Why does a Bi ‘A board of directors is a non times a year to pi the disposal of comprehensive cover therefore necessary th other than the manageme! matlers that are placed be getting such an assistance formed, while others may governance. ‘The advantages of formning specialized committe a | a oard Need Committees? execulive body that meets no more than four or five arforin lis oversight, directional and advisory functions. The time at d - in fact too limited to allow a directors is rather limite age of all the various issues at the board should get some assistance from certain quarters, nt of the company, for expert advice or briefing on. the fore il. Forming committees ‘of the board is one way to Some of these committees may be required by lav to be | be formed purely as a convenience and a tool for better that are presented to the board. Itis are as tcllows: The directors are abe 10 get impartial, yet professional. put from a source other than the management of the company. If the board continues to rely solely on the information provided by the management, it will fail to perform its function a | effective oversight. A board that does not look beyond the papers presented tvit by the management will not be able to control the management; rather it will be controlled by the management. This reversal of roles is against the spirit of good governance and should be diligently avoided. Hence, in this respect, committees help to improve the quality of governance at a company. The work load of directors Is seduced. The detailed work ts done by IN comniltiee members while the Board receives a summarized reporl and/or recommendations for ils consideration. At least theoretically, this should nol result in dilution of powers of the board. While the board retains the power (0 make the final decision on all issues, the issues themselves are assigned © a committees in order to gel a meaningful division of work, In this wa)’ mmo woth can be done in lesser time, thereby improving, the overall ellicacy ot ~and hence the governance. | 5 inv such comunittees, the ondable avor 0 With the i ‘ . 2 bse ce netic of outside consultants or specialist! decizion ete detailed and specialized information for a more de ‘ing. This is’ perhaps the most important argument in !Chapter 6: THE COMMITTEES OFA BOARLY jttees and the role they can play in improving the . rd members should be provided this access ic oats seeca governance 's without . re Jusively on the co § paving tO rely excl i mpany’s own mani ‘ Hasrpendent view on the issues. agement in order to get an sues and Problens Board Commitlees are however like firearms. If they are used properly they defend the company and protect the interest of its stakeholders. However, if they are not pandled well, they can ill the company. The following issues and problems are commonly associated with board committees: a Committees are often accused of slowing down th a. : process of decision i Quite often, certain matters can be decided by the Boar ee ¢ 1 fers can b wut are referred to a committee which takes its time in coming up with recommendations for the board. Again, quite often discussion on these recommendations takes more tithe than the discussion on the issue ilself. It is not only the governmental committees that are known for guilty. delaying decisions; corporate committees are often quile as mittee is formed about a particul myer (ie. directors) sto or even thinking about it. This leads to jbdication of responsibility. AS it is, most non-executive directors are neither aware of nor concerned about their specific responsibilities as board members. Commitices provide them an excellent means of escape because less than diligent directors can easily hide behind the recommendations of the committee. If a wrong decision is reached by the board and a process of accountability begins, such directors conveniently point a finger at the committee and escape unscathed. It has been commonly observed that once the board members have a ready scapegoat for any error in decision-making, the jevel of their diligence and vigilance somehow subsides. matter, many (if not all) board. or en tl Board Committees are often not competent "or snost boards still confine the Frembership of their committees to HS OWN members only; they ™ay frequently fail to find sufficient talent jn the board to constitute 2 meaningful commillee on a particular subject. Such a committee may not have specific competence to deal with the matters referred to it Forming @ committee that does not have adequate intellectual capacity to look at a difficult probler ai 51030 optometrist parti i a jg malice is . for a heart implant. Quite unfortunately, Ui mt rm its duty, it also. events! the others. from isice also pret “{ales to the general paychology of directors. pevlafining nat Fonction THIS interforéint Those Whe are n a particular ‘committee, do nrot want 10 interie® inits wre = this means if the committee Is not performing, iS woe oe ke committee bwoaid and hence the company suffers: AUN me time, (NOSE I AT ndations do nol approve of other directors © sing objections 10 Wer ‘Biggest issevvice even when such recommendations are fault): ‘rig is one of the biggest of board committees . When a committee fails to perfo‘Chapter 6: THE COMMITTEES OF A BOARD e. Given . . men 9 the board netures in Pakistan, Board Committees often become one- all the committees ofthe family who owns majority of the shares tendls to chair member. tn. this a - attend their meetings without being even a formal decisions ihabwiduan ‘ strips the committee of any real power, taking all connie eee if the top honcho is not involved in such eroovildoaninaditule once coin ne beech tenets cen the fhe Of an effective co ane : over it with a strong hand. I came across the definition satipvses of four menbew, ther ef whoox d said “an effective committee ee asics nen ers, three of whom don’t give a damn and one who board eythiing hisway- Quite unfortunately, if the board is not vigilant most comimiltees get transformed into such bodies. And Iastly Board Committees are often used by the real management of the ie pany to Bet legitimacy for their decisions without taking responsibility for em. For example, the family controlling a company may form a board committee to give recommendations on a new project and make sure that the recommendations are all in line with what the group really wants to do in the matter. Manipulation of committees by crafty managers (in Europe) and controlling shareholders (in countries like Pakistan) is, fairly common. Committees are used as a rubber stamp for decisions made elsewhere. Naturally, such committees are no help in improving the quality of governance of a company.f Common Committees According to the code of corporate governance issued by Securities and Exchange Commission of Pakistan (SECP), the only committee that must legally be formed is audit committee. However, better managed companies find it necessary to form certain other committees as well, for example nominations committee, executive committee, remuneration committee, compliance committee, etc’ Some companies combine the functions of two or more conunitiees into one, €g, many companies have only one nominations committee that also functions as remuneration committee. Similarly, the functions of compliance committee are often assigned to the audit QUICK QUIZ committee. We will now discuss the functions of three Committees can be as important committees that are commonly found in eek SS Pakistani listed companies, namely audit-cum-compliance intends tham tobe, Discus. committee, nominations-cum-remuneration committee and executive committee. ¥ “f THE AUDIT COMMITTEE The relevant laws in most countries now require listed companies to form an audit committee comprising of three or four board members. It is charged with the responsibility to oversee certain functions on behalf of the board and to brief the board there-on, 4 Membership of Audit Committee ° in most developed countries the following standards are follovied in this regard:part Liaison with ¢ a G Chapter 6: THE COMMITTEES OF A BOARS: a a J a are independent non- eoulved rectors (INEDs). In particular, no executive director is made 2 member of audit cmnuittee to ensure its independence Similarly, the chairman of the company, even if he is a non-executive director, should not be a member of this committee Audit Commitige is considered the eyes and ears of the Board of Directors. Wiule the Board retains the right to continue exercising the brain function, Avett Committe provides all tha input for making Important decisions, particularly those relating to finance, reporting ‘end risk management. b. The chairman of the audit committee mus i it cor ss fee must be one membe ©. USA law requires that at le a the audit committee must have financial expertise or background. However such a inember should not be an executive er paid employee/consullant of the company ‘ d. The audit committee can however get outside professionals to assist it if ite members deem it necessary Responsibilities of Audit Committee The following responsibilities are generaliv assigned to the audit commuttee us/ policies ApWversight of financial reporting and accounting © disclosure and other requirements Ensuring 1 ompany < of the company Lei us discuss these respunsibilities brie! porting and Accounting Policies Before periodic financial statements like income statement, balance sheet, cash flow statement, etc. are presented to the board (at the end of each quarter and at year: .), these are reviewed by the audit committee so that it can brief the board members on the validity and acceptability of such statements. The audit committee Should have sufficient expertise to discuss the various accounting policies and standards that have been adopted by the company’s management and to make a judgment on their suitability. In particular they should go over the contents of the external auditor’s report to see if the company’s financial statements meet the requisite standards. If the audit report is 2 qualified report (ie. it points out certain weaknesses or short-comings in the financial statements under audit), the audit committee should investigate the qualifications and explain their implications to the board members. Oversight of Financial R Liaison with external auditors ; he In the process of their work, the mem! financial management team and extern: J information. In particular, all comm bers of audit committee can interact with a] auditors of the company in order to get all the necessary vinication between the externalChapter 6: THE COMMITTEES OF ABOARD ent of the company must pass through the audi i me t comanitiss i d manage! “a _ Mur aul committee remains fully informed of all aspe external audit and that management does not unduly influence the Sie, Of the ‘This also enables the audit commitlee to explain the matters to the board i. its, Some of the common documents that are exchanged between external ide management of the board are management letter, statement of leu and weaknesses in the internal control systems of the company, preliminary ican objections prior to finalization of audit report, etc. If such documents are cated the management, the board will never know the relevant details that might reflec : the quality of financial statements thet eventually emerge out of the external andi, tory requirements on ilisclosure isclosures in the financial statements. ‘The external auditors report if such disclosures have been properly made and The audit committee should pay particular attention d members on such disclosures. Compliance with regula The law requires certain d generally comment in their meet the prescribed standards. fo this aspect and brief the boar Monitoring the Internal Control Systems Jementing_internal_con! While designing and_imp! responsil of the management of 2 company, assigned the task of monitoring this aspect of management. In the first instance, Audit Committee should ensure that the internal control procedures are properly drawn up and cover all the essential parts of a company’s activities and records. For this purpose they can interact with the management and if they so feel, they can gel external expert help. Once they are satisfied with the comprehensiveness of the internal control procedures, the next step is to ensure that these procedures are actually being enforced. For this purpose, regular internal audits are carried out by the Internal ‘Auditor. However, Intess Auditor is a part of the management team. The Audit Committee should therefor meet regularly and formerly with the internal audit team and go over all their report {o ensure full compliance with laid down procedures. The ‘Audit Committee ca he hee about any weaknesses of shortcomings in the syste" 10 generate executive action where needed. trol policy and systems is the the audit committee has been QUICK QUIZ 5 UK OE Tn Pakistan, as per the Colo of Corporate Governance, fe ‘only commit thal musi be formed by the Elvan ult Committes. Why do you tli this is 50? J! vemight of Risk Management Process ae pe a ae toa number of risks that threaten its profitabl exis! i i edie le i ree The management must identify and se plant ca? eh ere example, the risk of fire at company’s factory ot insurance policy. Similes suitable preventive measures and taking Oo can Ie thibgaled © eater teens, fo thet operational activites © os Durcee a ered through other available means like Fngurance, heats at must formulat ion, proper preventive and safety measures: etc Manet ay i Tes] a fe procedures and . q Committe? responsible for overseeing all systems for this purpose. The The © ae highly ey a procedures and their effective ime entree, eling with then ee and Audit Committee needs ! The poard ermal professional help may be taken- eration’: e OP ears |Chapter THE COMMITIRES OF A BOARD sjreclOrs depends on the Audit Committee to remain aware o| aac of the company. Also see the chapter on Risk this aspect of corporate governance, f tisk management Management for Greater details on this a —_ or reference of Audit Committee “Phe Code af Ci porate Governance issued by & of reference for an audit committee: ‘P has prescribed the following terms . 4, Determination of suitable measure for protecting the assets of listed company, * xamination of initial declaration of results before publication; ‘ Review of quarterly, half-yearly and annual financial statement of listed company before presenting to Board of Directors; Facilitate the external audit by discussing significant observations r interim and external audit with external auditors; 4 Assessment of management letter which is issued by external auditors with management response in this regard; antee free communication between external and internal auditors; 6. Evaluation of scope and degree of internal audit and make ensure its Independence; 7. Consileration of significant outcome of internal audit as well as management feedback regarding it; esulting from , along “8 Ensuring the effectiveness of internal control systems (financial and operatinnal), accounting structure and reporting system; ~$. Reviewing of company's stalements which contain description of internal audit systern, before presenting them to Hoard of Directors; . Consideration of special projects, value for money studies or any other matters as _ determined by Board of Directors in consultation with CEO, ~11 Participate in negotiation on the issue of remittance with external auditors or other external bodies; » Specifying compliance practices relaled to slalutory requisites; . Managing the compliance with best Corporate Governance practices and - Highlighting any major violation observed; The Code also states that the audit committee of a listed company shall appoint a fecrelary who is responsible for the distribution of minutes of Audit Committee ‘neetings lo all members, directors and CFO within a fortnight. Nature of Aud; Despite its a Wise lit Committee wy itis parent importance and influence on the governance of ee te Car ‘6 temember that an Audit Commillee is not an executive bad ye ae weit any executive function al all. It does not draw up the acco ning ey Proce oes it approve ii, The management draws accounting i ci Commie While the Board of Directors approves them. ‘The role ol Auth impigt® § to advise the Board on the efficacy of the policy “MChlation, ian Ih dloes Ho i 40 Audit Committee does nol perfor intemal or external audit oud orsees their work and "ANY instructions to the either auditor. 1 simply overs¢Chapter 6: THE COMMITTEES OF A BOARD. reviews their reports in order to keep the Board of Di vis-a-vis the audil inatlers. tors informed of the status Audit Committee reports to the Board of Directors and gives its reports, tindin advice and recommendations lo the board. The Board’ in firm may decide on whatever action needs 10D taken on the basis of Audit Committee's reports or advice. The Audil Committee does not have the powers or mandate to issue ant directives to (he management of the company, including the internal auditor. It at al limes provide views and observations to relevant managers, but not instructions to carry out any specific ask. Any such instructions must come from the Board. In certain situations, it lies within the prerogative of the Audit Committee to give a report direc! tothe shareholders, or to conimunicate with them through some other formal or informal means to convey its views. If for example, the Audit Committee finds that the Board Chairman is not paying adequate attention to its recommendations, it may opt to send these recommendations direct to major sharehoiders, or present them at AGM. However, in Pakistan such incidences are extreiely rare What difference can an Audit Committee make? It is one of the basic concepts of corporate governance that non-executive directors should oversee the work of execulive direclors. Audit Committee is perhaps the most potent tool available to a Board of Directors to have an effective oversight over the financial systems, reports y's management. A truly Despite ils apparent importance and influence on the governance of @ company, fis wise lo remember thal an Aut Commitioe i not an ox body to and conduct of Ue cony any sxocutve fonction #2. TF indenendent, efficient and professionally competent Audit Commiltee can ensue that the company’s management does not get an opportunity to cul comers in relation to financial and related operational matters. Tt ean improve quality of company’s financial reports by tnsuring thal the accounting records and policies on which such reports are based in line with relevant standards, in accordance with the law and in with good practices. In tum this leads to umprovement in company’s stock exchange and among general public. or misuse its pow are correct, conformily image and ratings at the Je internal whistle-blowing issues to ‘An efficient audit committee can also hand is saved from potential damage from ensure that these are solved and the company such actions. minittees Best Practices for Audit Con to audit committees for cot ‘The following advice is available ellectively: nducting its business Managing its Agenda ‘Typically, an Audit Committee draws up its agenda on prograrm is drawn for the whole yeat’s activities covering t falling, wilhis: its ambit While the general practice is to hav meeting just prior to Board of Directors’ meeting ai the end of each an annual basis. A formal he various responsibilities ean Aut Committee quarter, better‘Chapter 6: THE COMMITTEES OF A BOARD d committees have Audit Committee meetings far more frequently than one in collation with internal and tant manage quarterly. Drawing up the annual program is d external auditor, so that important meetings are arranged according to impor accounting and audit related events of the year, e.g. issuance of letter of acceptance to the external auditor, start of internal audit cycle, initial meetings with external auditor, date of periodic presentation of internal audit reports, receipt of management letter from external auditor, etc. Frequency of interaction with Management Regular contact between audit committee and important managers of the company is essential to ensure that the work of audit committee is done smoothly. Key contacts in this regard are the CEO, CFO, Internal Audit Manager, External Audit firm's relevant partner, company’s tax advisor, etc. Formal interaction between Audit Committee and these officials should not erode the independence and effectiveness of the Audit Committee; rather it should provide the committee to do its work more closely. Regular Executive Sessions These are formally scheduled meetings between the Audit Committee and key managerial staff or external auditors of the company to attend to certain important events like discussion of audit program, review of management letter received from the external auditor, etc. Such meetings infuse discipline among all relevant executives and keep the Board informed, through Audit Committee, of all important developments in this field. QUICK QUIZ Regular Evaluation Can Audit Committee improve The chairman of audit committee must complete formal self-evaluation annually to identify improvement opportunities. Each member of the audit committee, and the overall performance of the committee over the period as compared to previous periods, should be evaluated in order to make meaningful changes where necessary. the quelity of corporate govomance of a company? Audit Committee and the External Auditor As stated earlier, audit committee should maintain constant liaison with the external auditor. In fact all communication between the external auditor and. the company should pass through the Audit Committee. Similarly, all negotiations with the | external auditors on issues like audit time table, audit fees, audit expenses, etc. must be made in presence of the chairman of the Audit Committee. The code of corporate governance issued by the SECP places the following résponsibilities on Audit Committee regarding the relationship with external auditors: “gl 4. AC has vouch for (after due checking) the details of the qualifications, experience, past record, etc of any firm of auditors whose name is proposed al) the AGM for appointment as external auditor of the company. b. AC should ensure the independence of the external auditor by verifying tha there are no untoward linkages between the external auditor and company’s management. Another way is to make a formal policy that external auditors are }Chapter 6: DN: ONMITTERS OF A BOAR, nol given any other assiy, ment (like tax or financial cons: company. erltane y ork wh) by th © AC should ensure rotation of external a uditors after suitable vecommends after every three years, fable DEVIOUS. The ong a. AC should monitor the performance of exte TNal auditors and repo, is to the board of directors. von Finding, e. Different communications received from the external auditor, ey. nin i letter, should be discussed with extemal auditors as well ‘ the compar ay management. The findings should be communicated formally ta the eet directors. " Situation of Audit Committees in Pakistan While almost all companies are complying with the KSE and SECP requirement « having an audit comunittee, sadly most audit committees are far from independen, Some companies nominate their executives, even ihe director finance, on such committees. Others assign the chairmanship of audit committee te the chaitman a the company. In many companies, since most directors are family members, itis no uncommon to find that one brother is chairman of the company; another is the C0 while the third is chairman of the audit committee, thereby totally killing the | wndependence and effectiveness of the audit committee. [= Again, since the local law does not prescribe any ‘duicK auiZ qualification for members of the audit committee, Wy are Audit Commits — companies take advantage and nominate such members | not.co elfectve in Pakistan? on the audit committee who ave nol competent or {oo Gained to handle its functions. THE NOMINATIONS AND REMUNERATION COMMITTEE scitnth The principal function of this committee is to ensure that the company su Sine attracting and retaining good board members - both executive and noterestt’ directors. This committee can take help fron outside consultants to enste vngh in possession of all relevant data and inforination needed for formulating mest and practical policies relating to recruitment, motivation, Te pile ol of competent directors. It is recommended that this committee shoul on fond only non-executive directors. In Pakistan, most companies do not have repaitet remuneration committee of the board. One reason for the absence of this ¢: from Pakistani boards is lack of any legal requirement to have it. Responsibilities of Nom-cum-Rem Committee ‘These include the following: _— + poth te 4 Formalization of the process of finding sultable directors, ee appro executive and non-executive directors. This includes identify pay (eg a candidates, interviewing them to assess their suitability for the cer viating 2" they able and willing to give sufficient time to the company), NB é -on. It shoul of engagement, and making recommendation to the board there-oFChapter 6; THE COMMITTEES OF A BOARD noted that Nom-Rem conunitlee does not appoint the directors, bul makes reconumendations to the board who in turn either decide to appoint them (in case of executive directors) or nominate them to shareholders (in case of non- executive directors. Formulation of policy regarding remuneration of executive and non-executive directors as well as senior managers of the company. This is a highly technical function and the committee may need external assistance to ensure that it is able to offer (he most appropriate terms lo ils directors and senior managers. For this purpose, the committee may be allowed access lo professional HR consultants and head-hunters to stay in touch with the market situation for senior managers. Formally carrying out periodic performance evaluation of executive directors, non-executive directors and senior management officials. The reports of such evaluation form basis of decision for re-election, or renewal of contract, or grant of bonuses. + Succession planning of directors and senior officials including the chairman. This is a very important function because the continued progress of the company depends on its directors and senior officials. If comprehensive planning is not done to ensure that suitable candidates are ready to take over from retiring directors and senior managers, the company may suffer irreparable damage. Succession should be orderly, efficient and cost effective. Making, recommendation on the board size and structure to meet the demand of changing times and environment. Ensuring that directors are not being paid any additional fees, or given consullancy assignments or such other contracts that may undermine their independence. Uf the company operates any bonus scheme for directors or senior officials, the Nont-Rem committee should be involved in devising such a scheme, establishing, targels and setting the basis of computing bonuses. Again, the computation of such amounts rust be cleared by the Nom-Rem committee before it is put up for approval to board and subsequently to AGM of members. Ensuring that disclosures relating to directors remuneration are correctly made in perlodic financial statements. Directory’ Remuneration In USA and Europe, the executive directors control the company and dominate the board. Over the recent past, QUICK QUIZ these executive directors have been paying themselves While Romuneralion ‘luge salaries and bonuses, causing a lot of concern to Committees and Nomination Nol only the shareholders who were directly affected by |. Comics ne oor es in developed economias, they ® enormous payments but also other stakeholders aro almost non-existent whose ‘ose interests were also adversely affected. In fact, one Paikistan, Why is it so? of the causes of shareholders’ activism seen in these(Chapter 6: THE COMMITTEES OF 4 BOARD. oe bis shareholders’ resentment against such high remuner to directors. For example, Enron in a particular year show i profi $975 milion and yet paid bonuses totaling $750 willion to execute a son of company. As il later transpired, the profil as shown by the financial statements wae much higher than the actual profit - hence the directors’ bonus was even less juslifed. There have been several similar or slightly les severe cases of huge bonuses being paid to directors of publicly traded companies in USA and Europe. While it is true that directors’ remuneration is technically approved by shareholders, but in reality the proposal to this effect is made by the ditectors and is almost always endorsed by the shareholders. Two reasons why sharcholders approve these huge payments in the West are: rations being paid a. Firstly, shareholders are not united. The sharcholding is fragmented, so individual shareholders feel that any attempt at opposing the proposal put forward by the directors is likely to fail; hence they do not even try. b. Secondly, most of these shareholders of listed companies in USA and Europe are institutional investors who send their employees (paid officials) to shareholders’ meetings. Such employees, being themselves paid officers, have more affinity towards directors tha real shareholders and are therefore reluctant to oppose any remuneration proposal put forward by directors. » \_Bicis of Remunerating Directors irectors' pay is generally Directors pay is generally divided into two se; 5: Directors’ pa ¥ grnents: Ra no ligsemners & the first part is relatively fixed and is paid every anc? | month. Let us call it fixed salary. The second part is based on the performance, varies from year to year and is generally paid at the end of the year. Let us call this based incenive pay. bonus or incentive pay. _Fixed Salary Only Approach If a company pays only a fixed salary to its directors, it does not motivate them to work harder for company’s profitability or growth. It engenders an attitude of status- quo commonly found in public sector companies where directors are not interested in bringing about any change or improvement in the company’s operations as such a change is not likely to benefit them in any way. Restricting directors’ remuneration to only salary also takes away the entrepreneurial instincts and initiative from their working. And finally, fixed salaries generally lead to higher rate of tum-over of senior managers and executive directors. Performance Based Pay On the other hand, a performance based pay or incentive pay, promotes motivation. It gives the directors a reason for better performance as they siand lo gain personaily from company’s profitability and/or growth. However, for an incentive pay model to work effectively, it should be based on realistic, achievable targets. Setting unrealistic or unachievable targets makes the directors give up their efforts after a short while, thereby defeating the very purpose of the incentive scheme. On the other side, performance based pay can also leaid to manipulation of financial results. QuiteChapter 6: THE COMMITTEES OF A BOARD often, the amount of bonus paid has no relationship with the quantity of effort pul in by the recipient. The performance based pay, or bonus, can be given in various forms, €.g+ r ir ermi igure like Cash bonus, representing a certain percentage of a pre-determined figure sales, or increase in sales, profit, or growth in profit, etc. 4 Ci wever Bonus in the form of free shares of the company. This arrangement can howev be allowed only if permitted by the company’s Articles of Association. Computation of bonus may be made on the basis of not a single years performance, but on that of a series of years. In this way, a smaller perceniaee of bonus amounts may be paid in the initial years, allowing for ihe eee ge to rise as the company continues to achieve consistently good miei _— words, the bonus payment may be divided into short term and long ‘incentives. Bonus in the form of share options. A share option allows a director to buy he company’s share at a pre-set price but ata future date. The idea is to motivate 7 directors to work harder towards improving the market value of the company & shares (through better profits and sustained growth) so that they stand to benefit from exercising the share option. Share options are a form of long term incentive. However, this form of bonus payment is not encouraged by controlling shareholders in Pakistan who do not like the idea of diluting their shareholding through grant of low-priced share options to paid directors who are treated no more than employees. Need for Balance in Remuneration ; . There is therefore a need for a balance in the different components of directors remuneration. The general guidelines for constructing a pay package for directors are: a. The pay should include both the elements: a fixed salary element as well as a bonus element, in reasonable proportion. The fixed salary should be adequate to sustain a decent standard of living, while bonus payments should be offered as added incentive for improvement in overall quality of life. While it is difficult to draw formal lines between the amounts of fixed pay and bonuses, the experts feel that the portion of bonus pay should be slightly higher than fixed pay segment. The bonus element should include both a short term and a long term element, in reasonable Proportion. The scale of bonus payments should preferably be ascending in nature, that is a lower rate of bonus in initial year, steadily rising in Subsequent years. Also, the use of both free issue of shares and share options © may i i i iy be made in order to sustain long term interest of directors in the company.Chapter 6: THE COMMIPTHES OF A BOARD i / Remuneration in Pakistan | Sitti Che aiaion te Pakistan is veotly different from the West, 10 bes: Hewetet executive directors do not run the boards ~ controling sharehogn ace controlling shareholders do not pay executive directors anything mot market salary fa comparable job, Hence, hee director’ remaneratcn gee a governance issue as yet. Payment of bonuses to directors (other than thos ty # paid lo senior managers) is quite uncommon. Free issue of shares to director al “ and grant of share options is even rarer. ian ' Another sad aspect of direclors’ remuneration in Pakistan is the practice of paying any remuneration other than meetings fee to non-executive dire, ines, Ty j has contributed to poor performance by INEDs in Pakistan ay they donate | 5 motivated to take adequate interestin.company’s affairs. is| 8 i Due to family control of most listed companies, nominations and/or remunerato, | # committees either do not exist, or simply play a subservient role in Pakistan corporate sector. Controlling shareholders do not attach much importance io ‘sb i like proper selection of directors, proper planning for their succession or their proper motivation. Most of the executive directors on the boards of family controlled Quick quiz Why is directors’ romuneraig, companies belong to the family and are therefore well looked after. As for those executive directors who are not members of the controlling family, they are treated like ordinary employees who must obey their orders or quit. Not 4 real corporate govemanca issue in 7 THE EXECUTIVE COMMITTEE Board members are very busy people. Il is therefore not possible to sumunan a board meeting for every minor issue. At the same time, a considerable number of maites must be brought to board’s formal attention, which must be deliberated upon and decided on by the board. It is therefore often considered helpful tu form a specid committee, fromm among the board members, to look at all the dliflerent issues and documents that need to be presented to the board, before they are presented to te board. This special committee, called Executive Committee, is often granted powes to make a decision on many of the matters (up toa specific limit) thereby eliminating the need for bringing those matters to the board. On other matters thal exceed the Ex Com’s powers, it prepares a brief so that when the matter is put forward to the full board, Ex-Com is able to explain it to the board members, thereby helping then reach a decision in a more enlightened and informed manner. Ex-Com therefor essentially offers two main advantages: + Il reduces the work load for the board of directors by handling many of th relatively minor matters that would otherwise have to be sent to the board. D. St studies the issues, seeks detailed information from the management ot collects | whatever additional data ig required from inside or outside (he company a brit, Sues, 80 that it is able 1o provide a more informed anid comprehens™ rief to the board, This in tum makes the job of the board easier and specterChapter 6; THE COMMITTEES OF A BOARD: The membership of an executive committee may come from both the executive and onwexecti¥e directors. In cerlain companies some ron-board members who are senior managers in the company may also be co-opted in this committee to make it Tore effective. In most companies, Executive Commiltee has more frequent meetings than the board. In effect, an Ex-Com serves as the lower tier of a unitary board in absence of a formal two-tiered board. Ap HOC COMMITTEES OF BOARD In addition to the Audit Comumittee, a Nom-Rem Committee and an Ex-Com, companies also form special purpose committees from time to time to allend to issues that arise during the course of company’s operations and once they have been resolved, the committee ceases to exist. Examples of such ad hoc comunittees are: a. Investigation Committee, often set up to investigate a serious breach of company’s operational codes. It may draw membership from the board as well as norn-board members to suit the nature of investigations to be carried out. b. Negotiation Committee, often set up when some major negotiations with workers’ union or government or some external party are be carried out. c. Projects Committee, often set up when a company pians to undertake a major project, or make a major acquisition. d. Cornmunications Commitiee, often charged with the responsibility to maintain a healthy relationship with stakeholders, investors, and the media. Terms of reference and powers of each ad hoc committee are decided by the board of directors on need basis whenever such a committee is to be created.