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Directors Orientation Course: Role and Duties of Directors

Directors Orientation Course: Role and Duties of Directors. Presented by Altaf Noor Ali Director, Avais Hyder Liaquat Nauman Chartered Accountants. Our purpose is to highlight the role and duties of directors of a listed company like yourself.

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Directors Orientation Course: Role and Duties of Directors

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  1. Directors Orientation Course:Role and Duties of Directors Presented by Altaf Noor Ali Director, Avais Hyder Liaquat Nauman Chartered Accountants

  2. Our purpose is to highlight the role and duties of directors of a listed company like yourself. A company is a separate legal entity created under the law. Shareholders of a company are its members who elect a Board of Directors (the “Board”). A director may be executive or non-executive. The Companies Ordinance 1984 (the “CO1984”) is the basic statute. The Code of Corporate Governance (the “Code”) is a part of listing regulation. Common law refers to cases decided by the honorable Court. Memorandum and Articles of Association (the “AOA”) are basic documents regulating the affairs of a corporate entity. Annual Report (the “AR”) Program Introduction

  3. The Board of Directors of a Company is bound to discharge certain “legal duties” under the Companies Ordinance 1984 and the Code of Corporate Governance. Add to this the relevant provisions in the Articles of Association to form a complete legal framework for directors. We shall be discussing the legal requirements first. Next, we will present an outline of Code of Conduct for Directors under the common law. Finally, we will present an “Assessment of Compliance with the Code”, with our recommendations Program

  4. Roadmap • Introduction • Role and Duties of the Board and Directors: An Overview in Context of • Companies Ordinance, 1984 • Code of Corporate Governance • Articles of Association of the Company • Conduct of Conduct (by Common Law) and Ethics for Directors • State of Compliance with the Code

  5. Speaker Introduction: Altaf Noor Ali • I am Director, Training Assignments, in Avais, Hyder, Liaquat, Nauman, Chartered Accountants. • Profile • Chartered Accountant • Licensed International Financial Analyst, US • Diploma, Islamic Banking and Insurance, UK • LL.B 2010

  6. Duties of Board of Directors Under the CO 1984, the Code, and the AOA which states. “All business of the company shall be managed by the Directors…” Article 65 Articles of Association

  7. Let us start from a standard audit report, it states: “It is the responsibility of the company’s management to establish and maintain a system of internal control, and prepare and present the above said statements in conformity with the approved accounting standards and the requirements of the Companies Ordinance, 1984”. 2008 AR 16 Auditors’ Report to the members. The statement in audit report requires revision. The board is responsible for maintaining. Every director and CFO knowingly been the cause of the default is liable to prison term upto one year, fine upto Rs. 20k, and per day fine of upto Rs. 5k. S.230 (“S” refers to section in CO1984) 1. Maintaining Books of Accounts

  8. The directors shall lay before the company in annual general meeting the audited balance sheet and profit and loss account. S.233 The penalty for violation is same as in case of failure to maintain books of accounts = imprisonment upto 1 year, fine from Rs. 20k to Rs. 50k, and per day fine of upto Rs. 5k. 2. Annual Accounts and Balance Sheet

  9. The directors shall approve, and the CEO and ATLEAST one director shall sign, the balance sheet and profit and loss account. S.241 Every director or CEO in default shall be liable for a fine not exceeding Rs. 5k. 3. Authentication of Balance Sheet

  10. The Board shall establish a system of sound internal control, which is effectively implemented at all levels within the company. Code para viii (c) Note that directors are responsible for preparation and maintenance of proper books of account. The Code extends this responsibility for establishing (and functioning) internal controls in all aspects of the business, and not simply controls on financial aspects. 4. Establishing sound system of internal control

  11. The board shall establish an Audit Committee. Code para xxx, and xxxiii The Board of every listed company shall determine the terms of reference of the Audit Committee. Regulation 37 sub-reg xiii notified on 19-1-09 by KSE requires the related party transactions to be placed before the Board of Directors and the audit committee for review and approval. 5. Establishing Audit Committee

  12. The directors shall make out and attach to every balance sheet a report with respect to the state of the company. Such report shall be signed by the Chairman or the CEO on behalf of the directors. The directors of the holding company shall also make out and attach a report with respect to the state of affairs of the group. S.236 In case of default, every director shall be responsible for For a listed company, imprisonment term which may extend upto one year and fine not less than Rs. 20k and not more than Rs. 50k and per day fine which may extend upto Rs. 5k. For any other company, imprisonment upto six months and with fine which may extend upto Rs. 10k. 6. Directors’ Report

  13. Certifications about financial statement etc. 2008 AR 08 Considerable latitude has been provided to the board in discharging its responsibilities to disclose the true and fair view. Code para xiii Matters to be included…. Significant deviations from last year with reasons. Key operating and financial data. Significant plans and decisions The number of board meeting and attendance by each director. 6A. Directors’ Report

  14. Board to meet at least once every quarter. Code para xi This is so because the board is required to approve the quarterly and final accounts. Summary of AOA Number of directors = not less than 7 nor more than 10. (a 49) Number of directors can be increase or reduce in General Meeting (a 50) Qualification shares of Rs. 5,000 i.e 500 ordinary shares (a 49) Shareholders may remove directors by Ordinary Resolution and appoint another person (a 51) 7. Meetings of the Board of Directors

  15. Minimum number of meetings = 2 (article 56) “A Director may and the Secretary on the requisition of a Director shall, at any time, summon a Meeting of the Directors” (a 57) “Questions arising at any Meeting shall be decided by a majority of votes and in case of an equality of votes the Chairman shall have a second or casting vote” (a 58) Meetings to be presided over by the Chairman (a 59) Quorum = 4 (a 60) Those directors constituting quorum competent to exercise all or any authorities granted by the Ordinance or articles. (a 61). Resolution evidence by writing under the hands of all the Directors valid without a meeting of directors (a 62) Directors may delegate powers to (a 63) Defect in appointment not to affect the validity of Board decisions (a64) 7. Proceedings of DirectorsSummary of Articles of Association (Article 56-64).

  16. To pass resolutions in its meetings to: Adopt a vision/mission statement and overall corporate strategy for the company and also formulate significant policies. Code para viii Issue shares s.86; Invest funds; To approve annual, half-yearly and other periodical accounts; To declare interim dividend; To approve bonus to employees; To write-off bad debts, advances, receivables, inventories and other assets; To compromise a law suit or to waive a claim of the company. S.196 (2) 7. Board Decisions (Resolutions)

  17. The directors recommend the dividend for approval of shareholders in general meeting. Articles of Association Regulation 74 states that the general meeting cannot exceed the amount recommended by the directors. The declaration of the Directors as to the amount of the net profits of the company shall be conclusive. 8. Recommend Dividend s.248(1)

  18. Casual vacancy. The Board may fill any casual vacancy in the office of auditors. s.252(4) The Board shall fix the remuneration of the auditors in such case. s.252(8) The Audit Committee of the Board and the Board recommends the appointment of auditor. 9. Recommend auditors for appointment at agm

  19. The remuneration of a director for performing extra services, including the holding of the office of the Chairman, shall be determined in general meeting. S.191 and a 53 “The remuneration of the Directors shall from time to time be determined by the Company in General Meeting (a 53). 10. Remuneration of Directors

  20. The board to appoint an individual to be the CEO of the company. The board shall also determine the terms and conditions of appointment of a chief executive. Violation may result in a fine which may extend upto Rs. 10,000 and debarred for a period upto three years. “The Directors shall appoint any individuals as Chief Executive…and designate such Chief Executive as Managing Director of the Company” (a 66) “Provided that the terms of appointment and remuneration of the Managing Director shall be determined by the Directors from time to time” (a 66) 10. Appoint CEO

  21. The Board may remove a ceo by a resolution passed by not less than three-fourths of the total number of directors. s.202 The shareholders may also remove a ceo by a special resolution. 10A. Remove Chief Executive Officer

  22. Any casual vacancy in the Board shall be filled up by the Board within 30 days thereof. Code para vi “… the person so appointed shall be subject to retirement at the same time as if he had become a Director on the day on which the Director in whose place he is chosen was last elected as Director” (a 54) The person so co-opted is required to be qualified in all respects. 11. Casual vacancy on Board

  23. An extra-ordinary general meeting may be called at any time by the Chairman on behalf of the Board for requiring approval of any matter to be placed in such meetings. S.159 (2) Note that a general meeting is also called by the Company Secretary on Order of the Board. Date, time and venue of the meeting is announced by the Board with the year-end results. 12. Calling of Extra Ordinary General Meeting

  24. Each listed company shall determine a closed period prior to the announcement of interim / final results and any business decision, which may materially affect the market price of its shares. Code para xxvi No director shall directly or indirectly deal in the shares of the company during the closed period. 13. Determining Closed Period

  25. 14. Related-Party Transactions Listing Regulation 37 Sub-reg (xiii a) notified on 19-1-09 • All companies registered under the CO 1984 shall place before the Board all the transactions with the related parties for review and approval. • The detail of all related party transactions shall be placed before the Audit Committee of the company. • The related party transaction not at arm’s length will also be placed separately before with justification to the board and the audit committee. • “The Board…shall approve the pricing methods for related party transactions that were made on the terms equivalent to those that prevail in arm’s length transaction only”.

  26. Specific approval of General Meeting is required by Directors to do the following: Sell, lease or otherwise dispose a sizeable part of the company Extending time for repayment of loans made to any director. Violation may result in Directors held individually and severally liable for losses or damages arising out of such action alongwith a fine that may extend upto Rs. 100k only. S. 196(3) 15. Acts Prohibited for the Board

  27. A company can only make a loan or give any guarantee or provide any security with the approval of the SECP. S.195 This can be done in respect of a director who is in the full-time employment of the Company for: Acquisition or construction of a dwelling house Medical treatment of self or dependant. 15A. Loans to Directors

  28. A company can only make an investment in any of its associated companies through special resolution. S.208 The special resolution shall indicate nature, period and amount of investment and the return on such investment. Where such investment is in the form of a loan, its return shall not be less than the borrowing cost of investing company. 15B. Investment in Associated Companies and Undertaking

  29. Chairman: Additional portfolio held by a Director… A director, as individual, on election or nomination by the Board, may also hold the position of: • Chairman, • Chief Executive Officer • Or both. • The Code clearly prefers Chairman and Chief Executive Officer to be separate individuals. • Our next section is about the Chairman. The board elects a chairman to preside over its meetings. Director Chief Executive Officer Chairman

  30. The Board of Directors shall clearly define the respective roles and responsibilities of the Chairman and Chief Executive, whether or not these offices are held by separate individuals. Code para ix The Code of Conduct is obviously referring to a written document. Role and responsibility of the Chairman and CEO

  31. To preside over general meetings (next slide) and meetings of the Directors. The chairman shall ensure that the minutes of meetings of the Board are appropriately recorded and circulated to the directors not later than 30 days thereof. Code para xii A director not satisfied that his dissenting note has been recorded properly n minutes may refer the matter to the Company Secretary. The director may require a note to be appended to the minutes, failing which he may file an objection with the SECP in the form of a statement to that effect. Chairman’s Role: Meetings of the Board

  32. The Chairman of the Board of Directors to preside as Chairman at every general meeting of the Company. S.160(3) Is it mandatory for directors to attend the annual general meeting? Presiding General Meeting

  33. Directors as Individuals Duties under CO1984 and the Code

  34. The directors, at the time of filing their consent to act as such, give a declaration that they are aware of their duties and powers under the relevant laws and the Memorandum and Articles and the listing regulations of stock exchanges in Pakistan. Note that directors declare they possess sufficient knowledge to discharge their responsibilities. Code para ii 1. Declaration at the time of filing Consent to act as Director

  35. Directors interested in any contract or arrangement to be entered into by or on behalf of the company shall disclose the nature of his concern or interest at a meeting of the directors. Director found responsible shall be liable to a fine upto Rs. 5,000. The gain so made shall be surrendered to the company. S. 214(1) The director so interested shall also abstain from discussion and voting on the contract. His presence shall not be counted for the purpose of forming a quorum. In case he votes, his vote shall be void. S. 216 2. Disclosure of Interestby individual directors and restriction on voting by interested directors

  36. Signing of “Statement of Ethics and Business Practices” is prepared and circulated by the Board annually and signed by the individual director. Code para viii Note that this is an annual requirement. Statement of Ethics and Business Practices

  37. Every director shall give notice to the company to comply with s. 220 S.221 Those found responsible will be liable to an imprisonment term which may extend upto two year and fine upto Rs. 5k. 3. Disclosure of shareholding

  38. Where any director of a listed company makes a gain by way of buying and selling of securities of the company within a period of less than six months of buying or selling such security, it shall be reported and tendered to the company. Information to be send to the Registrar and the SECP. Directors found to be in violation are liable to a fine upto Rs. 30,000 plus upto Rs.1000 per day during which the default continues. S. 224 4. Trading of securities

  39. Where any director, CEO or executive of a listed company or their spouses sell, buy or take any position, whether directly or indirectly, in shares of said listed company, he shall immediately notify in writing the Company Secretary. Applicable to individual directors and their spouses. Code para xxvi 5. Trading by Directors and their Spouses

  40. Conduct of Directors (and Ethical Framework) By Common Law

  41. Directors: As Individuals • Neither of these types of duty are well-defined, they are not codified and stem entirely from case law. • We will be distributing a specimen of “Code of Business Conduct and Ethics for Directors” . A sampling of headings: core values, conflict of interest, corporate opportunity, fair dealing, protection and proper use of Company Assets, reporting unethical or illegal behaviour, etc.

  42. “The law has refused to review the board’s business discretion but has stood against the tide of human nature and required company directors to act not in self-interest but in the interests of the company”. To act bonafide in the interests of the company Directors: Duty to Act with care and skill

  43. Duty to exercise reasonable care, skill and diligence (1) A director of a company must exercise reasonable care, skill and diligence. (2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with — (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has. S.174 Companies Act 2006 UK

  44. Directors: Fiduciary Duties

  45. Independence Duty to exercise independent judgment (1) A director of a company must exercise independent judgment. (2) This duty is not infringed by his acting— (a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or (b) in a way authorised by the company’s constitution. S. 173 of the Companies Act 2006.

  46. Duty to promote the success of the company A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company. S. 172 (1) Companies Act 2006 UK

  47. Duty not to accept benefits from third parties 176A director of a company must not accept a benefit from a third party conferred by reason of— (a) his being a director, or (b) his doing (or not doing) anything as director. • A “third party” means a person other than the company, an associated body corporate or a person acting on behalf of a company or an associated body corporate. • Benefits received by a director from a person by whom his services (as a director or otherwise) are provided to the company are not regarded as conferred by a third party. • This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflictof interest. • Any reference in this section to a conflict of interest includes a conflict of interest and duty and a conflict of duties.

  48. Duty to avoid conflicts of interest…. Extract (1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. (2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity). (3) This duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company. (4) This duty is not infringed— (a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or (b) if the matter has been authorised by the directors (s.175 Companies Act 2006 not complete)

  49. State of Compliance with Statute and Code

  50. The Code expressly mentions its preference for separation of the offices of the Chairman and CEO. There are many valid reasons for combining the offices in one. However, there is sufficient empirical evidence to suggest the benefits of separate offices and its has been attained in most corporate entities. We also recommend that the Board should consider succession. Chairman & CEO

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