Advisory Boards That Work

Fresh out of business school, John answered a job advertisement for an accountant. At the interview with a middle aged man who ran a small business that he had started himself, the interviewer said, “I need someone with an accounting degree, but mainly, I’m looking for someone to do my worrying for me.” “Excuse me?” said John.”I worry about a lot of things,” the interviewer said. “But I don’t want to have to worry about money. Your job will be to take all the money worries off my back.” “I see,” John said. “And how much does the job pay?” “I’ll start you at five hundred thousand shillings a month.” “What? How can such a small business afford a sum like that?” John exclaimed. “That,” the interviewer said, “is your first worry.”

Family business owners are constantly worrying. Worrying about whether they have the right people working for or stealing from them. Worrying about the competition and whether they can afford pricing wars or cheaper alternatives to their products. Worrying about the economy and consumer purchasing power that will affect their customer’s ability to buy their goods and services. Worrying about the Byzantine tax regime that is bound to trip them up if their accountant falls asleep on the job and a more than eager tax authority official with a target to meet identifies the slip up. The last thing on many of their minds is setting up a board of directors made up of non-family members or non-shareholders.

For many business owners, keeping their financial performance and intellectual property confidential is a critical requirement for survival of the fittest in an often cut throat competitive environment. This of course potentially stifles bottom line growth and product innovation where the organization lacks external expertise and thought leadership on the trajectory that a business is taking. Maria identified this when she joined the confectionery manufacturing business that her parents had founded and nurtured for thirty years. She immediately embarked on creating an advisory board made up of herself, her parents and three external and independent resources that were subject matter experts in various fields. The benefit of the advisory board she says, is that it immediately brought a sense of professionalism into the way the business was run.

An agenda had to be created for the meetings, which led Maria and her parents to put some thought into what the objectives and what the best outcomes would be for each meeting. Maria wanted to eliminate the echo chamber that had arisen at the family leadership table as the breadth of creative thought and experience was limited to the family members’ existing capacity. She convinced her parents that they needed to bring in independent resources who had experience in formulating strategy, retail distribution and manufacturing.

Her father’s concern was that the advisory board members would tell him what to do and he had no business taking instructions from strangers. Maria was careful to design the agenda into key discussion areas that the business needed addressed around route to consumer and innovation as well as production efficiencies. She assured her father that the meetings would be structured as round table discussions where the company’s current products and processes would be tabled for a constructive discourse on where best to improve on the same. She also created an advisory board charter that clearly laid out the terms of reference for the members from number of meetings, length of tenure (in this case it was one year to get her father comfortable with the concept initially), areas of focus and responsibilities of members.

As the advisory board members were not registered as directors at the Companies Registry, they did not bear any fiduciary or legal responsibilities which put her father at ease in terms of the information that had to be shared with them and the fears he had that he would be beholden to their decisions. Maria then sought out experienced resources in the chosen fields and used the family’s well respected social capital to convince the resources to accept the role. She was astute enough to ensure that one of the resources was her close to her father’s age with an independent and richly experienced background, who helped to lead the discussions respectfully while skillfully occupying an imaginary chairperson role. The resultant probing and very challenging conversations yielded up an apparent need to move the family business into a more corporate and sustainable culture and Maria succeeded in convincing her parents to eventually transform the advisory board into a longer lasting company board of directors made up of family as well as independent directors.

An advisory board does not require to morph into a legal board of directors if a family business does not wish it to. However, it is an excellent way of putting nervous toes into the frigid waters of the unknown area of governance and testing the practice of knowledge sharing, comprehensive strategy formulation, risk management, financial control and setting up a business for sustainability in the long term.

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Twitter: @carolmusyoka

Wells Fargo Gets Taken To School

The Wells Fargo two million fake accounts scandal of September 2016 was one of the immediate former Federal Reserve Bank Chair Janet Yellen’s final thoughts as she retired from her position early February 2018. In the last week of January 2018, the Federal Reserve Bank (the Fed) undertook enforcement actions against Wells Fargo to curb any business expansion until the bank was able to demonstrate it had put in place appropriate risk management and customer protection measures. According to a February 2018 article authored by John Heltman in the American Banker onlinemagazine, Janet Yellen is quoted as saying, “We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again.”
The Fed barred Wells Fargo from growing beyond its asset size as at the December 31st 2017 which was $1.95 trillion dollars. It also required that the bank replace three current board members by April 2018 and a fourth board member by the end of the year.
This is a fairly sticky debate I’ve had with many directors during the course of many years of undertaking corporate governance training. How much can a director be expected to know when they only come for board meetings four times a year and likely attend committee meetings the same number of times annually? Should a board member be held responsible for the commissions and omissions of management? The answer is yes absolutely, and this is now expressly provided for by Kenyan Companies Act 2015 which has codified a lot of corporate governance practice that has evolved over the years.
The Fed expressed the same sentiments in its letter to Stephen Sanger, the former lead independent director of the Wells board who was elected as board chair once the scandal broke. According to the American Banker article the letter to Sanger said that there were “many pervasive and serious compliance and conduct failures” during Sanger’s tenure and that he failed to elevate abuses to the rest of the board of directors when he was made aware of them.
“This lack of inquiry and lack of demand for additional information are not consistent with the duties and responsibilities of the Lead Director as described in the firm’s Corporate Governance Guidelines between 2013 and 2016. Your performance in that role is an example of ineffective oversight that is not consistent with the Federal Reserve’s expectations for a firm of WFC’s size and scope of operations.”
Hold on! Did Sanger just get schooled by the regulator on Wells Fargo corporate governance rules that he should have read during his induction and subsequent tenure as the lead independent director? Furthermore, the Fed put the governance monkey squarely on the back of all the directors by describing their oversight as “ineffective”. With a minimum of four board meetings, and various committee meetings during the year, board directors are supposed to provide “effective” oversight over professionals who know the business far better than the directors could ever know.
But again I ask, how were the non-executive board members to know what was going on, especially when their lead director kept them in the dark after learning about the abuses?
The burden to have board directors who can ask the right questions and ensure that an appropriate control environment exists has never been higher than in the 21st century following the massive corporate scandals in both the United States and here in Kenya as well. It is not enough to know that management are “on top of it” like sufuria lids covering the boiling cauldron of business activity. There must be directors who have proven skills in overseeing multi-faceted businesses that have the constantly moving parts of customers, employees, operations, suppliers and other business appendages particularly for publicly listed companies who partly grow their capital off the backs of minority shareholders and banks who take wananchi deposits. These directors then have the duty to ensure that the right reporting standards are applied in the board report, which would include querying compliance and, where necessary, establishing a risk management framework to test exactly what controls management have put in place. Directors also need to be alive to the fact that they are not there “to take one for the team”. Information parity is key, and once a director learns about corporate malfeasance, it is imperative that he alerts his colleagues on the board to the same.
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Twitter: @carolmusyoka

Boring but critical role of operational risk

A few years ago, I went to visit a client’s team manager at their site off Mombasa Road. The client who was in the manufacturing business, had an extremely convoluted walkway from the car park to the main offices, with clearly marked lanes that were deliberately placed adjacent to building walls. Being a former boarding school resident, where breaking (what seemed to be unfathomable) rules was de rigueur, I promptly started to cross the car park in what appeared to be the most direct, sensible and shortest path to the main reception. A security guard yelled out at me and hurriedly came to redirect my delinquency to the luminous yellow painted pedestrian walkway. Grumbling to myself, I humbly made my way down the well-trodden path. About a month later, I met the team manager walking on crutches, with a heavily bandaged left foot. Apparently she had been hit by a fork lift whose driver had breached the company rules and driven on the clearly marked pedestrian walkway. An operational risk in the area of safety had materialized.

While training some board directors on risk management a few years ago, a few muttered under their breadth about just how boring the whole subject was with their eyes darting about the room lookingfor the nearest exit from the risk management educative hell.Look,it is boring. Roll your eyes into the back of your sockets kind of boring! Determining key risk factors and the probability of their materializing versus impact of such materialization as well as the resultant bottom line effect that may occur is not as exciting as discussing strategy and innovation of an organization.

In a 2001 operational risk paper by Hans-Ulrich Doreig, then vice chairman of the Credit Suisse Group, he summarized what many bank managements and boards reduce themselves to: only what is measured, observed and recognized gets attention.Board member expertise on day to day management of the organization is significantly exceeded by the management who are in a much better position to determine what should get measured, observed and recognized as they live, breathe and eat the organization. Doreig demonstrates the struggle to define what operational risk and concludes it thus: Operational risk is the risk of losses resulting from inadequate or failed processes, people and systems or from external events.

It therefore becomes imperative for boards of not only financial institutions, but other organizations as well, that directors must have the capacity to interrogate the process by which management has arrived at its recognition of what the organization’s risks are and therefore what the key focus for risk mitigation is. A good example would be Nakumatt Supermarket chain. With the benefit of hindsight, the company was running its cash flow operation off the backs of suppliers. Just like banks actively track liquidity risk, a good Nakumatt board would have identified that cash – the lifeblood of any retail entity – or lack thereof is a real risk worth tracking and would have placed key triggers for monitoring the company’s liquidity at the audit and risk committee level. But such risks related to day to day management like liquidity or health and safety, while easy to identify and track, cannot tame the ghost of fraud that floats through the ignominious collapse of Chase, Dubai and Imperial banks.

As regulated institutions on a risk based supervisory system that allocates capital to identified risks such as credit, liquidity or market risk, in plain and simple terms no amount of capital can be allocated to fraud. Which is why corporate governance developments in the western economies are pushing for the requirement that Chief Risk Officers report directly to the board where they are able to clearly articulate why and how they have chosen the specific risks to measure, place limits and approval structures without such voices getting swallowed in the layers of bureaucratic cotton wool that exist between management and the board.

The team manager on crutches did eventually recover and her accident exposed me to my ignorance about why risk mitigants, such as a clearly demarcated pedestrian walkway is created. It turned out that the forklift driver, despite being very well trained on the health and safety rules of the organization, had been having personal problems that caused him to be highly distracted as he drove the forklift. Risk management can indeed be boring to non-risk practitioners but it does and has saved lives and institutions. Board directors are well advised to be alive to this critical oversight aspect.

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Twitter: @carolmusyoka