Recent developments have raised questions about the selection and appointment of board members and the man who sits at the head of the table

The Companies Act 2017 lays out the factors that make a person ineligible to become a director. Disqualifications include: a minor or a person of unsound mind; a person who has applied to be adjudicated as an insolvent and his application is pending; an undischarged insolvent and a person who has been convicted by a court of law for an offense involving moral turpitude.

A person who has been debarred from holding such office under any provisions of the Companies Act; he who is lacking fiduciary behaviour and a declaration to this effect has been made by the court at any time during the preceding five years; and a person who has been declared by a court as a defaulter in repayment of a loan to a financial institution, is also considered ineligible.

Most listed companies pay directors up to Rs100,000 in fees for attending a single meeting, which makes a tidy annual package of around Rs500,000 even if a company holds just the five mandatory meetings in a year

All listed companies are required to hold a meeting for the election of directors. Provision 161 of the Companies Act states that a director shall hold office for three years unless they resign or vacate office earlier due to a fresh election, are disqualified from being a director, or otherwise cease to hold office. According to Section 154, the minimum number of directors of a listed company shall not be less than seven.

Section 166 of the Companies Act describes the manner of the selection of independent directors, stating that an independent director to be appointed under any law, rules, regulations or code shall be selected from a databank containing names, addresses and qualifications of persons who are eligible and willing to act as an independent director, maintained by any institute, body or association, as may be notified by the commission.

The section goes on to state that the responsibility for exercising due diligence before selecting a person from the databank as an independent director shall lie with the company or the government, as the case may be, making the appointment. An independent director is one who can reasonably be perceived as being able to exercise independent business judgement without being subservient to any form of conflict of interest.

The stakeholders’ interest in occupying the seat on the board of a listed company is understandable. But why must independent directors agree to go through all that hassle in order to secure a seat on the board? There could be many reasons, but one that ostensibly lures qualified people to make their way into the boardroom is that it is a lucrative affair.

In contrast with the pittance that the directors were paid as fees for attending meetings several years ago, big companies, particularly banks, pay mouth-watering amounts in meeting fees to their board members.

Many former chairmen and CEOs of large firms are known to clamour for entry into corporate boardrooms. Most listed companies disburse between Rs40,000 and Rs100,000 as fees to directors for attending a single meeting, which makes a tidy annual package of around Rs200,000 to Rs500,000 even if a company holds just the five mandatory meetings in a year.

But that is petty cash compared to what corporate bosses of banks, particularly foreign ones, disburse to non-executive directors. In many cases, the aggregate sum runs up to Rs5m-15m, not including the actual disbursements of hotel and travelling bills. Foreign banks remunerate in dollars.

And that is not all. Every listed company is required by law to maintain a set of committees, such as the audit committee and human resource and remuneration committee. Directors also get paid for attending committee meetings.

Until orders were passed by the State Bank of Pakistan restraining banks to hold not more than a couple of board meetings outside the country, board members had the opportunity to mix business with pleasure by setting the venue in Paris, Cairo, Bahamas and other exotic locations.

But many directors disagree with the view that corporate fat cats are licking a good deal of milk and honey. A former president of a local bank argued that it was all very well to fairly remunerate highly seasoned and reputable people who lend or rent their time and reputation to the board as non-executive directors. One company secretary affirmed: “Non-executive directors are paid to accept fiduciary responsibilities.”

The Pakistan Stock Exchange (PSX) now pays Rs50,000 to a director for attending a board meeting. Several years ago when it offered nothing, reputable persons with knowledge and skill declined the regulators’ request to accept the post of non-member directors.

But there are also other reasons to vie for a place on the PSX board. A veteran broker said that as the PSX has matured to join the MSCI Emerging Market and the market capitalisation has grown to Rs8 trillion from billions a couple of decades ago, it is now considered a matter of prestige to hold a place on the bourse’s board.

Published in Dawn, The Business and Finance Weekly, July 16th, 2018