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THE BOARD OF DIRECTOR
PRESENTED BY. RAJA ADEEL NASEEM
TOQEER ABBASI
CLASS. MSBA-I (EVE)
PRESENTED DATE. 04-OCT-2012
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The Board of directors is the body of elected orappointed members who jointly oversee the activityof the company.
Definition
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Board as the principal instrument ofGovernance
Shareholders own the company but dont 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.
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Provide Entrepreneurial leadership.
Set strategic. (long term objectives and planto Implement).
Arrange resources to Implement Strategicplan.
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
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Ineffective board are the those boards whos
members are not fully aware of theirresponsibilities and work for the company.
Ineffective Boards
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I. Rubber stamp Board or Yes Men board.
II. Good old boys board or country clubboards.
III. Paper board
IV. Trophy board
Types of ineffective boards
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That simply approves whatever proposal orresolution is put forward by the executivedirectors, or more particularly, the chairmanof the board
1. Rubber stamp Board or Yes Menboard
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These are old friends of the chairman whosimply meet at exotic places for boardmeetings but only talk about good old daysrather than conduct the company business.
2.Gold old boys board or country clubboard
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It exists only on paper and plays no role inthe company e.g. wives and daughter ofprincipal shareholder of the company.
3. Paper board
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It comprises of people who have a big namein the society ( trophies like major sportsstars, film actors, politicians, etc. ) but haveno acumen for conducting a company
business.
4. Trophy board
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Power of Board The BOD of a company has absolute power to
conduct the affairs of the company.
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Power of Board
The BOD draws its power fromthe following sources
1) The company Constitution
2) The Law
3) Resolution Passed byShareholder
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In case of Pakistan, this means the Articlesand Memorandum of association of thecompany which clearly lay down. The powerof directors and how may be exercised.
The company Constitution
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In case of Pakistan, this refers to companies
act which provides a standard set of Articlesin its Table A.
The Law
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In certain cases shareholder may grant such
powers to the directors that were notpreviously available to the directors bypassing a special resolution to that effect
Resolution Passed by Shareholder
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Board may delegate one or more of its collective powerto an individuals or a committee who may or may notbe 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
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Delegation of power can be done by passing
resolution with majority.Example
Board authorize Finance director to Negotiate loanterms and sign all necessary documents. The company
will be responsible for loan and board will beaccountable to shareholders.
Delegation of power by the board
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Board pay due attention to following when delegatingpower.
1) Is necessary to delegate this power
2) Method use for delegation is appropriate.(passingproper resolution, TOR)
3) Board will also ensure that the Power will not missuse.
Delegation of power by the board
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The board of director of the company has three
main functions.1) Oversight
2) Directional
3) Advisory
Functions of Board
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Approving and monitoring company strategic
plan. Approving annual budgets and plans.
Engaging external auditor and liaising withthem.
Ensuring the integrity and reliability ofcompany annual reports
Review of major operational activities.
1. The Oversight function of theBoard
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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 committeeexecutive committee and remuneration committee.
2. The Directional Function of theBoard
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This refers to provision of general guidance
to the management keeping them informedof what is happing in the rest of thecorporate world and offering specializedhelp in certain areas.
3. The Advisory function of the Board
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(1) Composition of the board
(2) independence of the board.
(3) committees
(4) external help
(5) Government intervention
Tools Available to a Board
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If the individual directors are competent person they
ensure the function of the board are performed in asatisfactory and professional manners.
In the other side if the directors are in bulk, oldcountry club guys or unqualified persons they are
not able to meet up the challenges of an effectiveboard.
1. Composition of the board
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In order to perform effectively, a board must be
independent. They should not be dependent on any particular
shareholders, stakeholders, external party, investoror organization.
They should be free to take the decisions forcommon good of company.
2. Independence of the board.
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A board can form any number of committees to
ensure that due intention is paid to the variousmatters that are brought before it.
A committee may comprise wholly of directors or itmay have members from outside the board is well.
A committee can examine a matter in greater detailand come up with summarized report for theconsideration of the board.
3. Committees
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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 remunerationof employees, it is often deemed helpful to use the
service of external HR expert to carry out a survey ofsalaries in the particular industry and draftrecommendations in light-of.
4. External Help
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Board use governmental or society help inconducting is affairs.
In Pakistan directors are often unwilling to seekassistance from the government for fear of invitingundue intervention.
In some situation its necessary to chose governmenthelp.
5. Government Intervention
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Responsibilities refers to act and duties thatmust be performed by a person or body.
I.e. (BOD present annual report to shareholder)
Accountability refers to the requirement ofhaving to explain and give an account of whathas been done by a person or body.
i.e. (Shareholder can ask them Question regardingtheir performance)
Responsibility and Accountability
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The board is responsible for its acts and
accountable to the company and not to anyother party .
There are two types:
1. Collective responsibility
2. individual responsibility
Responsibilities of a Board
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There are four types:
1) Acting in the best interest of the company2) Accountability to the owners
3) Statutory duties
4) Fiduciary or trustee-ship duties
Collective responsibility
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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 refrainform taking any decisions which harm company
overall interest, financial position and performance
1. Acting in the best interest of thecompany
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The director are required to present an account of theirconduct to the owners of the company.
In formal terms Directors issue Periodic report likequarterly reports, half year reports or annual reports toshareholder
Shareholder have right to ask question and board musthave to answer.
In Informal communication they issue newsletter, specialreport etc.
b. Accountability to the Owners
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Maintain proper Minutes of all meeting
Send copy of Periodic reports to SECP.
Director ensure that company maintain proper bookor account and audit at proper time.
If company listed at Stock Exchange the director may
required to file certain document with the StockExchange at appropriate interval.
c. Statutory Duties
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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 theinterest 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
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The following represent a test of how a board may handleits fiduciary duties.
1) The board should approve only those transactions thatappear reasonable incidental to the business of thecompany.
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
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One of the power that a board of directors has is to borrowfunds on the behalf of the company.
The company act does not place any limitation on the amountof borrowing that a company can make .
The prudential regulation issue by SBP restrict the amount ofloan.
Borrowing is often and attractive form of financing newprojects.
Board has to create balance between borrowing and Equityfinancing.
Borrowing power of the Board
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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
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A unitary boards does not have tiers or division.
All member of the board are Equi-status participatein the deliberation of the board simultaneously.
1- Unitary Board
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A two tiers has two distinct tiers.
Upper tier called supervisory board and lower tier iscalled management board.
The supervisory board comprise entirely of nonexecutives 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 makerecommendations and send proposal to SupervisoryBoard.
Supervisory board discuss issues and take decisions.
Two tier boards
Continue
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1) Provide grater power to Non-executive director byplacing Management board under Supervisoryboard.
2) It allows for better and more comprehensiverepresentation of various stakeholders.
3) Clear division of work B/W the supervisor andmanagement tiers.
4) Decision making improved.
Two tier boardsPrincipal Advantage
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Large size.
In GERMANY avg size of board isabove 20.
Difficult to handle
Large boards will weak the effect of
batter directors. Slow decision making.
Two tier boardsProblems
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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
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Under this arrangement only a part of board retires at theend of stated tenure while the duration of each director
remain fixed.Example.
If Total 8 director. Each director Tenure 4 years. Afterevery 2 years 4 new director appointed.
A,B,C,D appoint in 2002 and retire in 2006. then new 4director Appointed and their tenure is (2006-2010)
E,F,G,H appoint in 2004 and retire in 2008
4- Staggered Boards
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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 BoardsAdvantages
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Second half of the presentation
Toqueer Abbasi
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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 andproportion of different attributes needed its members.
It is felt that each board of directors should be balanced infour respects .
1) Representation
2) Talents3) Power
4) Attitudes
Balance on the Board
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This means all the stakeholders should have a
adequate holders representation on the board. Withonly shareholders allow to vote in directors, andcontrolling shareholders stage managing AGM in anorchestrated manner ,
Most companies in Pakistan lack a balance arepresentation.
Balance of representation
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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
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This mean having an adequate number of trulyindependent non executive directors(INED) on a
board who enjoy sufficient power to overturn theproposals by executive or representative nonexecutive director.
INED represent particular stakeholder and protect
his interest.
Balance of Power
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This mean having diversity of views at the board that
ensure presence of a wide range of moral and managerialattitudes of directors .
If all majority of the directors are aid complying sort ofindividuals with no courage to stand up to the chairmanthe of board become a rubber stamp board similarly the
majority of directors are with no one to mitigate theimpact of there adventurous spirit the company can landon more trouble then it can handle.
Balance of Attitude or Views
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The prime cause of Poor Governance in Pakistani listedcompanies is Unbalanced boards.An boards in absence of sufficient numbers INEDS who have:
1) The knowledge and talent to participate meaningfully inboard proceedings.
2) An understanding of the individual interest of allstakeholders and are willing their protection.
3) The independence and courage to differ with the
management where it is necessary4) The power to over-rule the representative directorswhere the collective interest of all stakeholder sodemanded.
Causes of absence of balance in aBoard
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A boar of directors conduct its affairs through board
meeting all their deliberation and decision are takenat board meeting law requires that meeting be held atsuitable frequency and fully recorded .
Board Meetings
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The meeting between board of directors should be held at leastonce in every quarter in every financial year
A meeting notice shall be delivered to directors at least sevendays prior to the board meeting except in case of emergencymeeting.
The chairman of the company should direct the meeting ofboard of direction he shall be responsible for the recording ofminutes 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 ofmeeting
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These issues include:
1) Annual business plan, cash flow projection, forecastplan and long term plans, budgets, along withvariance analyses.
2) Quarterly operating results of the listed company as awhole 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 bythe external auditors.
Significant issues
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4) Join venture or collaboration agreement.
5) Rules and regulation6) Implication of law
7) Recover the loans and returns
10) instant of population and environment
11) Agreement with the labor union collective bargainingagents.
Significant issues
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(A) The board should meeting regularly so as to ensure
that the directors retain full and effective control ofthe company
(B) it should monitor the performance of the executivemanagement
(C) clear lines if authority should be drawn between themanagement of the company and BOD certain decisionshould only be taken by the board.
Cadbury code for Board of Directors
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(a) All the directors particularly non executives directorsshould be able to contribute effectively to the decision
making process(b) there should be written procedure for the conduct ofboard meeting and compliance to these procedureshould be monitored by an appropriate committee ofthe board
(c) each director on first appointment should be given
sufficient in formation about the company and his rolein the board so that he is able to contributemeaningfully to board proceedings
(d) all directors should be given the same information andthe same quantum of the consider it before the meeting
Good Board Room Practices
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(e) As for as possible post facto approval of actionsalready 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 withthe company secretary
(g) If the board appoints any committee for a short
period of time a special assignment or standingcommittee, it must clearly spell out its function termsof reference and powers in a suitable documentapproved by board
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Chairman Function Include.
(a) Running the board, chairing all its meeting, setting itsagenda, 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
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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)
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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 affairsmore effectively.
Duties of Officer: Chairman and CEO
A i t t d A l f k
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Two important officials of the company haveconsiderable influence on its governance.
1. CFO
2. Company secretary
The code of corporate Governance issued by SECPstates the following regarding these two officials.
Appointment termQualification for CFO and Company Secretary
Requirement of attending the board meeting
Appointment and Approval of keyOfficials
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The appointment, remuneration , and terms and
condition of employment of CFO, Company sectary,Head of internal audit of listed companies shell bedetermined by CEO with the approval of BODs
Appointment term
Q lifi ti f CFO d C
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CFO should be a member of recognize body ofprofessional accountants; or he should be a
recognized university graduate having 5 yearsexperience in relevant field.
Same condition for Company Sectary.
Qualification for CFO and CompanySecretary
Req irement of attending the board
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CFO and Company Sectary should attend the
meeting of BODs. They will vote at the meeting only if they are elected
directors.
Requirement of attending the boardmeeting
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