THIS second instalment of a two-part article seeks to broaden the debate on multiple-board directorships in Zimbabwe. This article courts divergent views on the margin of productivity of a director who adds more directorships.
Advantages of multiple-board directorships
Multiple directorships, apparently, can have economic benefits.
An often-cited plus for multiple directorates is the potential to tap into the possibly rich network of directors. Those who myopically view multiple directorships from the angle of time-commitment fail to see the possibility that a director’s most effective contribution to the company may be for non-governance reasons. Multiple directorships can be a powerful tool of unlocking the doors for a company and moving its strategy forward. There is an emerging view that board-directing is as much a task of governance and compliance as it is of strategy-support.
Researchers Lacker, So and Wang (2010) have shown that companies with well-connected boards have greater future operating performance and higher future stock price returns than companies whose boards are less connected. In their analysis, they point out that the positive impact of well-connected boards is accentuated among firms that are either emerging or recovering and in need of transformation. They cite that the apparent success of start-ups such as Facebook owe to the presence of very influential and well-connected directors.
Multiple directorates can be a rich source of privileged information. Those who access useful information first are placed at a strategic advantage. For instance, a multiple director can alert a company concerning out-of-industry players who can threaten a firm’s current business model. Clearly, multiple directors can play a critical business intelligence-gathering role. Multiple directorates can catalyse the Medici effect by hybridising divergent ideas into innovations.
Multiple-board directorships disadvantages
The Corporate Governance Research Centre (CGRC) of the Stanford Graduate Business School has identified a quartet of handicaps lugged into the economic system via multiple-board directorships. These are reduction of director effort, collusion, spread of bad practices and bad information.
First, as is commonly advanced by several corporate governance thought leaders, the CGRC cites “reduction of director effort” resulting in “worst oversight” as one of the minuses of multiple directorships. McKinsey, the world’s largest management consultancy group, also known for its prolific research, has tried to quantify the effort a director should invest in board work. Between April 4 and April 15 last year, McKinsey surveyed 1 597 corporate directors from all the major geo-economic zones (31% were chairpersons) on wide-ranging issues pertaining to the state of global corporate governance in the aftermath of the economic and financial crises that surfaced in 2008.
One item in the survey that is relevant to this debate courted the thoughts of directors on what they deemed sufficient time to be set aside for board work. Of the 625 directors who shared their views on the item, board chairpersons revealed that they were at that time devoting, on average, 36 days a year to the board. Non-chairs indicated that they were allocating, on average, 25 days in a year. Asked what they envisaged as being sufficient time to devote to board work in view of the need for directors to devote more time to strategy, board chairpersons indicated that increasing their time allocation to 48 days in a single year would be ideal. Non-chairs suggested increasing days spent on board work to 35 days in a single year.
Bringing home these empirically-derived trends, is there a case for limiting the number of directorships a person should hold simultaneously? To make this debate more interesting, we will consider the view put forward by one reader who responded to last week’s article. The reader questioned the logic of a director serving on more than three boards, given the scale and complexity of the problems Zimbabwean companies are facing. The three-board limit is in line with the personal views of one of the lead crafters of the long-awaited National Code on Corporate Governance. Assuming a three-board standard, a chairperson is expected to dedicate 144 days to board work and a non-chairing director 105.
Are these times reasonable enough to allow a director in Zimbabwe to discharge his or her duties effectively? What is clear from this time-allocation analysis, serving on six to seven boards of listed company for an executive employed full-time elsewhere is not feasible — the mathematics alone is prohibitive. It would appear that Ric Marshal’s concept of “over-boarding” is not without empirical merit.
Secondly, multiple directorates can act as sources and channels of harmful information, abetting the establishment of bad business practices. Put differently, it can lead directors to hook onto the fallacy of convergence and build a seemingly strong empirical case based on the pseudo-scientific conclusion that “almost everybody is doing it’’. Directors sitting on multiple boards could mislead other boards to drink from a poisoned chalice.
One such practice common in Zimbabwe relates to the remuneration of senior executives. Bereft of a clear remuneration strategy, directors sitting on multiple boards can influence their boards to approve remuneration packages of senior executives that mirror those of the senior executives of the other firms on whose boards they serve. From a strategic point of view, each element of remuneration must be justified on the basis of a firm’s peculiarities, business strategy and stakeholder expectations. It is surprising, when studying the corporate reports of an industry, to pick a tendency that companies policy is to pay the median.
Now, if almost all the firms in an industry do this, then the use of the term median becomes redundant. This could mean that small and big companies are paying similar salaries, a prospect that is very dim. What it can also imply is that the so-touted median policy is most likely a mere formality, copied and pasted from other firms’ polices. The truth is that best practices do not place a firm at competitive advantage; they are simply an entry ticket into the playing field. Any director worth his salt knows that peculiar practice is what differentiates into a competitive advantage. Multiple directorships should be guarded from acting as a source of endorsement of common practice. Doing so risks firms running in the race to sameness. There is no money in sameness.
Thirdly, collusion among firms that have interlocking directorates is an omnipresent prospect. It has also been argued that multiple directorates can result in a powerful clique of corporate elites who dominate and influence business trajectories in an industry. When directors of firms sit on the boards of each other’s firms, that situation is called a direct interlock. An indirect interlock occurs when firms’ directors share third-party directors.
Interestingly, the world’s largest economy, the US, through the Clayton Antitrust Act, prohibits interlocking directorates by US companies in the same industry in the case interlocked firms would violate antitrust laws if they were to be a merged entity.
The thinking here is that interlocked directorates can potentially distort the market forces in an industry by changing the economic structure undergirding an industry, fanning unfair competition by way of either virtual monopolies or oligopolies. Without rehashing what is now public knowledge, a few of Zimbabwe’s executives once placed on a pedestal, who also sit on multiple boards, are reported to have leveraged on corporate interlocks to access resources at sub-market levels. The contribution of multiple directorates to laying a fertile ground for collusive behaviour in Zimbabwe’s corporate world cannot be easily discounted.
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