the effectiveness of corporate boards in...

MIES-6Members’ Information & Education Series

The Effectiveness ofCorporate Boards in PakistanAn assessment and some views

Members’ Information & Education Series MIES-6

THE INSTITUTE OF CHARTEREDACCOUNTANTS OF PAKISTAN

The Effectiveness ofCorporate Boards in Pakistan

An assessment and some views

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About the Author

Mr. Zaffar A. Khan graduated as a mechanical engineer from the University of Peshawarin 1967 and soon thereafter joined Esso Pakistan Fertilizer Company which later becomeExxon Chemical and following an employee led buyout became Engro Chemical. Heretired from the company in 2004 after serving for 35 years, the last 6 of which were asthe President and CEO of the Company. During the early years of his career he servedExxon for 10 years in Hong Kong, USA and Singapore in the petrochemicals business. Hehas done an Advanced Management Program from the University of Hawaii and hasattended short courses at INSEAD and the Harvard Business School.

Mr. Zaffar Khan has had the opportunity to serve on a number of diverse Boards some ofwhich he has also Chaired. These include Engro Chemical, Engro Vopak, Engro Asahi,United Bank, PTML (Ufone), Sui Southern Gas, PTCL, Pakistan Steel, Unilever Pakistan,Pakistan Centre for Philanthropy, Aga Khan-Education Board and more recently the KarachiStock Exchange.

Mr. Zaffar Khan was elected President of the Overseas Chamber of Commerce and Industryand has served on several advisory committees of the Government of Pakistan notably theEconomic Advisory Board, Pays and Pensions Committee and the Committee thatrecommended NEQS and implementation of the national environmental policy.

Mr. Zaffar Khan is a recipient of Sitara-e-Imtiaz.

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Foreword 05

Introduction 07

Questions, Responses and Comments 09

Conclusion 26

Appendix – I Names of Respondents 27

Appendix – II Boards of the Respondents 28

Contents

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Foreword

I am pleased to present the sixth booklet under the Members’ Information andEducation Series (MIES-6) on the subject of “The Effectiveness of Corporate Boardsin Pakistan”.

The booklet is based on a survey containing 26 questions relating to board ofdirectors, their power, functions, performance, duties and responsibilities, theirinvolvement in the entity’s vision/mission/values, key business strategies, theirremuneration, etc. The survey was conducted by Mr. Zaffar A. Khan past Presidentand CEO of Engro Chemical Pakistan Limited.

The Cadbury Committee on the Financial Aspects of Corporate Governance headedby Sir Adrian Cadbury recognized the importance of board of directors with thefollowing words:-

“Corporate governance is the system by which companies are directed andcontrolled. Boards of directors are responsible for the governance of theircompanies. The shareholders’ role in governance is to appoint the directors andthe auditors and to satisfy themselves that an appropriate governance structureis in place. The responsibilities of the directors include setting the company’sstrategic aims, providing the leadership to put them into effect, supervising themanagement of the business and reporting to shareholders on their stewardship.The Board’s actions are subject to laws, regulations and the shareholders ingeneral meeting.”

The key responsibility for the administration and performance of a company’saffairs remains with the directors. Since a company does not have a physicalpresence, it may only act with the assistance of natural persons. The directors ofa company act on behalf of a company as its agents, and they comprise the boardwhich has the power and duty to manage the affairs of the company. The Codeof Corporate Governance issued by SECP clearly states the importance of boardof directors, its functions, responsibilities and all the matters which should be dealtwith by the board of directors of a listed company. I am sure the survey and theComments of Mr. Khan would give some insight into the practice prevailing inmajority of the well known companies.

There is an acute shortage of direct input from various stakeholders on such matters.The approach used by Mr. Zaffar A. Khan who is also a Director of Pakistan Instituteof Corporate Governance is unique in character and is expected to represent theinception of practical and interactive approach in tackling such issues.


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I express my sincere gratitude to Mr. Zaffar A. Khan, for allowing the Institute toreprint the survey. I am thankful to the Directorate of Technical Services and theeditorial team at ICAP for their assistance and support in publishing it.

Syed Mohammad Shabbar ZaidiPresident

August 31, 2006

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Introduction

The words "Corporate Governance" they say was coined in the 1970's and startedto be used widely in the decade of the 1990’s. The major high profile corporatefailures in the developed economies brought urgency and a much greater focuson Corporate Governance (CG). The various codes of CG that are in existencearound the world are a product of this endeavor. Pakistan too, took an early start,and by March 2002 had framed a code which has started to impact the waycompanies 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 aredifferences in the corporate equity structure and the monitoring and enforcementcapabilities between developed and emerging economies which requiresconsideration. Whereas, differences in approach to governance may be justifiedona case to case basis, the underlying objective of good governance is universal.

There are many definitions of CG. A good many of them are focused on howcompanies should be directed and controlled so as to prevent pilferage,misrepresentation, insufficient disclosure, selective siphoning, favoritism etc. Thereare also definitions which address efficiency, value addition, transparency, socialresponsibility etc. based on high ethical behavior. All of the considerations statedare important and collectively they make for good CG. A brief but simple definitionthat I wish to offer is as follows: "Good corporate governance is about maximizingthe wealth of a company in a legitimate way and distributing it in an equitableway."

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 thecontrolling shareholder. An enlightened controlling shareholder who valuesefficiency, fair play and long term sustainability will encourage the formation ofan effective board. This is particularly important in emerging countries where thecontrolling share holder invariably has a dominant majority and often the influenceto play above the rules. The controlling shareholder could be the government, amultinational or a family. In either case, if the principles of good CG are notfollowed, the outcome is likely to be equally unsatisfactory.

Pakistan's corporate sector over the past few years has done well in terms ofgrowing its business and earnings. Fortunately, also during this period, there hasbeen no major corporate fiasco and shareholders have been well rewarded as canbe gauged from share prices on the stock markets. The role played by good CGin this achievement though not quantified, or researched, should not be overlooked.There is considerable global literature available on governance but there is limitedPakistan specific material. This survey though brief in scope, takes a snap shot ofwhat are the practices prevailing in majority of the well known companies ofPakistan. Along with sharing the results of the survey, I have taken the liberty to


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offer comments based on my experience of serving on several private and publicsector Boards. My comments, are of course, open to debate, as we chart our coursefor the future.

The design of the study is simple. It comprises of 26 questions aimed to probe theeffectiveness of corporate Boards in Pakistan. I selected 40 well known listedcompanies from the three broad categories of companies operating in the countrynamely, Public Sector, Multinational (MNC) and Private Local/Family Ownedcompanies. I attempted to solicit feedback from 2 directors on each Board whowere either the Chairman, CEO or an independent director of these companies.The response came from 54 persons who were serving on 35 different Boards.The names of the persons who responded are listed in Appendix-1 and the namesof the Companies on whose Boards they serve are mentioned in Appendix 2. I amextremely grateful to these persons for sharing their views.

In closing, I remain optimistic that the momentum of the past few years in raisingthe standards of CG in Pakistan will continue, which in turn will make our corporatesector more vibrant, appreciated and respected by all stakeholders including thesociety at large I hope this publication will serve as a stimulant.

Zaffar A. Khan

April 10, 2006

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Questions, Responses and Comments

Q.I) Does the Board assess its own performance?

The response: Yes 05No 48Blank 01

The overwhelming response is ‘No’. The few ‘Yes’ responses had contradictions,as other directors on the same Board responded with a ‘No’ to the question. Somerespondents indicated that they had an informal process of assessment.

My Comments: The overall response is not surprising. Boards assessing their ownperformance collectively as a group or of individual directors has not been formallypracticed even by vast majority of Boards in developed countries. However, thereis a growing interest in instituting processes that would allow this to happen. Therewas interest indicated by some of the respondents in this survey also. The objectiveof this exercise would be to improve the output and effectiveness of the Board.Various methodologies could be considered to undertake this assessment. Forexample, the Board could appoint one of its own directors or an independentconsultant (say a Business School professor) to periodically assess the collectivedynamics of the Board by talking to the directors and feeding back the collectiveassessment to the full Board with suggestions for improvement.

Q.2) Is the CEO formally appraised each year?

The response: Yes 27No 25Blank 02

Slightly more than half the respondents said the performance of the CEO wasformally assessed. The response was fairly similar between the three broad categoriesof companies in Pakistan i.e. Public Sector, Multinationals and predominantlyLocal/Family owned businesses. Several of the ‘Yes’ respondents indicated thatthe formal assessment was carried out by the controlling shareholder and a fewsaid by a Committee of the Board. The direct involvement of the Board in theperformance assessment of the CEO seems limited, certainly in majority of thecases.

My Comments: The purpose of the CEO appraisal is to have in place an objectiveprocedure to motivate, reward, guide and/or caution the person most responsibleto manage the affairs of the Company. Boards most often delegate substantialpowers to the CEO and rely upon him/her to effectively execute the policies andobjectives set forth by the Board. The absence of an appraisal process can reduceaccountability and the focus on the Company's mission. Boards that do not involvethemselves in the appraisal weaken themselves and should not be surprised if theCEO looks elsewhere for guidance.


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It is my sense that most CEOs will appreciate an objective and merit basedperformance assessment system. Further, if such a system is applied well at thevery top it will percolate down to lower tiers and make merit based performanceassessment system a part of the corporate culture.

It is extremely important that Boards when undertaking this task take measures toprotect the confidentiality of this exercise. In case the Board has executive directorsthey should be excluded from the process or the task should be entrusted to aBoard Committee of non-executive directors.

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 27Blank 01

Just over half the respondents said that their Boards are not truly empowered tohire/fire the CEO. This is invariably the case for Public Sector entities where thepower 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 controllingshareholder tends to exclusively exercises this power.

My Comments: One would expect that for a major decision such as hiring or firingof a CEO, consultation between directors would take place and the decision wouldbe approved by 3/4th of the directors in case of removal of a CEO and by majorityin case of appointment as provided in Company law. This by definition wouldmean that the appointment or a change of CEO cannot happen without the supportof the controlling shareholder whose voting power is often well represented onthe Board. In cases where this process is not followed and where the minorityshareholder and independent directors are not provided the opportunity to makean input, the authority of the Board stands undermined. Even the perceived absenceof this power is detrimental. What this means in practical terms is that the CEOis encouraged to look to the controlling shareholder for guidance and job securityinstead of the Board. This arrangement can weaken the governance structureespecially if the controlling shareholder is not enlightened and/or sensitive to theneeds of the other stakeholders.

Q.4) Does the Board formally review appraisals of positions reporting tothe CEO?


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More than half the respondents said that their Boards do not involve themselveswith the performance appraisal of the senior management of the company. Onclose examination of the Yes respondents there were a few instances where theresponse of two directors serving on the same Board was different about thepractice that they follow. It appears that if the system is tested for robustness manyof the ‘Yes’ responses would be found to be borderline. Public Sector and MNCrespondent provided bulk of the ‘No’ responses.

My Comments: The basic idea to have the appraisal of CEO by the Board or aBoard Committee is to: (a) give the directors a good sense of how the top teamof the company is performing (b) to ensure objectivity and fairness by reviewingthe integrity of the process being followed by the CEO (c) to bring in an elementof multiple assessment; and (d) to ac t as a court of appeal on the rare occasionthat the reportee is seriously aggrieved with the assessment. In some cases particularlythe MNCs the controlling shareholder is involved in the appraisal process of thesenior executives. In such cases requirements (b), (c) and (d) stated above do getaddressed but if the overall outcome is not shared with the local Board or itsdesignated committee, it limits the effectiveness of the Board.

Q.5) Is the Board empowered* to set the CEO's compensation?(*as opposed to rubber stamping a decision taken outside the Board)


Most Boards it seems are empowered to set the CEO's compensation. Theempowerment indicated by Family Owned Boards seems much more than whatPublic Sector and MNC Boards indicated. However, it is to be noted that relativeto the power to hire/fire or undertake performance assessment of CEOs, manymore Boards felt they were empowered to set compensation.

My Comments: The Companies Ordinance, 1984 and the Code of CorporateGovernance issued by the SECP clearly prescribes that directors mustdetermine compensation, but as indicated by the survey, not all Boards arefulfilling this responsibility and end up simply rubber stamping decisionstaken elsewhere.

Boards must be able to compensate their CEOs consistent with their viewof the CEOs performance. Boards which are unable to actively influencecompensation often get on the defensive with the CEO and cause negativeenergy to be generated. The CEO is the principal person through whom theBoard gets its policies implemented and objectives achieved. It must, therefore,be able to set compensation which is often an important means of impactingbehavioral change and the Board should be able to use this tool to furtherits governance of the company.


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Q.6) Does the Board engage in succession planning?


Less than half the respondents said that their Boards engaged themselves insuccession 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 intheir Boards. It was encouraging to note some of the local/family owned entitiessaid their Boards were doing succession planning.

My Comments: The law provides for appointment of CEO by the Board.However, in the absence of Boards involvement in succession planning, thechances are that when the time comes, Boards simply endorse the nomineeof the controlling shareholder.

Planning and developing future leadership is crucial for the long term andsustained success of a company. For a fair and reliable system it is importantfor the Board or a Board Committee to oversee this activity and demand anannual review. In certain instances this activity could also be performed bythe controlling shareholder. However, in such cases the Board should be takeninto confidence and their buy-in secured. Well established systems for successionplanning can be motivational for high performance/high potential employeeswho aspire for progression based on merit and a known criterion. It is mybelief that if the formation of a Board Human Resource Committee is mademandatory in the Code of Corporate Governance, succession planning activitywill become much more wide spread in the corporations of Pakistan.

Q.7) Is it good to separate the Chairman and CEO's position?


The overwhelming view of the respondents is that it is good to separate thetwo positions. The few ‘No’ respondents were mainly persons who currentlyoccupy both positions in their organizations. The argument in favor of combiningthe positions is that it provides a unified command, avoids confusion on whois incharge and enables expeditious decision making. Some respondentsmentioned that the answer could vary from company to company dependingupon who is at the helm of affairs in the subject company.

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My Comments: I believe it is extremely beneficial to separate the leadershipof management from the leadership of the Board. Separation enables a moredisciplined approach to governance in terms of openness, debate andaccountability. Increasingly the positions are being separated across the worldthough there is still a sizeable number of US companies who continue tocombine the positions. However, even in the US the concept of a lead directoris increasingly being adopted whereby some duties of the CEO cum Chairmanare taken over by such a director. Separation of the position is not withoutcons. For the arrangement to succeed it is extremely important that the Boardsclearly spell out the role of the Chairman and the CEO. Ambiguity or over lappingof authority and responsibility could cause a turf battle or finger pointing in theevent of difficult or failed situations. This must be avoided.

Q.8) How are vacancies on the Board filled?

The Response: The respondents mostly indicated that vacancies that arise are filledby nominations made by the majority shareholder. In cases where there are morethan one major shareholder the vacancy is filled by the shareholder whose nomineecaused the vacancy. Some indicated that the Chairman and/or the CEO proposenames which are then considered by the Board and approved for appointment.In case of Public Sector, the nomination is conveyed to the Board by the governmentwho then simply accept the nomination.

In situations where the election of directors is due, if the number of nomineesexceed the number of approved positions, an election is held as per provisionsof law. Here most often the controlling shareholder puts forth a full slate to coverall the approved director positions on the Board.

My Comments: Shareholders clearly have the right to put forward their nomineesand there is a well defined process for election in case the nominations exceedthe approved strength. A Board that is well balanced in terms of background anddiverse experience of its members certainly adds strength to the deliberations andquality of decisions made by it. It is therefore in the interest of the shareholder toconsider not only the individual capability of the director but also the collectiveskill pool of the Board. This opportunity is particularly available to the controllingshareholder. It is my view that it would be a good practice to consult the Chairmanand the CEO to benefit from their experience of the skill sets required to maketheir Board effective. The nominating authority would do well to also consider theavailability of their nominee to not only attend Board meetings but to also beavailable to be a member of one of more of the Board Committees. There is nopoint in having high profile names on the Board who cannot attend meetings dueto their other preoccupations. Having one or two independent directors withrelevant experience of the industry in the company's line of business is usuallyextremely beneficial.


Q.9) Should non-executive directors receive compensation?


An overwhelming majority support compensating non-executive directors. Thefew respondents who felt compensation was not warranted were CEO's. Thesupport for compensation was consistent across all categories of companies. Thecompensation 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 permeeting. There were also suggestions that compensation should be linked to thedaily salary rate of the company's CEO or what the company would pay for thetime of a senior consultant in their industry. Many said compensation should belinked to the time spent by the directors. A few suggested monthly payment butthe vast majority linked it to meeting attendance.

My Comments: There is little doubt that many who serve on Boards as nonexecutive (especially independent) directors do so for the honour/prestige or tomake a contribution by way of a payback to society or simply to stay engaged.However, it is a responsibility that cannot be taken lightly and today's corporationsand the new governance standards demand greater time, diligence, knowledgeand accountability. Compensation can certainly help in upping the expectationof performance from directors. The level of compensation must not however, betaken to levels that the director loses his independence and/or feels obliged toplay along with those appointing him. Directors on most developed country Boardsreceive compensation consistent with the above stated principles though there areexamples of some overly paid or underpaid directors.

The idea of setting compensation at levels that tie in on pro rata time with theCEO's salary or that of a senior consultant has merit. The linkage could also bemade with the compensation level of executive directors of that company. To methis seems appropriate. In this arrangement it would be prudent to estimate thedirector's time by taking into consideration meeting time, meeting preparationtime and travel time. Non-executive directors who serve on Board appointedCommittees should be compensated in a similar manner. The time spent on theBoard or a Board Committee should be treated at par.

Aside from considering appropriate compensation, Boards and particularly CEOsshould look for ways to keep the knowledge base of non-executive directorscurrent. This could be achieved by encouraging participation in seminars andworkshops or simply by keeping the external directors on certain mailing lists thatare relevant for the company's business. Well informed and motivated directorscan only help to improve the effectiveness of the Board.

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In addition, to encourage independent directors to serve on Boards, the companyshould provide liability insurance cover to directors to protect them in case oflitigation related to their functioning on the Board.

Q.10) Is the Board involved in setting Vision/Mission/Values?


The vast majority of respondents said that their Boards did involve themselves insetting the Vision/Mission/Value statements of their companies. The few who saidtheir Board was not involved indicated that they were either asked to rubber stampwhat was given to them by the controlling shareholder or that their Boards merelycompleted a formality without truly engaging the directors.

My Comments: It is important that the Vision/Mission/Values adopted by a companyhas ownership of the Board. If the Board engages its directors in the process ofestablishing the statements, the sense of ownership will be much stronger. In anycase, relative to a few years ago, many more Boards and directors are engagedwith this process or atleast have supported the Vision/Mission/Value statementsplaced before them. This should bring greater unity of thought in the Board on thebroader goals and the manner in which the pursuit of the goals should be made.

Q.11) Is the Board involved with debating and approving key businessstrategies?


The response is fairly similar to the previous question and the ‘No’ responses arealso mostly from the same respondents who said ‘No’ in Q-10. It has been pointedout by some that in the case of global companies (MNCs) the key business strategiesare formulated on a worldwide bases and as such these have to be followed bythe Pakistan affiliate which, therefore, limits the ability of the local Boards toimpact in this area.

My Comments: Setting key business strategies is an important function of Boards.A Board that does not concern itself with strategy is not fulfilling its expectedmandate. However, this does not mean that globally formulated strategies of theprincipal shareholder should not be adopted by the local Boards. It would in factstrengthen the local Boards if the global partner explained and got the buy-in ofthe local partners in adopting the global strategies. The minority shareholder andindependent directors should engage themselves constructively in the strategydialogue and in the event of differing view points after a debate, respect the majority


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view. The same principle applies to companies that are predominantly governmentowned or family owned.

Q.12) Are investment decisions freely debated and then decided?


One would expect that the response to this question would have been a 100%‘Yes’. However, some respondents indicated that these decisions are taken in the"Head Office".

My Comments: The law requires all investments above Rs.1 million to be approvedby the Board. There is, therefore, an opportunity provided by law for the Boardto consider investment proposals and to debate them. The investment decisionmay on occasions not satisfy all directors but the review process has to be followed.Majority shareholder directors or the majority shareholder nominated CEO mustmake the effort to explain major investment proposals to all members of the Boardto seek their understanding and support. This seems to be happening in the vastmajority of cases and should happen in all cases.

Q.13) Are dividend/bonus decisions freely debated and then decided?


There was near unanimity that this important function is performed by the Board.The one negative response was at variance with the response of another directoron the same board.

My Comments: It is indeed reassuring to see Boards playing their due role inmaking determinations which are of utmost importance to the shareholders. Hereagain, the proposal for dividend and / or bonus may come from any director orthe management but must get the support of the majority on the Board to becomeactionable.

Q.14) Are non executive directors given opportunities to interact withemployees?


A sizeable number of respondents said that the non-executive directors got tointeract with the employees of the company. However, many conveyed the sensethat this occurred at the Board or Board Committee meetings where senioremployees are invited to make presentations. Whereas it is good practice to expose

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senior employees to the Board members, the question was broader. It was whetherthe non-executive directors are provided an opportunity by the management tointeract in a business and social setting with a wider cross section of the organization.Some respondents felt such interactions would be counter productive and wouldundermine the CEO or the senior management team.

My Comments: Non-executive directors that do interact with a cross section ofthe employees develop a better feel for the organization, its culture, strengths andweaknesses. This understanding should position them to be more effective asdirectors and they could team-up much better with the CEO and other executivedirectors in dealing with both the issues and opportunities. It would be desirablethat such interaction opportunities are structured and with the full knowledge ofmanagement. An additional benefit of such interaction could be for the directorsto reinforce the key messages that management has been conveying and to beinspirational. Seasoned directors would understand that such interactions shouldnot be allowed to be used to play politics or to promote a personal vested interest.

Q.15) Does the Board have any retreat meetings?


The vast majority said that they do not have retreat meetings. The few ‘Yes’responses were from a diverse category of companies. The retreat in some caseswere held at the Company's factory and in other cases it was a normal meetingheld in another city. Most respondents did not offer any comment on retreatmeetings but a few expressed their support as they felt it was useful for the directors.

My Comments: Having well thought out retreat meetings can bring about severalbenefits. These meetings usually are meant to get the directors together in relaxedsettings where they can spend time together in an informal environment withreduced external business distractions. The social aspect of this get-together isgiven importance as it helps the directors to get to know each other better, leadingto improved team work on the Board. Retreat meetings that are done well canstimulate creativity and are a good forum to address organizational challenges,strategy and long term goals. These meetings also provide an excellent opportunityfor the directors to interact with senior management and other budding talentwithin the company. Management who get invited to such forums find it motivationaland a good opportunity to share their views on the company and its future prospectswith the directors. Retreat meetings are fairly common in the developed economies.

Q.16) Does the Board formally assess the Human Resource Stock andemployee morale?



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The vast majority have said that their Board does not formally engage in assessingthe Human Resource capital of the company or its well being. Some indicated thatthis matter was dealt with informally or indirectly by their Board or was beingdealt with by the Board Human Resource Committee. Some were candid in sayingthat they expected these matters to be dealt with by management.

My Comments: It is often said that people are our most valuable assets. Clearlythe response, shown above is not sufficiently reassuring that the Board is engagedin this important activity. Managing people no doubt is a primary responsibilityof management but the Board must assure itself that these assets are being diligentlycared for. Boards that have a Human Resource Committee are much better placedto focus on this aspect. Some respondents indicated that their Board Audit Committeealso oversees this area. This to me does not seem a satisfactory arrangement.Looking after the human resource of the company should go much beyond asecondary or a cursory review.

Q.17) Does the Board have a formal Corporate Social Responsibility (CSR)policy?


The response showed that most MNCs have a Board’s approved CSR policy whereasmany public sector entities do not. The other local/family owned companies wereevenly divided. Several of the ‘No’ respondents said that they were consideringadopting a CSR policy.

My Comments: It is encouraging to note the trend whereby increasingly Boardsrealize the value of having a CSR policy to encourage greater and proper involvementof their companies in this area. Today, stakeholders and society at large who arealso stakeholders expect companies to be not only socially responsible but alsoto be concerned corporate citizens. Compliance with law, payment of due taxes,respect for the environment etc. are all minimum expectations. Increasingly helpingthe community by way of philanthropy and sharing of know-how and managementtime are being expected. These activities if well managed can generate considerable"goodwill" for the company which adds to the company brand equity and enablesit to be more effective in pursuing its business objectives. Companies who exhibitmeaningful CSR behavior instill a sense of pride in their employees and theirfamilies which in turn helps with employee motivation and retention. Clearly wellmanaged CSR programs are in the best self interest of the company.

Q.18) Are directors on your Board sufficiently oriented to perform effectivelyas a Director?


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A overwhelming number of respondents felt that they had sufficient orientationto perform effectively as a director. The few ‘No’ responses were from public sectorrespondents.

My Comments: The high ‘Yes’ response comes as a surprise to me. My ownexperience has been that companies do not sufficiently orient their directors at thetime of joining and that learning occurs with time on the job. Orientation coveringbasic fundamentals of the company's business, the market drivers, the organizationstrengths, weaknesses, opportunities, threats etc. is either not provided or is donein a sketchy manner. Aside from that, orientation on the role of the director, hisor her fiduciary responsibility, managing the interest of the company when inconflict with the nominating shareholders’ interest etc. needs to be sufficientlyexplained. The response to some of the earlier questions indicates that not alldirectors fully appreciate their role and the empowerment provided to them bylaw. SECP's idea of setting up an Institute of Corporate Governance is an excellentone. My suggestion would be that they should develop a quality orientationprogram for directors on their basic role which should include how to handleconflict of interest situations and an understanding of the provisions of the lawand the code. It should be made mandatory for all directors who wish to serve oncompany boards in Pakistan to attend this program and get certified by the institute.Orientation that pertains to the specific business of the company will need to beprovided by the company and the chairman of the Board should ensure that thisis done in a quality manner for all new directors joining the Board.

Q.19) Are Board meetings of sufficient frequency/duration to complete thecompany's business?


Almost every respondent said ‘Yes’. Data gathered on the frequency and durationof 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 insession for 24 hours in a year to attend to the company's business and tofulfill 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 thereforeall other Boards in this survey meet fewer than 6 times per year and formuch shorter durations (<3 hours). Some Boards indicated that they meetfor as little as 8 hours per year i.e. 4 meetings of 2 hours each.


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My Comments: What is the optimum number of hours per year that the Boardshould be in a session? Is 24 hours per year enough to perform all the functionsexpected of a Board by law and by it's stakeholders i.e. approval of accounts 4times in a year, setting strategy, business targets, approving new investments etc.Clearly, there is no one answer. Each Board has to determine the length of timeit should be meeting to fulfill its obligations. Companies that are under threat orin a rapid expansion mode would need to spend more time than those operatingin a steady/static mode. It seems to me Boards that are meeting for a total of 8hours in a year would be barely doing even the minimum tasks mandated by law.On the other hand Public Sector Boards who meet for periods well above theaverage tend to involve themselves in tasks than belong to the managementfunction. Further, my experience of Public Sector Boards is that they are not ascohesive - they are more a group of individuals than a team focused on a commonmission. Consequently, it impinges on the efficiency of the Board. Also PublicSector Boards tend to be bigger (average of 12 directors versus 10 for othercategories) which requires more time to allow the directors present to express theirviews.

Q.20) Do the directors have a say in the agenda setting?


A sizeable number of respondents felt the directors have a say in the agenda settingof Board meetings.

My Comments: A good process for setting of the agenda of Board meetings wouldbe for the CEO to propose the agenda to the Chairman. The Chairman keepingin mind the importance of the agenda item, the time available and his sense of theinterest of other directors should finalize the agenda (again in consultation withthe CEO). The final call should be that of the Chairman. The process should alsoallow any other director, to propose items to be placed on the agenda. In case ofdifference of view the Chairman should seek the view of other directors to see ifthere is reasonable support to include the item for discussion in the Board meetings.The system should discourage a disgruntled director to utilize the limited time ofthe Board on an item that the majority feels is of lesser importance. However, insuch situations the chairman and/or the CEO must address the concern of thedirector by providing necessary information and explanations outside the Boardmeeting. Needless to say that an item not discussed to the satisfaction of theproposing director entitles him/her to have his views recorded in the minutes ofthe Board proceedings.

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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 interestsituation between a major shareholder and the company. Others said that suchissues are debated at the Board and resolved through discussion. Yet others saidthat in such situations the majority shareholder gets his way.

My Comments: It is indeed good to note majority of respondents saying that theydo not encounter such issues on their Boards. My own experience on variousBoards has been that in conflict of interest situations, the majority shareholderpushes his way through and his representatives on the Board remain more concernedof their sponsors interest than of the company. In an ideal situation when a conflictof interest situation arises, the majority shareholder should state or plead his caseand then abstain from being a part of the decision process of the Board. In otherwords the decision making should be left to the independent and minorityshareholder directors to decide what is in the best interest of the company.Enlightened controlling shareholders will encourage such a decision making processand overtime enhance the image and the value of the company. It will also addto their reputation as sponsors of the company.

Q.22) Are Board Committees playing a useful role?


All the Boards had atleast one Board Committee (i.e. Audit Committee) whereassome had as many as eight. More than half the respondent Boards have 3 or moreCommittees. The most frequently cited committees other than the Audit Committeewere Human Resource (or Remuneration) Committee and Finance Committee.

My Comments: Committees are a useful way to leverage the work of a Board.Committees made up of directors with subject matter experience and independencecan bring a sharper focus and enable management of the company to improvetheir proposals which are to be considered by the full Board. As indicated inQuestion 19, the time available to Boards is limited. Therefore, Boards that empowertheir Committees to take certain decisions or take a limited review of the Committee'srecommendation, do significantly increase the collective output of the Board. Forthis to work, Boards need to show confidence in their Committees, must composethe Committees well and must acknowledge and appreciate the work of theCommittee members when so deserved. As mentioned in Q 9, the time of directorsspent on committee work should be compensated at par with the time spent bythem on the main Board.

Aside from the Audit Committee which is mandated by regulation, companiesshould seriously consider a Human Resource Committee, the scope of which

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should go beyond remuneration. Such a Committee will bring focus on managementof the human resource assets often said to be the most valuable asset of thecompany.

Beyond the above two committees, each Board should determine what other BoardCommittees would be helpful - it should be need driven.

Q.23) In terms of value addition how do you rate your Board?

The Response:

Good Satisfactory Marginal Poor Blank

Public Sector 6 6 4 - -

MNCs 5 7 - 1 1

Family owned/other 15 8 1 - -

26 21 5 1 1

A sizeable 87% of the respondents rated their Boards in the Good to Satisfactoryrange. This is an impressive outcome even after considering that the companiesincluded in this survey are the leading listed companies of Pakistan. Most of theresponses in the ‘Marginal’ to ‘Poor’ category came from Public Sector respondents.

My Comments: The overall assessment is better than I had expected. It is possiblethat the result carries a bias because the bulk of the respondents are CEOs andChairman. A larger selection of independent/minority shareholder directors mayperhaps have yielded a less flattering outcome.

Q.24) Is SECP proactive enough in encouraging good governance?


A sizeable number of the respondents seem satisfied with the role of SECP inpromoting good corporate governance. The No responses came mainly fromindependent directors and public sector entities.

My Comments: It is a much more effective SECP that oversees the corporate worldof Pakistan today compared to a few years earlier. However, as the overall surveyresponse indicates, there is room to do more to increase the satisfaction level.SECP needs to address governance issues of public sector enterprises. Consultationwith a cross section of independent non-executive directors should also beconsidered to bring about greater appreciation of their concerns. SECP should

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create a platform (Institute of Corporate Governance) where such matters canbediscussed in a constructive manner. Greater vigor in penalizing wrong doersand greater appreciation of those practicing good governance would also lift theoverall national standards of governance.

Q.25) Are you satisfied with SECP's Code of Corporate Governance?


A fair degree of satisfaction has been expressed on the Code by the respondents.Nevertheless, there are respondents who want the Code revisited andchanges/improvements made in light of the experience of working with this Code.

My Comments: SECP a few years ago did a commendable job in producing a codein consultation with various stakeholders (notably ICAP). The task, however, is notcomplete as best practices in the field of governance the world over continue toevolve. The process of development of the code needs to be continued in Pakistanas well. A consultative process with the stakeholders should be repeated, localexperience together with global best practices should be examined and whereneeded, changes incorporated to further strengthen the Code.

Q. 26) List your top three suggestions to make your Board more effective?

The Response: Many suggestions were tabled by the respondents on what is neededto improve the effectiveness of their Boards. The suggestions that got mentionedare listed below and are stated in order of most mentions:-

1) The need for more independent directors on the Board who are professionalsand who have relevant experience of the industry.

2) Instituting a self evaluation process of the Board's performance. Some alsosuggested evaluation of independent directors.

3) Better orientation and training of directors on their role, responsibility, codeof governance etc.

4) Making effective use of Board Committees. More committees in some cases,better attendance by directors and more empowerment of the committeeswere the supporting comments.

5) Less interference from the government in the Board's decision making andin management of the company was desired by several respondents of thePublic Sector entities.


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6) Limiting the number of directorships a person can hold. The idea is to get thedirectors to be more regular in attendance of Board meetings and to makethemselves available to be members of their Board committees. The currentlimit 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 inmanagement issues.

There were several other suggestions as well but which got fewer mentions. Thesewere, creating opportunities for interaction between the non-executive directorsand the employees and other key stakeholders of the company, succession planning,holding of retreat meetings, involvement of the Board in CEO appraisal, compensationand appointment, better compensation to non-executive directors and improvementin quality of working papers given to directors for Board meetings.

My Comments: I too concur with the above mentioned suggestions and wish toadd or elaborate on a few points.

1) Controlling shareholders who invite experienced independent directors tojoin their Boards do themselves and the company good. Whilst not necessarilylosing the voting control, they get to benefit by being challenged, hearingalternate points of view or solutions, getting, frank feedback and often receivingreassuring support for the proposed strategies. The challenge is to findexperienced, knowledgeable and independent directors. Pakistan needs toexpand the size of this pool. The newly setup Pakistan Institute of CorporateGovernance can play an important role in identifying, training and findingplacement for such persons. I believe head hunting firms could also play arole in offering their services to identify suitable independent directors.

2) Boards should be encouraged to set up Human Resource Committees to bringgreater focus on the company's most precious resource — its people. Thiscould perhaps be achieved by giving the HR Committee the same status asthe Board Audit Committee in the Code of Corporate Governance.

3) I believe it would be useful to revisit the Code of Corporate Governance thatwas developed a few years ago. The Code has certainly served a very usefulpurpose in increasing awareness and bringing change in Corporate / Boardpractices of many companies. The experience of working with the currentCode plus evolution in this field around the world could be used to bringfurther improvement. As was done the last time, the proposed changes shouldbe handled through a process

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of consultation with the stakeholders. Further, the Regulators should considerhow those who comply with the Code should be recognized and those whodisregard it visibly penalized.

4) The OECD has put together governance guidelines pertaining to State OwnedEnterprises. Many of the issues and proposed guidelines are applicable toPakistan. This is an excellent document and it should be given due considerationby our government/regulator. Pakistan's Public Sector entities are keen thisshould happen.


Conclusion

A summation of the responses to the 26 questions posed to the practitioners onsome of Pakistan's major corporate Boards suggests that there is appreciablerecognition and a desire to conform to the principles of good corporate governance.This is indeed encouraging. In actual practice, even among our leading companies,there are gaps and in some cases the practice is superficial. When you take intoaccount the lesser known companies of the country, one could surmise that theoverall corporate universe requires a fair bit more to be done. There are somesuggestions listed under Question 26 to enhance the effectiveness of Boards. Theseshould be considered.

The effectiveness of Corporate Boards cannot be enhanced through prescriptionalone. It has to be a combination of factors. The most important being, anappreciation on the part of the most influential stakeholders (i.e. controllingshareholder, the Board and CEO) that good governance is the best insurance forsustained success. This has to come from within. However, good intentions alonewill not be enough. All stakeholders i.e. the minority shareholders, independentdirectors, customers, employees must play their role as must also the regulator.The capital markets and society must be more demanding and discerning to bringabout the full transformation. In so doing, care should be taken not to politicizeBoards. Personal ego and agenda must not be allowed to get in the way of thecollective best interest of the corporation. For in the end, good corporate governanceis about maximizing the wealth of a company in a legitimate way and distributingit in an equitable way.

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APPENDIX - I

NAMES OF RESPONDENTS

Mr. Nadeem AbdullahMr. Munawar Baseer AhmadSyed Naseem Ahmad (2 inputs)Syed Babar AliSyed Hyder AliMr. Parvez AliMr. Sultan AllanaMr. Azam AlizaiMr. Javaid AnwarMr. M. Veqar ArifMr. Salman BurneyMr. Farrokh CaptainMr. Kamal ChinoyMr. Towfiq H. ChinoyMr. Rafique DawoodMr. Shahzada DawoodMr. Amer FaruqueMr. Azam FaruqueMr. Ali HabibMr. Arif HabibMr. Munnawar HamidMr. Faud Azim HashmiSyed Zahoor HassanMr. M.J. JafferMr. Shafqat Ali Shah JamoteMr. Pervaiz KausarMr. Aslam KhaliqMr. Junaid I. KhanMr. Sikandar Mustafa KhanMr. Tariq KirmaniMr. A. Rashid LoneMr. R. Zakir MahmoodMr. Waqar A. MalikMr. M. Aftab ManzoorMr. Kamran Y. MirzaMr. Arshad NasarMr. Sanaullah Qureshi (2 inputs)Mr. J. R. RahimMr. Farooq Rahmatullah

Syed Ali RazaSyed Munsif RazaMr. RaziuddinMr. Tariq SaigolMr. Nizam ShahMr. Aitzaz ShahbazMr. Saquib H. ShiraziMr. Yusuf H. ShiraziMr. Jalees Ahmed SiddiquiMr. Sohail Wajahat H. SiddiquiMr. William TohMr. Asad UmarMr. Osman Khalid Waheed The Effectiveness of

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APPENDIX - II

BOARDS OF THE RESPONDENTS(Public Listed Companies)

1. Abbot Laboratories (Pak) Ltd.2. Al-Ghazi Tractors Ltd.3. Arif Habib Securities Ltd.4. Atlas Honda Ltd.5. BOC Pakistan Ltd.6. Cherat Papersack Ltd.7. Clariant Pakistan Ltd.8. Dawood Hercules Chemicals Ltd.9. Engro Chemical Pakistan Ltd.10.Ferozsons Laboratories Ltd.11.Glaxo Smithkline Pakistan Ltd.12.Habib Bank Ltd. *13.Hub Power Company Ltd.14. ICI Pakistan Ltd.15. International Industries Ltd.16. Indus Motor Company Ltd.17.Millat Tractors Ltd.18.Maple Leaf Cement Factory Ltd.19.Muslim Commercial Bank Ltd.20.National Bank of Pakistan21.National Refinery Ltd.22.Oil and Gas Development Company Ltd.23.Packages Ltd.24.Pakistan Cables Ltd.25.Pakistan International Airlines26.Pakistan Petroleum Ltd.27.Pakistan State Oil Ltd.28.Pakistan Telecommunications Company Ltd.29.Pakistan Tobacco Company Ltd.30.Sapphire Textile Mills Ltd.31.Security Papers Ltd.32.Shell Pakistan Ltd.33.Siemens Pakistan Engineering Company Ltd.34.Sui Northern Gas Company Ltd.35.Sui Southern Gas Company Ltd.

* Not a public listed company

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