The Board of Directors

Dr Safdar A Butt

Importance of the Board

It is often believed, by stakeholders, social scientists and the regulators alike, that the key to good corporate governance lies in the hands of a companys Board. But: How does a Board become good? Is a good Board born or made? Is a Board free to be good?
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The Boards Role

Provide entrepreneurial leadership Set strategic objectives of the company Arrange for resources needed to achieve the strategic objectives Review management performance Set the companys values and standards Act as a bridge between stakeholders
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Different Board Types: The Good, Bad, and Ugly

Yes-men Board Rubber Stamp Board Good Old Boys Board

The Real Thing

Country Club Board Trophy Board

Paper Board

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Powers of the Board

Sources of Power

Companys Articles of Association The Law Resolution passed by shareholders Sometimes, industrial practice.
Collective powers: may be delegated Executive Directors Non-executive Directors Members of Board Committees
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By and large, absolute powers vest in the directors

The issue of collective and individual powers

Functions of a Board

Oversight Directional Advisory

Oversight Function

Approving and monitoring strategic plans. Approving and monitoring annual plans, operational and capital budgets Engaging external auditors Ensuring integrity of annual report Review of major operational activities

Directional Function

Setting companys mission statement, vision statement, value statement, etc. Appointment of CEO and other senior executives Planning for succession of senior executives Appointing various committees like audit, remuneration, executive, etc.

Advisory Function

Guidance What else is happening in the world Different perspective Specialized input on specific areas

Tools Available

Composition of the board Independence of the board Committees External help where necessary Governmental intervention

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Boards Responsibilities

Collective responsibilities of the board Individual responsibilities of each director

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Collective Responsibilities

Acting in the best interest of the company. Accountability to owners Statutory duties:
Keeping minutes of all meetings Filing periodic reports and financial statements Stock exchange updates

Fiduciary / Trusteeship Duties

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Test of Fiduciary Duties

Transactions are reasonably incidental to companys business Good faith, believing the transactions to be correct. Disclosure of conflict of interest

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Delegation of Powers/Duties

Law permits delegation But does the responsibility remain with directors? (Governance Issue) Issues in Delegation:
Was it properly delegated. Was it properly supervised. The system of oversight and accountability over delegates.

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Borrowing Powers

How much can a Board borrow? Is it only a lenders problem, or should the other stakeholders also have a say? Regulatory constraints on lenders (e.g. Prudential Regulations of SBP) What if the company borrows from non-formal sector? Tax implications
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Types of Boards

Composition:
Unitary Two-tiered

Tenure
Common tenure Staggered

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Balance on the Board

Balance of representation Balance of talents / abilities Balance of power Balance of attitudes or views

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Consequences of Imbalance

Board can be misguided by the executives Interest of only one stakeholder is served Poor decision making Status quo mentality Lack of communication Things start getting fixed

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Cadbury Code Guidelines

Regular meetings Monitoring executive performance Draw clear lines of authority Good board room practices

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Board Room Practices

Every one should participate Formalized written procedures Induction program for directors Each director should get the same information at the same time No post-facto approvals Chairman decides the content of the agenda
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Role of Chairman

Running the board, chairing its meetings Ensuring all directors get timely and complete information Acting as bridge between the board and shareholders / stakeholders Evaluating the performance of individual directors Arbiter in event of internal disputes
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Responsibilities of CEO & Senior Management

Operating the company in an effective and ethical manner according to policies set by the Board Drawing the strategic plans Drawing annual plans and budgets Selection of managerial and other staff Identifying business risks Financial reporting Internal Controls Code of Conduct for all staff
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Duality of Office: Chairman & CEO

Speeds up decision making Quick action Saves cost: often only one salary More effective due greater powers:
Within the company Dealing with outsiders

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Separation of top offices

Provides an extra layer of answerability

Lesser chance of cover-ups

NE chairman not member of management NE chairman provides better option for monitoring NE chairman is closer to stakeholders

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The Corporate Sins

Sloth (unwillingness to take initiative, laziness) Greed (self over company) Fear (cowardice, lack of integrity)

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Thank you
Dr S A Butt

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