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"Bored" of Directors!



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Wednesday, October 28, 2009

Rajit Nair

Yes, it is simply getting bored with the actions or passiveness of many corporate Boards in many of the companies in the recent times. The Wikipedia defines Board of Directors (BOD), as “A Board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as Board of trustees, Board of governors, Board of managers, or executive Board. It is often simply referred to as "the Board."

Well! Is it really happening, especially to oversee the activities of a company or organization? Almost in all forms of organizations, whether it is a listed company, not-for-profit or family owned business, the basics are the same. Selection of Directors for the Board itself sometimes is irrational. Certain Boards have the owner’s or founder’s sons, nephews, cousins and spouses ‘chairing’ the cachet. Most of the Directors sitting on such boards even don’t know the ABC’s of business, their role, their duties and responsibilities and their powers due to their age or simply ignorance. Responsibility to the investors and stakeholders are compromised in such cases. Whatever form the Boards are (passive or active, enlightened or traditional), the basic function of the Board is to safeguard the interest of the investors and stakeholders. In the current situation, triggered by the economic turmoil, companies going bankrupt and investors losing their monies, mass layoffs, increase in unemployment, these Boards have more responsibility than ever before.

The importance of Corporate Governance is now being seriously embraced by many businesses including the family owned. The underlying principle behind Corporate Governance is the Gandhian philosophy on the formation of trusts. Corporate Governance started evolving since 2001, after the collapse of US based firms like Enron and WorldCom. This was followed by the passing of the Sarbanes-Oxley Act by the US aimed at restoring public confidence. However, diluting or misconstruing of the Corporate Governance principles again led many institutions’ exit from the world business map during the financial crisis.

Corporate Governance warrants lots of adherence to lots of requisites. Corporate Governance is a guide defining and delimiting the roles of the Executive Management and Board of Directors, each one’s responsibilities, reporting mechanism and problem solving steps defined, documented, approved and to be practiced in a Company. However, the practice in many companies is having a well-defined “Holy Book” with all principles and best practices, documented, approved by the Board of Directors. Appallingly, not even a single Director might have read this document before ‘blessing’ it with his/her signature. This is one of the reasons that led the companies to go bankruptcy or lockouts in the recent past.

Having people, qualified enough or well experienced on Board is very important. Investors have a greater responsibility in selecting / nominating seasoned Directors. In some GCC countries, the law stipulates having a certain number of nationals (Citizens) on Board. This would facilitate an entry-level employee becoming a Board member, if the organization is a multi-diversified conglomerate. Giving opportunity to a junior employee to sit on high profile Board is fair. However, s/he should be given proper orientation or training on the core business and objectives of the organization where s/he is selected/nominated as a Director, including Corporate Governance practices.

Having a ‘great” Board is the ‘end of the story’ for many investors. Due to the other commitments or pressing demands of his/her work (as most of them would be working with the parent company or with the another subsidiary) they will not find ‘adequate’ time to meet, discuss, question and approve issues for the company in question. So ‘microwaved’ meeting minutes will be circulated and get signed by these ‘apostles’. Believe it or not, most of the times, these people sign without even bothering to read or understand the implications of the content. Sometimes, they don’t have much of a choice but to approve, as the content may be ‘protecting the investor’s will”. Who they are deceiving here, the regulators or stakeholders or both?

One of the important requisite of Corporate Governance is to have periodic meetings, at least the minimum specified by the regulator (SEBI, Central Banks etc.). The members should have access to the agenda items along with the supporting documents prior (minimum 1 week) the meeting so that the Director of the Board could ‘digest’ and be prepared for a meaningful meeting.

Away from the topic, I would like to share with you the experience of my friend, a Quality Auditor (QA). As required by the Quality Certification process, the QA is supposed to audit the company’s departments on a periodic basis including the service department. Every audit visit, the power supply is interrupted and he was forced to pull up his sleeves and get rid of his jacket to perform the audit. After couple of visits he could unravel the enigma behind this power interruption, that the department heads are behind this ‘warm’ reception so that the auditor will finish the job in double quick time due to the extreme heat, especially during the summer, when the mercury touches 50C. Like-wise, to speed up or avoid ‘interrogation’ or ‘grilling’, the Executive Management would place the documents on the table during the session or just before the meeting, depriving time for the BOD members to go into detail. This would be viewed as a pressure tactic and this happens when there is something to hide from the BOD.

Interestingly, these pressure tactics happen in companies where the same person is holding dual positions of the Chairman and Managing Director (and where there is no Chief Executive Officer). Corporate Governance practitioners do not recommend the practice of one-person holding two positions, a malpractice that would tamper with the transparency warranted by the Corporate Governance. The integrity of the financials is also questionable in such situations. Satyam Computer Services Limited is a very recent example and at least the Founder Chairman had the ‘courtesy’ to disclose the manipulations though at a very late stage.

In the above-mentioned scenario, we are leaving a ‘backdoor’ open to fraud. If the External Auditor (if not reporting to an Audit Committee) along with the Finance & Accounts department under the ‘direction’ of the Chairman and Managing Director would be ‘encouraged’ to manipulate the figures. In such cases, if we have a passive Board and that too without any understanding of the business, the organization would never be able to ‘unearth’ such ‘creativity’.

The role of an Audit Committee is also very important for the success of the Corporate Governance initiatives in a company. Further, the Audit Committee should have independent members, even from different industries to uphold the transparency and evenhandedness. Internal and External Auditors should be independent from the Executive Management with total support from both the Audit Committee and the Board. If we have an audacious Board and a strong Audit Committee, I am sure more and more “Whistle-blowers" will rise from the “valley of fear” that may lead bursting of many so-called ‘success bubbles’.

However, in an offshore situation it would be a challenge for an expatriate to be a “Whistle-blower”, as it is very precarious for an expat employee to disclose any irregularity to a Board or an Audit Committee unless, total protection from any consequence is guaranteed. Sometimes, the secrecy may be compromised and there are instances where the name of the “informer” was disclosed and the latter getting crucified or framed. The ensuing consequences that the expat may face need not be elaborated.

Boards of Directors should be able to stamp all reports with 100% confidence. To reach such a stage, it is the prime responsibility of the Board of Directors to ensure the integrity of all reports through mechanisms underlying the Corporate Governance principles. It is a challenging task but none the less achievable. Don’t expect the BOD to have a ‘magic wand’ and to have all the skills sets required to take decisions on issues, which sometimes fall beyond their understanding or experience. In such cases, BOD should engage consultants. While engaging Consultants or Auditors, the decision should be unanimous, unbiased and fair. Some cases, one of the BOD members may influence the others to hire his/her ‘brother-in-law’s firm’ to do the job. If that is the case, then the company should not waste their time and efforts on Corporate Governance initiatives. Relationships should not influence any decisions on issues placed on the table of the Board.

We need Directors on Boards who would be able to contribute to the business, in the form of galvanizing new business opportunities or investment opportunities or network generation. Also, we need Directors on Board who would be able to expend time and efforts for the company, who would be able to attend all meetings, and who would assist in finding solutions for the betterment of the business.

Finally, as with employee appraisals, the performance of Board of Directors should also be evaluated on a periodic basis. Under-performing Directors should be replaced without apprehensions.

Such good practices can happen only if the investor(s) strive for the integrity and have a passion for transparency. Further they should be able to amass a very active Board and should be lucky to have an Executive Management team with integrity and cognizance. Still it’s a jackpot!

Please keep visiting http://stateoftheartconsulting.blogspot.com/ (every week) for more on the series “Fearless or Shameless”.

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