Board Committees

8/3/2019 Board Committees

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Committees of aCommittees of a

BoardBoardDr Safdar A ButtDr Safdar A Butt


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Why Committees?Why Committees?

To get impartial and professionalTo get impartial and professional

inputinput

Reduce work load for directorsReduce work load for directors More detailed workMore detailed work

Specialization principleSpecialization principle


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Common CommitteesCommon Committees

Audit CommitteeAudit Committee

Nominations CommitteeNominations Committee

Remunerations CommitteeRemunerations Committee Executive CommitteeExecutive Committee

Ad hoc CommitteesAd hoc Committees


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Audit CommitteeAudit Committee

MembershipMembership

All NEDs, preferably all INEDsAll NEDs, preferably all INEDs

Chairman must be INEDChairman must be INED Can take external help if neededCan take external help if needed

US law says at least one member ofUS law says at least one member of

AC must be a finance / accountingAC must be a finance / accountingprofessionalprofessional


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Responsibilities of ACResponsibilities of AC

Oversight of financial reporting andOversight of financial reporting and

accounting policies/systemsaccounting policies/systems

Liaison with external and internalLiaison with external and internal

auditorauditor

Ensuring regulatory compliance forEnsuring regulatory compliance for

disclosuresdisclosures

Monitoring internal controlsMonitoring internal controls

Oversight of risk managementOversight of risk management

processesprocesses


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Audit Committee IssuesAudit Committee Issues

CompositionComposition All NEDsAll NEDs

Majority INEDsMajority INEDs

Chairman of the company not a memberChairman of the company not a member

DurationDuration

Frequency of meetingsFrequency of meetings


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Nature of AuditNature of Audit

CommitteeCommittee It is not an executive body.It is not an executive body. It does not draw up accountingIt does not draw up accounting

policy; its role is only to review andpolicy; its role is only to review and

oversee.oversee. It does not perform internal orIt does not perform internal or

external audit.external audit.

It reports to the Board, notIt reports to the Board, notmanagement.management.

It issues advice to management, notIt issues advice to management, not

directives.directives.


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Best Practices for AuditBest Practices for Audit

ComComThe prime tool of good corporateThe prime tool of good corporate

governance.governance.

Managing its agenda:Managing its agenda: annual, quarterly programsannual, quarterly programs

Formal meetings with executivesFormal meetings with executives

Formal meetings with external auditorFormal meetings with external auditor

Frequency of interaction withFrequency of interaction with

managementmanagement

Regular self evaluationRegular self evaluation

8


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External Auditor &External Auditor &

Audit CommitteeAudit Committee Negotiations with external auditorNegotiations with external auditor

Verifies suitability of the external auditorVerifies suitability of the external auditor

Their resources, qualifications, independence,Their resources, qualifications, independence,

past recordpast record Ensures independenceEnsures independence

Linkages, non-audit workLinkages, non-audit work

Rotation, former employees of audit firmRotation, former employees of audit firm

Audit firms performance, ethicsAudit firms performance, ethics

Discusses report / management letter withDiscusses report / management letter with

external auditorexternal auditor


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Situation in Pakistan onSituation in Pakistan on

ACsACs Law is being followed in words butLaw is being followed in words but

often not in spirit.often not in spirit.

Often EDs are members of ACOften EDs are members of AC

In some cases, company chairman orIn some cases, company chairman or

CFO is made chairman of ACCFO is made chairman of AC

Since the whole board is subservient,Since the whole board is subservient,no hope for truly independentno hope for truly independent

members of audit committee.members of audit committee.


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Nominations CommitteeNominations Committee

ResponsibilitiesResponsibilities

Formalization of process of findingFormalization of process of finding

good directors & senior managersgood directors & senior managers

Evaluation of directors individualEvaluation of directors individual

performanceperformance

Succession planningSuccession planning Board size and structureBoard size and structure


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RemunerationsRemunerations

CommitteeCommittee Drawing up Remuneration Policy forDrawing up Remuneration Policy for

directors and senior managersdirectors and senior managers

Ensuring that directors are not paidEnsuring that directors are not paid

any additional fee or givenany additional fee or given

consultancy assignments etc.consultancy assignments etc.

Oversight of bonus computation forOversight of bonus computation for

directorsdirectors

Ensuring the proper disclosure isEnsuring the proper disclosure is

made in respect of directorsmade in respect of directors

remunerationremuneration


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Basis of RemunerationBasis of Remuneration

Fixed salary onlyFixed salary only

Bonus onlyBonus only

CombinationCombination Balance between the componentsBalance between the components

Too high fixed salary as bad as too highToo high fixed salary as bad as too high

bonusbonus


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Fixed SalaryFixed Salary

Promotes lethargy; status quoPromotes lethargy; status quo

mentalitymentality

Dampens entrepreneurial initiativeDampens entrepreneurial initiative

Increases staff turnoverIncreases staff turnover


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Performance Based PayPerformance Based Pay

BonusesBonuses CashCash

Free sharesFree shares

Share optionsShare options

Basis of computationBasis of computation Base figure: sales, profit, market share,Base figure: sales, profit, market share,

etcetc

Short term viewShort term view

Long term view: gradually increasingLong term view: gradually increasing

bonusbonus


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Balance in ComponentsBalance in Components

What is the right mix?What is the right mix?

Too high salary promotes lack ofToo high salary promotes lack of

initiativeinitiative

Too high bonus promotes:Too high bonus promotes: short term viewshort term view

Dishonesty; greed; fudgingDishonesty; greed; fudging

CCG recommends 1 : 2 ratioCCG recommends 1 : 2 ratio


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Situation in PakistanSituation in Pakistan

Executive directors do not run theExecutive directors do not run the

board, controlling shareholder does.board, controlling shareholder does.

Directors remuneration treated asDirectors remuneration treated as

employee salary issue.employee salary issue.

NEDs not paid any thing at all exceptNEDs not paid any thing at all except

attendance fee.attendance fee.

Nom-Rem committees do not exist inNom-Rem committees do not exist in

PakistanPakistan


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Executive CommitteeExecutive Committee

Some decisions can only be taken bySome decisions can only be taken by

board but board cannot meet tooboard but board cannot meet too

frequently; hence executivefrequently; hence executive

committee with delegated powers.committee with delegated powers. Often has EDs and some INEDs asOften has EDs and some INEDs as

membersmembers

Meets frequently to dispose offMeets frequently to dispose off

routine executive mattersroutine executive matters

Gives detailed report to board onGives detailed report to board on

more important mattersmore important matters


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Executive Committee - 2Executive Committee - 2

Reduces work for the boardReduces work for the board

Provides specialized input to theProvides specialized input to the

boardboard

Provides extra layer of checkingProvides extra layer of checking

Has more time to investigate andHas more time to investigate and

give more detailed reportgive more detailed report Serves as lower tier of a unitaryServes as lower tier of a unitary

board.board.


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Ad hoc CommitteesAd hoc Committees

Created for a situation, purpose orCreated for a situation, purpose or

time and liquidated afterwardstime and liquidated afterwards

Project Committee; InvestigationProject Committee; Investigation

Committee, Negotiations Committee,Committee, Negotiations Committee,

etc.etc.

Terms of reference decided by theTerms of reference decided by the

board on need basis.board on need basis.


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Thank youThank you

Dr S A ButtDr S A Butt

Documents

Board Committees