Governance helps you to see around corners

The CEO asked his Chief Financial Officer whether he had tripled the training budget for the next financial year as he had requested. “What if the employees that we spend money training leave us?” asked the accountant. “And what if we don’t train them and they stay?” retorted the CEO.
The role of a company’s board is two pronged: to ensure conformance and to drive performance. Conformance is like driving while looking through the rear view mirror as the board spends time monitoring and supervising management performance. Are the operations on track? Have the financial numbers been met? Was policy followed and did management execute within the realm of their delegated authority?

Performance is quite simply looking way ahead of the road before the driver. What might lie around that corner? Will the company drop off a cliff because the road has ended? This is the strategic outlook that directors cannot shy away from as the existential basis of the company relies primarily on the strategic decisions or omissions that they make. We don’t have to go far to find local examples. On 28th August 2017, Kenya said “it’s a wrap” and plastic bags were banned in a monumental environmental win for the country.

The Kenya Association of Manufacturers (KAM) adopted a heavyweight boxing champion’s stance – it ain’t over till it’s over –and went to court to challenge the notice placed by Ms. Judi Wakhungu, Kenya’s Environment Cabinet Secretary, that gave a six month notice of a ban on plastic bags on 28th of March 2017. You must understand the thinking that they had a snowball’s chance in hell since there had been two previous unsuccessful plastic bag bans in 2007 and 2011. According to KAM, 176 companies were facing a grim future of potential closure.

So let’s assume that even 10% of those companies had a fully functional board of directors with non-executive directors of an independent extraction. Seventeen company boards that should have undoubtedly asked the CEO at the April 2017 board meeting: “What if this plastic ban is here to stay?” The fatal response that the CEO would have provided would have been “What if it’s not? We have seen this happen twice before in the past and we know it will not take effect.”

In the book authored by R. Monks and N. Minow titled “Corporate Governance”, this situation is aptly summarized thus: value is created or destroyed at the point where decisions are made. These companies should have made an assumption that they needed a back up plan in the (what seemed to be unlikely) event that the ban would be effected. Hope is not a strategy. In this case, Judge Bernard Eboso of the Environmental and Land Court ruled that the juice was not worth the squeeze. “Granting the orders sought will severely undermine the protection of the environment while serving commercial interests,” he said.

Good boards are about good decisions write Monks and Minow. A good board would have asked management to start executing a plan just in case the ban took place. Actually, a good board would have started pushing management to create an alternative packaging line after the second attempt at banning plastic bags occurred in 2011.

The second illustration of the strategic role of boards is the Nakumatt supermarket chain implosion. A company does not suddenly begin to unravel one sunny East African morning. The conformance role of a non-existing Nakumatt board would have noted the spiraling supplier and landlord debt and raked management through the coals on what was the cause of the cash flow shrinkage. If a strategy had been tabled to the board years before to begin an expansion that quite clearly was going to suck valuable cash out of the business, the board would have asked management to provide a plan on how this expansion was going to be financed to avoid the current ignominy of landlord’s distressing for rent or, in the Ugandan case, the revenue authority auctioning assets to recover tax arrears.

Good boards are about good decisions. The value of a forward thinking board is infinitesimal.

Carol.musyoka@gmail.comTwitter: @carolmusyoka