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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