Home »Articles and Letters » Articles » Companies Act, 2017: Appraising roles of chairman & directors
Section 192 of the Companies Act-2017 provides that board of directors of a listed company is required to appoint a chairman to hold office for three years. The period can be less than three years in circumstances cited by the Act. With reference to appointment of 'Chairman', sub-section (1) of section 192 reads: "The board of a listed company shall within fourteen days from the date of election of directors, appoint a chairman from among the non-executive directors who shall hold office for a period of three years ........."

Webster's New World Dictionary defines the word "executive", inter alia, in the following terms: "any person whose function is to administer or manage affairs, as of a corporate, school, etc." The law gives no leeway for avoidance or circumvention in this respect. This being one of the main law provisions, it may not be possible to dilute the play effect through another provision.

Sub-section (3) of section 192 is:

"The chairman shall be responsible for leadership of the board and ensure that the board plays an effective role in fulfilling its responsibilities." According to section 181(2) of the Act, a non-executive director means a person on the board of the company who:

(a). is not from among the executive management team and may or may not be independent;

(b). is expected to lend an outside viewpoint to the board of a company;

(c). does not undertake to devote his whole working time to the company and not involve in managing the affairs of the company;

(d). is not a beneficial owner of the company or any of its associated companies or undertakings;

(e). does not draw any remuneration from the company except the meeting fee."

Heading of section 181 is: "Protection to independent and non-executive directors". Words in section 181(1) suggest that for laying hand on an independent or a non-executive director on account of acts of omission and commission by a listed company or a public sector company, shall be required to be proved that:

(i). the same had occurred with his knowledge - attributable through the boards process and,

(ii). with his consent or connivance where he had not acted diligently or,

(iii). he had not acted diligently.

Notwithstanding any other provision contained in this Act:

(a). an independent director; and

(b). a non-executive director; shall be held liable only in respect of such acts of omission or commission by a listed company or a public sector company which had occurred with his knowledge, attributable through board processes and with his consent or connivance or where he had not acted diligently, so reads section 181(1) of the Act.

This is strong, efficacious protection to an independent or a non-executive director. One may not favour making available a strong protective wall that way when there are too many faults recurring at different times attributed to board of a company having independent and/or non-executive directors.

According to the Indian Companies Act-2013:

(i). an independent director;

(ii). a non-executive director, not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

Section 163 in our law details matters with reference to removal of directors. Remuneration of a director for performing extra services, including for holding the office of chairman, is directed to be determined by the board in general meeting, in accordance with provisions in the company's articles.

Remuneration to be paid to a director for performing extra services, holding office of chairman or for attending meetings of the board or a committee of directors is not allowed to exceed scale approved by the company or the board, as the case may be, in accordance with provisions of the articles, so lay down sub-sections (1) & (2) of section 170. According to law remuneration for extra services is not to exceed what is provided by the articles.

To do away with a possible misunderstanding between functions and responsibilities of chairman and chief executive, sub-section (2) of section 192 reads:

"The board shall clearly define the respective roles and responsibilities of the chairman and chief executive."

This is with a proviso reading:

"Provided that the Commission may specify the classes of companies for which the chairman and chief executive shall not be the same individual." The chairman is to be a non-executive director. The law does not allow the chairman to be an "executive director", as against a chief executive, engrossed in working of the company.

The words executive and non-executive are diametrically opposed. Thus offices of chairman and chief executive cannot vest in the same person. In view of this, the provision appearing after section 192(2) above, in negation of section 192(1), may not hold ground. Obviously, one cannot imagine a non-executive director as a chief executive because, by his very designation, he has to be 'executive'.

In envisaging that the chairman and chief executive can be the same person, lost sight is of following words in sub-section (1) of section 192. "The board of a listed company shall within fourteen days from the date of election of directors, appoint a chairman from among the non-executive directors ....". In the event of a chairman being a non-executive director, as laid down in the sub-section (1), the same person cannot simultaneously hold the offices of chairman and chief executive.

The SECP may specify the classes of companies for which chairman and chief executive shall not be the same individual, so reads parenthesis of section 192(2). The law pundits hold that words in a parenthesis of a section of the law, when in conflict with words in the main law do not hold ground. The SECP's access to power to amalgamate the offices of chief executive and chairman subsisting does not appear in sight. It appears that bar on the chairman to be non-executive director in terms of the Companies Law may not be possible to do away with.

Section 170(1) provides that a director holding office as chairman entitles him to a remuneration determined by the board or the company in general meeting, keeping in view articles of the company. Since matters travel to a general meeting from the board, probably more appropriate would be to say that the chairman may be paid a remuneration by the board. Anyway, to be reckoned is that a chairman 'administering' or 'performing as a working director' shall ipso facto cease to be his being reckoned as non-executive director and thus loose his office as 'chairman' with provisions of section 192(1) in view.

Sections 186 to 192 deal with appointment and removal etc. of a chief executive. Within 14 days of its election, the board has to appoint a chief executive. One not eligible to become director of a company cannot be appointed or allowed to continue as chief executive. Section 187 restricts tenure of a chief executive to three years. The law appears to provide that such a person should be an elected director. If not already a director, the chief executive is a deemed director of a company, provides section 188(3).

The chief executive on completion of his three years term is eligible to serve another term. In the case of a company with majority of directors nominated by the government, nomination of chief executive is the government's prerogative. Government has the power to nominate chief executive of a public sector company.

Since the law appears to be not specific, SECP has to clarify and give a ruling in respect of the following issues:

(i). whether chairman of a company has to be a non-executive director or he can be a common (elected) director.

(ii). whether a chairman, can have remuneration from the company and whether such a person in receipt of remuneration shall per se cease to be a non-executive director and as such chairman.

(iii). can a director be a non-executive chairman with ability to draw remuneration in addition to fee for attending meetings of the board.

(iv). shall a chairman, on receipt of remuneration, cease to be independent director.

Incidentally, section 149(4) of the Indian law has following provision in respect of independent directors:

"Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies."

Our law could better have something like the Indian law's section 149(7), reading:

"Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6)."

Section 192(2) calls upon the directors to define the respective roles and responsibilities of the chairman and chief executive. When read with sub-clause (1), the law provides that the two shall be different persons. However, as pointed earlier, sub-section (2) has a rider reading: "Provided that the Commission may specify the classes of companies for which the chairman and chief executive shall not be same individual". This apparently means that the two can be the same. However, at the option of SECP, certain specific (type of) companies may not be allowed to have the two offices pooled in the same person, meaning thereby that ordinarily the two offices can vest into one person. Thus there appears a dichotomy in the law on this account.

Whether substantive law should be sidelined to save the system appears to pose a difficult proposition.

Section 134(5) provides that chairman of the board shall preside at general meeting of the company. On a show of hands in vote on a resolution at a meeting, declaration by the chairman is conclusive evidence of the fact without proof of the number or proportion of votes recorded in favour or against the resolution, so provides section 142.

Section 223 of the Act requires the board of every company to lay "before the company in a general meeting" its financial statements. Section 192(4) mandates that financial statements shall contain a review report by the chairman on over all performance of the board and effectiveness of role played by it in achieving company's objectives. This section strengthens hands of the company in dealing with contentious stands. The directors can reiterate that, in keeping with the law, their role is commented upon by the chairman. Implicit otherwise, the law (section 192(4)) forcefully provides for the chairman's review on overall performance of the board and effectiveness of role played by the board in achieving company's objectives. The review may be meaningful, effective and persuasive in the event of the chairman being an independent director - not on payroll of the company.

In section 172 of the Act, spelled is that SECP may pass a disqualification order against a person to be a director on the grounds listed in the law. Such an order may be passed by SECP on its motion or upon a complaint made in this regard. 'Expedient in the public interest so to do' is cited as a ground under clause (o) of section 172(1). It can be said to be an extension of section 220. An important interesting feature of law in this connection is that provision of section 220 apply to "the books of accounts", such books of accounts also which a liquidator is required to maintain and keep.

Section 226 has guidance in relation to 'duty to prepare directors' report and statement of compliance'. Section 227 is a guide on contents of directors' report and statement of compliance. In the case of a listed company, the business review is necessary for understanding the development, performance or position of the company's business. The directors report and statement of compliance approved by the board should be attached to the financial statements. "Any material changes and commitments affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statement relates and the date of the report" is a highly welcome feature provided under this section.

A very interesting provision is in terms of section 166 of the Act, is detailing 'manner of selection of independent directors and maintenance of data bank of independent director.

The theme of 'independent director' in our law appears to be a derivative from the Indian Companies Act-2013. Section 150 whereof carries the provision of maintaining a data bank, containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained in accordance with provisions of the said law. Section 166 of Pakistani Companies Act lays down manner of selection of an independent director. As in India, he is required to be selected out of a data bank of persons eligible and willing to act as independent directors. Such data bank is to be maintained by any institute, body or association as may be notified by SECP. The data bank is directed to be posted on the website for use by the company desirous of making the appointment of such director(s).

As per section 166(1), the Companies Law has introduced details of independent director to be selected and elected as such as per section 166(1).

Section 166(2) of Pakistani Law provides that no director shall be considered independent in the wake of any of the following circumstances:

(a). he has been an employee of the company, any of its subsidiaries or holding company within the last three years or a person nominated as a director under the Act's sections 164 and 165;

(b). he is or has been the chief executive officer of subsidiaries, associated company, associated undertaking or holding company in the last three years;

(c). he has or has had within the last three years, a material business relationship with the company either directly, or indirectly as a partner, major shareholder or director of a body with such a relationship with the company.

(d). he has received remuneration in the three years preceding his/her appointment as a director or receives additional remuneration, excluding retirement benefits, from the company apart from a director's fee or has participated in the company's stock option or a performance-related pay scheme;

(e). he is a close relative of the company's promoters, directors or major shareholders of he holds cross-directorships or has significant links with other directors through involvement in other companies or bodies not being the associations licensed under section 42 of the Act uplift for social, educational or professional; and

(f). he has served on the board for more than three consecutive terms from the date of his first appointment, and for more than two consecutive terms in case of a public sector company, provided that such person shall be deemed "independent director" after a lapse of one term or is a person nominated as a director under the Act's sections 164 and 165.

In the statement of material facts annexed to notice of the general meeting is to be given justification for choosing the person for appointment as independent director.

Requirements with regards to the manner and procedure of the "selection" required to be laid down by SECP. Provision with reference to appointment of the independent director, the law provides, "shall be deemed relaxed till such time a notification is issued by the Commission".

According to the Indian law, an independent director is one who, inter alia, has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year. A highly interesting disqualification is: "none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two percent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year".

The Pakistani law requires that an independent director shall be elected in the same manner as other directors are elected, in terms of section 159. The law does not give an edge, reverence or special treatment for election to the (would-be) an independent director. With no special treatment to the one to be an independent director candidate, he has to contest the election as a commoner. Then what is the use of a data bank to select an independent director, who may not feature as such during the election process - for voting purposes. Probably, the law provision will be reworded in future. Either, the concept of 'independent director' will be consigned to obscurity or special provision for his election in the law as such shall feature.

The law mentions the word "Secretary". His play is interwoven with life of the company and moving its machine. However, the Companies Act omits to tell what he is like or should be like. Already an important pillar of corporate structure, the present law quietly adds to what his functions are or are to be. Appears called for is the law providing space to a Corporate Secretary. The law may provide who is or can be a Corporate Secretary, guide and driver, rather sine qua non for the companies' constitutional affairs.

The SECP may have arrangements to see what goes to crown one as Corporate Secretary. To this end it should have a 'supervisory' or 'overseeing' woven in the structure of the Institute of Corporate Secretaries. This the Commission can best do through its representation on the Council of the Institute. Needless to say that per se a Chartered Accountant or a Cost Accountant may not be a Corporate Secretary in view of courses of their Institutes.

The SECP may also consider representation of the Institute of Cost & Management Accountants and Institute of Chartered Accountants of Pakistan on the Corporate Secretaries Council. Other known professionals may also be nominated to the Council if SECP so deems fit. To this end charter of the Institute of Corporate Secretaries will have to be amended which would strongly appear called for.

(The writer practices as advocate & corporate counsel. E-mail: mufti1002001@yahoo.com)



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