1. 1 Committees of a Board

2. 2 Why Committees? To get impartial and professional input To get impartial and professional input Reduce work load for directors Reduce work load for directors More detailed work More detailed work Specialization principle Specialization principle

3. 3 Common Committees Audit Committee Audit Committee Nominations Committee Nominations Committee Remunerations Committee Remunerations Committee Executive Committee Executive Committee Ad hoc Committees Ad hoc Committees

4. 4 Audit Committee Membership Membership All NEDs, preferably all INEDs All NEDs, preferably all INEDs Chairman must be INED Chairman must be INED Can take external help if needed Can take external help if needed US law says at least one member of AC must be a finance / accounting professional US law says at least one member of AC must be a finance / accounting professional

5. 5 Responsibilities of AC Oversight of financial reporting and accounting policies/systems Oversight of financial reporting and accounting policies/systems Liaison with external and internal auditor Liaison with external and internal auditor Ensuring regulatory compliance for disclosures Ensuring regulatory compliance for disclosures Monitoring internal controls Monitoring internal controls Oversight of risk management processes Oversight of risk management processes

6. 6 Audit Committee Issues Composition Composition All NEDs All NEDs Majority INEDs Majority INEDs Chairman of the company not a member Chairman of the company not a member Duration Duration Frequency of meetings Frequency of meetings

7. 7 Nature of Audit Committee It is not an executive body. It is not an executive body. It does not draw up accounting policy; its role is only to review and oversee. It does not draw up accounting policy; its role is only to review and oversee. It does not perform internal or external audit. It does not perform internal or external audit. It reports to the Board, not management. It reports to the Board, not management. It issues advice to management, not directives. It issues advice to management, not directives. Committee can go to shareholders Committee can go to shareholders

8. Best Practices for Audit Com The prime tool of good corporate governance. The prime tool of good corporate governance. Managing its agenda: Managing its agenda: annual, quarterly programs annual, quarterly programs Formal meetings with executives Formal meetings with executives Formal meetings with external auditor Formal meetings with external auditor Frequency of interaction with management Frequency of interaction with management Regular self evaluation Regular self evaluation 8

9. 9 External Auditor & Audit Committee Negotiations with external auditor Negotiations with external auditor Verifies suitability of the external auditor Verifies suitability of the external auditor Their resources, qualifications, independence, past record Their resources, qualifications, independence, past record Ensures independence Ensures independence Linkages, non-audit work Linkages, non-audit work Rotation, former employees of audit firm Rotation, former employees of audit firm Audit firm’s performance, ethics Audit firm’s performance, ethics Discusses report / management letter with external auditor Discusses report / management letter with external auditor

10. 10 Situation in Pakistan on ACs Law is being followed in words but often not in spirit. Law is being followed in words but often not in spirit. Often EDs are members of AC Often EDs are members of AC In some cases, company chairman or CFO is made chairman of AC In some cases, company chairman or CFO is made chairman of AC Since the whole board is subservient, no hope for truly independent members of audit committee. Since the whole board is subservient, no hope for truly independent members of audit committee.

11. 11 Nominations Committee Responsibilities Responsibilities Formalization of process of finding good directors & senior managers Formalization of process of finding good directors & senior managers Evaluation of directors’ individual performance Evaluation of directors’ individual performance Succession planning Succession planning Board size and structure Board size and structure

12. 12 Remunerations Committee Drawing up Remuneration Policy for directors and senior managers Drawing up Remuneration Policy for directors and senior managers Ensuring that directors are not paid any additional fee or given consultancy assignments etc. Ensuring that directors are not paid any additional fee or given consultancy assignments etc. Oversight of bonus computation for directors Oversight of bonus computation for directors Ensuring the proper disclosure is made in respect of directors’ remuneration Ensuring the proper disclosure is made in respect of directors’ remuneration

13. 13 Basis of Remuneration Fixed salary only Fixed salary only Bonus only Bonus only Combination Combination Balance between the components Balance between the components Too high fixed salary as bad as too high bonus Too high fixed salary as bad as too high bonus

14. 14 Fixed Salary Promotes lethargy; status quo mentality Promotes lethargy; status quo mentality Dampens entrepreneurial initiative Dampens entrepreneurial initiative Increases staff turnover Increases staff turnover

15. 15 Performance Based Pay Bonuses Bonuses Cash Cash Free shares Free shares Share options Share options Basis of computation Basis of computation Base figure: sales, profit, market share, etc Base figure: sales, profit, market share, etc Short term view Short term view Long term view: gradually increasing bonus Long term view: gradually increasing bonus

16. 16 Balance in Components What is the right mix? What is the right mix? Too high salary promotes lack of initiative Too high salary promotes lack of initiative Too high bonus promotes: Too high bonus promotes: short term view short term view Dishonesty; greed; fudging Dishonesty; greed; fudging CCG recommends 1 : 2 ratio CCG recommends 1 : 2 ratio

17. 17 Situation in Pakistan Executive directors do not run the board, controlling shareholder does. Executive directors do not run the board, controlling shareholder does. Directors remuneration treated as employee salary issue. Directors remuneration treated as employee salary issue. NEDs not paid any thing at all except attendance fee. NEDs not paid any thing at all except attendance fee. Nom-Rem committees do not exist in Pakistan Nom-Rem committees do not exist in Pakistan

18. 18 Executive Committee Some decisions can only be taken by board but board cannot meet too frequently; hence executive committee with delegated powers. Some decisions can only be taken by board but board cannot meet too frequently; hence executive committee with delegated powers. Often has EDs and some INEDs as members Often has EDs and some INEDs as members Meets frequently to dispose off routine executive matters Meets frequently to dispose off routine executive matters Gives detailed report to board on more important matters Gives detailed report to board on more important matters

19. 19 Executive Committee - 2 Reduces work for the board Reduces work for the board Provides specialized input to the board Provides specialized input to the board Provides extra layer of checking Provides extra layer of checking Has more time to investigate and give more detailed report Has more time to investigate and give more detailed report Serves as lower tier of a unitary board. Serves as lower tier of a unitary board.

20. 20 Ad hoc Committees Created for a situation, purpose or time and liquidated afterwards Created for a situation, purpose or time and liquidated afterwards Project Committee; Investigation Committee, Negotiations Committee, etc. Project Committee; Investigation Committee, Negotiations Committee, etc. Terms of reference decided by the board on need basis. Terms of reference decided by the board on need basis.

21. 21 Thank you