Browsing Tag

board of directors

corporate directors’ challenges

Business by definition requires taking up risk in order to exploit opportunities for growth. This creates another challenge of estimating the risk that can be taken within a growth strategy to increases value.

I remember one Board on which I sat struggling to decide whether to assume the risk of investing in an industry that we had no core competencies. It looked lucrative but the Board after much discussion; decided that we had no risk appetite for this kind of investment. subsequent events proved that our decision then was wise. But at the point of making the decision we also had an apprehension that we could be missing a great opportunity.

The balance between risk appetite which is normally driven by the executives to grow the business and risk tolerance which is normally fronted by the Board needs to be struck. The Board should not unnecessarily be too conservative and still expect returns on investment. and yet it should not be too risky that it destroys value.

Related to the previous dilemma is the fact that one chooses to either have organizational performance and growth or choose compliance with corporate governance codes and regulatory requirements through form filling. Compliance has to be balanced with performance. Some Boards are too focused on complying with boundaries imposed by regulators and codes that they dare not take any risks to growth the business. Acting in the best interests of the organization-which is one of the key roles of the Board – means that the Board should take appropriate risks to ensure sustainability and viability of the corporation. Viable sustainability and business continuity are critical aspects that require mindful consideration rather than just form filling to ensure compliance.

Governing bodies have to manage the often conflicting interests of the stakeholders. Often the interests of the equity shareholders and of other stakeholders may conflict. These will need to be managed. While equity providers are keen to see returns on investment, other stakeholders like the surrounding communities are keen to see meaningful investment in the community. After all the community is the ultimate licensor of the business. If the community withdraws its support and license the organization cannot be sustainable in that area. A more challenging dilemma for governing bodies is when the interests of the shareholders like a desire for dividend declaration, conflicts with the interests of the corporate. In cases like this directors have a legal obligation to serve the interests of the corporation. The moral hazard is that by choosing the interests of the organization, the governing body risks the censure of the shareholders since they serve at the pleasure of the shareholders.

The final challenge is that of speaking up and expressing a contrarian view without being perceived as toxic. It’s easy to drift into groupthink because members want to fit in. The desire to please others can cause a member to suppress their divergent view which would have been beneficial to the organization. It’s important for the governing body to allow for robust discussion and to entertain divergent views. It’s better to have a diversity of opinion rather than to have uniformity at all times. Learning to disagree and expressing a divergent point of view without being disagreeable is critical.

Despite all these challenges it is fulfilling to see an organization grow and thrive as the governing body works closely with management.

corporate leadership

I am preparing for certification in Corporate Governance with IoDSA. In that process I will be sharing my thoughts on corporate governance based on the King IV Report and the South African Companies Act 2008. While this is primarily as part of my studies, I certainly hope that this will help some of my readers. I have served on numerous Boards over my time and so will use some of my experiences to illustrate concepts.

In the next few posts we start be interrogating the definition of corporate governance. Many definitions have been proferred but I believe that the King IV Report one is quite succinct and user friendly.

“Corporate Governance -is the exercise of ethical and effective leadership by the governing body towards achievement of the following governance outcomes: ethical culture, good performance, effective control and legitimacy.” King IV Report

The corporate governance is really an exercise of leadership by the governing Board (Board of Directors, Trustees etc). This definition clearly places the leadership responsibility of the corporation in the hands of the directors.

Leadership of the organization is not vested in the shareholders or the management. It is vested in the Board.

I remember reading of a business leader and major shareholder who claimed that he employed and paid the Board and so he was not going to be hamstrung by the Board. I have also heard sentiments expressed in non governmental organizations that the Board is simply advisory. This is a major misunderstanding. The Board exercises leadership of the organization.

Leadership means to govern, direct, control within the context of fiduciary duties of the directors/trustees (members of governing body) to the body corporate. Fiduciary duties refer to the duty of acting in good faith towards the organization. Put in another way fiduciary duty means a legal obligation of one party (the governing body) to act in the best interest of another (the company) when entrusted with the care of the corporate’s assets.

The primary responsibility of the governing body is to act in the best interests of the organization AND not necessarily in the best interests of the shareholders.

Remember that the organization is a separate legal person from the shareholders.  

When the interests of shareholders and the organizations diverge, the Governing Body is legally bound to act in the best interests of the organization.

(We will examine this duty in depth later on)

From the foregoing it is clear that the leadership of the organization does not lie in the management or the shareholders. But actually lies in the governing body i.e. the body of directors or trustees. Shareholders entrust the leadership to the directors while directors appoint and are responsible for management to whom they delegate certain leadership responsibilities. Yet many governing bodies do not actually exercise leadership of the organization.

To emphasize the leadership responsibility of the governing body of organizations, notice that at law, the legal liability of the organization is broken down as follows: shareholders’ liability is limited to their shareholding, management’s liability is limited to their levels of authorizations or negligence WHILE the liability of the Board members is unlimited.

In other words the greatest legal liability for a corporate body’s failure lies with the Board members both individually and jointly.

As an aside it is important for Board members not to treat their responsibilities lightly as they can expose their personal wealth at risk for the liability coming from their Board seating.

I once served on the Board of a non governmental organization which had a rental dispute with its landlord and was in arrears. As directors we were sued in our personal capacity while the management (who in effect were responsible for the delinquency) were not included in the litigation. Fortunately we managed to negotiate and get the organization to pay its obligations. If it had failed to do that all the Board members were to be personally liable for the organizations’ rentals.

It is also important to be cautious about the Board seats that you accept. Do proper due diligence. Otherwise you are putting your own wealth at risk if you seat on a Board that does not exercise leadership on the organization

In the next post we will take a closer look at the nature of this leadership.