The economics of corporate governance: are boards useless?

“Useless boards, hypothetically, can have a negative impact on company growth both in the short-run and long-run”

Naspers is a global internet and entertainment group and one of the largest technology investors in the world. Today the company is worth over US$60billion and it has presence in more than 120 countries.

Notable brands and subsidiaries include but not limited to MultiChoice, SuperSport, DStv, MNet, OLX, Ibibo and Similarweb. This South African business is exemplary by all standards. It genuinely rhymes with the African rising rhetoric – indeed an African model that works. This major achievement begs for an intriguing question. Are corporate boards in Ghana, rather useless – if we have to compare like for like in the Naspers case.

The Ghana Experience

In the corporate context, governance issues are thrown into stark relief by events such as corruption, shareholder meetings and proxy contests, and controversies surrounding board selection, composition and executive compensation. More mundane decisions involving the reallocation of physical, human, and financial resources, capital budgeting, expansion or contraction of the organization’s boundaries, and labor negotiations are also strongly affected by governance.

Indeed, the Ghana experience is a case worth exploring. The Ghana SME landscape, as an example, is characterized by sole shareholders, who according to anecdotal evidence, refer to themselves as ‘the board’.

As opined by some board members of institutions (both public and private) I interviewed, majority of shareholders or business owners are always careful to appoint loyal executives as opposed to the culture of selecting competent individuals. In their view, such business owners operate under a philosophy of ‘shared interests’ – a principle that does not encourage team work primarily because Individuals compete to be the ‘darling boy’ of the owner.

See Also:  What needs to be done beyond mobile money interoperability for more growth!

To a larger extent, people use loyalty to create power for themselves by aligning with powerful individuals (shareholders) in the organization or align of powerful individuals in the case of public sectors. Board selection can easily be taken for granted when friends, family, old school mates, neighbors, prayer partners, ethic affiliations and party loyalists, are hand-picked to strategically direct and supervise affairs of the institution at the board level.

With a negative social capital mindset of this nature, our companies will never go global, and the benefits of short-termism is what can be settled for. To many the journey into such boardrooms is a clearly a sign of contentment and a chance to claim a sitting allowance enroute to compensation packages to vote and appropriate for themselves.

What matters in board selection?

A number of commentators argue that the absence of governmental direction, and the resulting lack of uniformity in key board dimensions, encourages certain shareholder abuses commonly attributed to the separation of ownership and control in corporations.

Researchers Barry Baysinger and Henry Butler contribute to the corporate governance conversation by outlining a typology of corporate governance components. According to them, there are three corporate governance components: the Executive Component, (EC) the Instrumental Component (IC) and the Monitoring Component (MC).

The Executive Component, in their view, will normally have a pool of specialists: corporate officers, corporate retirees or other insiders. The Instrumental Component (IC) makes use of financiers, consultants, legal counsel and interdependent decisionmakers. To complete a well composed board, the Monitoring Component (MC) must take account of the following professionals where applicable: public directors, professional directors, private investors and independent decisionmakers.

A survey conducted to test the relevance of these components reveal that EC and MC are very significant and key to successful board spillovers. To some economists, an ill composed board can comfortably be termed as a useless one partly because, the success rate of such boards genuinely diminishes.

See Also:  Women’s Rights Online: understanding the issues and pushing towards a solution

To cite but a few, some of Africa’s largest companies: Sonatrach, Sonangol, Sasol, MTN Group, Bidvest, Shoprite Holdings, Vodacom Group, Imperial Holdings, etc. are led by boards who meet the selection criteria enumerated above.

Fostering board culture

It is widely expected that boardroom directors would exhibit certain behaviors that reflect national stereotypes or culture. However, according to research, critical success factors for an effective board are the following: possess the courage to do the right thing for the right reasons, be willing to constructively challenge management when appropriate, demonstrate sound business judgement, ask the right questions and possess an independent perspective and avoid “groupthink”.

Contrary to popular belief, actively cultivating a relationship with the CEO or willingness to engage with investors when requested or merely attending meetings are not good behaviors that contribute to company turnaround strategies.

Corporate governance is an issue of immense importance both to policymakers and to individual firms hence the need for competent boards. ‘Useless’ boards – where useless refers to boards that are not well composed, can significantly contribute to the organization’s downfall.

The economics of corporate governance is normally a principal-agent problem, that high-powered incentive contracts provide board members with incentives for self-dealing and significant costs are therefore transferred to shareholders or consumers due to the obscurity. Lack of board independence, stemming from poor selection criteria, promotes rent capture at the top for personal gain. The debate becomes complex. Is rent capture at the board level a criminal offense?

The author is an Assistant Professor of Economics and Entrepreneurship at the Nobel International Business School. He can be reached on profhod@gmail.com

Leave a Reply

Please Login to comment
  Subscribe  
Notify of