Corporate Governance Hassan Tariq

The Directors
Importance of Individual Directors
The decisions of board depend on abilities of individual directors
Every company should ensure that only competent and desirable people get elected on board
While nominating candidates for election as directors, these points should be kept in mind by
the shareholders;
Suitability
The character of the person
The personal traits of the person
Willingness and ability to give time
Sound judgment
Skill and Care Duty of Individual Directors
An individual director should accept an appointment as a director only if he has necessary
qualifications, knowledge and experience
Once appointed, a director should exercise due care and diligence in executing his duties
A director should offer his views fairly and openly, raise objections (if necessary) and seek
clarification before casting vote
Types of Directors
Executive Directors
Member of board as well as management and hold full time office of the company
Draw formal salary and other benefits from the company
E.g. Finance Director, Marketing director, Operations Director
Non-Executive Directors
They are not connected with the management of the company
They are not employees of the company
Only attend board meetings
Expected to provide guidance and supervision to executive directors
Representative Directors
Members of board who represent particular stakeholder
Protect the interest of those people who they represent
Independent Directors
Members who are expected to look after the interest of whole the company (all stakeholders)
Dont represent particular stakeholders
Independent Non-Executive Directors (INEDs)
Neither become part of companys management nor represent particular stakeholder
All Independent Directors are deemed to be INEDs
De-facto Director
Not formally elected as director but attends boards meeting as an observer or facilitator
He is generally senior employee of the company who provide assistance to directors in meeting
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Doesnt have voting right

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Has no influence on board members

Shadow Director
Not formally elected as director
Doesn't attend meetings but has great influence on the conduct of meetings
Other director participate in boards meetings after taking instructions from him
Corporate Governance Hassan Tariq
The Directors
Alternative Director
Nominated as director to attend board meeting in absence of nominating director
The nomination of alternative director has to be approved by the board
An alternative director enjoys full rights of nominating director (e.g. voting right)

Independent Non-Executive Directors (INEDs)

They have necessary professional knowledge and expertise to ab able to particle effectively in
boards proceedings
They dont participate in routine management but they oversight management very seriously
Their presence on the board serves to create balance of power in the board
They are the best candidates of various board committees like Audit Committee, Remuneration
Committee, and Nomination Committee etc.
Presence of INEDs instills a certain degree of discipline in the company
Often serve as bridge between board and outside world

Importance of INEDs
Management scientists and experts on CG believe that effectiveness of a board depends upon
largely on the conduct of its INEDs
These directors are expected to be pure professionals whose presence on the board helps to
improve quality of decisions
INEDs offers following benefits to the company and stakeholders;
Not work for particular stakeholder or shareholders but work for whole the company
Dont take instructions from any party. They follow their own professional expertise
Preserving the Independence of INEDs
He should not have any link with owners or major shareholders or other directors of the
company
He should not have material interest other than fixed remuneration
Past employees should not be elected as INEDs as they still carry their personal loyalties
to executive directors
INEDs should not be connected to any other organization that has commercial relations
with company
He should not be a director of any other related company
For ensuring the independence of non-executive directors the willingness of a company
to allow them to be independent
How many INEDs?
The Combined Code of UK issued in 2003 recommends that at least half of the board,
including chairman should comprise o f NEDs. It also prescribes that all or most of NEDs
should be independents, i.e. INEDs
To change SETH culture from Pakistani companies, these guidelines can be followed;
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No more than one third of the total board should be executive directors
This means two-thirds of the total board should be non-executive directors
including chairman of the board
No less than half the NEDs should be INEDs.
Corporate Governance Hassan Tariq
The Directors

Criticism on INEDs
Many person who are elected as INEDs dont have sufficient knowledge to be able to contribute
effectively to board proceedings
Good INEDs dont have adequate time for the company due to their engagement in various
companies
Because of low remuneration, they are not willing to devote enough time to the affairs of the
company
INEDs are elected due to willingness of controlling shareholders and it is expected that they
have some sort of relationship which can impede independence of NEDs
Many controlling shareholders are agree to act as INED on board of other companies and invite
the main directors of such company to serve and INED of their own companies
Where to look for NEDs?
Executive directors, NED or chairman in other, unrelated companies, with good reputation
Retired professionals like lawyers or charted accountants, or those are still in practice but not
connected with any firm which has business dealings with company
Retired civil servant, judges
Socially prominent figures who have some particular skill relevant to the needs of the company
Qualities of for NED Ship
High level of personal integrity and ethical standards, sound judgment and professional
approach to decision making, good interpersonal skills and finally has adequate time to exercise
his duties as NED
Directors Induction
Companies conduct induction on appointment of new directors by covering;
Visits are arranged to all key locations of companies to fully understand the scope of company
Presentations are given by departmental or divisional heads regarding functions of their
department
Informal meetings with all senior functional and line managers are arranged
Meetings are arranged with major shareholders to understand their expectations from company
as well as newly appointed director
Meetings with external advisors and consultants of the company e.g. tax advisors, financial
consultants and external auditors
Register of Directors Interest
Details of any shares held by him or his immediate family in the company
Details of other directorship held
His interest in other companies and firms that may have dealings with company
His past or present relationship, if any, with the company or any of its directors or senior
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managers
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Any other relevant information that may have bearing on his performance as director of the
company
Corporate Governance Hassan Tariq
The Directors
Directors Dealings with the Company
All dealings should be fair and transparent
No loans may be granted by the company to directors on whatever terms
Directors must make a disclosure of interest when matters relating to dealings with director (or
any other company in which director has an interest)
It is collective responsibility of the directors to prevent misuse of information by a board
member
All transactions of significant size between a company and any of its directors must be put to
shareholders
All transactions between a company and any of its directors must be disclosed in annual
financial statements as related party transactions
Directors Dealing in Companys Shares
Insider Trading or Insider Dealing
Dealing in shares of company by an individual who has knowledge of undisclosed price-
sensitive information
It comes to him from either his position in the company or from some other inside
source
Inside price sensitive is any such information which is not known publicly but only to
relevant persons within the company
If that information were known publicly it would affect the share price
Market Abuse
When misleading and incorrect information deliberately releases into market to distort
the market investment
It creates false or misleading impression about the likely movement in share price
Its objective is to make investors react in such a manner that the share price moves in a
direction desired by market abuser
Issues of Re-election of Directors
Directors are elected for a fixed tenure but often are eligible for re-election
The law doesnt provide any restriction on the number of tenures that can be served by a
director
AOA of most companies allow right of re-election for indefinite number of times
The experts in CG feel that to retain the element of independence and to ensure constant inflow
of fresh blood, a reasonable limit must be imposed
Before re-election of directors, following point be considered;
A formal evaluation must be made by Nomination Committee with the help of external
experts.
The chairman of Nomination Committee must explain to external shareholder about re-
electing of particular director
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Removal or Disqualification of Directors

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He ceases to hold the requisite number of share in the company for holding directorship
He becomes of insane mind
He is formally declared bankrupt by a court
He is convicted of a criminal offence by a court
Corporate Governance Hassan Tariq
The Directors
He fails to attend a pre-set number of board meeting without due permission as prescribed by
articles o association and is removed by all director through passing a resolution to that effect

Dominant Personality
A person with strong personality and occupying the positions of chairman and chief executive
officer
He takes all the decisions single-handedly without paying any attention to the views of board
members or other senior managers
He misuses his power, impose his will on all and refuse to accept any criticism
He has great personal charm and is able to convince any one

Dominant Personality Issues

One person doesnt have all the necessary talents and level of knowledge of every field needed
to run company effectively
A dominant chairman may interfere in all departments and get their respective policies
amended to suit his own particular style
People working under dominant personality soon lose interest in making decisions
Dominant personalities dont groom a successor as they dont consider any one else
competent enough to take their place
Their intolerance to opposition deprives the company of potentially useful ideas

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