Brett Chulu: Zim board director independence elusive

WORKERS of a Bulawayo-based manufacturing company are resisting the appointment of an experienced auditor as a judicial manager.

The bone of contention is that the appointed judicial manager is said to be a regular provider of professional auditing services to the company and thus  “too close’’ , casting aspersions on his impartiality, creating a palpable apprehension among the workers that the judicial manager is likely to favour the chief executive-cum-chairman-cum-majority shareholder.

In other words, the workers are asking if one can bite the hand that feeds them. Put differently, can people who regularly “drink tea together’ maintain objectivity when making decisions affecting their fellow “tea party goers?’’. Can such  “see no evil and hear no evil’’?

These are questions boards, for a long time now, have been grappling with. The South Africans have been decisive on this front, entrenching into the law an algorithm to help answer the “tea’’ question. The Corporate Laws Amendment Act of South Africa (The Amendment Act), enacted at the end of 2007, attempts to deploy an “objective’’ framework for determining director independence.

Specifically, a director, under the Act, qualifies as independent if they meet the following criteria:

  • Expresses opinions, exercises judgement and makes decisions impartially
  • Not related to the company or any shareholder, supplier, customer, or other director of the company in a way that would lead a reasonable and informed  third party to conclude that the integrity, impartiality or objectivity of that director is compromised by that relationship

If a director’s daughter works for a firm that audits the company’s books, does the director lose independence? In the US, before 2008 that would automatically make a director lose their independence status. This stringent standard has been relaxed. Currently, in the US, a director loses their independence status if an immediate family member is directly involved in the audit work relating to the company. Most likely, under SA norms the same conclusion would be reached.

What if it were the daughter of the chair of the board?

In the UK that would largely be irrelevant.  According to Principle A.3.1 of the UK Code (replaced the Combined Code in June), the chairman needs only to satisfy the independence criteria at first appointment. Thereafter, the independence test does not apply. The issue here, in my opinion, is that the chair by the nature of their duties  finds himself  regularly “drinking tea’’ with key employees, that is, interact more closely with the key managers in the company especially the chief executive and the finance head honcho, possibly, robbing the chair of some degree of independence.

Consider the case of EasyJet, the largest British-based no-frills low cost airline. EasyJet’s new chairman, Sir Mike Rake, earns £300 000 per year from EasyJet. Can we reasonably expect Sir Mike to remain objective given such a huge compensation?  In my opinion, in the UK, the notion of an independent non-executive chair is purely academic and of no practical significance.

This could explain why in the UK the non-executive chairman’s powers are being counterbalanced.  In this regard, the UK Code requires companies to appoint a senior independent director. The senior independent director among other duties chairs a meeting of independent directors convened specifically to evaluate the performance of the board chair.

Is Tawanda Nyambirai, the CEO of TN Holdings and the current chairman of Econet an independent director?

Three instances, at face value, would make Nyambirai non-independent. First, a significant number of Econet’s employees are members of the TN Medical Scheme run by Nyambirai’s company. Second, TN Financial Services act as financial advisers to Econet.

Third, Mtetwa and Nyambirai, a law firm in which Nyambirai is a senior partner is one of Econet’s legal advisers. Is Nyambirai’s “integrity, impartiality or objectivity’’ clouded and compromised by his close business ties with Econet? This is a question with no simple answers.

It depends on the corporate governance norms one chooses to apply. Under US norms, that determination is very scientific. If the revenue from Econet to any company exceeds US$1 000 000 or 2% of the total consolidated revenues of the recipient company in the preceding three years, the director would automatically be deemed not independent.

Under UK and SA norms, the board would have to assess whether the director’s behaviour is demonstrably impairing his judgement when making decisions on the board. Thus a director who is considered not independent in the US can be declared independent under UK and SA norms. Simply put, close ties with the company, its group, directors, senior management, and immediate family are only seen as increasing the probability of a non-executive director acting partially, but cannot prove that the director is acting subjectively.

Board director independence in Zimbabwe does not have statutory entrenchment, opening room to multifarious interpretations.

The major corporate governance codes now require an audit committee to be made up entirely of independent directors.

The majority of the members of a remuneration committee should be deemed independent according to the major codes.

In SA companies cannot cherry-pick when it comes to appointing members of the audit committee as the Amendment Act of SA makes it mandatory for all the members of the audit committee to be independent.

King III, in compliance with the Amendment Act, requires all members of the audit committee to be independent. However, Zimbabwean companies applying King III norms are not obliged by any local laws to abide by this requirement.

In fact, companies in Zimbabwe can use a cafeteria approach to corporate governance. Owing to sharing arguably the same historical umbilical chord with SA and UK companies, Zimbabwean companies tend to be influenced by SA and/or UK norms.

Zimbabwe firms could opt for the UK Code and in some aspects choose the SA norms and thus cleverly follow the path of least resistance. In SA and the UK, determining director independence is more of an art than a science, birthing a domesticated view of director independence.

In my opinion, the UK, SA and US corporate governance norms do not capture the entire gamut of the Zimbabwean culture and thus are not robust enough to provide rigorous standards to establish director independence.

For instance, close relatives are restricted to those who live under the same roof. In Zimbabwe, we have the extended family culture, tribal loyalty, totemic reverence, for instance. Whereas in Europe blood may be thicker than water, it does not necessarily hold here as sahwira’s (a close buddie) blood may be “thicker’’.

Does the fact that a director’s sahwira’s daughter or the sahwira himself is part of an audit team make the director lose their independence? Presently, in Zimbabwe you could have all members of the audit committee being sahwiras and still be declared independent. Is this right?

We now have the Moyo-driven corporate governance framework for state enterprises.

We will soon have a Canaan Dube-led national corporate governance code.

My fear is that a state enterprises director may be declared independent under the state enterprises norms and fail the independence test under the national code, and vice versa. Perhaps the Companies Act needs tweaking to obviate this potentially embarrassing apparition.

 

  • Share your views on this matter at brettchulu@consultant.com.

 

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