Notes: The Corporate Board – Structure and Responsibilities

Course: BBA-311 Corporate Governance

Learning Objectives

By the end of this week, you will be able to:

1. Explain the roles and responsibilities of the Board of Directors with practical examples.

2. Differentiate between Executive, Non-Executive, Independent, Shadow, De-facto, and Alternate

Directors.

3. Understand the structure, composition, and functions of key board committees (Audit, HR&R,
Nomination).

4. Apply SECP regulatory requirements to board composition and committee formation.

5. Analyze the duties, liabilities, and ethical obligations of individual directors.

6. Evaluate the Pakistani context regarding independent directors and dominant personalities

3.1 The Board of Directors: An Overview

3.1.1 What is a Board of Directors?

The Board of Directors is the highest governing body within a company. Think of it as the brain of the
organization—it decides where the company should go, sets the rules, and ensures that everything is
done correctly. The board acts as the critical bridge between:

- Shareholders (Owners): Those who have invested their money in the company.

- Management (Operators): Those who run the company on a day-to-day basis.

Why is this bridge necessary? Imagine you own a large house (the company) but you hire a property
manager to run it. You want to ensure the manager maintains the house properly, doesn't overspend,
and keeps it safe. The board is like a supervisory committee that checks on the property manager on
your behalf.

3.1.2 Why is the Board So Important?

The board's effectiveness determines the quality of corporate governance. When the board functions
well, it ensures:

| Benefit | | Explanation
| Strategic Direction | | The company moves in the right direction, not just reacting to events but
proactively planning for the future.
| Risk Oversight | | The company's assets, resources, reputation, and interests are
safeguarded from internal and external threats.
| Accountability | | Management is held responsible for its performance—good or bad.
| Stakeholder Confidence Investors trust the company, which lowers the cost of capital (borrowing
 || becomes cheaper).

In 2026, the SECP issued compliance notices to seven power sector companies (including National Grid
Company and Gujranwala Electric Power Company) for governance lapses. These companies failed to
appoint independent directors and female directors. This shows that regulatory authorities take board
composition seriously—and there are consequences for non-compliance.

3.2 Roles and Responsibilities of the Board of Directors

The board's responsibilities can be categorized into four core functions. Let's explore each one in detail
with practical examples.

3.2.1 Oversight Function (The "Watchdog" Role)

The board monitors management to ensure they act in the best interest of the company and its
shareholders. Imagine a watchdog that keeps an eye on the house while the owners are away.

Responsibility What It Means Practical Example

Approving The board reviews and If management proposes entering a new market
Strategic Plans endorses long-term strategic (e.g., expanding from textiles to renewable energy),
objectives (3-5 years) set by the board evaluates whether this makes sense
management. before giving the green light.
Monitoring Ensuring operational and The board reviews the yearly budget to ensure
Annual Plans & capital budgets align with the resources are allocated to priority areas.
Budgets overall strategy.
Engaging External Appointing independent The board selects a reputable audit firm (like
Auditors auditors to verify that financial KPMG or A.F. Ferguson) to audit the company's
statements are accurate. books annually.
Ensuring Reviewing annual reports and Before releasing the annual report, the board
Financial Integrity financial statements to scrutinizes the financials to ensure no
confirm they are accurate and misstatements.
complete.
Reviewing Major Monitoring significant If a major factory is underperforming, the board
Operations operational activities and key asks management for explanations and action
performance indicators (KPIs). plans.

3.2.2 Directional Function (The "Compass" Role)

The board sets the course for the company's future. Think of the board as the captain of a ship—they
decide the destination, not how to steer every minute.

Responsibility What It Means Practical Example

Setting Mission & Defining the company's The board of Engro Corporation sets a vision like "Be
Vision purpose, values, and long- the leading chemical and fertilizer company in South
 term aspirations. Asia by 2030."
Appointing Senior Selecting and, if necessary, When a CEO retires, the board conducts a search and
Management removing the CEO and appoints the successor.
other key executives (CFO,
Company Secretary).
Succession Ensuring there is a pipeline The board ensures that potential internal candidates
Planning of talent to fill key roles are being groomed for top positions so there's no
when vacancies arise. leadership vacuum.
Establishing Creating specialized Rather than the full board discussing audit details, the
Committees committees (Audit, HR, Audit Committee handles it and reports back.
Nomination) to handle
specific tasks efficiently.

3.2.3 Advisory Function (The "Counselor" Role)

The board provides guidance and specialized expertise to management. Imagine having a panel of
experienced advisors who can offer insights based on their diverse backgrounds.

Responsibility What It Means Practical Example

Providing Offering insights on global A board member who runs a technology company
External trends, industry shifts, and can advise management on digital transformation.
Perspective competitive dynamics.
Specialized Input Contributing expertise in A retired Supreme Court judge on the board can
areas like law, finance, advise on legal compliance issues.
international expansion, or
technology.
Mentoring Advising the CEO and senior The board chairman meets privately with the CEO
Management team on strategic decisions to offer guidance on handling a difficult negotiation.
without interfering in daily
operations.

3.2.4 Risk Management Responsibility

Under the SECP's Listed Companies (Code of Corporate Governance) Regulations, 2019, the board is
explicitly responsible for the governance of risk.

Responsibility What It Means

:--- :---
Determining Risk The board decides how much risk the company is willing to take (e.g.,
 Tolerance conservative vs. aggressive growth).
Establishing Risk Setting formal policies for identifying, measuring, and managing risks.
Policies
Annual Risk Review Conducting a systematic review of all business risks at least once a year.
Ensuring Internal Making sure management has systems in place to detect and prevent
Controls fraud, errors, and operational failures.

> SECP Requirement: The board must ensure that systems are in place to safeguard assets, resources,
reputation, and the interest of the company and shareholders.

3.3 Types of Directors

3.3.1 Executive Directors (EDs)

Definition: Full-time employees of the company who hold both a directorship and a managerial position.

Think of them as: Player-coaches. They are on the field playing (managing operations) but also in the
strategy room (board meetings).

Key Characteristics:

- Involved in day-to-day operations.

- Responsible for specific functional areas (e.g., Finance Director, Chief Operating Officer, Sales Director).

- They receive a salary, benefits, and often performance-related bonuses.

- They bring operational expertise and insider knowledge to board discussions.

Example:

- Mr. Ali is the Chief Financial Officer (CFO) of a textile company. He is also on the board as an Executive
Director. He attends board meetings to present financial reports and discuss financial strategy, but his
primary job is running the finance department daily.

SECP Restriction: Executive directors, including the CEO, shall not be more than one-third of the board.
Why? To prevent management from dominating the board. If executives control the board, there's no
independent oversight.

3.3.2 Non-Executive Directors (NEDs)

Definition: Directors who are not employees of the company and are not involved in daily management.

Think of them as: Referees. They are not playing the game but ensure the rules are followed and the
game is fair.

Key Characteristics:

- Provide independent oversight and strategic advice.

- They typically receive a flat fee (retainer) rather than a salary.

 - They bring external perspectives and diverse experience from other industries or sectors.

- They are expected to challenge executive management constructively—to ask tough questions.

Example:

- Ms. Fatima is a retired banking executive. She serves as a Non-Executive Director on the board of a
pharmaceutical company. She doesn't work at the company daily but attends board meetings to provide
insights on financial risk and corporate banking relationships.

3.3.3 Independent Non-Executive Directors (INEDs)

Definition: A subset of NEDs who meet strict criteria to ensure they have no material relationship with
the company that could interfere with their independent judgment.

Think of them as: Supreme Court judges. They are appointed for their expertise and integrity, and they
are expected to be completely impartial.

Core Characteristics of INEDs (from slides):

- Do not represent any particular stakeholder, but the entire company.

- Do not take instructions from anyone—not from the CEO, not from major shareholders.

- Professionally competent—they bring valuable skills and experience.

- Take their work as INED very seriously—they prepare for meetings and engage actively.

- Create balance of power on board—preventing any single person or group from dominating.

- Serve on board committees—especially Audit and HR committees.

- Bring discipline to the board—their presence makes everyone more diligent.

Test of Independence (What Makes Someone Independent?):

Criteria Explanation
Lack of conflict of interest No personal financial interest in the outcome of board decisions.
Appointer is different from They are elected by shareholders, not appointed by the CEO.
manager
No direct loyalties or They don't owe their position to any particular stakeholder.
influence
Not undermined by familiarity Long-serving directors may become too comfortable with management
and lose objectivity.

Preserving Independence of INEDs:

To remain independent, an INED should:

- Not be related to directors, major shareholders, or related organizations.

- Have no material interest in the company (except fixed remuneration—their fee).

 - Not be an immediate past employee or paid consultant to the company.

- Most important, the company should be willing to let an INED be independent. If the company culture
does not value independent thought, even the best INED will be ineffective.

How Many INEDs Are Required?

Source Requirement
SECP Code of Corporate At least one-third of the board must be independent directors.
Governance (Pakistan)
UK Corporate Governance 50% of directors should be NEDs, and most NEDs should be INEDs.
Code
Alternate Formula (from Not more than 1/3 Executive Directors, at least 2/3 Non-Executive
slides) Directors. At least half of NEDs should be INEDs. This means INEDs should
not be less than 1/3 of total.

3.3.4 The Situation in Pakistan (Critical for Exams)

Your slides provide a stark assessment of the Pakistani reality—and it's important to understand this for
your exams and for real-world understanding.

The Problem:

Observation Explanation
Virtually no true INEDs In most Pakistani companies, almost all NEDs are representative of the
majority shareholder (often a family). None is ever truly independent
because they owe their position to the controlling family.
No remuneration to NEDs In many Pakistani companies, NEDs are not paid adequately (or at all).
Professionals are not keen to serve as INEDs because there's no financial
incentive.
Source of INEDs in the West In Western countries, INEDs are often nominated by institutional investors
(pension funds, mutual funds) who have significant shareholdings and
demand independent oversight. This practice is not yet prevalent in
Pakistan.

The Solution (as per slides):

Paying good remuneration can attract good INEDs who can remain independent—just as auditors and
judges are paid but retain their independence. If we expect professionals to devote time and expertise
to board service, they should be fairly compensated.

Main Role of INED (from slides):

 - Putting good, professionally competent INEDs on the board is tantamount to putting a very efficient
external auditor or judge on the board.

- Their presence brings discipline and diligence to all other directors.

- They improve the quality of the decision-making process by asking tough questions.

- They serve on board committees (especially Audit, HR, Nomination).

- They act for all stakeholders, not just the majority shareholder.

Criticism of INEDs (from slides):

Criticism Response
Many INEDs are simply not competent. This is a selection problem, not a flaw in the concept.
Companies must choose better candidates.
Good INEDs do not have adequate time for the They may be over-committed. Companies should check
company. availability before appointment.
Due to lack of remuneration, they don't pay enough Pay them properly to ensure engagement.
attention.
It's impossible that INEDs will have no relationship True, but the goal is to minimize relationships that materially
with those who vote for them. affect independence.
Reciprocal arrangements between companies ("you This is a governance weakness that should be disclosed and
be on my board, I'll be on yours") undermine avoided.
independence.

Where to Find INEDs?

Source Example
Directors of unrelated companies An executive director from a bank serving on a textile company's board.
Retired professional practitioners Retired Chartered Accountants, lawyers, engineers, consultants.
Retired civil servants Retired judges, generals, secretaries of government departments.
Socially prominent persons Respected individuals with no business ties to the company.
Professional head-hunters Specialist firms that identify qualified candidates.

Qualities to Look for in INEDs:

Quality Why It Matters

High level of personal integrity and ethics They must be trustworthy and principled.
Sound judgment and professional They must be able to analyze complex issues objectively.
approach
Ability and willingness to serve They must be committed to the role, not just collecting a fee.
Good inter-personal skills They must work well with other directors and management.
Adequate time at their disposal They must prepare for meetings and attend regularly.

3.3.5 Other Types of Directors

Type Description Example

Representative Directors Appointed to represent A bank that has lent money to the company may appoint
the interests of a a representative director to monitor its investment. The
particular stakeholder. government may appoint a director to a state-owned
enterprise.
De-facto Directors A person who acts as a Someone who attends board meetings, participates in
director but has not been decisions, and is treated as a director by others, but was
formally or legally never formally elected.
appointed.
Shadow Directors A person who is not A major shareholder who tells the board how to vote on
formally appointed as a key issues, and the board follows those instructions.
director but whose
instructions the appointed
directors are accustomed
to following.
Alternate Directors A person appointed to act If a director goes abroad for six months, they may appoint
as a substitute for a an alternate to attend meetings on their behalf.
regular director during
their temporary absence.

Types of Directors

Type Employment Status Key Role SECP Limit / Status

Executive Full-time employee Day-to-day management Max 1/3 of board
Non-Executive Not an employee Oversight & advice No specific limit
Independent Not an employee; no Objective, unbiased Min 1/3 or 2, whichever higher
material ties judgment
Representative May be employee of Represent specific interest No specific limit
stakeholder
Shadow Not appointed; Exercises power behind the Liable as if a director
influences decisions scenes
De-facto Not appointed; acts as Performs director functions Liable as if a director
director
Alternate Substitute for regular Temporarily fills in Appointed by regular director
director

3.4 Board Committees

 Given the complexity of modern corporate operations, boards delegate specific responsibilities to
specialized committees. These committees report back to the full board and consist primarily of non-
executive and independent directors. Under SECP regulations, certain committees are mandatory for
listed companies.

3.4.1 Why Does the Board Need Committees?

Imagine the full board of 10-12 people trying to discuss every detail of the audit, every executive salary
decision, and every board nomination. It would be inefficient. Committees allow:

- Specialization: Members with relevant expertise focus on specific areas.

- Efficiency: Detailed work is done in smaller groups.

- Deeper Analysis: Committees can spend more time on complex issues.

- Independence: Committees are often composed of independent directors, ensuring objective

oversight.

3.4.2 Audit Committee

The Audit Committee is mandatory for all listed companies and is considered the most critical
committee for financial oversight.

Composition:

- Composed entirely of non-executive directors.

- Chairperson is typically an independent director.

- Members include other non-executive directors (and may include one independent director).

Why is the Audit Committee So Important?

The Audit Committee acts as a bridge between the board, management, and external auditors. It
ensures that financial reporting is accurate and that there is no pressure on auditors to compromise
their independence.

Key Responsibilities (Terms of Reference):

Responsibility Detailed Explanation

Safeguarding Assets Determines appropriate measures to protect company assets from fraud,
theft, or mismanagement.
Review Financial Statements Examines annual and interim financial statements before board approval,
focusing on: major judgmental areas (e.g., provisions for bad debts),
significant audit adjustments, going concern assumptions (can the company
continue operating?), changes in accounting policies.
 Compliance Review Ensures compliance with applicable accounting standards (IFRS), SECP
regulations, and other statutory requirements.
Related Party Transactions Reviews all transactions with related parties (e.g., sales to companies owned
by directors' families) and ensures they are at arm's length (commercially fair,
not preferential).
External Audit Facilitation Discusses major audit observations with external auditors, sometimes in the
absence of management, to ensure auditors can speak freely.
Preliminary Results Review Reviews results announcements (quarterly and annual) before publication to
ensure accuracy.

> Important: The details of all related party transactions shall be placed periodically before the Audit
Committee, and upon the committee's recommendations, the same shall be placed before the board for
review and approval.

Practical Example:

If a company's CEO wants to sell a piece of land to his brother's company, the Audit Committee would
review this transaction to ensure it's at fair market value and properly disclosed. Without this oversight,
the CEO could sell the land at an artificially low price, harming the company and its shareholders.

3.4.3 Human Resource and Remuneration Committee (HR&R Committee)

This committee ensures that executive pay is fair, transparent, and aligned with long-term company
performance. It prevents situations where executives pay themselves excessively regardless of company
performance.

Composition:

- Typically chaired by a non-executive director.

- Includes other non-executive or independent directors.

Key Responsibilities:

Responsibility Detailed Explanation

Remuneration Policy Recommends to the board a policy framework for determining
remuneration of executive and non-executive directors and senior
management. This includes base salary, bonuses, stock options, and
retirement benefits.
Senior Management Recommends selection, evaluation, development, and compensation of
Appointments key roles: COO, CFO, Company Secretary, Head of Internal Audit.
CEO Recommendations Considers and approves CEO recommendations for key management
positions.
HR Policy Development Recommends human resource management policies to the board (e.g.,
 hiring, training, performance evaluation).
Consultant Oversight Reviews credentials of HR/remuneration consultants and confirms any
other connections with the company to avoid conflicts of interest.

Practical Example:

The CEO asks for a 50% bonus despite the company's profits declining by 20%. The HR&R Committee
reviews this request, compares it to market benchmarks, and either approves it (if justified) or rejects it
(if excessive). This prevents the CEO from enriching themselves at shareholders' expense.

3.4.4 Nomination Committee

The Nomination Committee plays a vital role in board composition and succession planning. It ensures
that the board has the right people with the right skills

Key Functions:

- Identifying Candidates: Seeking out qualified individuals for board vacancies.

- Assessing Fit: Ensuring candidates have the right mix of skills, experience, and diversity.

- Induction Oversight: Ensuring new directors receive proper orientation about the company.

- Succession Planning: Planning for CEO and board leadership transitions.

The SECP now encourages boards to focus on gender diversity and inclusion. The 2024 proposed
amendments emphasize the board's responsibility for promoting gender mainstreaming, gender
equality, and the participation of women on boards.

Practical Example:

The Nomination Committee realizes that the board has no one with digital transformation expertise, and
the company is planning a major technology upgrade. They identify and recommend a qualified
candidate with a strong IT background to join the board.

3.4.5 Sustainability Committee (Emerging Requirement)

Under proposed 2024 amendments to the Code, boards are encouraged to establish a dedicated
sustainability committee or assign ESG (Environmental, Social, Governance) matters to an existing
committee.

Responsibilities:

- Oversee sustainability efforts and DE&I (Diversity, Equity, and Inclusion) practices.

- Ensure ESG compliance with regulatory requirements.

 - Align with upcoming ESG Disclosure Guidelines.

- Include at least one female director on the committee if established separately.

Why This Matters:

This reflects global best practices. Investors are increasingly looking at ESG performance when deciding
where to invest. A company with poor environmental practices or weak social responsibility may
struggle to attract capital.

3.5 Individual Directors: Duties, Liabilities, and Ethical Conduct

3.5.1 What Makes a Good Director?

A person must possess several qualities to be a good director. It's not just about being successful in
one's own career; it's about bringing the right attributes to the boardroom.

Quality What It Means

Suitability and ability The necessary knowledge, skill, and background/experience that is reasonably
expected of a director of a particular company. A director of a bank needs
financial expertise; a director of a manufacturing company needs operational
knowledge.
Character Personal traits, views, and attitude that align with good governance—
integrity, honesty, courage to speak up.
Willingness and ability to give This is crucial and often overlooked. Directors must prepare for meetings,
time read materials, and attend regularly. A "busy" director who never shows up is
not adding value.

The Duty of Skill & Care:

- Directors must exercise the degree of care, caution, and skill that can reasonably be expected from
them.

- A golden rule: Do not agree to be a director if you are not fit to be a director. If you don't understand
financial statements, don't join a board where financial oversight is key.

3.5.2 Directors' Liability

Who are directors responsible to?

Directors are responsible primarily to shareholders, not to outsiders. Their fiduciary duty is to act in the
best interests of the company and its owners.

When are directors liable?

 Directors are liable only if they are proved to be:

- Negligent: They failed to exercise reasonable care (e.g., they didn't read financial reports and approved
misleading statements).

- A willful party to fraud: They knowingly participated in dishonest activities.

Protection for Directors:

- If not negligent or a willful party to fraud, directors are generally covered by the company
(indemnified) against losses.

- Companies may obtain Directors' and Officers' (D&O) insurance to cover liability costs.

Practical Example:

If a director attends all meetings, asks questions, and relies on expert advice from auditors, but the
company still suffers a financial loss, that director is generally not personally liable. However, if a
director knew about a fraudulent scheme and remained silent, they could be held personally liable.

3.5.3 Directors' Induction

When a new director joins the board, proper induction should include:

Activity Purpose
Visits to key locations/facilities Understand the company's operations firsthand.
Presentations by departmental heads Learn about each function (finance, operations, sales, HR).
Informal meetings with top managers Build relationships and understand the culture.
Meetings with major Understand investor perspectives and expectations.
shareholders/institutional investors
Formal training in corporate governance Understand legal and regulatory obligations.

3.5.4 Register of Directors' Interests

To ensure transparency, a formal register must be maintained and regularly updated with:

Information Purpose
Shares held by the director or Disclose potential conflicts of interest.
immediate family
Directorships held by the director Disclose other commitments that may affect time or create conflicts.
or spouse
Interest in other related Disclose relationships with competitors or business partners.
companies
Past and present relationships with Disclose any prior employment or consulting arrangements.
the company
 3.5.5 Directors' Dealings with the Company

All transactions between a director and the company must be handled with extreme care:

Requirement Why It Matters

Fair, transparent, at arm's Prevent self-dealing. A director should not get preferential treatment.
length
No loans to directors This is a common prohibition to prevent misuse of company funds.
Disclosure of conflict of If a director has a personal interest in a transaction, they must disclose it
interest and recuse themselves from voting.
No misuse of privileged Directors often have access to confidential information that could affect
information share prices.
Significant deals put to Major transactions with directors (e.g., selling a subsidiary to a director's
shareholders company) require shareholder approval.
Disclosure in annual All such transactions must be reported publicly.
statements

3.5.6 Directors' Dealing in Company Shares

- Dealing in company shares is not forbidden by law—directors can buy and sell shares like any other
investor.

- However, such dealings must be noted in the Director's Interest Register to ensure transparency.

- Insider trading restrictions apply: Directors cannot trade based on unpublished price-sensitive
information.

3.5.7 Insider Trading and Market Abuse

Concept Definition Legal Status

Insider Trading Dealings in the shares of a company by an Crime (can result in imprisonment
individual who has knowledge of and fines)
undisclosed price-sensitive information that
comes to them due to their position.
Market Abuse Deliberately releasing misleading and Civil Offense (can result in fines and
incorrect information to the market with a bans)
view to distorting the market value of
shares, aiming to benefit from that
distortion.
 What is "price-sensitive information"?

Information that could affect the share price if made public. Examples:

- A major contract win or loss.

- A planned merger or acquisition.

- Upcoming financial results.

- A major regulatory action against the company.

> The Jehangir Tareen case involved insider trading where shares were bought in the names of his cook
and gardener. He was fined Rs 70 million by the SECP. The SECP also filed a criminal complaint
(Complaint No. 14 of 2025) against a company secretary and his relatives for insider trading.

3.5.8 Other Issues Affecting Directors

Issue Explanation
Re-election issues Directors must face re-election periodically. If shareholders are unhappy, they
can vote them out.
Succession planning Boards must plan for the departure of key directors and executives to ensure
continuity.
Removal or A director may be removed if they: fall below requirements of the articles of
disqualification association, are convicted of a crime, become bankrupt or insane, or are
subject to a court order or regulator's order.

3.6 The Dominant Personality Problem

This is identified as the principal cause of corporate governance issues. Let's understand why.

3.6.1 Characteristics of a Dominant Leader

Characteristic What It Looks Like

Charismatic They are often very persuasive and inspiring. People want to follow them.
Powerful They have accumulated significant authority, often as founder or long-time
CEO.
Intolerant They do not tolerate disagreement or dissent.
Often seemingly sincere They believe they are doing what's best for the company.
Does not nurture They keep people weak to maintain their own power.
subordinates

3.6.2 Why Dominant Personalities Fail

Reason Explanation
No one has all talents Even the most brilliant person cannot be an expert in everything. As
companies grow, they need diverse expertise.
People lose interest in When the dominant leader makes all decisions, others stop thinking critically.
decision-making They become "yes-men."
Tendency to micro-manage They get involved in small details rather than focusing on strategy.
Do not grow with the The skills that made them successful as founders may not be the skills needed
company to lead a large, complex organization.
Intolerance drives away Talented people will not stay in an environment where their ideas are not
good managers valued.

3.6.3 Why Dominant Personalities Gain Importance

Reason Explanation
Legal divisions don't stop Even if laws and regulations require board oversight, a dominant leader can
them still get their way by intimidating or manipulating others.
They are often creators or They may have founded the company or saved it from collapse. They have
benefactors earned the trust (and sometimes fear) of others.
They may mean well Some genuinely believe they are acting in the company's best interest, but
their methods are harmful. Your slides call this "naadaan dost" —a well-
meaning but harmful friend.

> Example: The TRG Pakistan case involving ex-CEO Zia Chishti illustrates the dominant personality
problem. His attempt to regain control after a sexual misconduct scandal in the US, and the subsequent
legal battles (including the Supreme Court's intervention in July 2025), demonstrates how a dominant
founder can create governance crises. The share price jumped 7% when the Supreme Court ruled
against him—suggesting that the market saw his influence as harmful to shareholder value.

3.7 Collective Integrity

Concept Meaning
Individual honesty A person's personal integrity. They may be honest in their personal life.
Collective integrity Whether the board as a whole acts with integrity. Even if individuals are
honest, the board may collectively fail to do the right thing.

Key Question: Are they team players who uphold governance standards, or weak directors who go along
with wrongdoing?

The Enron Case

- Enron paid $750 million as a bonus to senior executives with a net profit of only $975 million.

- Executives had off-balance sheet contracts with Enron—hiding debts and risks from investors.

- Non-executive directors were being paid for consultancy, compromising their independence.
This is a classic example of how the absence of collective integrity and truly independent directors can
lead to catastrophic governance failure. The board went along with the CEO's schemes rather than
challenging them.

3.8 SECP Regulatory Framework for Boards (Updated)

3.8.1 Key Composition Requirements

| Requirement | Details |

| Independent Directors | Minimum of 2 or 1/3 of board, whichever is higher. |

| Executive Directors | Maximum of 1/3 of board. |

| Female Director | At least one female director (mandatory when board is reconstituted after the
effective date). |

| Chairman & CEO Separation | Chairman and CEO cannot be the same person. |

| Maximum Directorships | No person can serve as director of more than 7 listed companies
simultaneously. |

3.8.2 Recent Reforms (2024-2025)

| Reform | What It Means |

| Category-Wise Voting Removed (March 2025) | The SECP removed the category-wise voting scheme
for director elections. This reform is designed to provide greater representation for minority
shareholders on the board. |

| Enhanced Scrutinizer Role | The role of the scrutinizer has been bolstered to ensure greater
transparency in accepting or rejecting nominations for director elections and proxies. |

| Mandatory Director Attendance | Directors are now required to attend general meetings, ensuring
they remain actively engaged in the company's affairs. |

| Independent Board Evaluations | Companies are encouraged to seek independent evaluations of

board performance from external bodies to hold directors accountable. |

---

3.9 Case Studies and Practical Examples

3.9.1 Pakistan Oilfields Limited (POL) – Board Committee Structure

POL's Annual Report 2022 provides an excellent example of how a listed company structures its board
committees:

| Committee | Chairman | Members |

| :--- | :--- | :--- |

| Human Resource & Remuneration | Mr. Babar Bashir Nawaz | Mr. Shuaib A. Malik, Mr. Abdus Sattar |

| Audit Committee | Mr. Shamim Ahmad Khan | Mr. Abdus Sattar, Mr. Babar Bashir Nawaz, Mr. Tariq
Iqbal Khan |

This structure ensures that:

- The Audit Committee is chaired by an independent director (Mr. Shamim Ahmad Khan).

- The HR&R Committee is chaired by a non-executive director.

- There is proper segregation of duties between oversight (Audit) and management oversight (HR&R).

3.9.2 SECP Enforcement Actions (2026)

The SECP issued compliance notices to seven power sector-related entities for governance failures:

| Violation | Details |

| :--- | :--- |

| Failure to appoint independent directors | Violation of Section 166 of the Companies Act, 2017. |

| Absence of a female director | Violation of Section 154. |

| Failure to file annual returns | Non-compliance with Section 130. |

| Non-submission of financial statements | Non-compliance with Section 233. |

| Failure to appoint an auditor | Non-compliance with Section 246. |

Entities Cited: National Grid Company (NGC), Gujranwala Electric Power Company, Hyderabad Electric
Supply Company, and others.

SECP's Warning: Continued non-compliance could result in the company being listed as a defaulter or
classified as an "inactive company" under Section 424.

> Teaching Point: This case demonstrates that governance requirements apply to all companies,
including state-owned enterprises (SOEs), and the