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CASE Study

MAHFOOZ GENERAL INSURANCE COMPANY LTD

A colorful board that does virtually nothing

Mahfooz Ali left his rather powerful position as an additional secretary in finance to go into business on his own in 1976. He started his own spinning mill with the help of some friends. Within twenty years, his business empire spread to Spinning mills, a weaving and finishing mils, a sugar mills on chemical plant his son Shayan Mahfooz returned from USA with an MBA from Princeton and joined his father empire in 1985. Shayan had studied the Japanese and German corporate models. He strongly felt that for his family's industrial empire to have real chances of grow and Sustainability, they must venture into the finance arena. Despite their pretty good reputation in the market, they were not able to secure a license to set up a commercial bank. Shayan opted for the second best choice: he launched an investment bank and insurance company. Mahfooz Investment Bank Ltd opened its doors in 1999 and Mahfooz General Insurance Company Ltd was floated three years later.

Mahfooz Ali died in 2006 whereupon Shayan Mahfooz took over the reins of the Group.

Nature of Insurance Business

Insurance is pretty much a B-to-B business in Pakistan. Apart from motor vehicles, virtually the entire insurance business comes from business firms. Insurance companies are not particularly keen at underwriting motor vehicles covers due to high rate of car Thefts and road accidents. Hence. Shayan Mahfooz has concentrated on building Good contacts with SMUs. One method he has adopted for winning over support from good business firms is offering directorships on the board of Mahfooz General Insurance Co. Ltd (MAGIC). This magic has worked well for the insurance company as it now has a stable source of business.

MAGIC's Board of Directors

MAGIC's board of directors has eleven members seven non-executive and four Executive directors.

The Executive Directors

The four executive directors are Shayan Mahfooz who holds the offices of company chairman and CEO. His younger brother, Kamran Mahfooz is company's director finance. Kamran is qualified chartered accountant and looks after the financial affairs of not just MAGIC but also of most of the companies in Mahfooz Group. The h Executive director is Jamal Uddin Shah who heads the underwriting deportment of the Company. He is a very experienced insurance professional who was poached by Shayan one of the largest insurance companies in the country. His selection has been quite fruitful for MAGIC. The fourth executive director is Mrs. Ayesha Siddiqui who heads the claims department which effectively means she controls at least 70% of the expense budget of the company. She too is a very experienced insurance professional who Come to MAGIC from a very good insurance company.

One reason Shayan was able to attract Jamal Uddin Shah and Ayesha Siddiqui is the fact that both are his distant relatives. This meant two things for Shayan: he was willing to pay them very well, quite above the market rate, without any reservation; and secondly, their loyalty was absolute. Shayan attached a lot of importance to the loyalty factor as no insurance company can survive dishonest senior managers.

The four executive directors together constitute the Executive Committee of the insurance company which virtually fakes all important decisions. In the history of MAGIC, not a single proposal sent by the Executive Committee has ever been turned down by the full board of directors, or by the shareholders.

The Non-executive Directors:

The seven non-executive directors of MAGIC are:

1. Maqbool Dawood, chief executive and director of Dawood Industries Ltd. This company has several sister companies but no insurance company in the group. Maqbool had attended college with Shayan. By getting him on MAGIC's board Shayan was able to get a good share of Dawood Groups insurance business. Maqbool holds only 2.5% of company's shares so he poses no real threat. To Mahfooz familys control

2 Nasir Makhanwala, another industrialist and an old friend of Kamran Mahfooz. He holds less than 1% of MAGIC's shares but was offered a position on the board to win over a sizeable share of Makhanwala group of companies' insurance business.

3 Omar Nawaz Khan, a member of Pakistan's cricket team. Omar is a flamboyant Character who has a huge following among general populace. He does a lot of commercials for a number of consumer products. Shayan feels that Omar's presence on the board gives the company a certain degree of visibility. Even though MAGIC does not care much for consumer business, this visibility comes in handy when MAGIC's agents meet with officials of smaller and medium sized films.

4. Ms Sheetal Ghauri, a brilliant vocalist. Sheetal is a Pakistani singer based in Middle East who enjoys huge popularity among film and television fans. She too brings visibility of MAGIC.

5. Dr Qaddus uz Zaman, a retired civil servant and on old friend of late MAHFOOZ ALI who still has active contacts in most government departments and is able to help MAGIC in this respect. While Dr Zaman is not paid any regular car remuneration he has been informally provided an all-expenses paid Honda Civic.

6. Yusuf Orakzai, a well-known social worker and chairman of one of the more active NGOs in Pakistan. Yusuf is also a literary figure -his romantic novels are a rage among the younger generation. Two of his novels were filmed as television serials and were hugely popular. He is instrumental in getting MAGIC as considerable quantum of insurance business from the non-governmental sector.

7. Zain ul Abideen Miza, a retired banker who still enjoys considerable influence Banking circles. Recently, Mr Mirza resigned due to his ill-health. He was replaced by Ms Shayan Mahfooz who seldom attends any meetings of the board (through her attendance is always marked). Other board members wonder if she even knows that that she is a director of the company.

Board Meetings' Proceedings

MAGIC holds four board meetings in a year. Two meetings (held at the end of first quarter and the third quarter) are held at head office. The two board meetings that consider half yearly and annual accounts are held at a holiday resort in the places like Bhurban, Swat or Abbottabad where rooms are booked for the families of the entire board for three days. The actual meetings seldom take more than two hours -the rest of the time is spent relaxing and "thinking about the future. The company is fairly profitable and there is seldom any critical issue that would demand any serious input from the full board.

Shayan always holds an Executive Committee meeting before the full board meeting

Where all the details are thrashed out. Whatever is put forward to the Board is mere a formality and is always approved without any serious deliberation whatsoever. There are three reasons for absence of any real debate at MAGIC's board meetings:

a. Shayan Mahfooz ensures that all board members are briefed before hand on the issues to be raised at the board meeting. In this way, if any board member has any reservation on any issue, it is sorted out before the meeting.

b. Board members, particularly the non-executive directors, have no real knowledge of the insurance business. So they are not really able to give any meaningful input. Nor is any such input expected from them.

c. As Omar Nawaz Khan said once, board meetings are a time to relax. They are no meant to be battlegrounds. Shayan owns the company, he runs the company, why should we interfere in his decisions anyway?"

Director Remuneration and Development

Executive directors are not paid any fee or special allowance for their directorial roles. Their managerial salaries are deemed to include this port of their job.

Non-executive directors are paid no formal remuneration except for a meeting attendance fee. This fees has risen from Rs 1000 per meeting about five years ago to the current rate of Rs 50000 per meeting. The company is not considering any proposal to pay any regular monthly remuneration or performance bonus (based on company profits) to NEDS.

One of the reasons for the low level of interest token in the affairs of the company by the non-executive directors is the size of the meetings fee. One NED recently remarked. Board members are paid just Rs 50.000 for the meeting. So they should not be expected to do any meaningful or comprehensive research or preparation for the meeting. Real preparation for a board meeting takes four to five full days' work. This means the meeting fee of Rs. 50.000 comes to a mere Rs 12,500 per day. My own time is worth much more than Rs. 12.500 a day."

Over the recent past, Shayan Mahfooz has nominated several non-executive directors to attend courses mounted by Pakistan Institute of Corporate Governance, or similar bodies. Meant for making the NEDS aware of their role in efficient conduct of board proceedings. On each occasion, the directors of MAGIC declined to attend the courses on grounds of being too occupied in their respective businesses.

The executive directors are also frequently sent on various training courses or seminars but those courses are almost always related to their functional areas, seldom on their role as a member of the board.

Shayan Mahfooz or his family has never paid any serious thought to changing the directors. Nor have they ever considered it necessary to draw up a succession plan for executive or non-executive directors. In words of Shayan Mahfooz, such decisions should only be made when they become inevitable as indeed was experienced on the death of Mr Zian ul Abideen Miza.

Never in the history of MAGIC has any shareholder (other than Mahfooz family) ever put forward a candidate for election as a member of the board. Quite similarly. The external auditors of the company are also hand-picked by Shayan Mahfooz.

Questions

2 Do you think this board is serving the real purpose of having a board?

3. Is such a Board capable of meeting its statutory and fiduciary responsibilities?

4. Shayan Mahfooz thinks MAGIC's board is making wonderful contribution to the company's profitability and growth. Do you agree with him? Why?

5. If you were asked to reconstitute the company's Board, what would do? Where would you get suitable INED$? What balance would you try to 'maintain in the board, and how?