1. Board of Directors:
Corporate governance

2. Learning Objectives
Examine the duties and liabilities that come with directorship.
Overview of the role of the board and the requirement for independence.
Review the basic operations of the board.
Examine the legal responsibilities that come with directorship and consider the potential liability directors face when they fail to uphold their duties.

3. Board as the principle instrument of governance
Shareholders own the company but do not run it
Managers run the company but do not own it
The bridge – Board
Good board = better governance & vice versa

4. Entrepreneurial Leadership
Profit, but:
Regard to social responsibility
Prudence
Risk management
Strategic

5. Types of ineffective boards
Rubber stamp
Good old boys or country club
Paper board
Trophy board

6. Powers of a board Absolute or maximum powers
Whatever the company is authorized to do through its MoA (Memorandum of Association), the board can do it on behalf of the company
In Pk (Pakistan), the board draws powers from:
The company’s constitution
The law – Companies Act
Resolutions passed by shareholders
Prevailing industry practices

7. Delegations of powers by the board
Possible…
E.g., signing of loan documents by CEO or CFO
But should come with establishment of the system to keep the things in the right way

8. Board Responsibilities
A document titled “Principles of Corporate Governance”, the Organization for Economic Cooperation and Development (OECD) lays out a vision of the responsibilities of the board:
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

9. Board Responsibilities (Con’t)
From this we can conclude that the board is suppose to perform two functions:
Advisory
Oversight
In an advisory capacity:
The board consults with management regarding the strategic and operational direction of the company.
Attention is paid to decisions that balance risk and reward.
Board members are (should be) selected based on the skill and expertise they offer for this purpose, including previous experience in a relevant industry or function.

10. Board Responsibilities (Con’t)
In an oversight capacity:
The board is expected to monitor management and ensure that it is acting diligently in the interests of shareholders.
The board hires and fires the chief executive officer, measures corporate performance, evaluates management contribution to performance, and awards compensation.
It also oversees legal and regulatory compliance, including the audit process, reporting requirements for publicly traded companies, and industry-specific regulations.
In fulfilling these responsibilities, the board often relies on the advice of legal counsel and other paid professionals, such as external auditors, executive recruiters, compensation consultants, investment bankers, and tax advisors.
Effective board members are individuals that can capably complete both advisory and oversight responsibilities.

11. Board Responsibilities (Con’t)
The responsibilities of directors are separate and distinct from those of management.
Directors are expected to advise on corporate strategy but do not develop the strategy.
They are expected to ensure the integrity of the financial statements but do not prepare the statements themselves.
The board is not an extension of management. It is a governing body elected to represent the interests of shareholders.

12. Tools available to a board
Its members composition
And independence of the board
Committees
External help
Government intervention

13. Responsibilities of a Board
Acting in the best interest of the company
Accountability to the owners (formally and informally)
Statutory duties
Keeping records
Reporting to SECP
Stock exchange reports

14. Responsibilities of a Board (cont’d)
Fiduciary or trusteeship duties
Board is the trustee
Good faith
Avoid conflict of interest
Borrowing powers of the board
Board has the unlimited powers to borrow for their companies
Problem for the investors and CG proponents
SBP – all directors must extend personal guarantees for the loans

15. Board Independence
In order to carry out the two functions discussed earlier – independence of the board members has been suggested.
Regulatory requirement also suggests that the director is free from conflict of interest, that might compromise his efforts
For example; NYSE requires that listed companies have a majority of independent directors
Similarly the audit, compensation and monitoring and governance committees should be wholly independent
Pk… (ref to CG Code 2012)
However, independence can be affected by several factors
An informal study by Harvard’s professors suggest that relevant experience is more important than independence

16. Balance on the board Balance of representation
Balance of talents/abilities
Balance of power
Balance of attitudes

17. Board structures According to composition Tenure of the members
Unitary or two tiered
Tenure of the members
Common tenured & staggered

18. Causes of absence of balance in a board
Unbalanced boards
Majority of boards are based on family/friends
Independent directors are not independent
No talent in the boards
Not efforts to extend boards influence

19. Operations of the Board
Chairman’s role
Presiding officer
Sets the agenda, schedule meeting, coordinating of the committees (Coms:)
Very important role
Traditionally CEO used to hold chairmanship
The dual role – its problems
Nowadays, Non-Executive Directors assume this responsibility
Sarbanes Oxley Act (SOX 2002) view
Rejected the idea of independent directors chairman
Concept of lead director

20. Operations of the Board
Board’s actions take place by either arranging meetings or written consents but in any case they are done through voting.
Independent directors are also suppose to meet at least once a year to discuss the different issues pertaining to the affairs of the company though no actions take place (this is requirement under S-OX 2002)

21. Operations of the Board
Boards should meet in every quarter
The meetings should be properly communicated and recorded

22. Operations of the Board
Issues at the boards to be discussed
Annual plans, cash flows, strategic plans
Periodic reports
Internal audit reports, joint ventures, agreements etc
And many others as given on pp83 and refer to the CG 2012….

23. Operations of the Board
Directors spend around 20 Hrs/Month on board matters
Typical meeting of the directors range from 2-6 Hr and more
Board and its committees
Full board
Standing or ad hoc committees
Assigned directors on qualifications and experience
Audit, compensation, governance, nominating committees
Essentially composed of independent directors under SOX 2002

24. Cadbury Code Regular and frequent meetings
Effective control over the company
Important decisions should not be taken by executives, but referred to Board.
Definition of which decisions should be referred to Board.
Good board room practices.

25. Good Boardroom Practice
Background information must be provided to the directors.
All directors must get the same information and same time to study it.
Directors should be able to participate.
Certain matters, even if delegate-able should not be delegated to the executive.

26. Good Boardroom Practice
Formalization of meetings’ conduct – avoid unwritten practices.
Formal induction of new directors
Post-facto approvals should be discouraged.
Proper use of board committees.

27. Directors Duration
Traditionally, directors are elected annually to one year terms.
In some companies, directors are elected to two- or three-year terms, with a subset of directors standing for reelection each year.
Companies that follow this protocol are referred to as having staggered (or classified) boards.
Under a typical staggered board, directors are elected to three- year terms, with one-third of the board standing for reelection every three years.
As a result, it is not possible for the board to be ousted in a single year; two election cycles are needed for a majority of the board to turn over.

28. Directors Duration (Cont’d)
In recent years, however, the trend has reversed. Companies have come under fire from shareholder activists and proxy advisory firms who believe that staggered board elections insulate directors from shareholder influence.
Institutional investors, particularly public pension plans, often have policies of opposing staggered boards.
Some public companies have responded to shareholder pressure by de-staggering their boards.
In 2009, about 50 percent of publicly traded companies had staggered boards, down from 63 percent in 2002.

29. Directors Elections
In most companies, the board of directors is elected by shareholders on a one-share, one-vote basis.
For example, if there are nine seats on a board, a shareholder with 100 shares can cast 100 votes for each of the nine people nominated. Shareholders who do not want to vote for one or all of the nominees can withhold votes for selected individuals.
Directors win an election by obtaining a plurality of votes, meaning that the directors who receive the most votes win, regardless of whether they receive a majority of votes.
Alternative options are: dual class voting; majority voting & cumulative voting
In an uncontested election, a director is elected as long as he or she receives at least one vote.

30. Removal of Directors
Once elected, directors generally serve their full term—one year for annually elected boards and three years for staggered boards.
Shareholders may be able to prevent directors from being re- elected at the next election by withholding votes. Their ability to do so, however, depends on the voting procedures in place.
They can also replace directors at the next election if a competing slate of nominees is put up for election.
Finally, unless a company’s certificate of incorporation provides otherwise, shareholders may vote to “remove” a director between meetings.
That said, shareholder power to remove a director is generally limited.

31. Legal Obligations of Directors
Fiduciary responsibilities
to act in the interest of the company
Means that director is expected to act in the interest of shareholders
A duty of care
A duty of loyalty
A duty of candor
Legal responsibilities as defined by the regulators/government

32. Legal Obligations of Directors (Cont’d)

33. Results of a survey Issues discussed by the directors include:
Profitability and shareholders value
Future growth
Risk management
Development of human capital
Cultural development
Executive compensation
Regulatory compliance
Strategic planning
Competition
Succession planning