On a bright, sunny afternoon last week, out of sheer boredom and need for intellectual stimulation of the statutory kind, I opened the corporate governance regulations for financial institutions in Tanzania recently published in 2021. These are regulations published under the Banking and Financial Institutions Act. I punched my fist in the air in jubilation! Our friends next door get it. They totally get it. The regulations define who an independent director is, breaking it down into seven distinct descriptions. The seventh descriptor states categorically that an independent director “does not receive remuneration contingent upon the performance of the bank or financial institution.”

The reason for my happiness was because in my last article, I had questioned whether board directors should get bonuses. It generated some very interesting emails to me and social conversations, with some directors asking me why this would be a problem. I’ll state it here again for the nth time: The role of the board director is to provide oversight, insight and foresight. The minute a board director begins to be rewarded for the performance of an institution, his role as a key champion and principal guardian for ensuring sustainable business practices is thrown out of the board room window. The oversight role of the board is meant to check the excesses or omissions of management. It is to rein in the executive that may be standing at the cliff edge about to throw itself into the abyss of bad decision making.

A typical example would be where the executive is reporting a fantastic year of revenues. Sales are through the roof, north of fifty percent of previous year numbers. A closer interrogation of the financials would show that in actual fact, the debtor numbers have perhaps doubled. The debts are from sales executed by giving credit to the buyers. Company policy dictates that buyers are only given seven days to pay for the goods. However, debtor days are now at 180 average days of unpaid debts. Were these actual sales? Or were goods pushed to buyers by a visionary sales team drunk with dreams of booking holidays in Cape Town? Buyers who were either not interested in stocking up the company’s products or who were given incredible discounts to just move the product off the company’s books.

A good board audit committee would question what is clearly a questionable debtors book. The audit committee would demand the finance team to start making provisions for bad debts, since the 7 debtor days company policy has been breached exponentially. The committee (with the background soprano singing external auditor choir) would tell management to ringfence those “amazing sales” and stop accounting for them as revenue. Better still, those debts should start being set aside as questionable and any profits emanating from the same should stop being counted. By the time those debts are reaching 365 days, prudence dictates that they should be written off, which would take a painful but necessary hit on the profit numbers for the company.

This is how the board, through its audit committee, would pull management back from the brink of bad decision making. If the board were to be paid on a performance based remuneration policy, they could be convinced by the fork tongued management team that those debtors would eventually have a change of heart, seeking monetary salvation from spiritual sources that will ensure their debts are settled. In heaven.

Performance driven remuneration yields performance driven choices at all levels of the decision making chain. Board director remuneration compensates directors for their time and for the risk they take for exercising their fiduciary duties. That is the contract that a board director undertakes with the organization and, by extension, with its shareholders.

By categorically stating that performance remuneration extinguishes the independence of a director, the Bank of Tanzania has come out of the governance starting blocks strong. Of course one can argue that the definition therefore limits any bonuses to be paid to independent directors but does not preclude the same being paid to the non-independent directors. Well, that is the making of a potentially major war because on the round table of board knights, everyone is equal. Some directors cannot be paid while others are not; it is all of us, or none of us. The biggest worry in such a case should be for the shareholders. Have they appointed the right minded individuals to their board? Would such a payment require approval from the shareholders at the annual general meeting, or in fact will such a payment be reported to the shareholders at all?

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Twitter: @carolmusyoka