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The Effectiveness of Corporate Boards in Pakistan

The Effectiveness of Corporate Boards in Pakistan. The Effectiveness of Boards in PK. The words "Corporate Governance" was coined in the 1970's and started to be used widely in the decade of the 1990’s.

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The Effectiveness of Corporate Boards in Pakistan

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  1. The Effectiveness of Corporate Boards in Pakistan

  2. The Effectiveness of Boards in PK • The words "Corporate Governance" was coined in the 1970's and started to be used widely in the decade of the 1990’s. • Pakistan too, took an early start, and by March 2002 had framed a code which has started to impact the way companies are being governed. However, the application of the code in Pakistanis not wide spread and is still evolving, as it is in the rest of the world. There are differences in the corporate equity structure and the monitoring and enforcement capabilities between developed and emerging economies which requiresconsideration

  3. The Effectiveness of Boards in PK • Khan, Z (2006) defines CG as “Good corporate governance is about maximizing the wealth of a company in a legitimate way and distributing it in an equitable way” • To achieve the twin objectives just stated, an essential prerequisite is to have an "Effective Board". • The best positioned stakeholder to make that happen is the controlling shareholder. An enlightened controlling shareholder who values efficiency, fair play and long term sustainability will encourage the formation ofan effective board

  4. The Effectiveness of Boards in PK • A survey was conducted by Khan, Zaffar in 2006 to evaluate the effectiveness of Corporate boards in Pakistan • Though its carried out in 2006, still it may have some co-relation with the companies working, even in 2013. However, such surveys should be conducted from time to time to provide more realistic picture of the companies. • The design of the study is simple. It comprises of 26 questions aimed to probe the effectiveness of corporate Boards in Pakistan. He has selected 40 well known listed companies from the three broad categories of companies operating in the country namely, Public Sector, Multinational (MNC) and Private Local/Family Owned companies. • He attempted to solicit feedback from 2 directors on each Board who were either the Chairman, CEO or an independent director of these companies. The response came from 54 persons who were serving on 35 different Boards.

  5. The Effectiveness of Boards in PK Q.I) Does the Board assess its own performance?The response: Yes 05No 48 Blank 01The overwhelming response is ‘No’. The few ‘Yes’ responses had contradictions, as other directors on the same Board responded with a ‘No’ to the question. Some respondents indicated that they had an informal process of assessment. • It’s been uncommon so far, however Boards need to develop some mechanism to tackle this problem.

  6. The Effectiveness of Boards in PK Q.2) Is the CEO formally appraised each year?The response: Yes 27No 25 Blank 02Slightly more than half the respondents said the performance of the CEO was formally assessed. The response was fairly similar between the three broad categories of companies in Pakistan i.e. Public Sector, Multinationals and predominantly Local/Family owned businesses. Several of the ‘Yes’ respondents indicated that the formal assessment was carried out by the controlling shareholder and a few said by a Committee of the Board. The direct involvement of the Board in the performance assessment of the CEO seems limited, certainly in majority of the cases. • Boards have the responsibilities to appraise the CEOs performance and they need to be done in a systematic way.

  7. The Effectiveness of Boards in PK Q.3) Is the Board empowered* to hire/fire the CEO?(* as opposed to rubber stamping a decision taken outside the Board)The Response: Yes 26No 27 Just over half the respondents said that their Boards are not truly empowered to hire/fire the CEO. This is invariably the case for Public Sector entities where the power is said to vest with the Prime Minister's office. It is also apparent that incase of other categories of Companies (MNCs, Family Owned), the controlling shareholder tends to exclusively exercises this power. • Ideally: !!!!!

  8. The Effectiveness of Boards in PK Q.5) Is the Board empowered* to set the CEO's compensation?(*as opposed to rubber stamping a decision taken outside the Board) The Response: Yes 36 No 18 Most Boards it seems are empowered to set the CEO's compensation. • The Companies Ordinance, 1984 and the Code of Corporate Governance issued by the SECP clearly prescribes that directors must determine compensation, but as indicated by the survey, not all Boards are fulfilling this responsibility and end up simply rubber stamping decisions taken elsewhere.

  9. The Effectiveness of Boards in PK Q.6) Does the Board engage in succession planning?The Response: Yes 22 No 31 Less than half the respondents said that their Boards engaged themselves in succession planning. A few said they were considering instituting a process. The least amount of succession planning is done in Public Sector entities. Some of the MNC Boards were also not addressing succession planning in their Boards. It was encouraging to note some of the local/family owned entities said their Boards were doing succession planning. • The law provides for appointment of CEO by the Board.

  10. The Effectiveness of Boards in PK Q.7) Is it good to separate the Chairman and CEO's position?The Response: Yes 49 No 04The overwhelming view of the respondents is that it is good to separate the two positions. The few ‘No’ respondents were mainly persons who currently occupy both positions in their organizations. • All over the world separation of the two have outweighed the benefits compared with the negative factors.

  11. The Effectiveness of Boards in PK Q.9) Should non-executive directors receive compensation?The Response: Yes 46 No 07 An overwhelming majority support compensating non-executive directors. The support for compensation was consistent across all categories of companies. The compensation level indicated ranged from Rs.5000 to Rs.200,000 per meeting. The most frequently cited compensation was between Rs.10,000 to Rs.50,000 per meeting. There were also suggestions that compensation should be linked to the daily salary rate of the company's CEO or what the company would pay for the time of a senior consultant in their industry. • BS!!!!

  12. The Effectiveness of Boards in PK Q.10) Is the Board involved in setting Vision/Mission/Values?And debating and approving key business strategies The Response: Yes 45 No 08The vast majority of respondents said that their Boards did involve themselves insetting the Vision/Mission/Value statements of their companies • Ideally this is what they are suppose to do!!!!

  13. The Effectiveness of Boards in PK • Similarly questions relating to investment decisions and dividend/bonuses are freely debated and decided in the boards were answered by more than 95% participants of the survey in the positive way. • The law requires all investments above Rs.1 million to be approved by the Board. There is, therefore, an opportunity provided by law for the Board to consider investment proposals and to debate them. The investment decision may on occasions not satisfy all directors but the review process has to be followed. Majority shareholder directors or the majority shareholder nominated CEO must make the effort to explain major investment proposals to all members of the Board to seek their understanding and support. This seems to be happening in the vast majority of cases and should happen in all cases.

  14. The Effectiveness of Boards in PK • Again regarding the question of interaction of the non-executive directors with the company employees, majority of the respondents replied in the positive which is a good omen. However next questions brings out the contrast: • Q.16) Does the Board formally assess the Human Resource Stock andemployee morale?The Response: Yes 10 No 42 • It is often said that people are our most valuable assets. Clearly the response, shown above is not sufficiently reassuring that the Board is engaged in this important activity. Managing people no doubt is a primary responsibility of management but the Board must assure itself that these assets are being diligently cared for. Boards that have a Human Resource Committee are much better placed to focus on this aspect. Some respondents indicated that their Board Audit Committee also oversees this area

  15. The Effectiveness of Boards in PK Q.19) Are Board meetings of sufficient frequency/duration to complete thecompany's business?The Response: Yes 51 No 01 Almost every respondent said ‘Yes’. Data gathered on the frequency and duration of meetings showed the following:(i) On average the Boards are meeting 6 times per year and the average durationof a meeting is 4 hours. This means, on average, Boards are formally in session for 24 hours in a year to attend to the company's business and to fulfill the obligation of directors.(ii) Public Sector Boards are meeting much more frequently (Average 10+times/year) and for longer duration (average 6 hours). By deduction therefore all other Boards in this survey meet fewer than 6 times per year and for much shorter durations (<3 hours). Some Boards indicated that they meet for as little as 8 hours per year i.e. 4 meetings of 2 hours each • BS!!! • Is it possible to decide about strategies in such a short time?????

  16. The Effectiveness of Boards in PK Q.21) How is conflict of interest between major shareholder and thecompany handled?Many of the respondents said they had not experienced a conflict of interest situation between a major shareholder and the company. Others said that such issues are debated at the Board and resolved through discussion. Yet others said that in such situations the majority shareholder gets his way. Khan, Z Comments:It is indeed good to note majority of respondents saying that they do not encounter such issues on their Boards. My own experience on various Boards has been that in conflict of interest situations, the majority shareholder pushes his way through and his representatives on the Board remain more concerned of their sponsors interest than of the company. In an ideal situation when a conflict of interest situation arises, the majority shareholder should state or plead his case and then abstain from being a part of the decision process of the Board. In other words the decision making should be left to the independent and minority shareholder directors to decide what is in the best interest of the company.

  17. The Effectiveness of Boards in PK • Other questions asked were about the effectiveness of the board committees and Value addition of the board – which have been positively replied by the respondents. This shows that the majority of the companies are having a very good board system. However, this may have some bias from the respondents as well. • Similarly, the respondents have shown confidence in the actions of the SECP in CG issues, however, it has been pointed out that it is a continuous process and SECP and companies, both still need to do a lot more.

  18. The Effectiveness of Boards in PK Directors’ suggestions regarding further effectiveness of the Boards: 1) The need for more independent directors on the Board who are professionals and who have relevant experience of the industry. 2) Instituting a self evaluation process of the Board's performance. Some also suggested evaluation of independent directors. 3) Better orientation and training of directors on their role, responsibility, code of governance etc. 4) Making effective use of Board Committees. More committees in some cases, better attendance by directors and more empowerment of the committees were the supporting comments.

  19. The Effectiveness of Boards in PK 5) Less interference from the government in the Board's decision making and in management of the company was desired by several respondents of the Public Sector entities. 6) Limiting the number of directorships a person can hold. The idea is to get the directors to be more regular in attendance of Board meetings and to make themselves available to be members of their Board committees. The current limit of 10 directorships is considered excessive. Some suggest the limit beset at 4-5 directorships. 7) Greater focus by the Board on strategy as opposed to getting involved in management issues.

  20. The Effectiveness of Boards in PK References: • Thanks to Institute of Chartered Accountants of Pakistan (ICAP) and Zaffar A Khan • http://www.icap.org.pk/mies/mies6.pdf

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