A Poor Balance of Interests: The Crucial Role of Corporate Directors
Written by Amani Tuntufye, Principal Officer of TAPEX Reinsurance Brokers Ltd, Tanzania.
“Anybody can manage short. Anybody can manage long. Balancing those two things is what management is”. Jack Wetch, General Electric CEO.
“ But light and darkness cannot harmonize. Between truth and error there is an irrepressible conflict. To uphold and defend the one is to attack and overthrow the other”. Ellen G. White.
Directors ought to discreetly scrutinize and pay attention to the details of the Management’s proposals because naturally, the Chief Executive Officer and other senior officers would be inclined to have a dual purpose.
Executives in their individual capacities have their reasons for joining the company and their own life missions and visions. First and secondly, it would be the corporate mission and vision. In the circumstances, they would individually and collectively strive to shape the course of business after their own similitude.
This phenomenon is dualism in corporate management. It is a coexistence of both individual and corporate missions which may more often than not be not a peaceful and balanced one. This is a challenge of serving two masters facing the executives. On the one hand, there are business goals and on the other, personal life goals.
“As a matter of fact, one may not safely and confidently unhinge corporate scandals from a state of unmanaged and unbalanced mission duality”.
What comes out very apparently, is the risk of exceeding and uncontrolled affection on personal mission and a semblance of love for the corporate one. All over the globe, thousands of reports and incidents of corporate doom in connection with corporate fraud have been hinged on this dualism. As a matter of fact, one may not safely and confidently unhinge corporate scandals from a state of unmanaged and unbalanced mission duality.
Directors, individually and collectively ought to work in the same manner that sentinels do. The defects cherished in dealing with business’ seemingly minor details are capable of permeating into more important affairs. This culminates into a business ignominious death.
Therefore, certain repeated and unchecked business attitude, state of mind and imbalanced pursuit of personal mission at the expense of corporate mission form a business character and from this character, the destiny of the business is fixed, unfortunately for perdition.
It is a matter of fact that when an individual applies for a job, one is looking for personal advancement both career and income wise. This is a cardinal perception of a job seeker. However, in the course of seeking to attain them, the success and prosperity of an organization or a business surface and come to view. This is always a key question that any competent interviewer wishes to probe and establish from an interviewee whether he or she is up to the task ahead, that is, the position being interviewed for.
Prudent interviewers adept at sifting the suitability of each individual candidate endeavor to confirm as far as they can, perhaps with the aid of empirical evidence and a thorough looking into the past job accomplishments of the interviewee as an indicator of future ability to deliver.
Fusing personal goals with the goals and objectives of a company begins during the induction and continues as a work of afterlife as long as an individual remains with the organization.
One critical matter on this delicate task is the inculcating and propagating business ethics. Business ethics is all about what is suitable and acceptable to a business. In order to be clear on this subject, the purpose of business must be clearly stated and this purpose is none other than to maximize shareholders long term value by selling either goods or services. This also obligates the business to consider and meet the needs of the other stakeholders which are deemed pertinent for the business to survive and prosper.
“A singular thing that in the majority of cases is not in people’s minds in many companies and organizations is that though a company is made up of people, a company is not itself people and therefore, not a biological being and neither is it a social being”.
The reason why propagating and inculcating business ethics is that if it does not happen, the singular purpose of business may end up being toast and hence left floating in the deep of dualism. The principles of business ethos are certainly sensible. They are grounded in the nature of business, which is to maximize creation of long term value for owners. They make sense of the business and for the business.
It is an undeniable truth that businesses are made up of people. A business is conceived by people who have a business idea, they would incorporate the same and put in capital to make their idea operational. They would craft documents such as the Memorandum of Association before incorporation and the Articles of Association, to say how the company would be managed internally and thereafter move on to draft and approve policies and regulations in their varied form and format.
They would form a Board of Directors to provide oversight of the business and indeed foresight. The Board will in turn hire a Chief Executive Officer and other senior management staff who act under delegated authority from the Board, will hire other employees from the marzipan layer downwards to a shop flow worker. The workforce is expected to be as diverse as possible in terms of parameters such as education and skills, race, gender, religion and nationality for multinationals.
A singular thing that in the majority of cases is out of people’s minds in many companies and organizations is that though a company is made up of people, a company is not itself people and therefore, not a biological being and neither is it a social being. It is not an organism to be very precise. A business is an organization and has a limited purpose..
Logically, this truth leads to one cardinal business ethics foundation and this is that what is ethical for an individual, be it a board member, a Chief Executive Officer or any other person related to the business whether as an employee or a stakeholder can be unethical for a business. This encompasses things such as personal preferences, hobbies and aspirations. Personal ethical habits and preferences including spending patterns and behavior are therefore unreliable guides to ethical conduct for business.
Many companies have been left to wonder and oscillate back and forth around traits of a Chief Executive Officer to the extent that business ethics have been eclipsed by individual ethos.
“Many companies are seen swimming in the pond of self- deception by a misguided belief that as long as a director is non -executive, one is automatically independent. This is a deadly snare into which many do not pay attention”.
So much so that goal displacement has become the order of the day. This is evidenced by sluggish customer service, reckless expenditure and enfeebled and porous internal control systems. It is no surprise that in such companies, no one would dare question as to whether the proposed spending is linked to and supports the mission of the company.
Displacement of goals is indicative of a situation in which individual goals supersedes the goals of a business. In most of the cases, project proposals and the associated expenditure, accompanied by jovial moods and a toast after a lavish but shallow board discussions and deliberations, are covered and clothed with a company banner while the company is not the genuine beneficiary.
Many companies have lost and even destroyed value due to such practices, some have lost customers as a result and some have found themselves on the verge of collapse and rating downgrade.
A very notable feature of many boards of directors is this: though many companies would be seen chest-thumping especially as you peruse their Annual Reports and Accounts that brag on account that either all of their Board Members are non- executives or some would be seen reporting that ninety percent of the Board Members are non-executives, what is not clearly said is the most important aspect of directorship. This is none-other than independence.
Many companies are seen swimming in the pond of deception by a misguided belief that as long as a director is non- executive, one is automatically independent. This is a deadly snare into which many company stakeholders do not pay attention.
That is why there is a prevalence of business as usual syndrome and the “this is how we have been doing things” mentality in a myriad of companies and businesses. In many boards, directors think, view matters and share the thought process of the Chief Executive Officer because they are not independent though they are non-executives. Many companies do not have any criteria for assessing and sifting the independence of individual directors. It must be remembered that it is this independence that invigorates and energizes the moral backbone of directors individually and collectively to say No when the Chief Executive Officers places and plants his feet on a forbidden tableland. Directors, though non-executive, cannot exercise skill and care in their fiduciary responsibility if they are not independent.
Modern times directors are expected to have industry knowledge, both local and international, a knowledge of risk and technological issues. When it comes to independence of a director, the following qualities are pivotal and range from intellectual curiosity to unassailable integrity. Any director who does not possess those two qualities must be deemed to be not independent and as such, any company under the directorship of such individuals is bound to fail. Corruption, nepotism, quick fixes, evil scheming, victimization and superficial board and management meetings characterize such boards and this becomes a tone at the top.
Such practices cascade downwards the ranks of the company and become embedded in the Deoxyribonucleic Acid (DNA) malignant as they are. This ends up with a man eating man organization. As a consequence, an imbalanced pursuit of objectives ascends to the helm.
Much as human beings have a natural inclination to form alliances and associate, in many cases, many board members do not mingle wisely. Reasons for such a stance are varied but would generally be the influence of what they might receive in cash or in kind from the executives including other ties related to business associations, religious affiliations, ethnic and marital relations.
Whatever the centripetal forces that might be, an inappropriate alliance and especially, a three-fold one between the Chief Executive Officer, the Board Chairman and the Audit Committee chairperson is both an overt and insidious killer. The following are the main
issues that could bring a company down as a result of this improper alliance as far as the company is concerned:
- Inability to distinguish between what is permanent and what is temporary. The vision becomes blurred.
- This gives the Chief Executive Officer an upper hand in the sense that business goals might become subordinate to personal goals especially when these two key Board members reason like and fuse their thoughts with the Chief Executive. This ends up with the evolution, development and consolidation of a fiefdom. A fiefdom stifles industrial democracy and creates a fertile ground for the politicization of professional life and kills ingenuity, making it difficult for employees to unleash their potential.
- A faint focus on the veracity of financial reporting, and a lack of tone at the top when it comes to management of enterprise risks.
- The board becomes crippled in many aspects of oversight such as capital allocation and management, challenging business plans and strategy as well as the review of capital allocation alternatives.
- The two virtues of business ethics; distributive justice and ordinary decency are put aside and replaced by favoritism, nepotism, psychological terrorism, a disregard for merits and the worst case is the creation of an anarchical organization. A lack of fairness and honesty characterize a business as well as the use of coercion, lies, character assassination breach of internal controls and illegality become acceptable, adorable and cheered practices and such malicious practices become a uniting factor for some fraudsters in the company.
- Non-compliance with board approved policies and regulations characterize a company that has inappropriate alliances.
“A Board member who is not independent will most of the time think and reason to appease the “gods” and is incapacitated from offering constructive challenge”.
A company that does not instill a culture of business ethics cannot survive in the long term because of short termism which is influenced by short term gain which is normally pushed by a personal agenda at the expense of a corporate long-term agenda. Short-termism is the excessive focus of decision makers on short term goals at the expense of longer-term objectives. This results in insufficient attention being paid to the strategy, fundamentals and the long-term value creation of a company and its stakeholders.
Too many Chief Executive Officers play the quarterly game and manage their businesses accordingly. But many of the business and even global challenges cannot be addressed with a quarterly mindset. This is an inevitable result of a Board which is not composed of independent directors. A Board member who is not independent will most of the time think and reason to appease the “gods” and is incapacitated from offering constructive challenge.
No company, no business can stand sustainably if it is run in such a manner. There should be a strict adherence to business goals in the interest of both shareholders and stakeholders and the Board must clearly define and ensure boundaries are not crossed by the executive team. Every expenditure, plan or project must be assessed to the extent they are in line with the mission
The role of directors and the corresponding duty they owe to companies in which they serve may best be appreciated if a company is conceived from the perspective of an ailing patient – a completely dependent being lacking in mental capacity to make judgments or take decisions affecting his affairs; paralyzed, unable to perform any muscle function and placed in the custody of a group of physicians to care for him, cater to his interest, watch
over his affairs and keep him alive. Understood this way, one may consider it abhorrent for these physicians in whose custody and care the completely dependable and defenseless person (the company) has been entrusted, to take advantage of him and act prejudicial to his interest.
The idea that such physicians would consume (convert) food (company assets) reserved for this patient in their care or take his medication to improve their own health is both frightening and inhumane. Such is the nature of the relationship between a director and the company in which he serves; as he cares for it, caters to its interest, watches over its affairs and keeps it alive – as a going concern.
“The director’s fiduciary duty and independence has a deeper sense and meaning. It also means a declaration of independence from private beliefs that might otherwise move and influence a director”.
In view of this crucial responsibility owed by directors to companies, company laws in various jurisdictions contain a number of provisions detailing the duties of directors including a duty for directors to stand in a fiduciary relationship and observe utmost good faith towards the company in any transaction with it and on its behalf, as well as a duty not to fetter his discretion to vote in a particular way.
Central to the fiduciary responsibility of the board of directors as independent beings and as a collective team is to ensure that the Chief Executive Officer and the management team do not cause harm to the company through ill crafted business strategies and models and porous systems on internal controls influenced by excessive avarice and short termism that prioritizes personal interests at the expense of corporate interests. The behavioral indicators of this would include the following:
- A myopic focus on the short term, the next month or quarter, causing the organization to mortgage the future for the present when taking risk.
- A dominant Chief Executive Officer who ignores the warning signs posted by the risk management function, and who resists bad news or contrarian information that the company’s strategy is not working and in the worst case, does not involve the board with the strategic issues and policy matters in a timely fashion.
- Extreme performance pressures, unrealistic expansion plans, inadequate executive experience and a “ warrior culture” and unhealthy internal competition creating incentives for excessive risk taking and accounting misreporting.
The business world has witnessed the deadly consequences of not putting the dual purposes of the management teams under scrutiny and the board of directors’ laxity on following things up to the letter. Such actions are so imperceptible and they move like the muffled steps of a thief at midnight in order to catch off guard an unguarded dwelling. The director’s fiduciary duty and independence has a deeper sense and meaning. It also means a declaration of independence from private beliefs that might otherwise move and influence a director.