The board of directors


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Effort of NUML University Students MSBA-1 (2013)

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The board of directors

  2. 2.  The Board of directors is the body of elected orappointed members who jointly oversee the activityof the
  3. 3. Board as the principal instrument ofGovernance• Shareholders own the company but don’t run it.• Management run the company but does not ownit.• BOD lies between Share Holder andManagement.• Board of directors elected by shareholders andboard hire the management to run the company.• They work as a bridge between these
  4. 4.  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 forMgt and employees)Board Role as Principle Instrument ofCorporate
  5. 5.  Ineffective board are the those boards who’smembers are not fully aware of theirresponsibilities and work for the company.Ineffective
  6. 6. I. Rubber stamp Board or Yes Men board.II. Good old boys board or country clubboards.III. Paper boardIV. Trophy boardTypes of ineffective
  7. 7.  That simply approves whatever proposal orresolution is put forward by the executivedirectors, or more particularly, the chairmanof the board1. Rubber stamp Board or Yes
  8. 8.  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
  9. 9.  It exists only on paper and plays no role inthe company e.g. wives and daughter ofprincipal shareholder of the company.3. Paper
  10. 10.  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 companybusiness.4. Trophy
  11. 11. Power of Board• The BOD of a company has absolute power toconduct the affairs of the
  12. 12. Power of Board The BOD draws its power fromthe following sources1) The company Constitution2) The Law3) Resolution Passed
  13. 13.  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
  14. 14.  In case of Pakistan, this refers to companiesact which provides a standard set of Articlesin its Table A.The
  15. 15.  In certain cases shareholder may grant suchpowers to the directors that were notpreviously available to the directors bypassing a special resolution to that effectResolution Passed by
  16. 16.  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 likeo Company Acto Article of AssociationWill also allow to delegate power to other.continue...Delegation of power by the
  17. 17.  Delegation of power can be done by passingresolution with majority.Example Board authorize Finance director to Negotiate loanterms and sign all necessary documents. The companywill be responsible for loan and board will beaccountable to shareholders.Delegation of power by the
  18. 18. Board pay due attention to following when delegatingpower.1) Is necessary to delegate this power2) 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
  19. 19. The board of director of the company has threemain functions.1) Oversight2) Directional3) AdvisoryFunctions of
  20. 20.  Approving and monitoring company strategicplan. 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
  21. 21. 1) Setting of the company mission statement visionstatement value statement and formal code of conduct.2) Appointment of CEO and other senior executive of thecompany.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
  22. 22.  This refers to provision of general guidanceto 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
  23. 23. (1) Composition of the board(2) independence of the board.(3) committees(4) external help(5) Government interventionTools Available to a
  24. 24.  If the individual directors are competent person theyensure 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 arenot able to meet up the challenges of an effectiveboard.1. Composition of the
  25. 25.  In order to perform effectively, a board must beindependent. They should not be dependent on any particularshareholders, stakeholders, external party, investoror organization. They should be free to take the decisions forcommon good of company.2. Independence of the
  26. 26.  A board can form any number of committees toensure 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.
  27. 27.  A board can seek assistance from external experts toensure that they are able to take correct decisions.ExampleIf board make the police related to the remunerationof employees, it is often deemed helpful to use theservice of external HR expert to carry out a survey ofsalaries in the particular industry and draftrecommendations in light-of.4. External
  28. 28.  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
  29. 29.  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
  30. 30. The board is responsible for it’s acts andaccountable to the company and not to anyother party .There are two types:1. Collective responsibility2. individual responsibilityResponsibilities of a
  31. 31. There are four types:1) Acting in the best interest of the company2) Accountability to the owners3) Statutory duties4) Fiduciary or trustee-ship dutiesCollective
  32. 32.  Director are collectively required to act in the bestinterest of the company. i.e. They work for the achievement of collectiveinterest of all stakeholder. They should refrainform taking any decisions which harm companyoverall interest, financial position and performance1. Acting in the best interest of
  33. 33.  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
  34. 34.  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 mayrequired to file certain document with the StockExchange at appropriate interval.c. Statutory
  35. 35.  The law consider the board of director to be the trusteesof the company. Trustee is a person who has been given something intrust 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 theinterest of shareholder.d. Fiduciary of trustee-ship DutiesContinue…
  36. 36.  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 goodfaith, believing them to be beneficial to the company.3) If any member of board has any conflict of interest, heshould disclose it to board.Fiduciary of trustee-ship
  37. 37.  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
  38. 38. Classified according to composition 1. Unitary boards 2. Two-Tierd boardsClassified according to tenure of members 1. Common tenure boards 2. Staggered boardsTypes of
  39. 39.  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
  40. 40.  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 boardsand himself a Non-Executive Director.2- Two tier boardsContinue…
  41. 41.  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 boardsContinue…
  42. 42. 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 AdvantageContinue…
  43. 43.  Large size. In GERMANY avg size of board isabove 20. Difficult to handle Large boards will weak the effect ofbatter directors. Slow decision making.Two tier
  44. 44.  All the directors in such a board have the sametenure. They are elected at the same time and retired at thesame time at the end of their tenure3- Common Tenure
  45. 45.  Under this arrangement only a part of board retires at theend of stated tenure while the duration of each directorremain 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 20084- Staggered
  46. 46.  The board enjoy a degree of stability as the entireboard does not go out at any one time. Frequent re-election infuse new members.Staggered
  47. 47. Second half of the presentationToqueer
  48. 48.  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) Representation2) Talents3) Power4) AttitudesBalance on the
  49. 49.  This means all the stakeholders should have aadequate 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
  50. 50.  This mean having the blend all the necessary talentsand technical expertise needed to lead a company. This requires the presence the managerial , legal,financial , operational , social , marketing andindustry specific technical experts on the board .Balance of Talents or
  51. 51.  This mean having an adequate number of trulyindependent non executive directors(INED) on aboard who enjoy sufficient power to overturn theproposals by executive or representative nonexecutive director. INED represent particular stakeholder and protecthis interest.Balance of
  52. 52.  This mean having diversity of views at the board thatensure 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 themajority 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
  53. 53. The prime cause of Poor Governance in Pakistani listedcompanies is Unbalanced boards.An boards in absence of sufficient numbers INED’S 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 themanagement 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
  54. 54.  A boar of directors conduct its affairs through boardmeeting all their deliberation and decision are takenat board meeting law requires that meeting be held atsuitable frequency and fully recorded .Board
  55. 55.  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 then30 days . Upon failure of this case in the form of statement to SEC ofPakistan.Frequency and preparation
  56. 56. 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 orbusiness segments.3) Internal audit reports (cases of fraud or irregularitiesof material nature) and management letter issued bythe external auditors.Significant
  57. 57. 4) Join venture or collaboration agreement.5) Rules and regulation6) Implication of law7) Recover the loans and returns10) instant of population and environment11) Agreement with the labor union collective bargainingagents.Significant
  58. 58. (A) The board should meeting regularly so as to ensurethat 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
  59. 59. (a) All the directors particularly non executives directorsshould be able to contribute effectively to the decisionmaking 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 givensufficient 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 meetingGood Board Room
  60. 60. (e) As for as possible post facto approval of actionsalready taken by the management should not givenby the board(f) The decision about what is to be place on agendashould be taken by the chairman in the situation withthe company secretary(g) If the board appoints any committee for a shortperiod of time a special assignment or standingcommittee, it must clearly spell out its function termsof reference and powers in a suitable documentapproved by
  61. 61. Chairman Function Include.(a) Running the board, chairing all its meeting, setting itsagenda, conducting its proceeding, and leading alldiscussions at board and Shareholder meeting.(b) Ensuring that directors get adequate and timelyinformation.(c) Acting a bridge between the board and shareholders(d) Evaluating the performance of the board as a whole andof each of its individual members(e) Act as an arbiter for any issues between differentmembers of the board or management.Role of Chairman of the
  62. 62.  Responsible for management Company and itsoperations All Executive director or senior managers directly orindirectly report to him. He is answerable to board.Role of Chief Executive Officer (CEO)
  63. 63.  The company Law and article of association of mostcompanies 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.Dualities of Officer: Chairman
  64. 64.  Two important officials of the company haveconsiderable influence on its governance.1. CFO2. Company secretaryThe code of corporate Governance issued by SECPstates the following regarding these two officials.Appointment termQualification for CFO and Company SecretaryRequirement of attending the board meetingAppointment and Approval of
  65. 65.  The appointment, remuneration , and terms andcondition of employment of CFO, Company sectary,Head of internal audit of listed companies shell bedetermined by CEO with the approval of BOD’sAppointment
  66. 66.  CFO should be a member of recognize body ofprofessional accountants; or he should be arecognized university graduate having 5 yearsexperience in relevant field. Same condition for Company Sectary.Qualification for CFO and
  67. 67.  CFO and Company Sectary should attend themeeting of BOD’s. They will vote at the meeting only if they are electeddirectors.Requirement of attending the
  68. 68.