The Effective Director: Personal Attributes

It is acknowledged that the office of a Director is a “high calling”. It is oftentimes challenging and requires of the individual certain attributes to achieve effectiveness. Whilst each Board has its own peculiarities, being possessed of certain attributes will contribute to the effectiveness of a Director and by extension the effectiveness of the Board. These include the following:

Strong Interpersonal and Communications Skills: This key attribute is relevant in and out of the Boardroom. An effective Director should be able to relate well with his/her peers, be approachable and communicate clearly. Striking an appropriate balance between talking too much and too little at Board meetings is also critical to achieving effectiveness. An effective Director will be able to clearly articulate the key issues and provide critical insight. He will speak to the issues before the Board rather than attack the persons involved. Furthermore, whilst Executive Directors are required to engage with third parties as part of their day job, Non-Executive Directors will occasionally have to represent the company at meetings and in discussions with third parties including the media. Thus the ability to clearly articulate the Company’s position even at short notice is desirable.

Independent Judgement: Managers are expected to be “team-players” and sometimes get knocked when they criticize a decision made by their peers or superiors. However, the Director’s role (whether as an Executive or Non-Executive) is to take a step back and critically assess the motivation and consequences of a decision, and where necessary, put forward a reasoned view – even if it is unpopular. A Director is expected to apply independent judgement to all issues before the Board. This requires the Director putting the overall interest of the Company at the forefront. Directors for the most part, find themselves being swayed by narrow or short-term considerations when faced with certain decisions. An independent mindset will enable the Director take a stand when he/she is of the view that the company’s long term future is not being prioritized, no matter the consequences.

Analytical: Directors are often presented with problems that have a number of potential solutions, and the ability to analyze, sift through data and make sense of it to find the appropriate solution is an invaluable personality trait.

Not Sweating the Small Things: Strategic thinking is a key attribute of an effective Director as Directors are not expected to waste time and effort on the small stuff. Sometimes in a bid to demonstrate their competence and area of expertise (show off) they tend to distract the Board’s attention and dwell on less critical issues. The ability to stay focused on those matters strictly within the Board’s purview is a desirable attribute. For Non-Executive Directors, this also means respecting the professional and technical competencies of the Executive Directors and not seeking to micro-manage.

Staying Power: Companies are bound to face pressure from regulators, short-term focused shareholders, the media and competition, particularly during periods of perceived poor performance, or significant structural changes. An effective Director should have the strength of character to stay calm in the face of pressure to provide the much needed stability to the Board and the Company.

Respect for Alternative Viewpoints: There are “many ways to skin a cat” or execute a given strategy. At the height of Board effectiveness is diversity of skill set, experience and perspectives. A Director should recognize that the overall interest of the organization will be better served if multiple perspectives are considered before arriving at a decision on any issue

before the Board. The Director should not attempt to force his/her viewpoint on the Board on the oft wrong assumption that it is the way to go. This also requires appropriate listening skills – a sincere attempt to actually “hear” what another Director has to say as opposed to waiting to counter that position.

Integrity: A significant attribute of an effective Director is integrity. Integrity connotes sound ethical values, transparency, accountability, consistency, commitment and courage to set an appropriate “tone at the top”. Transparency and accountability that ensure all actions pass the test of public scrutiny. Enough time and attention committed to making a good job of it and courage to ask the right questions – or to walk away if that becomes necessary.

In addition to personal attributes, certain experiential factors also contribute to the effectiveness of a Director. These include:

International Exposure: Companies have embraced regional and global expansion which come with unique challenges. A Director that brings to the Board an international perspective and exposure to global benchmarks is an asset to the Board. An effective Director is one who keeps abreast of global issues that would have direct or remote implications for the business.

Industry Expertise: The Board is enriched by a Director that can contribute knowledge of the particular industry when evaluating issues and decisions before the Board. This need not be the industry in which the Company is operating as expertise in a sector in which the Company necessarily interfaces with is always desirable.

Financial Knowledge: Whilst not required to be a financial expert or an Accountant, the ability to interpret financial reports and evaluate the financial implications of an action or decision is definitely an advantage. Directors should not shy away from seeking help in this regard.

Bringing it all together, it is important for Directors to always be reminded that the leadership and direction they provide to the enterprise is invaluable and it behooves upon them to continuously self-develop to ensure impactful stewardship.

The Dysfunctional Board

As useful as a Board of Directors is to an organization, it can only be impactful if it is effective. An effective Board will provide direction and guidance, ensure that Management works towards maximizing shareholder value and meeting other stakeholder expectations.  To be effective, the Board most be composed of competent individuals who bring to the table sufficient diversity of skills and experience. The Board would have a Charter (which actually guides it and is not consigned to the Company Secretary’s filing cabinet) that sets out a transparent process for appointing Directors, the role of the Board, its responsibilities, delegation of authority, Director tenure, etc. The Board should also have an effective Committee system that ensures matters are robustly treated before they come to the Board.

A dysfunctional Board will expectedly not deliver value and is a waste of everybody’s time. What are the tell-tale signs of a dysfunctional Board?

Ineffective Chair – The Board Chairman is first amongst equals and leads the Board. The Chairman must be a unifying presence with the ability to guide the Board to a consensus in decision making. An effective Chairman should have a good working relationship with the CEO, and enjoy the respect of other Board members. The effectiveness of a Board is dependent largely on the Chairman’s industry knowledge, leadership skills and influence on Board processes. He/she is expected to have extensive business leadership experience, including crisis leadership, be collaborative and restrained in style, resilient, possess complete candor and have an expectation of same in others. He/she is expected to downplay self-interest, serve as a trusted counselor and partner of the CEO and display a passion for good corporate governance. The Board Chair should also be able to listen well and get Directors to express underlying concerns.

Overbearing CEO – CEOs are very powerful humans! Sometimes they abuse the significant power they wield and lord it over a weak Board. Where the CEO determines who gets appointed to the Board, handpicks the Chair, fixes Director remuneration, determines what matters come before the Board and generally calls the shots, the Board’s effectiveness is impaired.  This scenario plays out when the CEO is also a significant shareholder and is seen as the de facto “owner” of the entity. In many cases, this often breeds factionalism on the Board with a faction being “loyal’ to the CEO and the other constantly at logger heads in an attempt to assert the authority of the Board.

Ineffective Directors: Where individual Directors have limited cognate experience, are ill prepared for meetings (don’t read board packs) and do not have access to continuous training, they will not add value to the Board. Such Directors will not contribute meaningfully at Board meetings. Similarly, where the composition of the Board is not sufficiently diverse – homogenous (all male), too old (or too young – which is a rarity), members drawn from the same industry – it will not be effective. A Board is dysfunctional where Directors sweat the little things to the detriment of the big picture, tend to micromanage and have significant self interest in the affairs of the enterprise.

Ineffective Committee System: Board Committees are designed to support the Board in the performance of its oversight role. Each Committee Charter will spell out the terms of reference of the respective Committee. The Committee will drill down on matters within its purview and make recommendations to the Board. The Committee System is superfluous where matters already deliberated on by the Committee are again re-opened and considered at length by the full Board. This also ties into the effectiveness or otherwise of the Board Chair. Where the Board is not satisfied that the Committee has done a good job, it should send the matter back to the Committee with clear directives and timelines rather than delve into to matter. Ever wondered why some Board meetings go on for hours on end – here’s why!

Poor Management Reporting: Typically, Non-Executive Directors complain that they do not receive sufficient information to aid decision making. Management, recognizing that there is an asymmetry of information between the “insiders” and the Non-Executive Directors, should ensure that as much information as is required is provided in a timely manner to the Board. This responsibility would not have been discharged if Management dumps tons of reports and documents on hapless Directors expecting them to make sense of it. The Board should define the kind of reports it requires from Management, the frequency of such reports as well as the reporting format. Executive summaries should be an integral part of all reports.

Ineffective Secretariat: To a large extent, the ability of the Board to function effectively is aided by the professionalism and competence of the Company Secretarial team. The Company Secretary should ensure that Board Packs are delivered in good time to Directors to facilitate meaningful participation, work with the Chairman to ensure the Agenda is not over loaded, turn out concise, accurate and well written minutes in good time and circulate action points timeously to ensure that Board decisions are implemented. Working with the Chairman, the Company Secretary should ensure that new Directors are properly inducted (even where they are not green horns) and that Directors attend periodic training to keep them abreast of emerging trends.

Bringing it all together, the Board is ultimately responsible for its effectiveness or otherwise. With the Chairman taking the lead, the Board should ensure that it is not a ceremonial appendage, meeting quarterly over tea and coffee to flip through a pile of documents. Due regard should be paid to appointing a respectable Board Chair and only Directors that will add value should be appointed to the Board. The Board should clearly delineate the authority limits of the CEO and not allow him/her to hijack its authority. An effective Board will deliver tremendous value to the entity and provide strategic direction that assures sustainability.

Bisi Adeyemi is the Managing Director of DCSL Corporate Services Limited. Kindly send reactions and comments to badeyemi@dcsl.com.ng.

SUCCESSION PLANNING AND THE ROLE OF THE BOARD

A recurrent challenge with many businesses globally is the failure to adequately plan for succession. Whilst the reasons for this may vary from one institution to another, there is no gainsaying that failure of leadership to plan for the future has far-reaching consequences that go beyond the organization itself and impacts on economic sustainability and the society.

Succession Planning entails devising a systematic process for ensuring leadership availability, continuity and the development of an organization’s leadership talent.

  • Systematic Process – there must be a conscious, documented and pro-active process in place for defining and implementing an organization’s approach to succession planning
  • Availability – the process must identify suitable ‘ready now’ successors for the critical roles and leadership positions within the organization at any material time.
  • Continuity – succession planning must be linked with business continuity to ensure that the available human capital is sufficiently cross-trained to assume diverse responsibilities and be able to step in and fill critical positions even if on a temporary basis to ensure continuity.
  • Development – as the saying goes, “success occurs when opportunity meets preparation”. Management must take advantage of every opportunity to develop existing talent and prepare them to assume future, challenging leadership roles within the organization or elsewhere.

The Board has the primary responsibility for ensuring that an organization has a practical and implementable succession planning process in place which is applicable throughout the organization. Typically, the Board would delegate such responsibilities to a Board Committee (usually the Governance/Remuneration/HR Committee) which would receive and deliberate on reports from Management on employee-related and succession matters. The importance of the Board taking direct responsibility for the succession planning process, particularly as it pertains to the succession to the position of CEO/MD and other key executive roles, cannot be overemphasized. To this end, it is advisable that the Board periodically reviews the company’s leadership development program to ensure that the succession planning program is indeed being implemented.

In preparing its Succession Planning Policy, an organization should give careful consideration to existing talent and where the requisite capacity is lacking, it should not shy away from looking outside the organization to fill specific positions. Whatever option is expedient, an organization’s policy on succession planning must be clearly defined, transparent and properly managed to avoid disgruntled employees sabotaging the process.

As organizations are typically established to subsist in perpetuity, the process for implementing the succession planning is a continuous, ongoing one. The process is therefore not time-bound. A good Succession Planning process gives assurance to the organization’s stakeholders that their interests will not be negatively impacted in the event of sudden exits and that the going concern status of the organization will not be derailed.

Whether at the Board or at Management level, the talent development and management process is incomplete without opportunities for evaluation. Retaining ineffective employees in the system will ultimately prove detrimental to an organization’s health. A proactive organization will therefore structure its performance evaluation system around the attainment of set goals and objectives and ensure that periodic performance evaluation is undertaken to enable Management and the Board identify areas of improvement and note the star performers within the organization both for reward and to optimize the execution of the organization’s strategy.

Ownership of the succession planning process by the Board has been proven to enhance both organizational process and outcomes. Increased awareness at the Board level about the significance of succession to organizational sustainability will encourage Board members to focus on their own individual and collective professional development to prepare themselves to assume increased responsibilities, be positioned to identify potential successors to key roles more easily which will foster smoother transition to leadership roles.

Confidentiality and the Board of Directors

The courts have held that “a director’s right to information is usually unfettered in nature” (Kalisman V. Friedman, 2013 Delaware Chancery Court). Given the extent of their statutory duties, Directors are entitled to demand for and receive all such information as required to enable them take decisions that are in the best interest of the company. Remarkably, the use or misuse of information to which a director becomes privy by virtue of his/her membership of a Board of Directors is a subject to which many Boards do not pay significant attention until a breach of confidentiality or a threat thereof occurs.

The obligation of confidentiality fundamentally derives from the fiduciary duties of loyalty and care, hinged on the fact that in fulfilling their responsibilities, Directors are entrusted with significant amount of material, non-public information. Confidential Board information may be proprietary information of a competitive and commercial value to a company or sensitive information regarding Board proceedings and deliberations. It is typical for the Board to take for granted that Directors would always treat Board deliberations and other sensitive information with appropriate confidentiality. However, this is not always the case.

The concept of confidentiality may have different dynamics on the Board of a small privately-owned company as it would on the Board of a publicly listed or quoted company. Whilst a Director’s fiduciary duties of loyalty and care are constant, the degree of transparency and disclosure set by regulatory reporting standards is higher in the case of publicly quoted entities and Directors sitting on the Boards of such entities are exposed to significantly more sensitive information than their peers in privately held companies. However, the basic principles of transparency, disclosure, trust and confidentiality apply to a Board, be it of a private or a publicly quoted company.

There are generally no guidelines on directors’ obligations with respect to confidentiality and the law in this regard is not yet well articulated. There is also a dearth of case law to guide Directors and Boards on the subject. Consequently, when sensitive board information is deliberately or inadvertently leaked by a Director, the Board may struggle to respond as the remedies available to the Board and the company itself are limited. A typical remedy would be to ask the erring Director to resign or to remove him. This remedy may however not be sufficient deterrent – never mind that a Director can only be removed by shareholders. The consequences of breach may sometimes be far reaching as to threaten the very existence of the enterprise.

The problem of Directors breaching the confidentiality of board deliberations is not new. In January 2006, CNET published an article revealing Hewlett-Packard’s long-term strategy on the basis of information supplied by an unnamed insider, later identified as then-director George Keyworth. His identity was only uncovered because Hewlett-Packard hired private investigators who surreptitiously gained access to e-mail inboxes of the company’s directors and certain reporters from CNET. A contentious series of disputes occurred between HP’s Board Chairman, Patricia Dunn (who wanted Keyworth to resign), and Keyworth. Months later, after the smoke cleared, Keyworth resigned as a director, another director resigned in protest about the way Keyworth was treated and Dunn also as Chairman but remained as a Director. The culture of the HP Board needed to be rebuilt (Harvard Law Forum).

In the absence of a Confidentiality Policy by which Directors are bound, enforcing a sanction in the face of a breach could be resisted. It is recommended that the Board should take a deliberate and conscious approach to ensuring confidentiality on the Board by adopting a comprehensive Director Confidentiality Policy. To be effective, Directors should be required on their appointment to sign off on the policy and be availed a copy of the policy document.

A confidentiality policy should at the barest minimum specify what the Board considers to be “confidential information” and provide a list of examples of what type of information would be classified as confidential so that Directors are clear in their minds in this regard. The policy should also contain an unambiguous statement that prohibits Directors from disclosing confidential information to non-board members as well as other types of misuse and should provide a very narrow set of circumstances under which Directors are authorized to discuss confidential information, for example, when required by law or when authorized by the Board. It is recommended that the Policy should mandate the Board when required, to designate a Director to disseminate Board information to third parties. It should also specify the penalty for breach.

A Confidentiality Policy by no means ensures that there will be no breach of the duty of confidentiality on a Board but underscores the importance of maintaining the confidentiality of board information and ensures that all Directors are well aware of their duty to protect such information. Having such a Policy also creates a standard of conduct and voluntary adherence that should have significant moral suasion. The Policy makes it easier for the Board to deal with a breach when it occurs – provided of course it is able to identify the erring Director.

To enable them take qualitative and informed decisions, it is imperative that the boardroom gives Directors the assurance of an atmosphere of candor and free expression. Thus, the fabric of trust that such an atmosphere engenders, may be damaged irrevocably when sensitive deliberations are disclosed, albeit inadvertently and this would inevitably undermine the effectiveness of the Board. Directors should not discuss Board deliberations with those who do not owe fiduciary responsibility to the entity including spouses.

Ultimately, there is no substitute for genuine trust, collegiality and respect among board members and as such a culture of confidence is the surest safeguard against breach of confidentiality. To facilitate the enthronement of such a culture, Directors should treat all Board deliberations and all information that come within their knowledge by virtue of their being Directors, as confidential. The Chairman should provide direction in setting the tone of a culture of trust and respect on the Board and proactively build trust and cohesiveness on an ongoing basis.

The Board as A High-Performance Team

“We all owe the shareholder activists, accountants, lawyers, and analysts who study corporate governance a debt: In the 1980s and 1990s, they alerted us to the importance of independent directors, audit committees, ethical guidelines, and other structural elements that can help ensure that a corporate board does its job. Without a doubt, these good-governance guidelines have helped companies avoid problems, big and               small. But they’re not the whole story or even the longest chapter in the story. If a                 board is to truly fulfil its mission—to monitor performance, advise the CEO, and provide connections with a broader world—it must become a robust team—one whose members know how to ferret out the truth, challenge one another, and even have a good fight now and then.” Jeffery Sonnenfied, Yale School of Management.

In reviewing the high-profile governance failures in the recent past, typical questions that arise include the following –  were Directors asleep at the wheel? Were they in cahoots with corrupt management teams? Simply incompetent? Negligent? Clearly, we cannot establish a broad pattern of incompetence or corruption. The Boards of those companies followed most of the accepted standards for board operations – members showed up for meetings, Directors had lots of personal money invested in the enterprise (so there was sufficient ownership alignment), many had the appropriate Board Committees, most Directors had financial competence, Codes of Ethics were in place, the Boards weren’t too small, too large, too old, or too young and many had independent Directors as prescribed by the Codes.

It will then appear that following good-governance regulatory recipes doesn’t produce good Boards. The most involved, diligent, value-adding Boards may or may not follow every recommendation in the good-governance handbook. What distinguishes exemplary Boards is that they are robust, effective social systems. Drawing on individual Directors’ collective experience, insights and intellect, Boards operating as high-performance teams, can partner with Management in an environment of constructive contention to produce better decisions and run the company more effectively than it would if left to its own devices.

The nagging question then is – can the Board function as a team given that it meets infrequently and consists of a group of powerful people accustomed to leading their own teams? How can the Board transform from a “ritualistic appendage” to a real team?

It has been suggested (Nadler, Behan & Nadler – Building Better Boards) that the value adding Board should answer these three challenges: (a)How do you create a Board that is truly effective – one that not only meets the minimum legal obligations but also becomes a source of added value to the company? (b)How do you design the work of the Board so that it achieves an appropriate level of engagement without overstepping its proper role, which is to ensure that the company is managed effectively rather than manage the company? and (c) How do you build an effective relationship between the Board and the CEO, one that empowers the Board without hampering the CEO’s ability to lead?

According to Jefferry Sonnefeld (Harvard Business Review), the first step is to create a climate of respect, trust and candor. It is imperative that the CEO provides timely and accurate reports to Directors as well as share difficult information openly. He/she should also give Directors access to members of the Management team who can answer questions, thus obviating the need for Directors to develop back channels to line Managers. The atmosphere of trust can also be broken where the CEO sees the Board as an obstacle to be managed, encourages factions to develop, and then plays them against one another. The Chairman can break such factions by assigning members to different Board Committees.

Breach of confidentiality can also affect trust and candor on the Board. It is imperative that the boardroom gives Directors the assurance of an atmosphere of candor and free expression. The fabric of trust that such an atmosphere engenders, may be damaged irrevocably when sensitive deliberations are disclosed.

The Board should strive to foster a culture of open dissent. Respect and trust do not imply endless affability or absence of disagreement which inevitably manifests as groupthink. They imply bonds among Board members that are strong enough to withstand clashing viewpoints and challenging questions. Directors should understand that dissent is not the same thing as disloyalty and the Chairman should probe silent Board members for their opinions, and ask them to justify their positions.

Individual accountability tends to dissolve in large groups. Thus, conscious effort should be made to give Directors tasks that require them to inform the rest of the Board about strategic and operational issues the company faces. This may involve collecting external data, meeting with customers, anonymously visiting branches, and cultivating links to outside parties critical to the company.

The final step is to periodically evaluate the Board’s performance. Lack of feedback is self-destructive – organizational learning experts agree that people and organizations cannot learn without feedback. No matter how good a Board is, it is bound to get better if it’s performance is reviewed intelligently. The review will amongst other objectives examine Directors’ confidence in the integrity of the enterprise, quality of the discussions at Board meetings, credibility of reports, level of interpersonal cohesion and the degree of knowledge and skills.

 

KPIs for a Great Board Meeting

Hosting great Board meetings forms key deliverables for the Company Secretary. However, it is also the responsibility of the CEO to ensure that for Board meetings to achieve the intended objectives, sufficient attention goes to planning even the minutest detail. A few of the details that should be top of mind in achieving a great meeting are discussed below.

Venue and Ambience: Accessibility of the venue should be kept in mind when working with a diverse mix of Directors. From ensuring that the location is easily accessible, to making sure that elevators are functional, the comfort of Directors should not be compromised to ensure they are able to fully focus. Seamless arrangements should be made for out-of-town Directors to ensure they are settled in the day before the Board meeting. Where the meeting is held off-site, it is preferable to check them into the same facility to reduce commute time. Given the status of Directors, a certain level of quality is expected. Facilities must be top notch – Wi-Fi, video and teleconferencing facilities, etc. Whilst the venue should be upscale and clean, it need not be over the top. It is also important not to create an impression of opulence when the company is going through difficult times. This on the other hand is not an excuse to treat Directors shabbily.

The meeting space itself is of paramount importance. Given the confidential nature of Board proceedings, privacy is crucial. The meeting room should be located away from the general area where there is a lot of foot traffic. As much as possible, should be on its own floor or with a private entrance to ensure there is no eavesdropping. The ambiance and aesthetics are also key. Directors should not be cramped around a table without amble elbow room. There should be sufficient room to pace around if required and ideally an ante-room for tea/coffee breaks. Indeed, it is not out of place to provide another room where Directors can make and receive quick calls during breaks.

Hotel and meeting rooms should be booked as soon as the meeting dates are decided to ensure you don’t end up settling for what is available. As much as possible, book for the year if dates are fixed.

Good Food: It is not a bad idea – especially where some Board members are coming from out of town – to host Directors to dinner the day before the Board meeting. This sets the tone for a good meeting and affords a bonding opportunity. The Board gets an informal briefing of the status of the business and thus it is a good idea to invite key company executives and top management staff. This also ensures that Directors have open lines of communication with line Managers.

At the Board meeting itself, arrangements should be made    for unobtrusive finger food – fruits, nuts and biscuits as opposed to chunky pieces of chicken – to be within easy reach. A good tea break with a nice spread of healthy options is also important. Directors are happy to note that their dietary preferences have been taken into account without much fuss. For lunch, where the meeting is holding at Company’s premises and it does not have dining facilities, it is a bad idea to serve lunch in the Boardroom.   In that situation, it is best to book a table at a nice restaurant and head there after the meeting. Pre-ordering lunch saves time, as such a menu should be available for Directors to pre-order. Keeping downtime to the barest minimum should always be paramount. This is also not the time to try out a new restaurant or caterer – it could be a very costly misadventure.

Logistics: Sufficient attention should be paid to security – traveling from and to the airport, commuting from hotel to meeting venue and at the meeting venue. Arrangements should be made for enough cars as it is quite tacky to keep Directors waiting to leave the venue after the meeting. Dress rehearsals to test gadgets – video and telephone conferencing, interactive screens, etc. should be carried out the day before to forestall embarrassing glitches.

Rather than something to dread, Board meetings should be interesting. Working with the Chairman, the CEO should ensure that the agenda focuses on strategic issues and not mundane operational matters. Board packs should be delivered several days ahead of the Board meeting to allow for meaningful deliberation. Reports should be crisp, precise and straight to the point. The Chairman in working though the agenda and allowing Directors to contribute, should be mindful of properly pacing the meeting to ensure that Directors don’t spend the whole day at the meeting. It is not out of place to call for occasional breaks to ease tension or just to allow Directors refresh.

Good Board meetings require adequate preparation and nothing should be taken for granted or left to chance.

Independent State of Mind – Myth or Reality?

Directors owe their fiduciary duties to the Company as a whole and are expected to act in the best interest of the Company and not in the narrow interest of the stakeholders (typically shareholders) they represent. An independent mindset will enable the Director take a stand, when he/she is of the view that the company’s long term future is not being prioritized, no matter the consequences. However, many Directors are unable to take a step back when faced with decisions that are not in the best interest of the stakeholder block they represent, but which would benefit the company – often in the long run. This brings to the fore the struggle to align the interests of the Company (all stakeholders) and the interests of those charged with running the Company (Board and Management). The concept of Independent Directors is an attempt to ensure that there is sufficient “independent judgement” on the Board that enables the Board act in the best interest of the Company at all times.

It has been argued that the Independent Non-Executive Director (INED) is no different from any other Non-Executive Director (NED). However, the process of appointing Directors (INED or NED) unto the Board is critical in determining and assuring the individual’s independent state of mind and judgement. A well-defined and transparent appointment process, that clearly sets out the criteria for the role as well as the required skills set; outlines a procedure championed by the Nominations (Governance) Committee which is clear to all Directors, is one way of achieving true independence. The converse is where the Chairman or CEO unilaterally circulates CVs of individuals known to them to the Board “for consideration”. Sometimes these individuals go through the motion of “appearing” before the Nominations Committee before being “recommended” to the Board and the shareholders for appointment. More often than not, such Directors find it difficult to take a stand that will “hurt” their “benefactor”, even where such a position is in the best interest of the Company.

Ownership is also a significant factor in a Director’s ability to think and act independently. Separating the role of ownership and governance engenders Board independence which is a sine qua non to delivering value to a wider spectrum of stakeholders and acting in the company’s overall interest. Decisions would not always be influenced by investment objectives of the individual and institutional shareholders, but will be better focused on considerations beyond the bottom-line.

Another key determinant of the independence of the Non-Executive Director is the character of the individual. Integrity connotes sound ethical values, transparency, accountability, commitment and courage. If the selection process throws up an individual with integrity and sufficient moral fibre, he or she will bring on board the appropriate independent judgment required for Board effectiveness and sound decision making. It would be of little or no consequence to such a Director that he or she represents a shareholder, as such a Director will have the sufficient presence of mind required to make optimal decisions.

Conversational intelligence, candour, leadership skills, confidence are some of the desirable character traits in a Non-Executive Director.

The culture on the Board to a large extent also determines the level to which Directors are able to maintain independent judgment.  Openness to new ideas – as opposed to an attitude of “this is how we do it”, the ability of Directors to accept constructive criticism and feedback are attributes of the Board that will engender greater independence of thought. Also, if one or more Directors exercise overbearing influence whether by reason of shareholding or a propensity to dominate discussions, the tendency will be to always defer to such individuals. The Chairman (if he/she is not the culprit) will need to firmly deal with this by ensuring that no Director dominates discussions and drawing out the less vocal Directors.

The process of determining (and sometimes the quantum of) Non-Executive Director remuneration also has an impact on Director independence. Leaving the determination of Director remuneration to the CEO’s discretion is not best practice. This responsibility should be that of the Governance (Remuneration/Nomination) Committee which will make recommendations to the Board on the components, quantum and frequency of review. The Committee will periodically undertake a peer review to ensure that remuneration package compares favourably with industry peers. Excessive and arbitrary pecuniary benefits to Non-Executive Directors has the potential of beclouding their judgement.

Finally, Directors who are busy with other endeavours and who do not solely depend on their Board membership for relevance or economic gain are more likely to bring a greater degree of independent judgement to the Board.

 

“The Super Code” – A Postmortem?

The Financial Reporting Council (‘FRC’) in purported exercise of its powers under Section 50 of the Financial Reporting Council of Nigeria Act, 2011, had on the 17th of October 2016 issued the now suspended National Code of Corporate Governance which took effect on the same date. The much touted ‘Super Code’ which aimed to address the sectoral divergences and peculiarities, is in the form of a 3-in-one Code with variations to suit the peculiarities of the Public Sector, Private Sector and Not-For-Profit Organizations (NPFOs). The segmentation of the Codes on sectoral basis was an attempt to answer the question of the workability of a code for all sectors.

Following criticism from a cross section of stakeholders, the Federal Government suspended the implementation of the Code on the 7th of November, 2016 “pending a detailed review, extensive consultation with stakeholders and reconstitution of the Board”.  Contending that the Code was overreaching and inconsistent with the provisions of existing legislation – notably the Companies and Allied Matters Act (CAMA), the Minster of Trade and Investment also called to question the authority of the FRC to issue the Code in the absence of a substantive Board. Following the appointment of a new Executive Secretary and a Board Chairman, it remains to be seen whether the Code has died a natural death.

However, before we throw away the baby with the bath water, a review of some of the controversial provisions of the private sector Code is presented hereunder.

The Private Sector Code has as its focal thrust the harmonization and unification of all the existing sectoral corporate governance codes applicable in Nigeria (CBN, SEC, NAICOM, PENCOM & the NCC Codes) and was to have been applicable to:

  • All public companies (whether listed or not);
  • All private companies that are holding companies or subsidiaries of public companies; and
  • Regulated private companies as defined in Section 40.1.14 of the Code (“regulated private companies” means those private companies that file returns to any regulatory authority other than the Federal Inland Revenue Service and the Corporate Affairs Commission, except such companies with not more than eight (8) employees”).
  • Board Structure & Composition: “No person, having retired from the Board or Executive management of a company, shall continue to exercise any surreptitious influence or dominance over any of these two governance structures. Such continued dominance or influence may vitiate the validity of the disengagement cool-off period as provided for by this Code” . It has been alleged that this provision was targeted at specific individuals and as with a few other provisions of the Code, is reactionary. It is also not clear how this provision would be enforced as “surreptitious influence or dominance” may be difficult to prove.
  • Board Size: The Code prescribes a minimum Board membership of eight (8) for all Private Sector companies. However, Section 5.7 of the Code makes an exception for regulated private companies that are not holding companies or subsidiaries of public companies, to the effect that such companies shall have a board membership of not less than five (5) out of which three (3) shall be Non-Executive Directors (of which a majority shall be Independent Non-Executive Directors). This provision runs counter to Section 246 of CAMA which provides that “Every company registered on or after the commencement of this Act shall have at least two directors”.
  • Chairman: In apparent reaction to the return of some MD/CEOs to the Boards of their respective companies as Chairmen, the Code provides that “the MD/CEO shall not go on to be the Chairman of the same company. If in very exceptional circumstances the board decides that a former MD/CEO shall become Chairman, the cool off period shall be 7 years and the Board shall consult both majority and minority shareholders in advance and also inform the regulator of the appointment, setting out its reasons for such appointment. This shall also be stated in the next annual report”.
  • Independent Directors: Not less than half of the Non-Executive Directors shall be Independent Directors. The reclassification of an existing Non-Executive Director into an Independent Non-Executive Director on the same Board is not allowed. This provision was to have substantially changed the composition of many Boards, requiring the appointment of more Independent Directors.
  • Lead Independent Director (“LID”): The Code introduced the position of a Lead Independent Director (known in some jurisdictions as a Senior Independent Director) who is expected to ‘provide a sounding board for the Chairman’ and to serve as an intermediary for the other directors when necessary. It is submitted that this provision would provide some balance on the Board in the case of a “Super Chairman”.
  • Executive Directors: The MD/CEO should not be the only Executive Director on the Board of Company. This provision does not take into cognizance the size and nature of the company’s operations and assumes a “one-size-fits-all” posture.
  • Tenure:
    • Managing Director /Chief Executive Officer: 5 years x 2 terms
    • Non-Executive and Executive Directors: 4 years x 3 terms
    • Independent Directors: Maximum of nine years.
  • Board Meetings: Where a majority of Independent Non-Executive Directors dissent on an issue before the Board, such decision can only be valid where at least 75% of the full Board (without reference to quorum) vote in favor of such decision. One of the most controversial provisions of the suspended Code which is in disregard of the provisions of CAMA to the effect that each Director shall have one vote. It may also create undue tension on the Board and the emphasis on the role of the Independent Directors takes away from the expectation that all Directors are to approach their responsibilities with a degree of independence.
  • External Auditors:
    • Joint Auditors: Section 19.3 of the Code provides that listed and Significant Public Interest Entities shall engage Joint External Auditors to undertake statutory audit. These entities are those whose market capitalization is not less than =N=1 billion and/or whose annual turnover is not less than =N=10 billion. In addition, Section 19.2.2 provides that for every first statutory Auditor that is an international firm (i.e. one with at least one non-Nigerian partner), the subsequent statutory auditor shall be a National firm (i.e. one that has no foreigner as a partner).
  • Internal Audit: A Public Interest Entity shall not outsource its internal audit functions.

There is no gainsaying that the implications of the suspended Code are far reaching. However, it is also apparent that a convergence of the numerous industry specific Codes of Corporate Governance will engender best practice across sectors. Thus it is suggested that the “Super Code” should be reviewed as promised with a view to harmonizing all the Codes in close consultation with relevant stakeholders.

 

BEFORE APPOINTING A NON-EXECUTIVE DIRECTOR

Non-Executive Directors (NEDs) play an important and indispensable role in corporate governance and commercial sustenance. Although NEDs share the same general responsibilities and duties as other Directors, they occupy a central position in Board governance and play an integral role in ensuring the effectiveness of Executive Directors and the smooth functioning of any business enterprise. Perhaps the most critical of the roles of the NEDs is defining the company’s values and standards and ensuring that its obligations to its stakeholders are accomplished. NEDs are also expected to bring significant objectivity and independence to the Boardroom.

These important and incontrovertible roles and duties of the NED require specific skills, qualities and qualification from individuals appointed to occupy such positions and elevates the need to ensure that only individuals who possess the right qualities and characteristics are so appointed. There is a consensus that several of the recent high profile corporate failures could have been averted if the NEDs on the Boards of the affected companies exercised the level of independence and objectivity naturally expected of them. Thus, it is essential that in appointing a prospective NED, care must be taken to ensure that the individual possesses not only the relevant skills set, but is of such disposition and has attained such level of preparedness that would enable an objective and effective discharge of the duties of the NED.

A Non-Executive Director should have sufficient knowledge of the Company’s industry and the ability to make meaningful impact on the Company’s business, such that could easily give confidence to both Management and investors. Furthermore, a sufficiently strong character that would enable the NED constructively question Management proposals is also critical. A prospective NED should be able to bring positive attitude to the Board by participating actively in the decision-making process and scrutinizing the actions of Management without emotional hindrance.

Independence within the context of a NED is the ability to exude objective thinking devoid of extraneous influence. It is expected that a candidate for an NED position must possess a level of independence from Management and other interests related to the company to ensure that he/she is well positioned to provide an unbiased, impartial and objective view on matters before the Board. Thus, it is important to ascertain that the director is independent in character and judgement and that there are no relationships or circumstances which are likely to affect, or could affect the director’s judgement.

It is also important before finalizing the appointment of a NED, to confirm the ability of the prospective NED to remain on the Board for a reasonable period. There is no gain saying that organizational goals and objectives can hardly be achieved where there is a high level of Director attrition. A notable lacuna in most corporate governance codes is the requirement for NEDs to commit to spending a minimum period of time on the Board.

Perhaps the most important consideration before appointing a NED is the ability of the prospective candidate to devout sufficient time to the affairs of the company. To fulfil their roles, NEDs would be required to meet from time to time and to serve on Board Committees. This comes with a demand on the NED’s time and specifically his ability to show the required level of commitment to the Company’s affairs. Thus, it is important before appointing a NED, to ascertain that the candidate can allocate appropriate time to meet the demands of the role as may be required. Beyond this, Directors should be made to disclose their other significant commitments to the Board with a broad indication of the time involved in such other responsibilities. Ensuring that a Director has enough time to carry out the responsibilities of the role should be ongoing. Thus, a NED should typically get the Board’s buy-in before accepting additional commitment that might impact on his/her time availability.

Given the significant role of the Non-Executive Director in the achievement of corporate goals, it is imperative to get it right from the beginning by ensuring that prospective candidates possess the requisite qualities to perform the role and are able to devote adequate time to providing the requisite oversight.

Reputational Risk

“A good reputation is more valuable than costly perfume” Ecclesiastes 7:1 (The Holy Bible)

A few years ago, when CEOs had to answer the question “What are the major risks facing your organization?” many of them were quick to list political (environmental), operational, regulatory and human capital as the top four. Rarely did they consider the exposure of the organization to a risk that could be devastating in its impact – loss of reputation. This trend is changing as recent research on risk management by the Economist Intelligence Unit (EIU) indicate that CEOs consider reputational risk as the highest ranking (52%) above regulatory (41%) and human capital (41%).

“A company’s reputation is perhaps its most valuable asset. Reputational risk is the possible loss of the organization’s reputational capital”- Financial Times. It is any risk to an organization’s reputation that is likely to destroy shareholder value and can be defined as the risk arising from negative perception on the part of customers, shareholders, investors or regulators.

Changes in business practices arising from increased focus on good corporate governance practices, statutory and regulatory requirements have made companies more vulnerable to reputational damage. Increasingly, the power of the press and social media has intensified the focus on corporate reputation. Compliance breaches (and indeed the allegation thereof) leading to fines and sanctions affect the public perception of an entity. According to Warren Buffet” It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”.

Reputational risk when it crystalizes leads to negative publicity, loss of revenue, litigation, loss of clients (or customers), exit of key employees, share price decline (depending on the sophistication of the stock market) and difficulty in hiring talent. It also hinders access to capital and if the organization is lucky to find funding, this comes at a premium. The loss of reputation does not only affect the corporate entity, it rubs off on individual directors, employees and indeed business partners. Some individuals have had their names sullied in high profile corporate scandals. In some cases, these individuals did not even play active roles in events that heralded the collapse of the institutions.

Exposure to reputational risk is essentially a function of the adequacy of the organization’s internal risk management processes, as well as the manner and efficiency with which governance structures respond to internal and external influences. An organization through its internal risk management processes should identify potential sources of reputational risk to which it is exposed. It is ultimately the responsibility of the Board of Directors to ensure that the appropriate framework to manage reputational and other risk is in place.

Again, the recent EIU survey found that 62% of companies interviewed stated that reputational risk was the most difficult risk to manage. Among the major challenges identified are categorization and quantification of reputational risk. In anticipating the occurrence of a reputation-damaging event, it is difficult to foresee the likely impact and the dimensions thereof. Oftentimes, a damage to reputation leads to the crystallization of other risks – credit, liquidity, market and legal.

The key elements in the management of reputational risk include; sincere and consistent enforcement of governance controls; enthroning and encouraging ethical conduct across the organization; ensuring statutory and regulatory compliance; continuous monitoring of threats to reputation; prompt and effective communication with all stakeholders; having in place a crisis management plan and a crisis management team.

Re-establishing reputation takes a long time. Oftentimes, the damage is permanent and irreversible. Companies need to pay more attention to and place sufficient value on corporate reputation as in the words of Ronald J. Alsop in his book ‘The 18 Immutable Laws of Corporate Reputation’ “a good reputation can enhance business in good times, become a protective halo in turbulent times, and be destroyed in an instant by people at the lowest or highest levels of the corporate ladder”.