Committees of a Board

1
 Why Committees?
 To get impartial and professional input
 Reduce work load for directors
 More detailed work
 Specialization principle

2
 Common Committees
 Audit Committee
 Nominations Committee
 Remunerations Committee
 Executive Committee
 Ad hoc Committees

3
 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

4
 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

5
 Audit Committee Issues
 Composition
 All NEDs
 Majority INEDs

 Chairman of the company not a member

 Duration
 Frequency of meetings

6
 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.
 Committee can go to shareholders

7
 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

8
 External Auditor &
Audit Committee
 Negotiations with external auditor
 Verifies suitability of the external auditor
 Their resources, qualifications, independence, past record
 Ensures independence
 Linkages, non-audit work
 Rotation, former employees of audit firm
 Audit firm’s performance, ethics
 Discusses report / management letter with external
auditor

9
 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.

10
 Nominations Committee
 Responsibilities
 Formalization of process of finding good
directors & senior managers
 Evaluation of directors’ individual
performance
 Succession planning
 Board size and structure

11
 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

12
 Basis of Remuneration
 Fixed salary only
 Bonus only
 Combination
 Balance between the components
 Too high fixed salary as bad as too high bonus

13
 Fixed Salary
 Promotes lethargy; status quo mentality
 Dampens entrepreneurial initiative
 Increases staff turnover

14
 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

16
 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

17
 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

18
 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.

19
 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.

20
Thank you

21