The prime source of poor corporate governance is the board room where all strategic decisions are made. Almost the entire thrust of codes or legislation on corporate governance is on board room practices.

It is believed that good corporate governance can only emerge from responsible board rooms.

This brings us to the board structure and composition. If a board is not balanced in terms of representation, talents, power and attitudes, its performance will not measure up to the standards of good corporate governance. It will fail to protect and serve the individual interest of each stakeholder and the collective interest of all stakeholders. This absence of balance in board structures is more often by design.

Balance of representation means all the stakeholders should have adequate representation on the board. With only shareholders allowed to vote in directors, and controlling shareholders stage-managing annual general meetings (AGMs) in an orchestrated manner, most companies lack a balance of representation. A small percentage of listed companies may have long-term creditors represented on the board, but the other stakeholders like employees (other than executive directors), business associates and public at large are seldom represented on the board. Neither the Companies Ordinance, nor the Articles of Association of most companies provide for any mechanism that would ensure representation of all stakeholders at a board. Sadly, the Code of Corporate Governance issued by Securities & Exchange Commission of Pakistan (SECP) also fails to address this serious lapse. As long as the election of directors remains in the hands of only one class of stakeholders, the boards will continue to perform contrary to the spirit of good corporate governance.

Balance of talents means having a blend of all the necessary talents and technical expertise needed to lead the company. This requires the presence of managerial, legal, financial, operational, social, marketing and industry-specific technical experts on the board. The argument that companies have managers who carry these skills does not hold well.

If the board does not have the talent to understand and scrutinise the proposals made by the managers, it will simply not be able to perform its basic function of control. While it is understandable (if not pardonable) that shareholders refuse to allow a balance of representation on the board, the alarming absence of balance of talents in most boards is truly surprising. This can only be attributed to the desire of controlling shareholders to have no opposition on the board.

Balance of power means having an adequate number of truly independent non-executive directors on a board who enjoy sufficient power to overturn the proposals put forward by executive or representative non-executive directors. An executive director is part of company’s management, while a non-executive director (NED) sits only on the board and takes no part in company’s day-to- day operations. Now an NED may be a representative non-executive director (RNED) or independent non-executive director (INED). A representative NED represents a particular stakeholder and acts only for the protection and furtherance of interests of that stakeholder, e.g. a director nominated by a lending institution on a debtor company’s board.

Similarly, non-executive directors nominated by majority shareholders often – and in case of Pakistan always – act only to serve the interest of that group of shareholders. An independent NED does not represent any particular stakeholder and is expected to act for the collective interest of all stakeholders. Very sadly, INEDs are totally missing from the boards of most listed companies . This means these boards do not have a balance of power. With each director representing only a particular interest, and virtually no one looking after the collective interest of all stakeholders, the quality of corporate governance is bound to suffer.

The balance of attitudes means having diversity at the board that ensures presence of a wide range of social, moral and managerial attitudes of directors. If all, or majority of, the directors are timid, complying sort of individuals with no courage to stand up to the chairman, the board will inevitably become a rubber stamp board. Similarly, if the majority of directors are radicals with no one to mitigate the impact of their adventurous spirit, the company can land into more trouble than it can handle.

A good board requires a balanced combination of people who are motivated differently: some by profit, some by caution, some by social justice, some by excellence, some by growth, some by experimentation, etc. Another aspect of attitudes is the style of handling matters: some are bold persons who insist on being fully convinced before they vote on a proposal, some believe in just going along with the majority, some only aim to protect their jobs, some simply do not care. In an ideal attitude-balanced board, all of the directors will be bold and righteous and yet excellent team players. The listed companies are far from that ideal situation.

The prime cause of lack of balance in boards is absence of sufficient number of INEDs, who have the knowledge and talents to participate meaningfully in board proceedings; an understanding of the individual interests of all stakeholders; the independence and courage to differ with the management where it is necessary; and the power to over-rule the representative directors where the collective interest of all stakeholders so demands.

Only a tiny percentage of annual reports give any information in excess of statutory minimum. A not-so-cursory look at the published list of directors of most listed companies reveals the following trends:

(a) A majority of the directors are family members or close associates of controlling shareholders; (b) Directors who are technically designated as independent non-executive directors are seldom independent. Usually only two classes of stakeholders are represented on the board: the controlling shareholders and major lenders; (c) No attention is paid to having a pool of talents at the board.

The general preference is to have well paid managers (who are subservient to the controlling stakeholder) over having competent and qualified INEDs; (d) No attempt is made to ensure that the board comes in touch with other stakeholders and learns about their preferences and interests.

Why are there no INEDs on boards of companies? One very apparent reason for absence of INEDs on boards is of course the attitude of the controlling stakeholders. However, this is not the only reason. There is a genuine dearth of well qualified and competent persons who are willing to act as INEDs.

The reasons are: non-executive directors are paid only meeting fees. Generally no salaries or perks are paid to company directors. Directors’ fees typically range between Rs500 to Rs5,000 ($7 to $70) per meeting and most companies have no more than the prescribed minimum number of meetings per annum, i.e. four. This is hardly an incentive for any professional to join a board, or to pay any real attention to what transpires at board meetings.

The law does not protect INEDs. The Companies Act treats all directors equally responsible, regardless of their role. If the executive directors choose to bring only selected information before the board on the basis of which a decision is made, all directors are held liable for its consequences. There have been a significant number of cases where SECP has ruthlessly handled INEDs in the name of bringing discipline to board proceedings. Given the paltry meeting fees and heavy potential for penalties, professionals are understandably reluctant to join company boards.

If there is only one INED (the minimum number recommended by the Code of Corporate Governance issued by SECP) on a board, he often finds himself ignored at board meetings. His comments and views are frequently omitted from board meeting minutes because “the company does not want to give an impression to the world that its board is divided”.

One of the reasons INEDs are effective in the West is the backing they receive from institutional investors who have a significant holding in the company. Quite often, institutional investors are instrumental in getting truly independent non-executive directors appointed. They then support them, listen to them and supply them with whatever information (or influence) they require to do their jobs well.

In Pakistan, institutional investors rarely make long-term investment in listed companies. Even NIT (the government sponsored mutual fund) has no formal long-term strategy in this regard. This means NEDs are nominated on the board of a company only by a financial institution that has loaned heavy amounts to the company. This immediately takes away the “independence element” from the appointment, as such directors inevitably assume the posture of representative directors.

Due to the special nature of NIT, it does nominate directors on the boards of quite a few companies. But these directors are often full time employees of NIT whose primary responsibility is not being a director. They are engaged in some law or finance related duties in NIT and are assigned the additional responsibility of being a director on some companies. These nominees rarely measure up to the standards required of independent directors.

So what can or should be done? There is an immediate need to promote, strengthen and support the INEDs. But they must be Independent NEDs. There are two aspects of this issue: first is to ensure that controlling shareholders are persuaded to elect sufficient number of truly INEDs on their boards – and the second is to ensure that there are sufficient incentives for suitably qualified and competent persons to come forward to take up the onerous responsibility of being INEDs.

The writer is Dean of Faculty of Management Sciences at Mohammad Ali Jinnah University, Islamabad