Time to take directorships seriously

Jun 18, 2006 Leadership, Sunday Nation

Not too long ago, an offer of a position as a non-executive director was one you would accept with alacrity. Power without responsibility? Just four or five meetings a year? The company’s management does all the work, while I ask a couple of intelligent-sounding questions here and there and play the wise and experienced sage? Sitting fees and allowances? On top of that, sumptuous lunches and retreats, where the meat and wine are red and the company’s results usually well in the black? Where do I sign?

Things changed with that very interesting company called Enron, once America’s seventh-largest corporation. Its spectacular corporate implosion was caused by fraud and deceit on the part of its key officers, and brought in its wake a global crackdown. And it was not a one-off case: major governance failures occurred like a series of explosions around the globe – from the UK to Italy to Australia.

Billions of dollars of shareholders’ funds went up in smoke, and there was a price to pay. Enron’s business leaders were convicted recently on a wide array of counts, and may face long stints in prison. They would be joining a star-studded collection of corporate inmates: the chief executives of WorldCom and Tyco, once leading US companies, are also cooling their heels in gaol, having been sentenced to 25 years or more. Even before the Enron verdicts, the current US Attorney General had put 82 chief executives in prison.

Others were not spared. The venerable accounting firm Arthur Andersen suffered a meltdown for its role in Enron. Bankers from Merrill Lynch were jailed for participating in dubious deals. Non-executive directors did not end up behind bars, but they did suffer the consequences. Enron investors sued all 18 directors, alleging that they had engaged in insider dealing to sell their shares. Last year, 10 directors agreed to pay US$ 13 million out of their own pockets to settle the lawsuit.

The greater harm is done to reputation. The directors of Enron suffered widespread criticism and scrutiny from the public and investigators for failing to see or stop the company’s shenanigans. Most resigned from other directorships and went underground.

In the wake of these scandals, regulators in most countries have stepped in to place increasingly onerous demands on the directors of public companies. There is a different mood in the air in most boardrooms. The load of scrutiny and responsibility weighs heavily on the shoulders of non-executives now, so much so that it is sometimes referred to as “the job from hell”.

The truth is that directorship of a major company is an extremely important job and should be treated as such, whichever country you’re in. We have been complacent about governance for some time now in Kenya. We have had a tradition of giving the post to politicians, family members and retired friends, ignoring the skills and attributes needed for such an important post. It really is time we took directorships very seriously.

For one thing, we need to understand that directors have two distinct roles on a board: to act a ‘watchdog’ on behalf of shareholders; and to become ‘co-pilots’ who fly and navigate the corporation with the management team. One role requires a keen eye for detail, an understanding of regulatory requirements, and a dogged determination to protect the interests of all shareholders. The other demands wide-ranging business knowledge and ‘big-picture’ skills. Crucially, your directors have to be ready and able to put in time and commitment to steer your company properly. The job of directorship is not for part-timers and pretenders.

For companies and shareholders, the lesson is clear. Take your director recruitment process very, very seriously. It should be as rigorous and as transparent as the processes you use to select your top managers. Just because someone is a known figure is no reason to think he or she will add value to your board. You have to spell out the skills and expertise that your company’s strategic context demands, and set out to get them onto your board.

Personal attributes are just as important. You must recruit on the basis of integrity and probity – nothing less is acceptable. You simply cannot afford to have people with dubious track records around your company. And the ‘co-pilot’ role requires certain skills of its own: the ability to offer guidance and wise counsel to the CEO; and the facility to exercise keen business insight and judgement. Well-rounded individuals with a sound track record and deep business knowledge should be the order of the day for all leading boards.

For would-be directors, the writing is also on the wall. This job may offer status and reputation benefit, yes: but it can also bring the reverse. It is still very, very difficult to stop malfeasant managers from pulling the wool over your eyes. If you join the wrong company led by the wrong personalities, you could well get caught up in a maelstrom not of your own making. Proceed with caution, and do your homework well before taking up the very demanding duties of a public directorship.

What we must overcome in Kenya is the all-too-common culture of regarding shareholders as unschooled bumpkins. If you look around annual general meetings, you will see that many shareholders are indeed relatively unsophisticated. But that is beside the point. By putting their hard-earned money into your company, they have acquired certain rights. The right to have their investment prudently managed and their interest protected is paramount. Directors have a duty of care towards all shareholders – not just the ones they represent, or happen to know, or consort with on the golf course. Equally, a firm has many parties who hold a stake in its activities: employees, customers, suppliers, regulators – even the public at large. Directorship is about managing these multiple constituencies with skill and decency.

The best change comes from within. Kenya’s best companies already have well-structured boards displaying a wide array of business skills. They have clear processes that govern the workings of their boards. They are open and transparent, and disclose all necessary information to their shareholders. And they run company-wide ethics programmes that ensure compliance and good practice from top to bottom. For this, they are rewarded by the market. Investors will often pay premiums for companies with strong boards; credit-rating agencies and analysts regard good governance as an essential element in their assessments.

We have come a long way from the days when every board had to be packed with political operatives, or with people from the same tribe or with the same surname. Business at its best is a force for good in society. Misgoverned business can destroy the livelihoods, aspirations and savings of thousands. So there is more to be done. Good corporate governance is not an option – it is a vital ingredient in our national development. It is time to ensure that all of us – managers, directors, advisors, regulators, investors and customers – steer this debate in the right direction.