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The Directors. Individual Directors. Importance What should they have to be good directors: Suitability, ability Character Personal traits, views, attitude Willingness and ability to give time Sound judgment. Skill & Care Duty.
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Individual Directors • Importance • What should they have to be good directors: • Suitability, ability • Character • Personal traits, views, attitude • Willingness and ability to give time • Sound judgment
Skill & Care Duty • 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.
Directors’ Liability • 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
Types of Directors • Executive & Non-Executive Directors • Representative & Independent Directors • Independent Non-Executive Directors • De-facto directors • Shadow directors • Alternate directors
INEDs • 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
Preserving Independence of INEDs • 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.
How many INEDs? • 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: • 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.
Situation in Pakistan • 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.
Main Role of INED • 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.
Criticism on INEDs • 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.
Where to find INEDs? • 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.
Qualities to look for in INEDs • 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.
Directors’ Induction • Visits to key locations / facilities • Presentation by different departmental heads • Informal meetings with: • Top managers. • Major shareholders, institutional investors • Important consultants and professional associates • Formal training in CG
Register of Directors’ Interests • 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.
Directors’ Dealings with the Company • 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.
Directors’ dealing in company’s shares • Not forbidden by law. • However, note in Directors’ Interest Register. • Insider Trading • Market Abuse
Other Issues • 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.
Dominant Personality Aspect • Principal cause of CG issues • Characteristics of a dominant leader • Charismatic • Powerful • Intolerant • Often seemingly sincere • Does not nurture subordinates
Why dominant personalities fail? • 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.
Dominant Personality • 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”.
Collective Integrity • 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.
Case Studies • 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 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)
4. Develop possible solutions • 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.
Common Errors in Analyzing Case Studies • 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”
