The Directors

Dr Safdar A. Butt

Individual Directors

Importance What should they have to be good directors:

Suitability, ability Character Personal traits, views, attitude Willingness and ability to give time Sound judgment

Skill & Care Duty

Do not agree to be a director if you are not fit to be a director. Must have necessary knowledge, skill and background / experience that is reasonably expected of a director of a particular company. Should exercise the degree of care, caution and skill that can reasonably be expected from them as directors.
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Directors Liability

Responsible only to shareholders, not to outsiders. Only if they are proved to be negligent, or a willful party to fraud. If not negligent or willful party to a fraud, directors are generally covered by the company. Companies may obtain insurance:
For liability of directors For losses arising from directors

Types of Directors

Executive & Non-Executive Directors Representative & Independent Directors Independent Non-Executive Directors De-facto directors Shadow directors Alternate directors

INEDs

Do not represent any particular stakeholder, but the entire company. Do not take instructions from any one. Professionally competent. Take their work as INED very seriously. Create balance of power on board. Serve on board committees Bring discipline to the board
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Shades of Independence

Lack of conflict of interest Appointer different from manager. Procedures, leaving little room for dominance by a strong manager. Applied to NEDs, it means no direct loyalties / influence. Undermined by familiarity

Preserving Independence of INEDs

Should not be related to directors or major shareholders, or related organizations. Should have no material interest in the company (except his fixed remuneration) Should not be immediate past employee or paid consultant. Most important, the company should be willing to let an INED be independent.
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How many INEDs?

CCG of SECP says at least one. CCCG of UK says 50% of directors should be NED & that most of the NEDs should be INEDs. I say:

Not more 1/3 EDs, at least 2/3 NEDs At least half of NEDs should be INEDs It means INEDs should not be less than 1/3 of total.

Situation in Pakistan

There are virtually no INEDs in Pakistani companies. Almost all NEDs are representative of majority shareholder; none is ever independent. No remuneration to NEDs; hence professionals are not keen to serve as INED. Paying good remuneration can get good INEDs who can be independent just as auditors and judges who are paid but retain independence. In West, main source of INEDs is institutional investors.
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Main Role of INED

Putting good professionally competent INEDs in the board is tantamount to putting a very efficient external auditor, or judge, on the board. Their presence brings discipline and diligence to all the other directors. Improve the quality of decision-making process. Serving on board committees. Acting for all stakeholders.
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Criticism on INEDs

Many INEDs are simply not competent. Good INEDs do not have adequate time for the company. Due to lack of remuneration, they do not pay enough attention. It is impossible that INEDs will not have any relationship with those who vote for them. Reciprocal arrangements between companies. However, these are selection issues, not defect of the concept of INEDs.
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Where to find INEDs?

EDs, NEDs or chairmen of unrelated companies. Retired professional practitioners (CA, lawyers, consultants, engineers) Retired civil servants, judges, generals. Socially prominent persons. Use professional head-hunters to find them.

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Qualities to look for in INEDs

High level of personal integrity / ethics Sound judgment and professional approach Ability and willingness to serve. Good inter-personal skills Having adequate time at his disposal.

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Directors Induction

Visits to key locations / facilities Presentation by different departmental heads Informal meetings with:
Top managers. Major shareholders, institutional investors Important consultants and professional associates

Formal training in CG

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Register of Directors Interests

Details of shares held by him or his immediate family. Directorships held by him or spouse. Interest in other related companies. Past and present relationship with company or any of its directors, major shareholders. Any other relevant information. Regular updating of this register.
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Directors Dealings with the Company

Should be fair, transparent, at arms length. No loans to directors. Disclosure of conflict of interest in each deal. No misuse of privileged information. All significant deals with directors should be put to shareholders. All such transactions should also be disclosed in annual statements.
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Directors dealing in companys shares

Not forbidden by law. However, note in Directors Interest Register. Insider Trading Market Abuse

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Other Issues

Re-election issues Succession planning Removal or disqualification:

If falls below articles of association requirements Convicted of crime Bankruptcy, insanity Court order, or regulators order.

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Dominant Personality Aspect

Principal cause of CG issues Characteristics of a dominant leader

Charismatic Powerful Intolerant Often seemingly sincere Does not nurture subordinates

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Why dominant personalities fail?

No one can have all the talents. People working around dominant personalities lose interest in decision-making. Tendency to micro-manage affairs. Do not grow at the speed of the company. Intolerance leads to departure of good managers.

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Dominant Personality

Legal division of powers does not stop a dominant leader from getting his way. Dominant personalities are often the creators or benefactors of a company. They earn their power and later misuse it. Some may even mean well, but prove to be naadaan dost.

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Enron Case: Some Lessons

Misleading treatment of transactions in the books.

There are only 2 debits and 2 credits around which the entire edifice of accounting revolves. It is not difficult to treat one debit (asset) as another (expense); or one credit (liability) as another (income); or vice versa.

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Enron Case: Some Lessons

Audit committee approved seriously misleading accounts.

Willfully looked the other way Were unable to detect irregularities Were not provided adequate information Collusion of External auditors

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Enron Case: Some Lessons

Individuals profited personally from transactions with the company:

No body noticed it, or could have noticed it. No body objected to it, or objectors were pacified. No disclosure of interest Isolated cases, or a planned robbery.

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Enron Case: Some Lessons

Ineffective Board failed to properly supervise the senior executives:

Was Board ineffective, or incompetent? Were senior executives too clever, or were board members too ready to comply? Was the Board independent? What was the composition of the Board?

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Enron Case: Some Lessons

Enron Board had a large number of NEDs, but they had no leader. Audit committee was comprised of junior NEDs with no power or initiative to deal with external auditors, or prescribe accounting policies. Audit committee did not have power to deal with whistleblowers.
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Enron Case: Some Lessons

Board Composition:
Only CEO and Chairman were executive, rest all were supposedly NEDs No flow of information between management and Board except through CEO / Chairman Entire board virtually a stranger to the real working of the company.

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Collective Integrity

Individual honesty versus collective integrity. Teams players, or weak directors? Enron paid $750 million as bonus to senior executives with a net profit of only $975 million. Executives had off-balance sheet contracts with Enron NEDs were being paid for consultancy.

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Thank you
Dr S. A. Butt

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