Introduction
Corporate governance is like the steering wheel of a company without it, no matter how powerful the engine, the vehicle risks going off track. In Pakistan, the push for stronger governance frameworks has been critical for ensuring market stability, transparency, and investor protection. Recognizing this, the Securities and Exchange Commission of Pakistan (SECP), under the Companies Act, 2017, introduced the Listed Companies (Code of Corporate Governance) Regulations, 2019.
These regulations provide a clear roadmap for listed companies, ensuring they operate ethically, sustainably, and with accountability. Let’s dive into the key elements of this landmark reform.
The "Comply or Explain" Approach
One of the most unique aspects of the 2019 Code is the “comply or explain” principle. Instead of forcing companies into a rigid framework, the SECP allows flexibility for certain provisions.
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Mandatory requirements: Companies must strictly comply, and failure can lead to penalties.
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Non-mandatory provisions: Companies may choose not to comply but must clearly explain why in their annual compliance report.
This approach balances enforcement with flexibility, ensuring accountability while recognizing that one size doesn’t fit all.
Board of Directors Structure and Roles
Composition Requirements
The Regulations lay down detailed requirements for board structure:
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Director limit: An individual can serve as director in no more than seven listed companies at once.
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Independent directors: At least two or one-third (whichever is greater) must be independent.
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Female representation: Every board must have at least one female director.
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Executive directors cap: Executive directors, including the CEO, cannot exceed one-third of the board.
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Chairman vs. CEO: The same person cannot hold both roles, ensuring separation of powers.
Board Diversity and Skills
Boards must have a healthy mix of expertise, diversity, and industry knowledge to guide companies effectively.
Minority Shareholder Representation
Minority investors get greater protection through provisions allowing proxy solicitation, ensuring their voices aren’t drowned out.
Core Responsibilities
Boards are tasked with setting the vision, mission, and ethical direction of the company. This includes:
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Establishing a risk management framework
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Building strong internal controls
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Ensuring grievance redressal systems
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Promoting an ethical corporate culture
Sustainability, ESG, and DE&I Policies
The 2019 Regulations highlight modern priorities:
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Oversight of sustainability risks and opportunities
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Integration of ESG strategies
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Promotion of Diversity, Equity, and Inclusion (DE&I)
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Encouraging women’s participation in all levels of the organization
Key Policy Records
Boards must maintain proper documentation for critical policies such as HR, procurement, ESG, whistle-blowing, and anti-harassment.
Key Management Appointments
The board oversees crucial hires like the
CFO, Company Secretary, and Head of Internal Audit.
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Appointment & removal: Require board approval, with the audit committee’s involvement in some cases.
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Qualifications: The CFO and Head of Internal Audit must meet strict experience and education criteria.
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Separation of roles: No individual can serve as both CFO and Company Secretary.
Board Committees for Oversight
Audit Committee (Mandatory)
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Must have at least three non-executive directors, including one independent director as chairman.
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At least one member must be financially literate.
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Meets quarterly and holds private sessions with auditors without the CFO present.
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Safeguards assets, ensures reliable reporting, and recommends external auditors.
HR and Remuneration Committee (Mandatory)
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Majority non-executive directors with an independent chairperson.
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Oversees remuneration policy, board evaluations, and HR practices.
Nomination Committee (Optional)
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Recommends board and committee composition, strengthening succession planning.
Risk Management Committee (Optional)
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Monitors risk exposure and ensures mitigation strategies are effective
External Audit Regulations
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Quality: Auditors must be ICAP-accredited with satisfactory ratings.
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Independence: No close relatives of top executives may serve as auditors.
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Rotation: For financial sector companies, auditors must be changed every five years; for others, rotation of the lead partner is required.
Reporting and Disclosure Obligations
Transparency is at the heart of the 2019 Regulations.
Directors’ Report
Annual disclosures must include:
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Board composition (executive, non-executive, independent, female)
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Committee memberships
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Non-executive director remuneration policy
Annual Report Transparency
Aggregate remuneration details for all directors must be shared.
Website Disclosure of Policies
Companies are encouraged to post codes of conduct, ESG policies, and whistle-blowing mechanisms online.
Compliance Statement
Annual reports must include a compliance statement, verified by statutory auditors. Any non-compliance must be flagged.
Penalties and Enforcement
Non-compliance isn’t taken lightly. SECP can impose penalties, sanctions, or legal proceedings. This ensures companies treat these obligations seriously.
Benefits of Strong Corporate Governance
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Builds investor confidence
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Improves market credibility
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Encourages sustainable growth
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Protects shareholder interests
Challenges for Listed Companies
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Smaller firms may lack capacity for compliance
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Resistance to change within traditional boards
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Implementation gaps due to weak internal systems
Global Comparisons
Pakistan’s framework mirrors global best practices like those of the UK and OECD but also incorporates local priorities like gender inclusion and anti-harassment policies.
Future of Corporate Governance in Pakistan
The journey doesn’t stop here. We can expect:
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Greater emphasis on ESG integration
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Stricter compliance monitoring
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Use of technology (AI-driven risk management, digital reporting)
Conclusion
The Listed Companies (Code of Corporate Governance) Regulations, 2019 act as a compass for Pakistan’s corporate sector, pointing towards transparency, accountability, and long-term value creation. By mandating independent boards, clear reporting, and ESG integration, the Code not only protects investors but also aligns businesses with global standards. Think of it as a user manual for running a fair, transparent, and future-ready company.