Committees of a Board

Dr Safdar A Butt

Why Committees?

To get impartial and professional input Reduce work load for directors More detailed work Specialization principle

Common Committees

Audit Committee Nominations Committee Remunerations Committee Executive Committee Ad hoc Committees

Audit Committee

Membership All NEDs, preferably all INEDs Chairman must be INED Can take external help if needed US law says at least one member of AC must be a finance / accounting professional
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Responsibilities of AC

Oversight of financial reporting and accounting policies/systems Liaison with external and internal auditor Ensuring regulatory compliance for disclosures Monitoring internal controls Oversight of risk management processes
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Audit Committee Issues

Composition
All NEDs Majority INEDs Chairman of the company not a member

Duration Frequency of meetings

Nature of Audit Committee

It is not an executive body. It does not draw up accounting policy; its role is only to review and oversee. It does not perform internal or external audit. It reports to the Board, not management. It issues advice to management, not directives.
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Best Practices for Audit Com

The prime tool of good corporate governance. Managing its agenda:

annual, quarterly programs Formal meetings with executives Formal meetings with external auditor

Frequency of interaction with management Regular self evaluation

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External Auditor & Audit Committee

Negotiations with external auditor

Verifies suitability of the external auditor Their resources, qualifications, independence, past record Linkages, non-audit work Rotation, former employees of audit firm Audit firms performance, ethics

Ensures independence

Discusses report / management letter with external auditor

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Situation in Pakistan on ACs

Law is being followed in words but often not in spirit. Often EDs are members of AC In some cases, company chairman or CFO is made chairman of AC Since the whole board is subservient, no hope for truly independent members of audit committee.
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Nominations Committee

Responsibilities Formalization of process of finding good directors & senior managers Evaluation of directors individual performance Succession planning Board size and structure
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Remunerations Committee

Drawing up Remuneration Policy for directors and senior managers Ensuring that directors are not paid any additional fee or given consultancy assignments etc. Oversight of bonus computation for directors Ensuring the proper disclosure is made in respect of directors remuneration

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Basis of Remuneration

Fixed salary only Bonus only Combination

Balance between the components Too high fixed salary as bad as too high bonus

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Fixed Salary

Promotes lethargy; status quo mentality Dampens entrepreneurial initiative Increases staff turnover

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Performance Based Pay

Bonuses
Cash Free shares Share options

Basis of computation
Base figure: sales, profit, market share, etc Short term view Long term view: gradually increasing bonus 15

Balance in Components

What is the right mix? Too high salary promotes lack of initiative Too high bonus promotes:
short term view Dishonesty; greed; fudging

CCG recommends 1 : 2 ratio

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Situation in Pakistan

Executive directors do not run the board, controlling shareholder does. Directors remuneration treated as employee salary issue. NEDs not paid any thing at all except attendance fee. Nom-Rem committees do not exist in Pakistan
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Executive Committee

Some decisions can only be taken by board but board cannot meet too frequently; hence executive committee with delegated powers. Often has EDs and some INEDs as members Meets frequently to dispose off routine executive matters Gives detailed report to board on more important matters

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Executive Committee - 2

Reduces work for the board Provides specialized input to the board Provides extra layer of checking Has more time to investigate and give more detailed report Serves as lower tier of a unitary board.
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Ad hoc Committees

Created for a situation, purpose or time and liquidated afterwards Project Committee; Investigation Committee, Negotiations Committee, etc. Terms of reference decided by the board on need basis.

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Thank you
Dr S A Butt

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