Transcript The Directors

The Directors
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Individual Directors
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Importance
What should they have to be good directors:
Suitability, ability
 Character
 Personal traits, views, attitude
 Willingness and ability to give time
 Sound judgment
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Skill & Care Duty
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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
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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
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Types of Directors
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Executive & Non-Executive Directors
Representative & Independent Directors
Independent Non-Executive Directors
De-facto directors
Shadow directors
Alternate directors
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INEDs
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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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Preserving Independence of INEDs
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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?
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CCG of SECP says at least one.
CCG of UK says 50% of directors should be
NED & that most of the NEDs should be
INEDs.
Dr. Butt says:
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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.
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Situation in Pakistan
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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
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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
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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?
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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
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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
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Visits to key locations / facilities
Presentation by different departmental heads
Informal meetings with:
Top managers.
 Major shareholders, institutional investors
 Important consultants and professional associates
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Formal training in CG
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Register of Directors’ Interests
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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
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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
company’s shares
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Not forbidden by law.
However, note in Directors’ Interest Register.
Insider Trading
Market Abuse
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Other Issues
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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
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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?
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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
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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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Collective Integrity
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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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Case Studies
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A useful learning tool  used in management
education to give student a feel for the
complexities if the real work and how the
theories, models and research being studied can
be used in practice.
Steps in Analyzing Case Studies
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Gain an overview of the case
Establish what has happened (specify
objectives)
Determine the causes
Develop possible solutions
Evaluate these solutions
Formulate recommendations (write up
solutions)
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4. Develop possible solutions
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Students should develop several possible
solutions to the problem(s).
Different solutions may need to be considered,
depending upon whether the aim is:
to have prevented what has already happened
 to salvage the present situation
 to avoid similar problems in the future.
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Common Errors in Analyzing
Case Studies
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Not integrating the various points into a
preferred solution
Not using theories and concepts currently being
studied in the course
Seeking ways out of the situation (such as “fire
them all”) rather than trying to solve the
problems
Ignoring practicalities
Sticking to generalities, such as “they must try to
improve communication”
Thank you
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