Corporate misgovernance

Kevin Mokento | Friday January 29, 2021 16:26

However, sometimes, directors are mired in misconduct. I wish this oath could serve as a legally binding undertaking and a prerequisite to the appointment of directors, “I _____, affirm to diligently execute the office of the director of ______ with a sense of unimpeachable integrity, to demonstrate utmost respect for my duty, to transparently make decisions that are in the best interests of the company, and to offer strategic guidance while refraining from meddling in operational matters that are the sole preserve of the executive management team.”

True, some of these virtues are captured in the law. By accepting directorship, an individual implicitly vows to be bound by these requirements. I’m aware of the fact that unscrupulous individuals would rattle through such an oath without applying their mind to crucial elements of their implied covenant with the company. Wittingly contributing to the degeneration of what must form a credible compact into a hollow worthless ritual. Allow me to discuss three of the many underlying reasons for board failure.

Wind-vane directors. One of the cardinal duties of directors is to exercise independent judgement. This is often captured in board charters that govern the conduct of directors in their interaction with their colleagues, executive management, internal auditors and shareholders. Oftentimes, insecure directors are tempted to hive-off their autonomy to their domineering colleagues gifted with a good command of the English language. Fired up with sycophancy and compromised by their inarticulacy, they would cosy up to their heroes. Neither demonstrating the inclination nor the confidence to objectively take on and engage their overrated colleagues in debates.

These below-average directors would lie low, seemingly ambivalent, waiting for their icons to blow the wind. Thereafter, they would demonstrate their unquestioning loyalty to their furtive idols. Sometimes these subservient directors would deliberately shy away from offending representatives of majority shareholders. Scared of being relieved of board membership, and buoyed by their desire to continue raking in board fees while maintaining a seemingly respectable societal status, they would sacrifice their intelligence and integrity on the altar of expediency.

Together with their morally depraved icons, they would find ways of aggressively compelling management to make decisions that are in the short-term interests of majority shareholders while ignoring the more important long-term interests of all shareholders. If management opts to conduct itself in a morally upright manner by resolutely resisting such overreaching tendencies, the team is likely to be denounced as incompetent.

Conflict of interest and flagrant failure to read board packs and contracts. Board failure can be occasioned by inclination of directors to use the company as a cash cow for their kin and kith. Delinquent directors don’t read board packs. This is insane! Inexcusable! It gets pathetic if it is the chairperson who fails to read. How on earth can decisions that would promote success of a company be made if the boardroom is swarming with chair-warmers masquerading as directors!

Sadly, this awful habit of not reading can bind businesses to multi-million pula financial obligations. Especially where unprincipled but trusted iconic ‘lead’ directors connive with their poltroonish colleagues and unethical executives to defraud the company. In such a case, the board could bind the company to unprecedented and irrational contracts and executive compensation solely meant to line the pockets of the executives, and of course the ‘lead’ directors who would covertly fall into the payroll of compromised executives. By the time their horrendous indiscretions are exposed, the trusted ‘lead’ directors would have long resigned from the board, perhaps enjoying new directorship elsewhere, and well on their way to selfishly eviscerating the wealth of another unwary company. Talk about despicable larcenists bent on feathering their nests!

If you don’t have the time to give due attention to a directorship role, do the decent thing, decline appointment or resign. I always wonder where individuals serving in the upper echelons of businesses get the time to serve in demanding multiple boards. Can they give all these boards the attention they deserve while delivering at an optimal level in their day to day work?

Failure to apply one’s expertise. There is good reason for appointing individuals of different skills to boards. If they pull together, spurred on by their abiding synergetic skillsets, their collective balanced outlook would facilitate sound business decisions. However, spineless directors have the tendency to frivolously abandon their expertise at the door the moment they step into the boardroom. This has been found to be true with unconfident reticent lawyers, finance and accounting professionals. What a great injustice and disservice to shareholders, employees, clients and suppliers!

When you think about the fall of a business behemoth like Enron, you cannot help but wonder, where on earth were board appointed directors skilled in finance and accounting! Granted, the external auditors were complicit. But, how could a company continuously understate its debt and declare projected earnings as recognised revenue without woke finance-savvy people in the board picking this up? Disingenuously attributing this to being misled by an executive management team destitute of integrity doesn’t cut it!

Issues linked to board failure cannot be exhausted in a short article, but here is the bottom line, it is essential for all directors to recognise their fiduciary duties of care and loyalty to the company and its shareholders. Cyrus Ministry, the former chairperson of Tata Group asserts, “shareholder value gets lost when corporate governance is not adhered to.”