eBusiness Weekly
Dr Keen Mhlanga
A company is a separate legal entity from its members who constitute it. It can hold, purchase and sell properties and enter into contracts in its own name. It is an artificial legal person who can sue and be sued.
A company is a third legal business structure and has entirely a different organisational structure from the sole proprietorship or partnership.
There are two common types of companies namely Public limited which collects its capital by the sale of its shares to the general public and a Private limited whereby the transfer of shares is limited to its members.
For the past decades global economies have experienced the development of numerous companies around the world.
Companies facilitate economic growth of a nation and are of great importance to the government hence most companies share a set of goals namely profit maximisation, growth and expansion.
It is only evident that the success of companies creates a great centre of attention for its owners and partners hence much investment is required to ascertain a leading team that fuels the success of a company.
A company being an artificial person cannot run itself hence it requires agents who serve as leaders and managers on behalf of it.
Companies are owned by shareholders and they elect the board of directors, who run the company.
Company directors are the people responsible for the day to day running of a limited company but do not own the company whilst a board of directors is an elected group of individuals that represent shareholders.
In Zimbabwe Section 2 of the Companies Act 2012 defines a director as any person occupying the position of director by whatever name called and shall include a shadow director.
Therefore, under the law, a director is defined by what they do rather than the actual job title. Even a person not formally appointed by the shareholders might be deemed a director if their role could be deemed equivalent of a director.
The board is a governing body that typically meets at regular intervals to set corporate management and oversight policies.
In Zimbabwe according to the Companies Act every limited company is expected to have a set of board of directors. Directors exist in two forms namely executive and non-executive directors.
All the companies are managed and run by the company’s top executives, the board of directors who are appointed by the shareholders at the general meeting to handle the affairs of the company on their behalf.
The composition of the company’s board of directors includes both executive and non-executive directors. Executive directors are the working directors, hired by the company, for salary and who holds a position in the company’s board.
And so, they are the employee of the company and the member of the board as well who represent internal directors whilst non-executive directors popularly known as NEDs are not part of the managing team and employees of a company but plays a crucial role in the formulation of policies and plans, and decision making of the company and represents external directors.
The 1992 Cadbury Report initiated a debate on why a board of directors should have two thirds of its board as NEDs because the prior reason for appointing a non-executive director to the company’s board is their independence from the company’s management and other stakeholders. Hence, they bring objectivity, unbiasedness, calibre and other qualities to the board.
Up to date countries as the UK have adopted this predicament. A balanced board of directors should have both sets of non- executive and executive directors such as the UK Corporate Governance Code which states that the board should include an appropriate combination of executive and non-executive and in particular, independent non-executive directors, such that no one individual or small group of individuals dominates the board’s decision-making.
The structuring of a board of directors tends to be more varied outside of the United States. In certain countries in Asia and the European Union, the structure is often split into two primary boards — executive and supervisory.
The executive board is made up of company insiders that are elected by employees and shareholders. In most cases, the executive board is headed up by the company CEO or a managing officer. The board is typically tasked with overseeing the daily business operations.
The supervisory board concerns itself with a broader spectrum of issues when dealing with the company, and acts much like a typical US board.
The chair for the board varies but is always headed up by someone other than the pre-eminent executive officer and this is known as a two- tier structure.
The unitary board model is adopted by, inter alia, companies in the UK, US, Australia and South Africa. The company’s directors serve together on one board comprising both executive and non-executive directors.
While much of the comment and discussion on a board of directors focuses on their importance in the running of a company much is to be discussed about their expected duties as well.
The relation between a board of directors and the company they serve is of a principal — agent relationship hence a board of directors occupies fiduciary duties aspect.
The definition of fiduciary duty is an obligation to act in the best interest of another party which are strictly codified in Section 198 of the Companies Act 2012 of Zimbabwe.
In a foreshadowing of the Act, the board of directors should always prefer the long-term consequences for the company over the short-term benefit for shareholders.
The board should always ensure a rigorous assessment of the environmental, social and health implications of its operations for its long-term success. Additionally, board of directors must be involved the company’s strategic growth planning process.
The board must spend time dealing with the company’s business strategy, its risks, and maximizing growth opportunities for the company’s long- term success. The board of directors have a duty to exercise a degree of skill and care as a reasonable person would do looking after their own business.
Care can to be understood as carefulness, though not caution, skill suggests ability, whereas diligence might be understood as requiring a director to use his skills devotedly in the affairs of the company, in the particular matter in hand.
Such reasonable care must be measured by the care an ordinary man might be expected to take in the same circumstances on his own behalf and excludes damages occasioned by errors of judgment. Acting in good faith in the interests of the company as a whole includes fair and equal treatment of all holders of common shares is one of the key principles of effective corporate governance.
Among the specific rights that should be guaranteed equally total shareholders are: the right to receive dividends; preemptive rights to purchase additionally placed shares; the right to obtain adequate information on a company’s activities; the right to participate in the general shareholders meeting, including adequate disclosure in advance of all materials necessary to make informed decisions and the right to receive a proportionate share of a company’s property, after payment of creditors, in the event of its liquidation.
The board of directors has a duty not to put themselves in a position in which their duties to the company conflict with their personal interests as well as disclosing at the first opportunity their interest in any material contract with the company (or its subsidiaries) or their material interest in any person which is a party to a material contract with the company (or its subsidiaries).
The board must not use the position of director, or any information obtained as a director, to gain personal advantage or for personal gain, nor advantage for any other person, other than the company itself.
Nor must the director cause harm to the company as well as not accepting a benefit from a third party conferred by reason of being a director for his doing (or not doing) anything as a director and this obviously includes a bribe. The board covers a massive duty of ensuring that the company they serve operates and complies to the rules and regulations outlined in the Companies Act.
According to corporate governance executive and non-executive directors make up the board but their election process is different. The rules for appointing a director are set both by law and by a company’s governing documents (the articles of association). A company’s shareholders can appoint directors. This is usually done by passing an ordinary resolution in favour of the appointment.
The board of directors can normally also appoint directors but only when the articles of association allow them to do so.
Non-executive directors are appointed using a Letter of appointment (LOA) which is a contract setting out the terms of the appointment.
It has been argued that the process of appointing independent directors known as NEDs is influenced by the top management, the CEO, owners and controlling shareholders of a company as reported by the Malaysian Corporate Governance Code.
However, to ensure that the right people are appointed, the boards should follow a set of selection criteria for the appointment of new independent directors rather than make appointments based on a recommendation from top management.
Furthermore, appointment of non- executive directors should be from a broad range of professional backgrounds relevant to the operations of the company.
Executive directors are appointed using a type of contract of employment appointment (a service agreement), which covers their employment status, office as director and the relationship between these.
An effective and balanced board of directors adds up to the value of a company and leads it to overall success. Over the past years, companies have struggled to maintain a skilled board as its importance in the company outweighs the cost.
In essence, board directors are essential because they act as stewards of the company that govern for the present times and provide guidance and direction for the future. As they are the agents of the company, they serve they take part in making tough and risky decisions which should benefit the company and its shareholders in the long run.
They engage themselves into strategies to fight the company they serve against competition such as building brand and reputation, adopting new skills of operation and technology, compiling to a code of ethics. It is often argued that a well- recognised and good board of directors serve as a lee way to investor attraction.
A board of directors acts a listening ear to other lower employees since it ensures good working conditions for its subordinates, taking for instance, and executive directors aim to report to the NEDs and CEO issues facing and affecting lower level management.
Communication to the higher hierarchy is made easier when a board in place. Boards must communicate clearly and in a timely manner to develop a sense of mutual confidence and trust with their managers.
It’s important for board directors to be having regular conversations with managers about risk mitigation and prevention.
As your company grows, it will have an increasing need for experienced stewardship and strategic direction. In the real, world larger companies experience increasing tension between working in the business, day-to-day operations, working on the business, developing future strategy, creating policies to support business performance and dealing with compliance issues.
A board of directors comprises of both executive and non- executive directors and eventually big companies will reach a stage where it will benefit from “outside” or “independent” directors whose experience will help them work “on the business”.
These external directors bring valuable experience to guide a company through different growth stages. A board of directors is important in ensuring better business performance through skills of non-executive directors. Independent directors can bring additional skills that businesses may be lacking.
They can also contribute their experience, especially if they have been through the growth stage of a company, like yours.
Independent directors offer companies an invaluable source of expert advice and act as a “sounding board” outside of friends, colleague and family networks.
They also introduce their networks that different companies can draw on. A board of directors promotes and improves access to capital. Outside expertise can improve a company’s positioning and credibility in the market. Establishing an independent board demonstrates that a company is committed to good governance and compliance.
If trying to raise funds, investors will have a greater degree of comfort if they can see real independence demonstrated in company’s board and an audit committee, chaired by at least one experienced director with financial expertise.
The decision to implement a board of directors can be difficult for some private companies. CEOs worry about loss of control and debate whether it is worth the cost and effort.
Some private companies assume that a board of directors is just a formal entity that is created at the point where they take in investors but with a great board of directors, a company can have people who are totally focused on what it needs to be successful.
They can guide a company to avoid the risks they don’t really want to take. A great board of directors can help expand a company’s vision in a way that helps a company achieve its long-term goals and strategic objectives. Lodestone Global in America recently published data that explores the financial benefit of implementing a board.
87 percent of survey participants responded their companies saw increased revenues and 81% reported increased EBITDA which stands for earnings before interest, taxes, depreciation, and amortisation, after implementing a board. Boards promote accountability because key managers are held accountable to deliver on their promises to the board.
Everybody has to report to somebody, and the board helps reinforce accountability and urgency. A board of directors provides “air cover.” Boards can provide cover for difficult strategic decisions such that CEOs or key managers can justify tough choices by saying “the board recommended it.
Having a board of directors is very important as it entails a good corporate governance system in a company. A company’s Corporate Governance structure is critical for its successes. Strategy is as much a responsibility of the Board as it is of senior management and leadership. The level of involvement of the board however may vary depending on the size of a company. Rather than just being a “rubber-stamp”, engaged boards take a lead role in devising corporate strategies, ensuring that the company and all its departments are aligned towards its strategic goals at the same time monitoring proper implementation and execution of these strategic plans.
Numerous companies face the challenge of solving the question, how much should we remunerate the CEO, executive and non- executive directors?
The general public has a belief that directors and CEO often remunerate themselves which arouses conflict in any company set up.
A board of directors is important in handling such matters as it has a responsibility of drawing out remuneration schemes for the respected executives which works together with the boards role of creating dividend policies and layouts for its shareholders.
The board therefore eliminates suspicion amongst the public and interested investors of the notion that top- level management compensate itself.
An effective board portrays integrity and availability of balanced objective advice which helps mitigating risk. Financial institutions, investors and partners view it favourably, which effectively lowers the cost of capital financing for a company.
Customers, employees and vendors view it as a safeguard of their interests. The ultimate protection of interests of various stakeholders of a company due to the existence of a board of directors further increases the credibility of a company.
This in turn can also be beneficial for owners or investors planning an exit strategy, making an Initial Public Offering (IPO) and growing the business.
Unfair dismissal of employees in companies has been long practiced but existence of a board of directors limits such incidents because the board has an ultimate responsibility of hiring and firing of members and executives.
In addition, a board of directors is responsible for helping a corporation set broad goals, supporting executive duties, and ensuring the company has adequate, well-managed resources at its disposal.
The board is important as it has the responsibility of developing a governance system for the business.
The articles of governance provide a framework but the board develops a series of policies.
This refers to the board as a group and focuses on defining the rules of the group and how it will function.
The rules that the board establishes for the company should be policy based. In other words, the board develops policies to guide its own actions and the actions of the manager. The policies should be broad and not rigidly defined as to allow the board and manager leeway in achieving the goals of the business.
Another benefit of having a board of directors in a company is a board is responsible for representing and protecting the member’s/investor’s interest in the company. So, the board has to make sure the assets of the company are kept in good order.
This includes the company’s plant, equipment and facilities, including the human capital.
A board of directors makes it easier and possible for a company to develop a governance system. The governance system involves how the board interacts with the general manager or CEO. Periodically the board interacts with the CEO during meetings of the board of directors.
Typically, that is done with a monthly board meeting, although some boards have switched to meetings three to four times a year, or maybe eight times a year.
In the interim between these meetings, the board is kept informed through phone or video conferences or postal mail or e-mail. The board of directors acts as an internal control system in most companies since they have a role of monitoring and controlling. The board is in charge of the auditing process and hires the auditor. It is in charge of making sure the audit is done in a timely manner each year.
A board of directors’ authority and responsibility are determined by government regulations and the bylaws of the corporation or company they serve. Particularly, in Zimbabwe the Companies Act outlines the powers given to members or individuals serving as directors in companies. The board is expected to exercise its powers according to the authority invested in them only.
The board has the power to make all decisions on behalf of its corporation. Directors are subject to limitations on their powers. They may not act outside the corporation’s articles of incorporation or purposes. They may not take any action that is in violation of the law. There are also actions that directors cannot take such as amending the articles or merging into another corporation without first obtaining the shareholders’ approval. In addition, bylaw provisions of a company or organization may further limit the powers of directors.
Whenever two or more people agree to a union different opinions, options and ideas are mastered out. However, these differences create a gap between agreement and disagreement and which leads us to conclude that conflict is inevitable.
The relationship between the board of directors and the company shareholders they serve is agent – principal relationship which comes in handy when conflicts of interests start to occur within the company.
While there are benefits to establishing a board, it also can create challenges as conflict of interests, relational strife and expense to the company. While in cases of a company being unable to pay directors the same salary as a large corporation would, it’s common for directors who aren’t affiliated with the company to be reimbursed for board-related expenses and receive stock options.
The company may also need to purchase liability insurance to protect directors as they can be held personally liable for company actions which acts as an expense to the business as it seeks to avoid future costs created by unsatisfied directors. The move to satisfy the board in order to motivate it to act in a faithful and skilful manner is also an expense to a company considering the SMEs in a country as Zimbabwe.
Relational strife results from either personality clashes or negative emotional interactions between two or more people such as company shareholders and the board. While a board may provide shareholders a sense of security, company founders can struggle with the loss of control and potential to be removed from their positions due to ambitious members in the board hence company owners create strict control measures which create tension between the two parties.
To lead the company successfully, there must be healthy relationships between all parties and a balance between shareholder and stakeholder interests. Conflicts of interest abound at the board level. They constitute a significant issue in that they affect ethics by distorting decision making and generating consequences that can undermine the credibility of boards, organizations or even the entire objectives of a company.
The boardroom, a place where the board meets up for all its meetings is a dynamic place where struggles of ego, power, rules, and authority continuously surface, and it is not always clear, in the turmoil of group dynamics, what constitutes a conflict of interest or the manner in which one should participate in board deliberations.
Furthermore, director duties tend to diverge from one company to another and from country to country, which adds even more complexity. In countries with relatively strong shareholder rights, such as in the US, directors are expected to be accountable to shareholders.
However, excessive promotion of the interests of shareholders can lead to conflicts with other stakeholders.
Due to different contractual arrangements, the interests of stakeholders are often in conflict. In many other countries, directors have a duty to the company, not to shareholders. In Germany, for example, the company is considered distinct from the collective shareholders, which prevents shareholders from claiming that the directors have a duty toward them first and foremost.
Shareholders are seen as one kind of stakeholder among a pool of many, and the company does not have a duty to maximize shareholder value. Boards are composed of interested directors, such as representatives of employees, shareholders, and other stakeholders. The loyalties of these stakeholder representatives are often divided, and considering that multiple-role directors have to rebalance different interests, the potential for conflict becomes clear.
In order to solve conflict of interest between the board and company numerous companies have resorted to assigning their company attorneys to draft a strong Conflict of Interest policy outlining procedures to address conflicts of interest and should be signed by all board members.
Apart from experiencing challenges assorted with setting up a board of directors, financial analysts also focused on challenges and problems faced by a board of directors. While the Western and Eastern countries are far advanced in terms of the development and implementation of corporate governance codes,
Africa is lagging far behind particularly Zimbabwe. Way back the nation did not have its Corporate governance code hence it used adopted codes from other countries as South Africa and the UK. However,
The Zimcode was introduced in 2015 in Zimbabwe and its main purpose was to curtail corporate scandals that had ravaged listed companies as a result of inadequate corporate governance compliance and was meant to augment the outdated colonial-era Companies Act of 1951. Before the code was set up numerous companies have struggled to set up an efficient board of directors in Zimbabwe.
Several companies have faced difficulties associated with board failure. The major causes of corporate scandals were centered on poor oversight and lack of proper monitoring of the CEO and executive directors by the board leading to corporate governance breaches.
While board structures were in place in the organizations, the board of directors had the biggest share of the blame for its failure to monitor management.
Due to the widespread and the seemingly never- ending spectra- of scandals, the Zimbabwean Government notes with concern the plethora of scandals and company failures bedevilling the country and affecting the people and the economy at large a proposal to form a parliamentary committee to deal with corruption, scandals and misdemeanour’s perpetrated by those in fiduciary positions was made in 2014.
To buttress efforts by government, the Institute of Chartered secretaries and Administrators in Zimbabwe (ICSAZ) has started promoting good corporate governance by hosting corporate governance awards called “Excellence in Corporate Governance Award” and “The Chartered Secretary of the Year award”. These efforts seek to promote corporate governance and effective board practices in Zimbabwe.
The board of directors is also faced with a challenge of cybersecurity especially over the past years and currently when cybercrime is at its highest due to new technology reforms. Customers provide a lot of sensitive information to organizations, placing trust in the data storage systems.
Additionally, every organization has critical internal data that gives them a competitive advantage in the market. If data such as credit card details, social security numbers, unpublished financials, etc. is leaked to external sources it could have disastrous consequences. For instance, in Zimbabwe companies have recorded high crimes of customers bank and online cash accounts getting hacked such that the board of directors in many companies of Zimbabwe is striving to provide high tech security forms to fight cyber-crime.
Most companies choose to operate in a way that guarantees them high profits which sometimes breaches legal compliance systems hence a board of directors is faced with regulatory compliance risk. The board members have good reasons to be concerned about regulatory compliance because of increasing global operations and the ever-changing regulatory landscape. It takes 20 years to build a reputation and five minutes to ruin it. According to a 2012 study by World Economics, on average, approximately 25 percent of a company’s market value is directly attributable to its reputation.
This reputational risk is high on the list of board issues. The board is constantly being faced with the challenge of keeping up a good reputation and covering up black marks for an organization they serve. Poor corporate governance affects a board of directors especially in Zimbabwe where companies are run under corruption and nepotism artefacts.
Through the Enron scandal, one of the best-known challenges to corporate governance, the whole world saw how a lack of appropriate compliance checks in subsidiaries can spell doom for a giant company and a highly reputed audit firm.
Corporate governance issues today include robust corporate governance practices and policies to subsidiaries. Subsidiaries’ activities can directly impact the reputation of the parent company, which does not have as much visibility into the subsidiaries’ activities as it would like.
Board members are always looking out for the well-being of the company. To overcome the challenges faced by the board of directors, the group must come together as an effective governing body. The effectiveness of a board of directors is directly related to the level of commitment brought by each member to address board issues.
Sitting on a board requires the members to champion and support the organization outside of the regular board meetings. Each board member is tasked with influencing the direction of the organization and by doing so they bring passion to the role. Effective boards are not overly influenced by any one member.
They must work as a team that allows time for healthy debate and mutual respect. In meetings, the board members must be direct without being disrespectful, courageous without being arrogant, and they must always be mindful that they represent all stakeholders from the most junior employees to senior management.
To understand the organization, the board should also be aware of the organisation’s culture. More than ever, boards are realizing how culture can make or break the organization. Losing track of the culture can lead to unexpected behaviour that damages reputation beyond repair.
There is need to establish how directors are selected in light of the high rate of company and board failures. Who selects directors and with what motive, is a key issue. Literature has shown that shareholders and other stakeholders have been ignored in the board selection process, yet they are the ones mostly affected if boards fail.
There is need to determine how diverse boards should be like. The extent of director independence is essential as that has a bearing on the transaction of focused business on the board.
Even where there are codes of good corporate governance practices, boards are failing and there is scope to find out why and proffer lasting solutions so that boards perform their oversight role with undoubted expertise.
Executive Chairman of FinKing Financial Advisory/[email protected]/+263719516766
