INDEPENDENT directors on boards of numerous companies in which the public has a stake, are paid fat fees for attending board meetings. Some corporates hand over a cheque of as much as $3000 after conclusion of each meeting to the independent director.

If 10 meetings were to be held in a year, the outsider on the board would make a cool 30,000 dollars, or something around Rs3 million. It raises an unsettling question: could that kind of cash compromise the ‘independence’ of independent directors?

As the stock market has grown, with the market capitalisation now well above the Rs2-trillion mark, from a few hundred billions some years ago, big profitable companies, in almost all sectors, have grown tremendously in terms of size and financial strength.

In consequence, their share values have risen and ‘prior’ or ‘insider’ information about material facts, such as dividends and future plans could enrich those who are armed with such knowledge. The company boards are obviously the most well-informed. It could be one reason that more shareholders are now jostling for a place on company boards than any time before. Unlike the past when the number of contestants matched the number of vacant seats and all who stood were declared elected, increasing number of corporates are now having to go through the process of voting, counting and announcing the names of successful candidates.

Most lone contestants as independent directors are unlikely to make to the company boards unless backed by majority shareholders. But there could be other reasons for the recent surge in shareholders' interest for membership of board of directors that draws up company policies. One may be the Code of Corporate Governance that has given teeth to the board.

The 'powers of directors' were listed under section 196 of the Companies Ordinance, 1984. But as the law was ancient, some of the powers such as, “to make calls on shareholders in respect of money unpaid on their shares and to issue debentures”, hardly have relevance with the modern times.

With regard to the independent directors, corporate regulators point to several improvements in the refreshed Code of Corporate Governance promulgated in 2012 over the earlier Code of 2002. While the previous Code encourages a minimum of one independent director on the board of a listed company, the new law has made it mandatory to place one independent director, while preference is for one-third of the total number of the directors on the board to be independent directors.

Secondly, corporate monitors claim that “very scanty criteria for assessment of independence” was provided in the previous Code while the 2012 law “has substantially expanded the criteria”. Section 2(e) of the code defines 'independent director', as a person who is not connected or does not have any other relationship with the public sector company, its associated companies, subsidiaries, holding company or directors.

The test of independence principally emanates from the fact whether such person can be reasonably perceived as being able to exercise independent judgment without being subservient to any form of conflict of interest. The company shall disclose in the annual report non-executive, executive and independent directors.

Many corporate experts say that though well-intentioned, the idea of ‘independent directors’ seems impractical. “Minority shareholders are disorganised and election of candidates through cumulative voting by stockholders is a difficult task”, says one expert, adding that “the sitting sponsor directors, on the other hand, must be perfectly pleased to put puppets on the board, though that would clearly be seen as 'conflict of interest'.” But for the sponsoring directors, it would be best to ‘purchase’ independent directors’ silence.

The Code of Corporate Governance (CCG) 2012 among other things proposes that every company “shall elect the chairman of the board from amongst the independent directors so as to achieve an appropriate balance of power, increase accountability and improve the board's capacity for exercising independent judgment.”

A former head of the Securities and Exchange Commission of Pakistan (SECP) said that in theory at least the appointment of chairman of the board from truly empowered independent directors would forestall many corporate wrongdoings, one being the unjustified inter-corporate financing. “For every listed company there are on average eight subsidiaries and non-listed smaller entities to which such companies extend loans and advances and in most case, such loans are written off a year or two later”, he says.

Investors in public listed companies have forever looked forward to those happy prospects of separation of ownership from management, empowerment of independent directors and safeguarding interest of small shareholders. But most corporate law experts say that if the boards — in case of family-owned companies — admit an independent director to the board and also show generosity in payment of meeting fees, there is little chance of a board room brawl initiated by the independent director, even where such director believes some decisions taken by the board to be against company interests.

The corporate regulators have curbed a disagreeable board practice of holding unlimited meetings outside the country. There is perhaps a need to examine the extent of independence of independent directors on company boards and the fairness of fees paid to them for attending board meetings.


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