate arrangement be made for insurance cover in respect of Independent Appropriate arrangement be made for insurance cover in respect of Independent Directors.Directors.

• Board shall determine, subject to the Companies Ordinance, 1984 and the Company’s Board shall determine, subject to the Companies Ordinance, 1984 and the Company’s Articles of Association, reasonable remuneration for Non-Executive Directors at such Articles of Association, reasonable remuneration for Non-Executive Directors at such levels which may not be perceived to comprise their independence.levels which may not be perceived to comprise their independence.

• Casual vacancy in the Board shall be filled up latest within 90 days (currently, the time Casual vacancy in the Board shall be filled up latest within 90 days (currently, the time limit under the CCG 2002 is 30 days).limit under the CCG 2002 is 30 days).

• Adequate systems and controls should be in place for identification and redressel of Adequate systems and controls should be in place for identification and redressel of grievances arising from unethical practices.grievances arising from unethical practices.

• CFO shall be a person who is a member of a recognized Body of professional CFO shall be a person who is a member of a recognized Body of professional accountants or a post-graduate (under the current CCG, a graduate in any subject) in accountants or a post-graduate (under the current CCG, a graduate in any subject) in finance.finance.

• The term “executive” for purposes of financial reporting and certain disclosures The term “executive” for purposes of financial reporting and certain disclosures redefined to mean an employee of a listed company (other than CEO and directors) redefined to mean an employee of a listed company (other than CEO and directors) who report directly to the CEO or whose salary, allowances and benefits exceed Rs.5 who report directly to the CEO or whose salary, allowances and benefits exceed Rs.5 million in a financial year.million in a financial year.

OTHER GOVERNANCE REFORMS RECOMMENDED


►Thank you

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Page 1 Corporate Governance PICG’S Recommendations CODE OF CORPORATE GOVERNANCE – WAY FORWARD Presentation by: EBRAHIM SIDAT COUNTRY MANAGING PARTNER