A man went to his bank manager and said: ‘I’d like to start a small business. How do I go about it?’ ’Simple,’ said the bank manager. ‘Buy a big one and wait.’
Last week I had the good fortune to attend a workshop arranged by the Capital Markets Authority. Other than the free coffee and samosas, the primary purpose of the workshop was to engage stakeholders (read Chairman and CEOs of listed companies) and receive their feedback on the Draft Corporate Governance Code of Practice for listed companies. Most listed companies were represented by their compliance, legal or company secretarial teams. A few directors and even fewer chairmen made an appearance. Let me say this off the bat: The Chairperson, Catherine Musikali and her steering committee have done an excellent job of researching and putting together a draft code that encompasses global best practice as well as local circumstances that have driven the improvement process for the capital markets regulatory regime.
The workshop got interesting when participants were asked to give their feedback on the proposals. Two particular requirements generated significant excitement. The first requirement was that executive directors of listed companies be given fixed term contracts not exceeding five years. The explanation from the CMA team when this was tabled is that companies need to be injected every now and then with fresh ideas and innovation. The fatal assumption being made by the CMA steering committee is that company boards lack the impetus to kick out a non-performing, non-imaginative or geriatric CEO and need help from the regulator in the form of term limits in order to make that happen.
However, this requirement to set term limits (which CMA hastened to add does not mean that said term cannot be renewed) is in contradiction of the same document which sets fiduciary duties of directors (Section 1.3.) and evaluation of the CEO (Section 1.8).
Section 1.3 and its Recommendation 1.3.1 thereunder clearly states that the board of directors have a raft of fiduciary duties to observe one of which is to act in the best interests of the company and, further, to at all times exercise independent judgment. If a CEO is not performing it is as clear as mud that I as a director need to exercise my independent judgement and replace him or her as it is in the best interests of the company. After all, I will be dragged through the coals by very unsatisfied shareholders at the AGM baying for my blood for the poor performance by the company. The second contradiction arises from section 1.8 which requires evaluation of members of the board. Recommendation 1.8.1 specifically provides that the board should evaluate the role of the Chairperson, the CEO and the Company Secretary on an annual basis. If the board has formed the practice of evaluating the performance of the CEO, it would take a highly imaginative and spineless group of directors to fail to recommend the removal of a CEO whose performance has declined over a period of time. As the same code requires that boards undertake succession of a CEO, the period of annual evaluation would be the best time for board members to assess the need to replace an aging CEO, or the need to get fresh ideas from someone else as the company is being wiped on the dusty floor of irrelevance by the competition.
We don’t need term limits for executives as the travails of nature and aggressive (majority) shareholders in turn will take care of the executive’s tenure.
The second requirement that generated some discussion was the term limit on independent directors. The Draft Code in Recommendation 1.4.2 sets a limit of nine years for an individual to sit on the board as an independent director. After nine years, the individual is not precluded from serving on the board; rather they have to be designated as a non-executive director. I have to commend the Steering Committee as they have anticipated board mischief by clearly defining that it is not only a continuous term of nine years that counts, but also a cumulative term of nine years in the event that there have been intervals in the service of the member. I have to say that I fully agree with this recommendation. Having served as an independent director on a few boards, I can honestly say that the longer I serve on a board the more I get attuned with the challenges that management faces in driving the business agenda of the company. Time takes its southerly toll not only on my waistline, but also on my ability to take a tough stand on yet another sob story of why something cannot be done due to the vagaries of the business environment. I will more than likely accept that sob story because I have been on the board long enough to have seen the institution weather similar storms, rather than take a decision in the best interests of the company which may be to sell a non-performing asset or to sweat the balance sheet more despite the politico-economic environment. I will have grown fond of a team leader whose life I have come to know as we munch cookies during tea break at the company’s annual director’s retreat and whose unit needs to be jettisoned off to the competition as it is no longer a strategic fit with the company. However the challenge would typically be that there would be no room on the non-executive director’s bench as boards have specific number limits for directors and the majority shareholder would have placed their representatives on those seats.
The requirement to specifically replace independent directors is a healthy and hygienic way of churning turnover on the independent director’s bench. There is a very thin line between alignment of shareholder interests and alignment of company interests and nine years is a good time to ensure the lines get renewed just when they are beginning to fade.