The board of directors

THE BOARD OF DIRECTOR
PRESENTED BY. RAJA ADEEL NASEEM
TOQEER ABBASI
CLASS. MSBA-I
PRESENTED DATE. 04-OCT-2012
Qasimraza555@gmail.com

 The Board of directors is the body of elected or
appointed members who jointly oversee the activity
of the company.
Definition

Board as the principal instrument of
Governance
• Shareholders own the company but don’t run it.
• Management run the company but does not own
it.
• BOD lies between Share Holder and
Management.
• Board of directors elected by shareholders and
board hire the management to run the company.
• They work as a bridge between these two
groups.

 Provide Entrepreneurial leadership.
 Set strategic. (long term objectives and plan
to Implement).
 Arrange resources to Implement Strategic
plan.
 Review the performance of management.
 Set company values and standards.(mission,
vision, values statement, code of conduct for
Mgt and employees)
Board Role as Principle Instrument of
Corporate Governance

 Ineffective board are the those boards who’s
members are not fully aware of their
responsibilities and work for the company.
Ineffective Boards

I. Rubber stamp Board or Yes Men board.
II. Good old boys board or country club
boards.
III. Paper board
IV. Trophy board
Types of ineffective boards

 That simply approves whatever proposal or
resolution is put forward by the executive
directors, or more particularly, the chairman
of the board
1. Rubber stamp Board or Yes Men
board

 These are old friends of the chairman who
simply meet at exotic places for board
meetings but only talk about good old days
rather than conduct the company business.
2.Gold old boys board or country club
board

 It exists only on paper and plays no role in
the company e.g. wives and daughter of
principal shareholder of the company.
3. Paper board

 It comprises of people who have a big name
in the society ( trophies like major sports
stars, film actors, politicians, etc. ) but have
no acumen for conducting a company
business.
4. Trophy board

Power of Board
• The BOD of a company has absolute power to
conduct the affairs of the company.

Power of Board
 The BOD draws its power from
the following sources
1) The company Constitution
2) The Law
3) Resolution Passed by
Shareholder

 In case of Pakistan, this means the Articles
and Memorandum of association of the
company which clearly lay down. The power
of directors and how may be exercised.
The company Constitution

 In case of Pakistan, this refers to companies
act which provides a standard set of Articles
in its Table A.
The Law

 In certain cases shareholder may grant such
powers to the directors that were not
previously available to the directors by
passing a special resolution to that effect
Resolution Passed by Shareholder

 Board may delegate one or more of its collective power
to an individuals or a committee who may or may not
be the member of Board.
 Instrument that give power to board like
o Company Act
o Article of Association
Will also allow to delegate power to other.
continue...
Delegation of power by the board

 Delegation of power can be done by passing
resolution with majority.
Example
 Board authorize Finance director to Negotiate loan
terms and sign all necessary documents. The company
will be responsible for loan and board will be
accountable to shareholders.

Board pay due attention to following when delegating
power.
1) Is necessary to delegate this power
2) Method use for delegation is appropriate.(passing
proper resolution, TOR)
3) Board will also ensure that the Power will not miss
use.

The board of director of the company has three
main functions.
1) Oversight
2) Directional
3) Advisory
Functions of Board

 Approving and monitoring company strategic
plan.
 Approving annual budgets and plans.
 Engaging external auditor and liaising with
them.
 Ensuring the integrity and reliability of
company annual reports
 Review of major operational activities.
1. The Oversight function of the
Board

1) Setting of the company mission statement vision
statement value statement and formal code of conduct.
2) Appointment of CEO and other senior executive of the
company.
3) Planning for these secession of these senior executives.
4) Appointing various committees like audit committee
executive committee and remuneration committee.
2. The Directional Function of the
Board

 This refers to provision of general guidance
to the management keeping them informed
of what is happing in the rest of the
corporate world and offering specialized
help in certain areas.
3. The Advisory function of the Board

(1) Composition of the board
(2) independence of the board.
(3) committees
(4) external help
(5) Government intervention
Tools Available to a Board

 If the individual directors are competent person they
ensure the function of the board are performed in a
satisfactory and professional manners.
 In the other side if the directors are in bulk, old
country club guys or unqualified persons they are
not able to meet up the challenges of an effective
board.
1. Composition of the board

 In order to perform effectively, a board must be
independent.
 They should not be dependent on any particular
shareholders, stakeholders, external party, investor
or organization.
 They should be free to take the decisions for
common good of company.
2. Independence of the board.

 A board can form any number of committees to
ensure that due intention is paid to the various
matters that are brought before it.
 A committee may comprise wholly of directors or it
may have members from outside the board is well.
 A committee can examine a matter in greater detail
and come up with summarized report for the
consideration of the board.
3. Committees

 A board can seek assistance from external experts to
ensure that they are able to take correct decisions.
Example
If board make the police related to the remuneration
of employees, it is often deemed helpful to use the
service of external HR expert to carry out a survey of
salaries in the particular industry and draft
recommendations in light-of.
4. External Help

 Board use governmental or society help in
conducting is affairs.
 In Pakistan directors are often unwilling to seek
assistance from the government for fear of inviting
undue intervention.
 In some situation its necessary to chose government
help.
5. Government Intervention

 Responsibilities refers to act and duties that
must be performed by a person or body.
 I.e. (BOD present annual report to shareholder)
 Accountability refers to the requirement of
having to explain and give an account of what
has been done by a person or body.
 i.e. (Shareholder can ask them Question regarding
their performance)
Responsibility and Accountability

The board is responsible for it’s acts and
accountable to the company and not to any
other party .
There are two types:
1. Collective responsibility
2. individual responsibility
Responsibilities of a Board

There are four types:
1) Acting in the best interest of the company
2) Accountability to the owners
3) Statutory duties
4) Fiduciary or trustee-ship duties
Collective responsibility

 Director are collectively required to act in the best
interest of the company.
 i.e. They work for the achievement of collective
interest of all stakeholder. They should refrain
form taking any decisions which harm company
overall interest, financial position and performance
1. Acting in the best interest of the
company

 The director are required to present an account of their
conduct to the owners of the company.
 In formal terms Directors issue Periodic report like
quarterly reports, half year reports or annual reports to
shareholder
 Shareholder have right to ask question and board must
have to answer.
 In Informal communication they issue newsletter, special
report etc.
b. Accountability to the Owners

 Maintain proper Minutes of all meeting
 Send copy of Periodic reports to SECP.
 Director ensure that company maintain proper book
or account and audit at proper time.
 If company listed at Stock Exchange the director may
required to file certain document with the Stock
Exchange at appropriate interval.
c. Statutory Duties

 The law consider the board of director to be the trustees
of the company.
 Trustee is a person who has been given something in
trust and who is expected to look after that thing in the
interest of the giver.
 Assets and resources of company belong to Shareholder.
 BOD are responsible for best use of resources for the
interest of shareholder.

d. Fiduciary of trustee-ship Duties
Continue…Qasimraza555@gmail.com

 The following represent a test of how a board may handle
its fiduciary duties.
1) The board should approve only those transactions that
appear reasonable incidental to the business of the
company.
2) All transaction should be approved and undertaken in good
faith, believing them to be beneficial to the company.
3) If any member of board has any conflict of interest, he
should disclose it to board.
Fiduciary of trustee-ship Duties

 One of the power that a board of directors has is to borrow
funds on the behalf of the company.
 The company act does not place any limitation on the amount
of borrowing that a company can make .
 The prudential regulation issue by SBP restrict the amount of
loan.
 Borrowing is often and attractive form of financing new
projects.
 Board has to create balance between borrowing and Equity
financing.
Borrowing power of the Board

Classified according to composition
 1. Unitary boards
 2. Two-Tierd boards
Classified according to tenure of members
 1. Common tenure boards
 2. Staggered boards
Types of Boards

 A unitary boards does not have tiers or division.
 All member of the board are Equi-status participate
in the deliberation of the board simultaneously.
1- Unitary Board

 A two tiers has two distinct tiers.
 Upper tier called supervisory board and lower tier is
called management board.
 The supervisory board comprise entirely of non
executives directors.
 Management board comprise of executive director.
 Chairman of company is the chairman of both the boards
and himself a Non-Executive Director.
2- Two tier boards
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 All matters discussed at management board first.
 Management board authorize to make
recommendations and send proposal to Supervisory
Board.
 Supervisory board discuss issues and take decisions.
Two tier boards
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1) Provide grater power to Non-executive director by
placing Management board under Supervisory
board.
2) It allows for better and more comprehensive
representation of various stakeholders.
3) Clear division of work B/W the supervisor and
management tiers.
4) Decision making improved.
Two tier boards
Principal Advantage
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 Large size.
 In GERMANY avg size of board is
above 20.
 Difficult to handle
 Large boards will weak the effect of
batter directors.
 Slow decision making.
Two tier boards
Problems

 All the directors in such a board have the same
tenure.
 They are elected at the same time and retired at the
same time at the end of their tenure
3- Common Tenure Boards

 Under this arrangement only a part of board retires at the
end of stated tenure while the duration of each director
remain fixed.
Example.
 If Total 8 director. Each director Tenure 4 years. After
every 2 years 4 new director appointed.
 A,B,C,D appoint in 2002 and retire in 2006. then new 4
director Appointed and their tenure is (2006-2010)
 E,F,G,H appoint in 2004 and retire in 2008
4- Staggered Boards

 The board enjoy a degree of stability as the entire
board does not go out at any one time.
 Frequent re-election infuse new members.
Staggered Boards
Advantages

Second half of the presentation
Toqueer Abbasi

 The key to success of a board is to have a balance board
 A board is said to be balanced if it has the right bland and
proportion of different attributes needed its members.
 It is felt that each board of directors should be balanced in
four respects .
1) Representation
2) Talents
3) Power
4) Attitudes
Balance on the Board

 This means all the stakeholders should have a
adequate holders representation on the board. With
only shareholders allow to vote in directors, and
controlling shareholders stage managing AGM in an
orchestrated manner ,
 Most companies in Pakistan lack a balance a
representation.
Balance of representation

 This mean having the blend all the necessary talents
and technical expertise needed to lead a company.
 This requires the presence the managerial , legal,
financial , operational , social , marketing and
industry specific technical experts on the board .
Balance of Talents or Abilities

 This mean having an adequate number of truly
independent non executive directors(INED) on a
board who enjoy sufficient power to overturn the
proposals by executive or representative non
executive director.
 INED represent particular stakeholder and protect
his interest.
Balance of Power

 This mean having diversity of views at the board that
ensure presence of a wide range of moral and managerial
attitudes of directors .
 If all majority of the directors are aid complying sort of
individuals with no courage to stand up to the chairman
the of board become a rubber stamp board similarly the
majority of directors are with no one to mitigate the
impact of there adventurous spirit the company can land
on more trouble then it can handle.
Balance of Attitude or Views

The prime cause of Poor Governance in Pakistani listed
companies is Unbalanced boards.
An boards in absence of sufficient numbers INED’S who have:
1) The knowledge and talent to participate meaningfully in
board proceedings.
2) An understanding of the individual interest of all
stakeholders and are willing their protection.
3) The independence and courage to differ with the
management where it is necessary
4) The power to over-rule the representative directors
where the collective interest of all stakeholder so
demanded.
Causes of absence of balance in a
Board

 A boar of directors conduct its affairs through board
meeting all their deliberation and decision are taken
at board meeting law requires that meeting be held at
suitable frequency and fully recorded .
Board Meetings

 The meeting between board of directors should be held at least
once in every quarter in every financial year
 A meeting notice shall be delivered to directors at least seven
days prior to the board meeting except in case of emergency
meeting.
 The chairman of the company should direct the meeting of
board of direction he shall be responsible for the recording of
minutes and shall deliver to officers and directors no later then
30 days .
 Upon failure of this case in the form of statement to SEC of
Pakistan.
Frequency and preparation of
meeting

These issues include:
1) Annual business plan, cash flow projection, forecast
plan and long term plans, budgets, along with
variance analyses.
2) Quarterly operating results of the listed company as a
whole and in terms of its operating divisions or
business segments.
3) Internal audit reports (cases of fraud or irregularities
of material nature) and management letter issued by
the external auditors.
Significant issues

4) Join venture or collaboration agreement.
5) Rules and regulation
6) Implication of law
7) Recover the loans and returns
10) instant of population and environment
11) Agreement with the labor union collective bargaining
agents.
Significant issues

(A) The board should meeting regularly so as to ensure
that the directors retain full and effective control of
the company
(B) it should monitor the performance of the executive
management
(C) clear lines if authority should be drawn between the
management of the company and BOD certain decision
should only be taken by the board.
Cadbury code for Board of Directors

(a) All the directors particularly non executives directors
should be able to contribute effectively to the decision
making process
(b) there should be written procedure for the conduct of
board meeting and compliance to these procedure
should be monitored by an appropriate committee of
the board
(c) each director on first appointment should be given
sufficient in formation about the company and his role
in the board so that he is able to contribute
meaningfully to board proceedings
(d) all directors should be given the same information and
the same quantum of the consider it before the meeting
Good Board Room Practices

(e) As for as possible post facto approval of actions
already taken by the management should not given
by the board
(f) The decision about what is to be place on agenda
should be taken by the chairman in the situation with
the company secretary
(g) If the board appoints any committee for a short
period of time a special assignment or standing
committee, it must clearly spell out its function terms
of reference and powers in a suitable document
approved by board

Chairman Function Include.
(a) Running the board, chairing all its meeting, setting its
agenda, conducting its proceeding, and leading all
discussions at board and Shareholder meeting.
(b) Ensuring that directors get adequate and timely
information.
(c) Acting a bridge between the board and shareholders
(d) Evaluating the performance of the board as a whole and
of each of its individual members
(e) Act as an arbiter for any issues between different
members of the board or management.
Role of Chairman of the Board

 Responsible for management Company and its
operations
 All Executive director or senior managers directly or
indirectly report to him.
 He is answerable to board.
Role of Chief Executive Officer (CEO)

 The company Law and article of association of most
companies permit one person to hold both positions.
The following benefit of this arrangement.
1) Speed up decision making process.
2) Save the cost.
3) Grater influence on company so conduct its affairs
more effectively.
Dualities of Officer: Chairman and
CEO

 Two important officials of the company have
considerable influence on its governance.
1. CFO
2. Company secretary
The code of corporate Governance issued by SECP
states the following regarding these two officials.
Appointment term
Qualification for CFO and Company Secretary
Requirement of attending the board meeting
Appointment and Approval of key
Officials

 The appointment, remuneration , and terms and
condition of employment of CFO, Company sectary,
Head of internal audit of listed companies shell be
determined by CEO with the approval of BOD’s
Appointment term

 CFO should be a member of recognize body of
professional accountants; or he should be a
recognized university graduate having 5 years
experience in relevant field.
 Same condition for Company Sectary.
Qualification for CFO and Company
Secretary

 CFO and Company Sectary should attend the
meeting of BOD’s.
 They will vote at the meeting only if they are elected
directors.
Requirement of attending the board
meeting

The board of directors

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