Analysis: KALENGO SIMUKOKO
IN A free-enterprise, private-property system, it is expected that corporate executives as employees of the owners of businesses, have a direct responsibility to their employers.
That responsibility is to conduct the business in accordance with owners’ desires, which generally is to make as much money as possible while conforming to the basic rules of society, both those embodied in the law and those embodied in ethical custom.
The reality, however, is that most executives do not always act in the interest of shareholders. Corporate fraud scandals involving corporations such as Enron, Barrings Bank, Bank of Credit and Commerce, Maxwell Corporation Lehman Brothers and the recent interest rigging allegations all bear testimony to this reality.
Therefore, a mechanism needs to be put in place to compel corporate executives to act in the interest of investors. A critical component of that mechanism is the appointment of boards of directors to represent shareholders’ interests in a company and so help to minimise the mistrust that often exists between shareholders and executives (the principal-agency problem).
However, corporate boards, too, have not always been effective in their role of protecting shareholders’ interests, which is why, following the collapse of Enron Corporation, some shareholders filed legal suits against individual board members for failure in fulfilling their fiduciary obligations. Such actions, though, have often come a little too late to prevent financial losses.
So what are some of the early warning signs that a board may be in disarray or not be functioning as it should?
A board is dysfunctional when members are out of touch with events in the organisation over which they superintend. While board members shouldn’t get bogged down with the details, neither should they be the last to know about events within the company. It is not expected that board members should be at the company on a regular basis but they should find indirect ways of staying in touch so that they know the key issues and challenges that could impact the company.
Lack of a clear process for selecting new board members and for evaluating their performance once on board and for making recommendations regarding their continued stay on the board is another signal of a board in trouble. Nominations to the board should not be based merely on personal friendships with existing members but rather the strategic needs and demands of the organisation (major goals and issues faced or likely to be faced by the organisation).
A board of directors should be a collection of individuals with diverse backgrounds, who bring their specialised talents, experience and expertise to enhance an organisation’s governance and make decisions in the best interest of the organisation. Every person on the table should have an equal say on the issues at hand and each member must be willing to listen to the views of and learn from other members. However, if only one member dominates all deliberations and the rest of the directors feel subservient to that individual, such a board loses balance and is likely to become ineffective in its role.
Another warning sign that a board may be losing direction is when board members start meddling in the company’s daily operations or start getting bogged down with detail at the expense of bigger-picture issues.
A board exists to provide strategic direction through the establishment of broad goals and objectives, hiring senior executives who manage the daily activities of an organisation to achieve established goals and objectives, and working with those executives to create policies and operating procedures that are then implemented by a company’s managers.
Whenever board members attempt to be both policy setters and implementers, they take away valuable time from the key board function of strategy setting and the organisation begins to operate like a rudderless ship. This is particularly the case in multinational corporations where executives from one area of the business may be appointed as non-executive directors for another subsidiary or area of business.
While such appointments may be good for leadership development, the temptation for such appointees to meddle in operational matters is very high and their counsel is often inadequate for the organisation’s well-being as it reflects a very narrow – one company and one industry – perspective.
Poorly organised board meetings with agendas dealing with operational rather than strategic issues deserving more careful deliberations by the board, board packs not being sent in good time to allow members to acquaint themselves with matters to be discussed at the meeting, poor attendance at board meetings, and a lack of readily available documented board action points or having a lot of open board action items (i.e. required board actions that have not been completed) are all signs of a board that is in disarray.
Ineffective boards also manifest themselves through a lack a formal plan of orientation for new members and also lack training and educational plans for existing board members to enable them to continually upgrade their skills and knowledge.
Lack of a clear process for removing unproductive board members who fail to carry out their commitments is another sign of an ineffective board.
A properly functioning board can be a powerful force for a company’s success while one in disarray can be a source of distraction and missed opportunities. So, how do you rate your board?
The author is a finance and economic commentator, certified financial consultant and a director at United Bank for Africa (UBA).