The boardroom conundrum

October 21, 2019

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The corporate heads and shareholders are embroiled in a fiery debate over the composition of the board of directors of a listed company. The selection and appointment of independent directors, the determination of fit and proper criteria, the mouth-watering meeting fees and fiduciary duties of men who have no direct interest in the performance of companies are some of the uncomfortable questions. There also are the lingering issues of appointment of female directors on the board and allowing a member from amongst small shareholders to occupy a seat in the board rooms.

Section 154 (d) of the Companies Act 2017 stipulates the number of directors in private, unlisted and listed companies, by virtue of which a company listed on the stock exchange “shall have not less than seven directors”. The law identifies matters that render a person ineligible to become a director which range from disqualification due to an unsound mind to a convict involving moral turpitude. Provision 161 of the Companies Act states that a director shall hold office for three years. A person can hold the office of a director in not more than seven companies.

In addition to the executive directors who run the day-to-day affairs of the companies, every listed company is required by law to appoint two or one-third of the members on the board as ‘’independent directors”. The act defines an independent director as a person “who can reasonably be perceived as being able to exercise independent business judgement without being subservient to any form of conflict of interest”.

The fee for attending meetings now runs into hundreds of thousands for a single sitting against the pittance that used to be paid

Section 166 of the Companies Act mentions the maintenance of a databank of independent directors, but the responsibility of exercising due diligence before selecting a person from the databank lies with the company that makes such an appointment. The concept of a databank is not unique to the country but prevalent in the developed world.

The Institute of Directors in the United Kingdom maintains a database with a pool of 100 to 150 prospective independent directors. In July 2018, the Pakistan Institute of Corporate Gover­nance (PICG) announced that the databank of independent directors maintained by it had become operational. But for all that a company secretary, when queried, was not sure if independent directors on his company board were selected from the databank.

The general impression is that it is a hassle to secure the seat of an independent director on the board of major companies. 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. The fee for attending board meetings now runs into hundreds of thousands for a single sitting against the pittance that was paid some years back.

That could decidedly be the incentive for independent directors to jostle for a seat on the company board, but a former Commissioner at the Securities and Exchange Commission of Pakistan (SECP) said that it isn’t easy for companies to find competent and reputed people who would lend their time and reputation to be on the board.

As the regulations turn more stringent, not many seasoned ex-corporate heads are willing to accept the fiduciary responsibilities that come along with the fee envelope. A former general manager of the Pakistan Stock Exchange (PSX) Sani-e-Mahmood Khan comments: “It is a settled principle that a director should not use his position for personal gains.” He added that regulators have zero tolerance for anyone violating the code and pointed to the severance of service of ex-managing director PSX Richard Morin on the issue of conflict of interest.

A corporate lawyer based in Lahore said that after the great Enron debacle the responsibilities of corporate heads for damages to the companies have increased manifold. He mentioned that besides the auditors, the lawyers have to accept responsibilities for a slight oversight or negligence that could cause a company unforeseen losses.

He affirmed that there have been few cases of large shareholders suing directors for damages or negligence in the performance of their duties. However, he admitted that he knew of no case where the company fat cats were sentenced to jail or had to pay heavy penalties, for the reason that they always manage to wriggle out of the situation by obtaining stay orders from the courts.

Every listed company is required by law to maintain a set of committees, such as the audit committee and human resource and remuneration committee. The ex-commissioner SECP affirmed that companies exert a great deal of pressure on some of their best ex-executives and retired professionals reputed for their expertise and skill to accept the post of independent directors. The purpose is to display a greater ‘sanctity’ of the board and keep prying regulators at bay.

Women executives have been demanding greater gender inclusiveness on the boards of listed companies. A research report stated that there are just 21 female directors out of 4,000 in 559 listed companies. The argument for and against the claim of women executives being“more focused, tough and having greater efficiency and capability to deliver results” will continue.

But the Listed Companies (code of corporate governance) Regulations, 2017 in chapter II Section 7 says: “The board shall have at least one female director when it is next reconstituted not later than expiry of the current term or within the next one year from the effective date of the regulations (period starting after Dec 31, 2017) whichever is later.”A female executive in a multinational company says: “I know of no company that has as yet inducted a female director on their board in compliance with the law.”

Section 5 of the same chapter of the code specifies: “facilitation by the company for the representation of minority shareholders on the board.” The companies continue to set the issue aside knowing full well that if a member from the voiceless minority shareholders manages to enter the board room, he would prove all but a nuisance.

Published in Dawn, The Business and Finance Weekly, October, 2019