Board as the Principal Instrument of Governance

Board of Directors behave like a bridge between shareholders and management

It is the forum through which stakeholder can protect their rights
If company has responsible and effective board;
Quality of governance and overall performance increase
Better reputation
If the board is irresponsible and ineffective;
The interest of stakeholders (other than controlling group) suffers
Performance decreases, poor market reputation and unhappy staff
This role demands;
Provide entrepreneurial leadership for the company within a framework of prudent and
effective risk management;
Set the companys strategic aims;
Make sure that the necessary financial and human resources are in place for the
company to meet its objectives;
Review management performance;
Set the companys values and standards;
Make sure that the companys obligations to its shareholders are understood and met.

Powers of Board
The companys constitution
Article of Association
Memorandum of Association
The Law
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Companies Ordinance 1984

Resolutions passed by shareholders
Directors powers curtailed by shareholders
Practice prevailing in the industry
Delegation of Powers by Board
Board can delegate its powers to individual or committee which may or may not be part of
board
Instruments which give powers to board also allow them to delegate these powers
This can be done by passing resolution with requisite majority
Delegation doesnt take away the responsibility of the board
Board should pay attention while delegating powers;
Is it necessary to delegate powers?
Is the method used for delegating the power appropriate? For example; resolution,
preparation of relevant documents
Board should ensure that powers are not misused

Tools Available to Board

Composition of the Board
Independence of the Board
Committees
External Help
Government Intervention

Responsibility and Accountability

Responsibility: It refers to acts and duties must be performed by a person of body
Accountability: It refers to the requirement of having to explain and give an account of what has
been done by a person or body
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Responsibilities of a Board
There are two broad groups in this regard;
Collective Responsibilities
Individuals Responsibilities

Acting in the best interest of the company

 To work for the achievement of collective interest of the company
They shouldnt take any decision that harm companys overall interest and financial
performance
Board should also prevent management to acting against the interests of company
through its oversight, directional and advisory functions

Statutory Duties
They must keep proper minutes of all their meetings
They are required to deliver a copy of their periodic reports to SECP
They should ensure that financial statements are maintained and get audited
The directors are also required to file certain documents with stock exchange at
appropriate intervals
Fiduciary or Trustee-ship Duties
Board should approve those transactions which are incidental to the company
All transactions should be approved and undertaken in good faith
If any member of board has any conflict of interest, he should disclose it to the board
Borrowing Power of Board
Board can borrow fund on companys behalf
Company Ordinance doesnt place any limitation on amount of borrowings
SBP placed some restrictions on amount of a loan a bank or financial institution can lend to a
company
AOA also fail to place limit on companys borrowing power
Borrowing is an attractive form of financing new projects
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The interest paid on loans is tax deductible

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Negotiating with bank is much easier than raising capital through shares
Unitary Board
Doesnt have tiers or divisions
All members have equal-status
Participate in deliberations of the board simultaneously
In Pakistan, most companies have unitary board
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Two-Tier Board
Has two tiers;
Upper tier Supervisory Board [Comprises Non-Executive directors]
Lower tier Management Board [Comprises Executive Directors]
Chairman of company is often the chairman of both the boards and himself a NED
All the matters relating which are discussed by board are first deliberated to Management Board
who make recommendations and send to Supervisory Board
Supervisory Board discusses issue and make final decisions
Any or all members of supervisor boards can attend meeting of Supervisory board after
permission of Supervisory Board
No member of Management Board can put vote in Supervisory Boards meetings

Advantages of two-tier board

Provide greater power to NEDs
Allow for better and more comprehensive representation of various stakeholders
Clear division of work between both tiers of board which promotes the quality of
decision making
Disadvantages of two-tier board
Size of board becomes large e.g. in Germany two-tier boards comprised average 20
members
Large board is difficult to handle and costs a lot more
Slow decision making
Common Tenure Board
All directors have same tenure
They are elected at the same time for the same duration of tenure and retire at the same time
at the end the tenure
Most directors are eligible for re-election
If a directors resigns before completion of his tenure, his vacancy is filled only for the remaining
period of his tenure
Staggered Board
Only part of the board (usually half) retires at the end of a stated tenure while the duration of
each director remains fixed
Advantages
The entire board doesnt go out at any one time which ensures that there is
continuation of policies
Infuse new members into board, thereby enabling it to get new blood, fresh ides and
better exposure to the outside world
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Balance of Representation
All stakeholders should have adequate representation on board
Most Pakistani companies lack a balance of representation
A small percentage of listed companies have representation of long term creditors on the board
Other stakeholder like employees, business associates and public at large have no
representation on board
Article of Association of companies and SECPs Code of Corporate Governance fail to address
this serious lapse
It is dream to comprise a board with all stakeholders representation in the situation where only
shareholders have power to elect directors

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Balance of Attitudes or Views
It means having diversity of views at the board that ensures presence of a wide range of social,
moral and managerial attitudes of directors.
If majority of directors are timid the board will inevitably become a rubber stamp board
All of the directors should be bold [who insist on being fully convinced before he/she votes on
proposal] and yet excellent team players
Causes of Absence of Balance in a Board
Prime cause of poor governance in Pakistani listed companies is unbalanced boards due to
absence of sufficient number of NEDs, who have:
Knowledge and talents to participate meaningfully in board proceedings
An understanding of the individual interest of all stakeholders and are willing to work
for their protection
In Pakistani companies following trends are prevalent:
Majority of the directors are family members or close associates of controlling
shareholders
Directors who are technically designated as INEDs are seldom independent
No attention is paid to having a pool of talents at the board
No attempt is made to ensure that board comes with touch with other stakeholders
Board Meeting
A BODs conducts its affairs through board meetings
All their decisions are taken at board meetings
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Law requires that these meetings be held at suitable frequency and fully recorded
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Frequency and Preparation for Meetings

Once in every quarter
A notice of meeting should be delivered to all directors 7 days before meeting
Chairman of company should direct the meeting. He/she is responsible for recording
and delivering the minutes of meetings within 30 days.
Board Meeting
Related Party Transactions
All transactions should be presented to board of directors for review and acceptance
Before the placing these details to the board, these should be presented to Audit
Committee of company
Every listed company is required to maintain part wise record of transactions along with
necessary documents like
name of related party
relationship nature with related party
Nature and amount of transaction
Terms and conditions of transaction
Good Board Room Practices
All directors should contribute effectively to the decision making process. They should be
provided sufficient information before the meeting about subject of meeting
There should be written procedure of board meetings and a committee should monitor its
appropriateness
New directors should be given sufficient information about company and his role
All directors should be given same information and same quantum of time to consider it before
meeting
Post-facto approval of actions already taken by the management should not be given by board
The agenda of meeting should be taken by chairman in consultation with company secretary
If company appoints any committee, it must clearly spell out its functions, terms of reference
and powers in a suitable document, approved by board
Committees should be used by the board to help the board, rather than get rid of it work or
responsibility
Role of Chairman of the Board
Running the board, chairing all its meetings, setting its agenda, conducting its proceedings, and
leading all discussions at board and shareholders meeting
Ensuring that directors get adequate and timely information
Acting as bridge between board and shareholders.
Evaluating the performance of board as whole and of each of its individual members
Act as an arbiter for any issues between different members of board of management
Role of Chief Executive Officer
Also known as CEO, Managing Director or President
He is head of management and is responsible for management and operations of company
All executive directors and senior management is directly or indirectly report to him
He is answerable to the Board in respect of all operational and managerial matters
Most of CEOs are also member of the companys board, either through election or, if so
provided by the companys articles of association
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In many companies the offices of Chairman and CEO are held by same person
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Duality of Office: Chairman and CEO
The company law and articles of association of most companies permit one person to hold both
the offices
The following arguments are given in favor of this arrangement:
It speed up the decision making process
It saves the cost of company
He has greater influence on the company and is able to conduct it affairs more
effectively
SECPs latest revision to Code of Corporate Governance 2012 has made it mandatory for listed
company
The following reasons are put forward for this separation;
It provides extra layer of responsibility, making the CEO more careful
The chairman should be non executive director. This adds an element of independence
and increases his effectiveness
Combining the two offices may grant a level of authority to a person which may easily
lead to abuse to powers
A non-executive director is more likely to listen attentively to the grievances of
stakeholders.
Appointment and Approval of Key Officials
Chief Financial Officer/Director Finance and Company Secretary
Appointment, remunerations and terms and conditions of employment of CFO, Company
secretary and head internal audit should be determined by CEO with approval of board
Qualification:
Member of recognized body of professional accountants
University graduate having 5 years experience in dealing with corporate and financial
affairs at listed company or a financial institution
CFO and Company Secretary of listed company should attend the board meeting. However, they
can vote at the meeting only if they are elected directors

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