Reflections on corporate governance, directorships, and board room dynamics

0
Professor Douglas BOATENG

Insights into Directorships and the Boardroom

The strategic importance and open debate about governance have never been as loud though the basic principles, as rightly pointed out by Midanek DH., “have been around for some time.” Today, due to increasing shareholder activism, erosion of value in state-owned entities, CEO accountability amongst others, boards and their members are everybody’s business.  Widespread issues of maladministration and directional leadership continue to impact companies, industrial competitiveness, and long-term socio-economic developmental goals.

According to the King IV and the Cadbury reports on corporate governance, the role of a statutory board and its directors are to represent and protect the interests of shareholders. Shareholders, as affirmed by Shultz S., “delegate their decision control rights to agents(directors) as a more efficient way to ratify and monitor management’s decisions than having every shareholder assemble to do that.”

The American Bar Association posits that “Corporate powers are exercised by or under the authority of and the corporation’s business affairs managed under the direction of its board of directors’ subject to any limitations outlined in the articles of association.”

Directors are responsible for the well-being of the corporation, which, according to the World Bank Group, “cannot act for itself and must rely on agents (i.e., directors) to carry out whatever actions may be required.” In so doing, agents must put the corporation’s well-being above their interests.

According to Claessens S and Yurtoglu B., corporate governance is often divided into two areas of focus. The first is related to behavioral patterns, and the second refers to the rules under which organisations operate. They explain that behavioral patterns refer to “the actual behavior of corporations, as measured by performance, efficiency, growth, financial structure, and treatment of shareholders and other stakeholders,” while the rules tend to come from “such sources as the legal system, financial markets, and factor (labour) markets.”

When it comes to exploring governance related to individual countries or companies within countries, Claessens and Yurtoglu assert that corporate governance can be understood to consider “such matters as how boards of directors operate, the role of executive compensation in determining firm performance, the relationship between labour policies and firm performance, and the roles of multiple shareholders and stakeholders.”  

Okeahalam C.C, and Akinboade O.A., sum up corporate governance up well when they say: “It is concerned with creating a balance between economic and social goals and between individual and communal goals while encouraging efficient use of resources, accountability in the use of power and stewardship, and aligning the interests of individuals, corporations, and society.” 

It also encompasses the establishment of an appropriate legal, economic and institutional environment that allows companies to thrive as institutions for advancing long-term shareholder value and maximum human-centered development while remaining conscious of their other responsibilities to stakeholders, the environment, and the society in general.” They further suggested.

Good corporate governance has been recognised as providing effective institutional reform, investor confidence, greater access to capital, enhanced job creation opportunities, increased organisational value, and increased opportunities for economic growth and development.

Since the African Union’s Agenda 2063 highlights the importance of governance in the realisation of the continent’s developmental plan, it goes without saying that the public and private sector alike have a responsibility to assess and enhance their governance practices.

Former United Nations Secretary-General Kofi Annan noted, “Good governance is perhaps the single most important factor in eradicating poverty and promoting development.”

Several examples of how good corporate governance can impact growth and development have emerged. Claessens and Yurtoglu highlight the following as some of the most common examples:

  • “Better operational Performance through better allocation of resources and better management creates wealth more generally.
  • Good corporate governance can be associated with a reduced risk of financial crises, which is particularly important given that financial problems can have high economic and social costs.
  • Good corporate governance can generally mean better relationships with all stakeholders, which helps improve social and labor associations, helps address such issues as environmental protection, and help further reduce poverty and inequality. All these channels matters for growth, employment, poverty alleviation, and well-being more generally.”

Based on these and many other examples, it is clear that Ghana and other African countries need to begin to entrench mechanisms supporting and promoting good corporate governance to help them beyond aid agenda, economic growth, and development across the continent.

Effective leadership is an essential element of corporate governance. As such, the King IV Report on corporate governance describes corporate governance as “the exercise of ethical and effective leadership by the governing body.”

Directors are responsible for making decisions in the organization’s best interest. Since these decisions should be aligned with the organisation’s corporate governance structures, the board is mainly responsible for ensuring that their fiduciary responsibilities are duly discharged. In short, the board is accountable for protecting stakeholders’ interests, providing organisational oversight, and ensuring good governance.

The structure of a board plays a vital role in organisational success. As such, the composition of the board needs to be carefully considered. Having the right people in the right places can significantly impact the board’s ability to fulfill its role successfully. It will also determine whether or not the board will comply with its corporate governance requirements.

It is therefore essential that the board is made up of a diverse range of experienced professionals.

Diversity helps to strengthen corporate governance.  It takes various forms and can include a variety of different elements. Some of these include the diversity of expertise and experience, diversity in gender, ethnicity, and independence, and diversity in perspectives. Having variety in all of these areas allows organizations to make decisions based on inclusivity and diverse viewpoints.

There is a consensus that board diversity leads to better decision-making. If all board members came from the same backgrounds, had the same skills, and had the same experiences, there would be no need for the board.

Boards perform at their best when they comprise individuals who are diverse culturally when there is a diversity of thought and a diversity of perspective. Having this diversity in the boardroom allows for decision-making that takes various viewpoints into account and allows for creativity. It encourages a dynamic environment conducive to enhanced oversight.

In addition to diversity, having a skilled directorate is just as crucial for ensuring good corporate governance.

Boards are responsible for setting the governance tone from the top, and they must ensure that good governance is rooted in all organizational activities. If the board can achieve this, they will enhance opportunities for the organisation to benefit from the competitive advantage that good governance brings to the table. In addition to this, a board grounded in solid, sound governance principles will allow the organisation to grow and develop sustainably.

Despite this, there are still a large number of directors who have not had any governance training. This means that although they may be exceptionally skilled in their area of expertise, be it finance, marketing, procurement, etc., they tend to lack a proper understanding of the duties, responsibilities, and accountabilities expected of a director.

As a result, specific governance training should become an essential component of any new director induction program as a means to ensure boards are up to date with all governance-related responsibilities and provide directors with the competence that they need to make good governance-related decisions

Since good governance practices can be directly related to public and private sector growth, development, and sustainability, businesses and public institutions across Ghana need to step up efforts to re-examine their board structures to ensure that they have the right people with the right skills, expertise, and knowledge required for effective and sustainable decision-making. Moreover, they need to begin to evaluate how board diversity, independence, and governance experience is contributing to – or taking away from – the effectiveness of their governance.

Shultz S. rightly sums up emerging trends in governance practices. They include, amongst others: Ethics, Community citizenship, Fewer inside directors, Independent directors, Fewer board memberships and smaller boards, Strategic boards, Performance-based compensation (including equity), process-based instead of connection based director selection and appointments, etc

“Boards today reflect the new paradigm in their diversity, their inclusiveness, their openness, their values, and their strategic vision,” concluded Shultz.

To sum up, shareholders are entrusting their assets to the care of their appointed agents (the board and its members). As an appointed agent, each director bears the ultimate responsibility for the organization’s stewardship and Performance. As such, the composition of the board and its function, as warned by the World Bank Group, “has a significant impact on the entity’s governance, operational and financial Performance

In conclusion, Directors are diligent monitors working in partnership with management.  Their role as guardians of organizations is to carry the burden of responsibility for protecting the entity, furthering its growth, and stepping in when needed to prevent actions that are not in the organization’s long-term interest.  In discharging these duties, there could be substantial rewards in the world of board rooms and, increasingly these days, risks. Finalising the equation of rewards and risks is for the individual to weigh and arrive at their conclusion as to whether it is worth joining a particular organisation or not.

>>>the writer is an international chartered director and Africa’s first-ever appointed Professor Extraordinaire for Industrialisation and Supply Chain Governance. Independently recognised as one of the vertical specific global strategic thinkers on industrialization, supply and value chain governance and development, he continues to play leading academic and industrial roles in sectorial reforms both in Africa, and around the world. He is the CEO of PanAvest International and the founding non-executive chairman of MY-future YOUR-Future and OUR-Future (MYO) and the highly popular daily Nyansa Kasa series. For more information on COVID-19 updates and Nyansakasa visit www.myoglobal.org.

 

Leave a Reply