Governance, governance and more governance
The winter 2007 edition of the Sloan Management Review carried an article by two world-class intellectuals – David Kidd and Claudio Fernandez-Araoz, detailing their research findings on the performance of the boards of some corporations. According to them, many companies have not obtained benefit from their boards. They found this to be widespread and not limited to corporations with dysfunctional boards. Indeed, they established the same case even in very reputable corporations with very respectable boards. This finding made in 2007 reads as good today as it did read then. I will take a few of the points they highlighted to buttress my topic for today, which is essentially a call on our corporate organizations to improve their boards and make better use of them, even if only for these hard times, for the many strings they are capable of pulling and the many values they can bring to the corporate table.
In an effort to reveal why the observed situation prevailed, the authors identified five key challenges that have prevented many boards from bringing full value to their corporations. The first challenge is the lack of requisite competence on the part of the directors. A large proportion of the directors they interviewed felt that most board members were not competent to deal with the issues confronting their companies. The second challenge was the absence of diversity in the boards by which they mean that board appointments were not balanced in terms of knowledge and skills, thereby robbing the boards of the requisite mix of people and debate that builds organizations. Third, most of the non-executive directors in the study believed that their companies were under-utilizing them. They were not being engaged enough by the executive directors for better cross-fertilization of ideas. Fourth, many directors were found lacking in the performance of their roles. They were sleeping on their duties. Fifth, the process of selecting directors was flawed. Both the selection of directors and the review of their performance do not produce the best results. It is hard not to agree with these observations.
The longest economic contraction of the 20th Century was the famous Great Depression that began in August 1929 and lasted till 1933.During that period, most economies in the world experienced massive contraction in real output. Unemployment rate rose sharply and those who were lucky to find any jobs at all worked mostly part time. Indeed, a major feature of a depression is the massive loss of jobs that cut across industrial boundaries. The latest heart-wrenching numbers from the national Bureau of Statistics has left many in no doubt that a depression was afoot. It is therefore time to call on one of the best assets of every well-organized corporation – the board. It is also time for them to stand up and be counted. Indeed, it is time for executive directors to profit from the capabilities of other members of the board.
I do not think we have any need to worry about how many quarters of GDP contraction we require to move from recession to depression. One local adage says that a deaf person may be helped to understand what the people in the market are saying but he does not need any one to tell him that a riot has broken out in the market. When people begin to run it won’t be long before he joins. Economists have a joke they crack to assist those fascinated by the distinction between depression and recession to understand them. It goes like this: when your neighbour loses his job, it is a recession but once you lose yours it is depression.
In this economic misfortune (that’s exactly what we have); the forward looking corporation should learn from Kidd and Fernandez-Araoz and do one very simple but far-reaching thing: narrow the gap between the members of its board, especially the executive and nonexecutive directors. Evidently, the decision of many managers to limit external directors’ access to critical information, for whatever reason, has come at a high cost. It has also led to a lot of challenges including board ineffectiveness. The regulators in Nigeria, the Securities and Exchange Commission and the Stock Exchange, among others, have been attempting to strengthen the governance of corporations, especially the medium and large organizations, by the introduction of the independent directors, among other strategies. The good idea of independent directors, though not always practicable in microfinance industry, appears to have done much for corporate governance in Nigeria,
Independent directors, sometimes called outside directors, are indeed outsiders to the company. They are outsiders in the sense that they have no material pecuniary interest in the company. They are not investors, key customers or employees. Nor do they have any other significant interest in the company. Independent directors are not connected to the company in any material way. Coupled with the fact that they are selected on the basis of some tract record of interest to the regulators, they are considered to have more capacity for neutrality than the other directors, who are interested parties in the business. The independent director’s interest is sometimes limited to his sitting allowance. However, an independent director can only fulfil his duty if he decides to be truly independent.
Recent economic history has shown that the performance of corporate boards has been one of mixed outcome. While some of them, especially in the financial sector, do not appear to understand the risks their organizations take in the pursuit of profits, others appear to have been “captured” by management. This observation was made as far back as 2009, by Sir David Walker, in his review of the banking sector. Yet another set of directors, especially of small private companies, exist only on paper. They are directors of the company only whenever the Chief Executive Officer invites them over, mostly to ritualistic events like briefing by auditors or regulators, on inspection duty. This is one of the disasters in corporate Nigeria – technically non-existent directors used only to fulfil righteousness and having no hand in running the company. It is a disaster because their non-effective participation in the company’s affairs robs it of the energies, goodwill and other kinds of support they could have given the company.
The present economic condition demands much from companies that hope to survive, including MFBs. They need to be more open to new ideas, especially form their nonexecutive directors. There is need to revamp their boards and inject people with requisite competences. It’s an open secret that many of the boards of the MFBs are mere paper work and the result shows in a deteriorating industry loan book. Regulators may need to help them fix that part of their lives. This might mean mandating independent directorship, perhaps, starting with the national operators. Undoubtedly, one of the key handicaps of the MFBs is the shouting absence of effective governance, the manifestation of which is their worsening levels of non-performing loans.
Emeka Osuji