Tuesday, September 28, 2010

Corporate governance of large public sector companies-the double board system

In Germany and other European countries,there is a 2-boards system for corporate management of companies exceeding a certain size.Rationale being,broader risk management,transparency and accountability and catering to the stake-holders and not just share-holders.There are two boards;one board of directors as we find in Pakistan and elsewhere where Anglo-Saxon model is practiced ; the other called Board of Supervisors or Supervisory Board.Board of directors is subordinate to the Board of Supervisors.Supervisory Board(BoS) has a chairman of the Board and several members.At least two of the BOS members are to be independent,not belonging to or associated with the company or share-holders.Normally consumer associations,civil society or university professors are inducted/elected in the general meeting as independent members.BOS and BOD are supposed to act together.BoS is concerned with broad policy guidelines,risk management,major contracts and audit.BoD is responsible for day to day operational management of the company under a chief executive(CEO).Lately both models have been converging;single boards powers being more circumscribed and receiving varying levels of external oversight;and BoS's diffused power system and consultative process shortened in the interest of efficiency and quick management.

My proposal is to try this system of two-boards in Pakistan in large public sector companies .We have seen the results of single board managed companies:mounting losses ,corruption ,falling level and quality of service etc.Take PIA,Railways,Pakistan Steel, WAPDA,PEPCO,National Bank of Pakistan ,OGDC etc.Under the current style of management, the CEO has unbridled powers of Black and White,who is manipulated from behind by controlling ministries.If CEO manages to keep the ministry happy,he is not asked many questions and is free to do all kind of nepotism,and corruption etc.Some powerful CEOs have direct line with the chief executive,Pm or President of the country and are immune from ministry's control either.Board members are only part-time and either have full tome jobs elsewhere or are board members of numerous organisations earning fee and other formal and informal advantages such as misuse of official vehicles,travel and leverage in appointments of personnel.

BoS ,in case of large public sector corporations can bring external and independent oversight,transparency and control over powerful individuals of the board and the CEO.The stakes involved in organisations like PIA and Railways are too much and too many.It is worth examining the viability of such a system in our circumstances.We need not copy the whole system in Toto and can and should make suitable adjustments to the German model.We have seen that in the US and other Anglo-Saxon countries,the supremacy of the CEOs has brought in many problems of recklessness and lack of transparency giving rise to financial crashes.Public sector is going to remain in Pakistan for a long time despite efforts of privatization.Hence the need of some innovation in respect of corporate governance.

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