How can business management
be made independent and professional
By Mariah Ahmad Arif

Since the global recession has set in, companies big and small, across the globe are struggling to formulate new strategies to adjust to the current economic situation. As the country is not immune to such a crisis, the governance of financial institutions has come into focus. Bankruptcies and large losses of financial institutions have sparked a heated debate among governments, regulators, and investors over their governance.

The massive accounting scandal involving Satyam, one of India's largest outsourcing companies, adequately demonstrated that corporate governance scandals are widespread. In January, when the founder and Chairman of the company resigned, he shocked the entire economy by telling that he and his key accomplices made a fraud of around 500 Billion Rupees, and all the figures described in the company balance sheet were completely inflationary. Given their leadership role, boards of directors remain at the centre of the current debate for more effective administrative practices to minimise the risk of failure. Against the above background, it is important to investigate what it takes to establish an effective board. The key characteristics of an effective board are given below:

(a) Independence: To start with, it is the independence of the board that matters the most. An independent, non-executive director would be able to handle matters objectively by avoiding a conflict of interest. It is important to acknowledge that every non-executive director is not independent. Many factors tend to compromise non-executive directors' independence. Past affiliations, family and business ties, and time spent on the board are just a few instances to name. Unfortunately, most companies in Pakistan fail to fully appreciate the value of an independent, non-executive board member. This is particularly true for family owned businesses-a dominant segment of the corporate sector in Pakistan. As is the case with managerial ability, effective board leadership can't be ensured by relying on family members alone.

(b) Composition

The second important factor is the board composition. It is pivotal that the board has diverse skills. The composition of the board should be such that it satisfies the company's needs. A diversified board will have a better understanding of different aspects of the company. These factors include management, marketing, law, technology, and finance. Such a board will have a higher potential to provide thoughtful input at board meetings.

(c) Evaluation: Evaluation of a board's performance should be a priority for the company. Several tools can be employed for this purpose. The evaluation should begin with defining the roles and responsibilities of the board and sharing them with each board member. Without developing terms of reference for board members, the board can hardly be justified in evaluating their performance. Self-evaluation can be used to make directors accountable. The Chairman of the board can in addition have separate discussions with each board member aimed at their past performance and areas of improvement in going forward. The board's nomination committee should also develop performance indicators to use in these evaluations. Board evaluation is new to Pakistani corporate culture and is often met with scepticism by board members. It is important, therefore, that the evaluation is advocated as it is linked to increased board efficiency and better performance.

(d) Remuneration: Directors' remuneration is another important factor. Non-executive directors are offered meagre salaries in Pakistan. Like other professionals, non-executive directors deserve to be adequately remunerated for their services. The remuneration packages should be attractive enough to motivate high calibre individuals to act as directors. However, the salaries they get should be both competitive and fair. Remuneration packages that are not linked to a director's performance have the potential to be used as a tool by the management to influence his/her professional judgment.

(e) Board committees:  Finally, board committees should be set up to enhance the effectiveness of the board and to promote discussion on important issues of the company. These committees should be structured in a way that they report regularly to the board. The board committees that have long been part of good corporate governance practices are audit, compensation and nomination committees. The compensation committee would be responsible for determining the board's remuneration and overseeing all matters of executive compensation policy as well as regulating all aspects of executive officers' compensation arrangements.

Conclusion: As the debate over corporate governance practices of companies and banks intensifies, boards are going to be scrutinised more by shareholders, outsider investors, regulators, and customers. The above key characteristics are hence designed to help the board become independent and professional.