The Human Capital Telescope: Pros, cons of multiple-board directorships

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Brett Chulu

THIS two-part article seeks to explore the margin of productivity of a director taking up several directorships.
Farai Rwodzi, boss of beleaguered banking outfit, Interfin Holdings, which was placed under “recuperative curatorship” by the Reserve Bank of Zimbabwe, has the singular distinction of having held the most number of chairs of companies listed on the Zimbabwe Stock Exchange (ZSE) as at April 23 2010.
According to the Stock Exchange Handbook 2010, Farai Rwodzi sat on seven boards of ZSE-listed companies, five as a chairman (Apex Corporation, CFX, Dawn, Meikles, Seed Co) and two as an ordinary non-executive director (Gulliver and Phoenix). This excludes unlisted entities. Rwodzi has since stepped down from chairing some of the boards. Against the backdrop of corporate governance failure at Interfin and in view of Interfin’s corporate interlocks, the case of multiple directorates is resurrected.
Quality of board contributions
A board member is expected to belong to at least one sub-committee of the board, except in cases where a firm insists on the chairperson strictly sitting on the main board only, albeit such cases are rare.
My survey of official corporate reports of firms listed on the ZSE and unlisted financial institutions shows that in a significant number of instances, chairpersons sit on two to three sub-committees, this, in addition to the main board. On average, boards of Zimbabwean public companies and financial institutions meet once a quarter.
Limiting our analysis to public entities, a director who sits on, say, two sub-committees of the board, is expected to attend 12 meetings in one year, this, just for one firm. If we then factor in multiple boards, a director who sits on seven boards is expected to attend 72 meetings in a single year. Leaning towards the conservative and assuming a director sits on the main board and one other sub-committee, they are expected to attend 56 meetings in a single year, if they serve on seven boards.
On a generous note, we get a rate of one board sub-committee meeting a week. This excludes primary commitments such as internal executive committee meetings, in the case of a director who is fully employed elsewhere. This too, excludes the grinding demands of an eight to five job.
In our troubled economic times, we have had cases where some sub-committees are convening once a month. To prepare thoroughly for either the main board meeting or sub-committee meeting, a director needs to carefully study the contents of the board pack (a set of documents giving relevant information pertaining to a scheduled board meeting). That calls for serious investment of time and effort, including independent research. Informal discussions with directors both here and outside our borders show that some board members open their board packs just before a scheduled meeting, owing partly to the exhausting demands of personal, job and business interests.
The case of Enron, the disgraced Fortune 7 Texas-based energy and utilities conglomerate underlines the importance of non-executive directors’ need to thoroughly scrutinise copious corporate reports. Enron directors used the age-old deception stratagem: To hide something effectively, place it in the open. One way of doing that is to oversupply information.
Information overload can be deliberately calculated to weary the already-pressured non-executive directors into scurrying through lengthy reports. This is what happened in the case of Enron. Enron’s executive directors prepared copious notes detailing each of the more-than 500 special purposes entities, in which they neatly buried their illegal activities. The additional notes were so densely rich in detail that they ran into several thousands of pages. That corpus of “meticulous” work was daunting enough to intimidate even the most vociferous and pedantic of non-executive directors. Thus the smart executives at Enron could not be accused of not being transparent. They would simply say: “We gave you the details of our ‘corrupt tendencies’ and you didn’t bother to read.’’ The point is that if you are non-executive director who sits on a board with Enron-like information torrent, what would two or more such-like boards do to your effectiveness, let alone seven?
National versus international norms
In the absence of widely-recognised standards on multiple board directorates in Zimbabwe, we are left to read into the corporate mind, drawing from direct and public pronouncements. Though the Statutory Instrument 100 of 2010 issued by the Ministry of Finance “discourages” multiple chairs on ZSE companies, the fact that multiple chairmanships on ZSE companies still persist point to the dearth of a widely-accepted Zimbabwean standard.
If one were to carefully read the profiles of directors of several Zimbabwean companies, there is a tendency to embellish the status through citing that he/she sits on several boards. This widespread practice points strongly to an implicit belief in our corporate psyche that multiple directorates underscore a director’s credentials.
On the balance of probabilities, multiple directorships are largely viewed positively in Zimbabwe’s corporate arena. However, there is an emerging school of thought in Zimbabwe that supports limited multiple directorships.
Interestingly, one of the leading lights in the crafting of the much-awaited Zimbabwe National Code of Governance, not so long ago, remarked in the state media that in their opinion a director who has a full-time job should sit on no more than three boards, citing the need to thoroughly prepare for board meetings.
The foregoing path of intellection mirrors that of the architects of the UK and South African codes of corporate governance; the UK code providing a much more nuanced subtext. Principle B3 of the UK code states: “All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.”
Clearly, this places the onus on the board of directors to carefully consider the value-for-money to be extracted from a potential director as measured by the demands of prior commitments.
Sub-principle B.3.3 of the most current UK Code (2010) states that: “The board should not agree to a full-time executive director taking on more than one non-executive directorship in a FTSE 100 company nor the chairmanship of such a company.”
The thinking here is that an executive director presiding over a large listed company is already encumbered with weighty responsibilities — adding a heavier demand of contributing in their non-executive director capacity to the governance of another more or less demanding corporate entity is likely to compromise their effectiveness in both their eight-to-five job and non-executive directorships.
The foregoing, in my estimation, contrasts with the apparent suggestion by our leading corporate governance thought leader alluded to earlier, who seems to place the onus to turn down an offer on the director. It should be the task of the board of directors, preferably, through its nominating committee, not to tempt evidently overburdened directors with a directorship offer. Perhaps, a question must be asked: “Why should a board of directors nominate a person who is clearly snowed under?”
Ric Marshal of the US-based Corporate Library, a research entity that tracks legal class action suits brought onto directors of US companies, seems to have an answer. Marshal uses the term “over-boarding” to describe a situation where a non-executive director sits on more than four boards and a chief executive sits on more than two.
Using Marshal’s classification scheme, more than 60% of directors on ZSE-listed firms are “over-boarded”. Marshal makes two postulations to account for “over-boarding”. First, he suggests that over-boarding may reflect the unique competences of the director in question. His second suggestion is rather unpalatable. Marshal thinks that an over-boarded director could indicate that the director is a yes-person. His pointed conclusion is drawn from empirical data that a significant number of class actions brought on directors are associated with companies with over-boarded directors.
Let’s discuss at brettchulu@consultant.com

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