Corpoarte Governance and Borrowing Powers of Directors - III

Code of Corporate Governance issued by SECP in Pakistan provides guidelines regarding the responsibilities, powers and functions of board of directors. Here is a reproduction.

RESPONSIBILITIES, POWERS AND FUNCTIONS OF BOARD OF DIRECTORS

(vii) The directors of listed companies shall exercise their powers and carry out their fiduciary
duties with a sense of objective judgment and independence in the best interests of the listed company.
(viii) Every listed company shall ensure that:

(a) a ‘Statement of Ethics and Business Practices’ is prepared and circulated annually by its Board of Directors to establish a standard of conduct for directors and employees, which Statement shall be signed by each director and employee in acknowledgement of his understanding and acceptance of the standard of conduct;
(b) the Board of Directors adopt a vision/ mission statement and overall corporate strategy for the listed company and also formulate significant policies, having regard to the level of materiality, as may be determined it;

Explanation: Significant policies for this purpose may include:

• risk management;
• human resource management including preparation of a succession plan;
• procurement of goods and services;
• marketing;
• determination of terms of credit and discount to customers;
• write-off of bad/ doubtful debts, advances and receivables;
• acquisition/ disposal of fixed assets;
• investments;
• borrowing of moneys and the amount in excess of which borrowings shall be sanctioned/ ratified by a general meeting of shareholders;
• donations, charities, contributions and other payments of a similar nature;
• determination and delegation of financial powers;
• transactions or contracts with associated companies and related parties; and
• health, safety and environment

A complete record of particulars of the significant policies, as may be determined, along with the dates on which they were approved or amended by the Board of Directors shall be maintained.

The Board of Directors shall define the level of materiality, keeping in view the specific circumstances of the listed company and the recommendations of any technical or executive sub-committee of the Board that may be set up for the purpose;

(c) the Board of Directors establish a system of sound internal control, which is effectively implemented at all levels within the listed company;
(d) the following powers are exercised by the Board of Directors on behalf of the listed company and decisions on material transactions or significant matters are documented by a resolution passed at a meeting of the Board:

• investment and disinvestment of funds where the maturity period of such investments is six months or more, except in the case of banking companies, Non-Banking Financial Institutions, trusts and insurance companies;
• determination of the nature of loans and advances made by the listed company and fixing a monetary limit thereof;
• write-off of bad debts, advances and receivables and determination of a reasonable provision for doubtful debts;
• write-off of inventories and other assets; and
• determination of the terms of and the circumstances in which a law suit may be compromised and a claim/ right in favour of the listed company may be waived, released, extinguished or relinquished;

(e) appointment, remuneration and terms and conditions of employment of the Chief Executive Officer (CEO) and other executive directors of the listed company are determined and approved by the Board of Directors; and
(f) in the case of a modaraba or a Non-Banking Financial Institution, whose main business is investment in listed securities, the Board of Directors approve and adopt an investment policy, which is stated in each annual report of the modaraba / Non-Banking Financial Institution.

Explanation: The investment policy shall interalia state:

• that the modaraba / Non-Banking Financial Institution shall not invest in a connected person, as defined in the Asset Management Companies Rules, 1995, and shall provide a list of all such connected persons;
• that the modaraba / Non-Banking Financial Institution shall not invest in shares of unlisted companies; and
• the criteria for investment in listed securities.

The Net Asset Value of each modaraba / Non-Banking Financial Institution shall be provided for publication on a monthly basis to the stock exchange on which its shares/ certificates are listed.

(ix) The Chairman of a listed company shall preferably be elected from among the non-executive directors of the listed company. The Board of Directors shall clearly define the respective roles and responsibilities of the Chairman and Chief Executive, whether or not these offices

Corporate Governance and Borrowing Powers of Directors - II

The position in Company Law in Pakistan is that section 196 of Companies Ordinance 1984 describes the “Powers of Directors”, the section is being reproduced for reference.

“196. Powers of directors.- (l) The business of a company shall be managed by the directors, who may pay all expenses incurred in promoting and registering the
company, and may exercise all such powers of the company as are not by this Ordinance, or by the articles, or by a special resolution, required to be exercised by the company in general meeting.

(2) The directors of a company shall exercise the following powers on behalf of the company, and shall do so by means of a resolution passed at their meeting, namely. —
(a) to make calls on shareholders in respect of moneys unpaid on their shares;
(b) to issue shares;
(c) to issue debentures or 1[participation term certificate, any instrument in the nature of redeemable capital];
(d) to borrow moneys otherwise than on debentures;
(e) to invest the funds of the company;
(f ) to make loans;
(g) to authorise a director or the firm of which he is a partner or any partner of such firm or a private company of which he is a member or director to enter into any contract with the company for making sale, purchase or supply of goods or rendering services with the company;
(h) to approve annual or half-yearly or other periodical accounts as are required to be circulated to the members;
(i) to approve bonus to employees;
(j) to incur capital expenditure on any single item or dispose of a fixed asset in accordance with the limits as prescribed by the Commission from time to time;

(k) to undertake obligations under leasing contracts exceeding one million rupees;

(l) to declare interim dividend; and
(m) having regard to such amount as may be determined to be material (as construed in Generally Accepted Accounting Principles) by the Board-
(i) to write off bad debts, advances and receivables;
(ii) to write off inventories and other assets of the company; and
(iii) to determine the terms of and the circumstances in which a law suit may be compromised and a claim or right in favour of a company may be released, extinguished or relinquished:

Provided that the acceptance by a banking company in the ordinary course of its business of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise, or the placing of moneys or deposit by a banking company with another banking company on such conditions as the directors may prescribe, shall not be deemed to be a borrowing of moneys or, as the case may be, a making of loan by a banking company within the meaning of this section.

(3) The directors of a public company or of a subsidiary of a public company shall not except with the consent of the general meeting either specifically or by way of an authorisation, do any of the following things, namely.-
(a) sell, lease or otherwise dispose of the undertakings or a sizeable part thereof unless the main business of the company comprises of such selling or leasing; and
(b) remit, give any relief or give extension of time for the repayment of any debt outstanding against any person specified in sub-section (1) of section 195.

(4) Whosoever contravenes any provision of this section shall be punishable with a fine which may extend to 1[one hundred thousand] rupees and shall be individually
and severally liable for losses or damages arising out of such action.”

Table “A” of First Schedule to Companies Ord. 1984 contains a sample of “REGULATIONS FOR MANAGEMENT OF A COMPANY LIMITED BY SHARES”. Following is a reproduction of clauses that deal with “Powers of Director”.

“44. The business of the company shall be managed by the directors, who may pay all expenses incurred in promoting and registering the company, and may exercise all such powers of the company as are not by the Ordinance or any statutory modification thereof for the time being in force, or by these regulations, required to be exercised by the company in general meeting, subject nevertheless to the provisions of the Ordinance or to any of these regulations, and such regulations being not inconsistent with the aforesaid provisions, as may be prescribed by the company in general meeting but no regulation made by the company in general meeting shall in-radiate any prior act of the directors which would have been valid if that regulation had not been made.

45. The directors shall appoint a chief executive in accordance with the provisions of sections 198 and 199.

46. The amount for the time being remaining undercharged of moneys borrowed or raised by the directors for the purposes of the company (otherwise than by the issue of share capital) shall not at any time, without the sanction of the company in general meeting, exceed the issued share capital of the company.

47. The directors shall duly comply with the provisions of the Ordinance or any statutory modification thereof for the time being in force, and in particular with the provisions in regard to the registration of the particulars of mortgages and charges affecting the property of the company or created by it, to the keeping of a register of the directors, and to the sending to the registrar of an annual list of members, and a summary of particulars relating thereto and notice of any consolidation or increase of share capital, or sub-division of shares, and copies of special resolutions and a copy of the register of directors and notifications of any changes therein.

48. The directors shall cause minutes to be made in books provided for the purpose—
(a) of all appointments of officers made by the directors;
(b) of the names of the directors present at each meeting of the directors and any committee of the directors;
(c) of all resolutions and proceedings at all meetings of the company and of the directors and of committees of directors:

and every director present at any meeting of directors or committee of directors shall sign his name in a book to be kept for that purpose.”

How the tax code encourages debt: newyorker.com

How the tax code encourages debt: newyorker.com

John Kenneth Galbraith wrote that all financial crises are the result of “debt that, in one fashion or another, has become dangerously out of scale.” The recent financial crisis was no exception, with everyone—homeowners, private-equity investors, our biggest banks—taking on enormous amounts of debt. If it’s frustrating that the government is footing the bill to clean up the mess, it’s even worse that the government helped pay for the debt binge that created the mess in the first place, thanks to a tax system that actually subsidizes borrowing. Debt didn’t get dangerously out of scale because the system was broken. It got out of scale, in part, because the system worked

Read more: http://www.newyorker.com/talk/financial/2009/11/23/091123ta_talk_surowiecki#ixzz0XfTASpak

Corporate Governance and Borrowing Powers of Directors

Corporate governance is to ensure that a system is in place to protect the individual as well as collective interests of all the stakeholders in a company. In this respect the role of Board of Directors becomes very important because by its very nature a company is an artificial juridical person in the sense that it can sue and can be sued. But it works through its directors who are its eyes, brain and muscle. Directors are the persons who run day to day affairs of the company and possess the first hand information about every aspects of its operations. Directors are also in the best of position to determine its future course i-e set objectives, formulate strategy, devise operational plans etc. Shareholders are the owners of the company who provide capital to the company for its operations but are not supposed to run its affairs and delegate this function to professional managers. These professional managers may also be shareholders of the company. This separation of brain and capital poses agency problem and dual role of directors, shareholders as well as directors creates conflict of interest with other stakeholders such as outside shareholders.

In the wake of recent financial crises and recent past failure of Enron, Worldcom and Parmalat, a heated debate is going on the role of directors and the board in the governance of corporate world. Much of the debate is centered round the structure of the board, integrity of the financial reports, auditing, shareholder activism, corporate governance rules and regulations etc. A very little attention has been given to the concept of borrowing powers of the directors. One of the elements of the powers enjoyed by the directors is that these may be misused and abused as well. If these are being misused, it means due care and necessary diligence has not been taken care of and if these are being abused, it means these are used for the purposes other than the benefit of the company. In both the cases, the tendency or some inclination to misuse and /or abuse powers can lead to disaster. As a precautionary measure, there is a need to put some checks on the use of powers enjoyed by the directors. One of the powers given to directors or used by the directors on behalf of the company is borrowing power. There is no restriction on the borrowing powers of the directors in Articles of Association and neither there is any law that restricts this power. However, there are rules and regulations for the lenders that prohibit them to lend in case of borrowing beyond a certain percentage of equity but generally there is no restriction on borrowers.

As directors manage a corporation for and on behalf of the shareholders who own it, it is critical that any regulatory and legal requirements placed on directors do not seriously compromise their goal of maximizing shareholder wealth. Directors’ behavior influences the efficient operation of corporations. If directors are subject to undue transaction costs in protecting themselves from personal liability, these costs will ultimately be passed onto, and borne by, the corporation itself. On the other hand, if directors are permitted to operate completely unfettered by regulation and a degree of shareholder control, investor confidence in the corporate may potentially be undermined. In this regard, it is clear from past experience, particularly in relation to the corporate collapses as mentioned above, that the conduct of directors through corporations can have a significant impact on public perceptions and market confidence.

While regulatory requirements are usually placed on directors as a means of protecting investors, or the general public, such protection may well be achieved at the expense of investors themselves. Accordingly, it is vitally important that any measures put in place as a means of promoting investor protection are properly assessed from an economic perspective to ensure that they do not ultimately act to the detriment of shareholders as a whole. To promote investor confidence and thereby facilitate expansion of capital market, investors need to be satisfied that they have sufficient opportunity for redress against a corporation and its directors in clear cases of negligent, reckless or fraudulent conduct. However, directors who effectively control the corporation, must not feel so over-burdened with a fear of responsibility that their decision-making is seriously constrained. Regulation in the area of directors’ duties and shareholders’ rights invariably involves a fine balance between maintaining investor confidence and encouraging commercial enterprise. In the interests of maximizing shareholder wealth and economic growth, directors need to be encouraged to take enterprising decisions. However, these decisions must be taken in the interests of the company and be challengeable if they are not bona fides and well informed.

In the backdrop of above deliberations, it is important to thoroughly evaluate the possibility of check on the borrowing powers of the directors. This paper shall examine the all possible ways in which such a check can be placed and a critical analysis of each alternative shall be put forward. Finally, a recommendation shall be made whether such a check is required or not and if required what necessary amendments in Company Law are required.

Golf and Business

There are many things that are common between the game of golf and running a business. Both need a strategy to achieve objectives. before you play a shot of golf, you visualize where the ball should land. It is the same in business before you begin a day or a month or a year, you visualize where you should be at the end of that period. To play a good game of golf, you need to take stock of the resources you have e.g. number of irons and woods in the bag, your accuracy and yardage with each iron / wood. The same way, you need to take stock of your resources while running a successful business e.g. HR, Funds availability, Products etc. It is said that golf is a thinking man's game and the same is true for business, you can't run it without being thoughtful to so many things.It is imperative for a good shot of golf to have relaxed muscles and yet mentally focused towards the objective and same is said about the business achievement, the organization, the system should be in place, there should not be frenzy or paralysis but a calm and quite control over its affairs and yet all the organization as a whole, the system as a whole should be focused on the achievement of its objectives. There is observation that successful businessmen are mostly golfers. The reason may be that they enjoy the intricacies of game of golf with as much ease as that of business. They are typically challengers, are not afraid of any bad shot, constantly thinking to achieve the objectives, are relaxed in tough situations and focused towards the goals.

The lesson learned from this comparison is play golf to become successful businessman or be a successful businessman to play good golf.