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The Board of The Board of DirectorsDirectorsDr Safdar A ButtDr Safdar A Butt

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Importance of the BoardImportance of the BoardIt is often believed, by stakeholders, It is often believed, by stakeholders,

social scientists and the regulators social scientists and the regulators alike, that the key to good corporate alike, that the key to good corporate governance lies in the hands of a governance lies in the hands of a company’s Board.company’s Board.

But:But: How does a Board become good?How does a Board become good? Is a good Board born or made?Is a good Board born or made? Is a Board free to be good?Is a Board free to be good?

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The Board’s RoleThe Board’s Role Provide entrepreneurial leadershipProvide entrepreneurial leadership Set strategic objectives of the companySet strategic objectives of the company Arrange for resources needed to achieve Arrange for resources needed to achieve

the strategic objectivesthe strategic objectives Review management performanceReview management performance Set the company’s values and standardsSet the company’s values and standards Act as a bridge between stakeholdersAct as a bridge between stakeholders

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‘Yes-men’ Board

Different Board Types: Different Board Types: The Good, Bad, and UglyThe Good, Bad, and Ugly

‘Rubber Stamp’ Board

‘Country Club’ Board

‘Good Old Boys’ Board

‘The Real Thing’

‘Paper’ Board

?‘Trophy’ Board

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Powers of the BoardPowers of the Board Sources of PowerSources of Power

Company’s Articles of AssociationCompany’s Articles of Association The LawThe Law Resolution passed by shareholdersResolution passed by shareholders Sometimes, industrial practice.Sometimes, industrial practice.

By and large, absolute powers vest in the By and large, absolute powers vest in the directorsdirectors Collective powers: may be delegatedCollective powers: may be delegated

The issue of collective and individual powersThe issue of collective and individual powers Executive DirectorsExecutive Directors Non-executive DirectorsNon-executive Directors Members of Board CommitteesMembers of Board Committees

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Functions of a BoardFunctions of a Board OversightOversight DirectionalDirectional AdvisoryAdvisory

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Oversight FunctionOversight Function Approving and monitoring strategic Approving and monitoring strategic

plans.plans. Approving and monitoring annual Approving and monitoring annual

plans, operational and capital budgetsplans, operational and capital budgets Engaging external auditorsEngaging external auditors Ensuring integrity of annual reportEnsuring integrity of annual report Review of major operational activitiesReview of major operational activities

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Directional FunctionDirectional Function Setting company’s mission statement, Setting company’s mission statement,

vision statement, value statement, etc.vision statement, value statement, etc. Appointment of CEO and other senior Appointment of CEO and other senior

executivesexecutives Planning for succession of senior Planning for succession of senior

executivesexecutives Appointing various committees like Appointing various committees like

audit, remuneration, executive, etc.audit, remuneration, executive, etc.

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Advisory FunctionAdvisory Function GuidanceGuidance What else is happening in the worldWhat else is happening in the world Different perspectiveDifferent perspective Specialized input on specific areasSpecialized input on specific areas

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Tools AvailableTools Available Composition of the boardComposition of the board Independence of the boardIndependence of the board CommitteesCommittees External help where necessaryExternal help where necessary Governmental interventionGovernmental intervention

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Board’s ResponsibilitiesBoard’s Responsibilities Collective responsibilities of the Collective responsibilities of the

boardboard Individual responsibilities of each Individual responsibilities of each

directordirector

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Collective Collective ResponsibilitiesResponsibilities

Acting in the best interest of the Acting in the best interest of the company.company.

Accountability to ownersAccountability to owners Statutory duties:Statutory duties:

Keeping minutes of all meetingsKeeping minutes of all meetings Filing periodic reports and financial Filing periodic reports and financial

statementsstatements Stock exchange updatesStock exchange updates

Fiduciary / Trusteeship DutiesFiduciary / Trusteeship Duties

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Test of Fiduciary DutiesTest of Fiduciary Duties Transactions are reasonably Transactions are reasonably

incidental to company’s businessincidental to company’s business Good faith, believing the Good faith, believing the

transactions to be correct.transactions to be correct. Disclosure of conflict of interestDisclosure of conflict of interest

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Delegation of Delegation of Powers/DutiesPowers/Duties

Law permits delegationLaw permits delegation But does the responsibility remain But does the responsibility remain

with directors? (Governance Issue)with directors? (Governance Issue) Issues in Delegation:Issues in Delegation:

Was it properly delegated.Was it properly delegated. Was it properly supervised.Was it properly supervised. The system of oversight and The system of oversight and

accountability over delegates.accountability over delegates.

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Borrowing PowersBorrowing Powers How much can a Board borrow?How much can a Board borrow? Is it only a lenders’ problem, or should Is it only a lenders’ problem, or should

the other stakeholders also have a say?the other stakeholders also have a say? Regulatory constraints on lenders (e.g. Regulatory constraints on lenders (e.g.

Prudential Regulations of SBP)Prudential Regulations of SBP) What if the company borrows from What if the company borrows from

non-formal sector?non-formal sector? Tax implicationsTax implications

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Types of BoardsTypes of Boards Composition:Composition:

UnitaryUnitary Two-tieredTwo-tiered

TenureTenure Common tenureCommon tenure StaggeredStaggered

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Balance on the BoardBalance on the Board Balance of representationBalance of representation Balance of talents / abilitiesBalance of talents / abilities Balance of powerBalance of power Balance of attitudes or viewsBalance of attitudes or views

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Consequences of Consequences of ImbalanceImbalance

Board can be misguided by the Board can be misguided by the executivesexecutives

Interest of only one stakeholder is Interest of only one stakeholder is servedserved

Poor decision makingPoor decision making Status quo mentalityStatus quo mentality Lack of communicationLack of communication Things start getting fixedThings start getting fixed

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Cadbury Code GuidelinesCadbury Code Guidelines Regular meetingsRegular meetings Monitoring executive performanceMonitoring executive performance Draw clear lines of authorityDraw clear lines of authority Good board room practicesGood board room practices

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Board Room PracticesBoard Room Practices Every one should participateEvery one should participate Formalized written proceduresFormalized written procedures Induction program for directorsInduction program for directors Each director should get the same Each director should get the same

information at the same timeinformation at the same time No post-facto approvalsNo post-facto approvals Chairman decides the content of the Chairman decides the content of the

agendaagenda

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Role of ChairmanRole of Chairman Running the board, chairing its Running the board, chairing its

meetingsmeetings Ensuring all directors get timely and Ensuring all directors get timely and

complete informationcomplete information Acting as bridge between the board and Acting as bridge between the board and

shareholders / stakeholdersshareholders / stakeholders Evaluating the performance of Evaluating the performance of

individual directorsindividual directors Arbiter in event of internal disputesArbiter in event of internal disputes

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Responsibilities of CEO Responsibilities of CEO & Senior Management & Senior Management

Operating the company in an effective and Operating the company in an effective and ethical manner according to policies set by ethical manner according to policies set by the Boardthe Board

Drawing the strategic plansDrawing the strategic plans Drawing annual plans and budgetsDrawing annual plans and budgets Selection of managerial and other staffSelection of managerial and other staff Identifying business risksIdentifying business risks Financial reportingFinancial reporting Internal ControlsInternal Controls Code of Conduct for all staffCode of Conduct for all staff

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Duality of Office:Duality of Office:Chairman & CEOChairman & CEO

Speeds up decision makingSpeeds up decision making Quick actionQuick action Saves cost: often only one salarySaves cost: often only one salary More effective due greater powers:More effective due greater powers:

Within the companyWithin the company Dealing with outsidersDealing with outsiders

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Separation of top officesSeparation of top offices Provides an extra layer of Provides an extra layer of

answerabilityanswerability Lesser chance of cover-upsLesser chance of cover-ups

NE chairman not member of NE chairman not member of managementmanagement

NE chairman provides better option NE chairman provides better option for monitoringfor monitoring

NE chairman is closer to stakeholdersNE chairman is closer to stakeholders

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The Corporate SinsThe Corporate Sins Sloth (unwillingness to take Sloth (unwillingness to take

initiative, laziness)initiative, laziness) Greed (self over company)Greed (self over company) Fear (cowardice, lack of integrity)Fear (cowardice, lack of integrity)

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Thank youThank youDr S A ButtDr S A Butt