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Committees of a Committees of a BoardBoard

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Why Committees?Why Committees?

To get impartial and professional To get impartial and professional inputinput

Reduce work load for directorsReduce work load for directors More detailed workMore detailed work Specialization principleSpecialization principle

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Common CommitteesCommon Committees

Audit CommitteeAudit Committee Nominations CommitteeNominations Committee Remunerations CommitteeRemunerations Committee Executive CommitteeExecutive Committee Ad hoc CommitteesAd hoc Committees

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Audit CommitteeAudit Committee

MembershipMembership All NEDs, preferably all INEDsAll NEDs, preferably all INEDs Chairman must be INEDChairman must be INED Can take external help if neededCan take external help if needed US law says at least one member of US law says at least one member of

AC must be a finance / accounting AC must be a finance / accounting professionalprofessional

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Responsibilities of ACResponsibilities of AC

Oversight of financial reporting and Oversight of financial reporting and accounting policies/systemsaccounting policies/systems

Liaison with external and internal Liaison with external and internal auditorauditor

Ensuring regulatory compliance for Ensuring regulatory compliance for disclosuresdisclosures

Monitoring internal controls Monitoring internal controls Oversight of risk management Oversight of risk management

processesprocesses

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Audit Committee IssuesAudit Committee Issues

CompositionComposition All NEDsAll NEDs Majority INEDsMajority INEDs Chairman of the company not a memberChairman of the company not a member

DurationDuration Frequency of meetingsFrequency of meetings

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Nature of Audit Nature of Audit CommitteeCommittee

It is not an executive body.It is not an executive body. It does not draw up accounting policy; It does not draw up accounting policy;

its role is only to review and oversee.its role is only to review and oversee. It does not perform internal or external It does not perform internal or external

audit.audit. It reports to the Board, not It reports to the Board, not

management.management. It issues advice to management, not It issues advice to management, not

directives.directives. Committee can go to shareholdersCommittee can go to shareholders

Best Practices for Audit Best Practices for Audit ComCom

The prime tool of good corporate The prime tool of good corporate governance.governance.

Managing its agenda: Managing its agenda: annual, quarterly programs annual, quarterly programs Formal meetings with executivesFormal meetings with executives Formal meetings with external auditorFormal meetings with external auditor

Frequency of interaction with Frequency of interaction with managementmanagement

Regular self evaluationRegular self evaluation8

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External Auditor & External Auditor & Audit CommitteeAudit Committee

Negotiations with external auditorNegotiations with external auditor Verifies suitability of the external auditorVerifies suitability of the external auditor Their resources, qualifications, independence, Their resources, qualifications, independence,

past recordpast record Ensures independenceEnsures independence

Linkages, non-audit workLinkages, non-audit work Rotation, former employees of audit firmRotation, former employees of audit firm Audit firm’s performance, ethicsAudit firm’s performance, ethics

Discusses report / management letter Discusses report / management letter with external auditorwith external auditor

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Situation in Pakistan on Situation in Pakistan on ACsACs

Law is being followed in words but Law is being followed in words but often not in spirit.often not in spirit.

Often EDs are members of ACOften EDs are members of AC In some cases, company chairman or In some cases, company chairman or

CFO is made chairman of ACCFO is made chairman of AC Since the whole board is subservient, Since the whole board is subservient,

no hope for truly independent no hope for truly independent members of audit committee.members of audit committee.

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Nominations CommitteeNominations Committee

ResponsibilitiesResponsibilities Formalization of process of finding Formalization of process of finding

good directors & senior managersgood directors & senior managers Evaluation of directors’ individual Evaluation of directors’ individual

performanceperformance Succession planningSuccession planning Board size and structureBoard size and structure

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Remunerations Remunerations CommitteeCommittee

Drawing up Remuneration Policy for Drawing up Remuneration Policy for directors and senior managersdirectors and senior managers

Ensuring that directors are not paid Ensuring that directors are not paid any additional fee or given consultancy any additional fee or given consultancy assignments etc.assignments etc.

Oversight of bonus computation for Oversight of bonus computation for directors directors

Ensuring the proper disclosure is made Ensuring the proper disclosure is made in respect of directors’ remunerationin respect of directors’ remuneration

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Basis of RemunerationBasis of Remuneration

Fixed salary onlyFixed salary only Bonus onlyBonus only CombinationCombination

Balance between the componentsBalance between the components Too high fixed salary as bad as too high Too high fixed salary as bad as too high

bonusbonus

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Fixed SalaryFixed Salary

Promotes lethargy; status quo Promotes lethargy; status quo mentalitymentality

Dampens entrepreneurial initiativeDampens entrepreneurial initiative Increases staff turnoverIncreases staff turnover

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Performance Based PayPerformance Based Pay

BonusesBonuses CashCash Free sharesFree shares Share optionsShare options

Basis of computationBasis of computation Base figure: sales, profit, market share, etcBase figure: sales, profit, market share, etc Short term viewShort term view Long term view: gradually increasing Long term view: gradually increasing

bonusbonus

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Balance in ComponentsBalance in Components

What is the right mix?What is the right mix? Too high salary promotes lack of Too high salary promotes lack of

initiativeinitiative Too high bonus promotes:Too high bonus promotes:

short term viewshort term view Dishonesty; greed; fudgingDishonesty; greed; fudging

CCG recommends 1 : 2 ratioCCG recommends 1 : 2 ratio

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Situation in PakistanSituation in Pakistan

Executive directors do not run the Executive directors do not run the board, controlling shareholder does.board, controlling shareholder does.

Directors remuneration treated as Directors remuneration treated as employee salary issue.employee salary issue.

NEDs not paid any thing at all NEDs not paid any thing at all except attendance fee.except attendance fee.

Nom-Rem committees do not exist in Nom-Rem committees do not exist in PakistanPakistan

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Executive CommitteeExecutive Committee

Some decisions can only be taken by Some decisions can only be taken by board but board cannot meet too board but board cannot meet too frequently; hence executive committee frequently; hence executive committee with delegated powers.with delegated powers.

Often has EDs and some INEDs as Often has EDs and some INEDs as membersmembers

Meets frequently to dispose off routine Meets frequently to dispose off routine executive mattersexecutive matters

Gives detailed report to board on more Gives detailed report to board on more important mattersimportant matters

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Executive Committee - 2Executive Committee - 2

Reduces work for the boardReduces work for the board Provides specialized input to the Provides specialized input to the

boardboard Provides extra layer of checkingProvides extra layer of checking Has more time to investigate and Has more time to investigate and

give more detailed reportgive more detailed report Serves as lower tier of a unitary Serves as lower tier of a unitary

board.board.

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Ad hoc CommitteesAd hoc Committees

Created for a situation, purpose or Created for a situation, purpose or time and liquidated afterwardstime and liquidated afterwards

Project Committee; Investigation Project Committee; Investigation Committee, Negotiations Committee, Committee, Negotiations Committee, etc.etc.

Terms of reference decided by the Terms of reference decided by the board on need basis.board on need basis.

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Thank youThank you