As Myanmar re-joins the ASEAN markets and introduces its own Stock market, there will be increasing pressure on local Companies to adhere to good corporate governance criteria. There are a number of codes that are applied and cater for the local market conditions, and it can be argued that no one single approach to Corporate Governance is the absolute correct one. Corporate governance systems have recently been under the microscope, driven by many corporate failings of recent years such as Exxon Mobil, HIH and those financial institutions caught up in the global financial crises of 2008. Current texts and publications highlight the growing complexity of company financial arrangements and increasing distance between shareholders and the respective boards of companies, concluding that a more formal board monitoring process is required (Tricker 2009; Nicholson & Kiel 2007; Sharp & Stock 2005).
Approaches to Corporate Governance:
Whilst there are a number of theoretical approaches to explain board performance, with each model suggesting ways to better protect the shareholders, I contend that no one model provides a complete answer. Whilst the Agency theory of governance focuses on the natural desires of the directors to maximize their own personal benefit, the scope of the theory is fairly narrow. Furthermore, critics believe that board behaviour is not simply a set of contracts between the parties, but is a series of inter personal relationships and that these relationships are more important in the actual functioning of the boardroom (Tricker 2009). This is observable within the Ezion Holdings board make up and structure.
Stewardship theory places emphasis on the fiduciary duty on directors to acts as stewards for the shareholders. It ignores the growing distance between the shareholder and the board. Shareholders no longer have a direct say in director selection, with this function being done by the nominating committee. Again, this is evidenced in Ezion Holdings, but is open to manipulation, as will be discussed later in this report.
Other approaches towards investigating board performance are: Resource Dependency Theory, Managerial and Class Hegemony and Transaction Cost Economics (Tricker 2009; Nicholson & Kiel, 2007).
What Are the Key Elements within a Corporate Governance Framework?
When answering this question, we need to remind ourselves as to what the objectives of such a framework are. In simple terms, corporate governance is meant to protect and represent the shareholders’ interests. This is reflected in a number of Company processes and systems that regulate the following:
- Board Structure
- Board Process
- Information Flow
- Meeting Agenda
- Internal Controls
With the world economy stuttering and there being the real risk of recession, shareholders are looking increasingly at their appointed directors to guide the organisation through these troubled times. Exacerbating the economic woes are the geo-political events that make doing business in a global market, that much more difficult. These geo-political issues include threats of terrorism, tensions in the South China Sea and responses to dealing with climate change.
In short, a board structure is commonly accepted that the role of Chairman and CEO should be separated, there should be more independent directors than executive directors, and the role of the board is to provide direction to the company and monitor performance to increase shareholder value. A board should reflect a broad range of knowledge and experience to allow more effective business decision making.
In previous years the debate centred on the size of the board, namely how many directors should there be, particularly the ratio of Executive to Independent directors. The answer to this really depends on the type of business you are in as well as having the numbers such that a decision can be reached. Generally speaking, the greater the number of members on the board the slower and more cumbersome the decision making process. The debate around composition has shifted in recent years resulting in a more fundamental questioning not as to how many directors there should be but as to the number of directorships one individual should be allowed to hold. This has been debated over a number of years, and research has shown that, up until now, there is no direct correlation between a board directors performance with the number of boards that individual sits on. However the issue remains a hot topic for shareholders as seen by recent developments that have tried to curtail the number of boards that one can sit on. In some jurisdictions, such as Ireland, they require that an individual should not have 25 directorships. In India they argue the case for no more than 15 positions and SEBI, the Indian equivalent of the Australian Shareholders association say that it should be no more than 7. The Australian Shareholders Association say that it should be no more than 5 and PriceWaterhouse and Coopers say no more than three. So who is correct?
To answer this question, one needs to go back to the beginning and look at what the board’s role is. In simple terms the Board is appointed to act as stewards of shareholder/investor funds and to act in their best interests to protect Company value. The board composition is a reflection of this status and as such needs to have the right group of people with the right background skills and experience. Furthermore, the addition of an individual to the board should build the collective capability and functioning of the board.
In order to fulfil this, many Board Nominations Committees have an elaborate selection Matrix that measures an individual’s ability to: Manage Risk, Manage People, Legal Expertise, Industry Knowledge etc. The selection would be seeking to gain the following benefits to the Company, and these are:
- Access to key resources and funds
- Serve as leverage and communication channel to and from the external environment
- Enhance organisational legitimacy through reputation of board members.
What appears to be missing in most board appointments, is a critical evaluation of the individual’s current directorships and the potential influence these positions will play in their board performance. As we all know, requirements of each Company differs depending on its size, nature and complexity – suggesting that one cannot be prescriptive as to the number of directorships held but this means we need more detail around them. The types of questions / details that should be looked at to determine whether a person has too many directorships, would include:
- Are they Non-profit Organisations – as may not have significant time requirements?
- Are any of the Companies in financial stress? – These would need time and energy on fixing the problem.
- Are they start-up Companies – start-ups generally need more of a person’s available time?
- Are they Global?
- What Roles do they Play – passive, active, committee participation, again looking at time availability?
- What is potential for Conflict of Interest and impairment in sharing information?
- Has the market dynamics changed such that we need new and outside our industry thinking?
Whilst it is difficult to assign a number of directorships that one should hold, I would suggest that some common sense prevails. If you are a director that is there to fulfil your obligations in terms of stewardship of a Company and therefore actively engage in strategy and challenge/ evaluate Management decision making, then it is not practicable to have too many directorships. By and large, the USA and Australia has got it right and has informally set the standard, with only about 5% of directors having more than 3 directorships. As a director of a Company, the real question is whether you can do justice to your role if you have any more than three? After all, Shareholders today see a turbulent operating environment and have a right to demand that they want their directors to make more time to charter a way through this.
In order to ensure independent review of decision making is undertaken, it is recommended that:
- role of Chairman and CEO should be separated,
- Board committees, such as the Board Nomination, Audit and remuneration committees should be chaired by independent directors,
Should the board lack functional independence, focus is drawn to the reality of boardroom behaviour (Tricker 2009). The focus shifts to the following: leadership effectiveness (competencies, skills, behaviours); information flow and setting the agenda; interpersonal power and alliances in managing external and internal relationships and meeting manipulation.
Information flow is largely affected by the interface between the board and the management of the company through the organisational structure. One needs to be observant as to the relationship between key executive management and Executive Directors, particularly a structure has created a one-on-one reporting relationship between the CEO and COO. Without adequate checks and balances, the quality of information that reaches the board could be compromised. This could have a negative influence on decision making. Boards need to be careful that all information is not filtered through a single operational department or function. An example of this is from a real case study in which a SE Asian Company company structure allowed for distortion of information. This was as a result of the CFO role not reporting to the CEO and the Board, but to the COO and not the board. This impacts on the CFO's ability to supply independent information to the board and audit committee, since information is filtered through a single channel. This creates a ‘wicked problem’ i.e. information is not readily available until such time as solutions (if ever) are found (Sharp & Tan 2007). This combination of factors impacts on the board’s ability to affect the necessary changes required to protect the company.
Other mechanisms that a Company may use to ensure information is passed through include:
- Allowing access between board members and company management
- Whistle blower protection in which anyone in the Company may report unsavoury or false reporting without fear of dismissal or reprisals
- Key individuals or power groups, should not be allowed determine what goes onto the agenda as well as the sequence of items on that agenda. The allocation of resources and finances are affected by decisions made at this level (Tricker 2009).
I recently conducted an overview of the Corporate Governance structure of a well know SE Asian based public Company. It was a start-up business in a growing sector in the Marine services space. The business was experiencing a number of issues, particularly when raising capital to further expand and grow the business in a climate in which there was closer scrutiny on corporate governance and the flow of information to the market. The recommendations, set out below, demonstrate the degree of the problem but also shows that even Companies in advanced economies have issues in satisfying shareholders and market requirements for greater transparency.
The following recommendations were made, some of which have since been implemented:
1) The Chairman of the Board needs to be truly independent, with the current chairman not meeting this requirement as he owned more than 50% of the listed entity by means of trust funds, family etc.
2) The organisational structure should be changed with immediate effect, with the following roles reporting to the CEO to allow greater transparency in the flow of information: CFO, Business Development Director and Chief Commercial Officer. The CFO should not report to the COO.
3) The chairman of the Audit Committee should be replaced by a person who has no perceived personal connection with the CEO/MD.
4) A full review of the corporate governance process should be undertaken, with emphasis on the dimensions of what is expected of directors as well as the hard and soft components of leadership expected on a board (Le Blanc 2005).
5) Greater transparency and efficiency in feedback to shareholders by way of communicating risks and the progress of strategic initiatives (i.e. all critical information reported, not just expedient information; information dissemination not only by way of the web page, but by having meetings in suitable venues and not in remote places that have poor access to transport routes, as is the current practice.
With Myanmar re-joining the world economy coupled with the notion that corporate governance in Asia is still a risk factor, particularly when there is a small/ single group major shareholder, careful attention is going to be needed to corporate governance. Sound audit and internal control systems are vital in ensuring efficiency and providing a guard against individual interests being served at the expense of shareholders.
- Leblanc, RW 2005, 20 Questions Directors should Ask about Governance Assessments. Canadian Institute of Chartered Accountants, Toronto, Ontario, Canada.
- Nicholson, G.J & Kiel, GC 2007, ‘Can Directors Impact Performance? A case based test of three theories of corporate governance’, Corporate Governance: An International Review, vol. 15, no. 4, pp. 585-608.
- Sharp, CA & Stock, H 2005, ‘In Search of a Program Logic for the Evaluation of Corporate Governance and Organisational Performance’, Evaluation Journal of Australasia, vol. 5, no. 2, pp. 48-59.
- Tam, OK & Tan, MG 2007, ‘Ownership, governance and firm performance in Malaysia’, Corporate Governance: An International Review, vol. 15, no. 2, pp. 208-222.
- Tricker, B 2009, Corporate Governance Principles, Policies and Practices, Oxford University Press.
Asia Pacific Connex will be running a workshop on the principles and importance of Corporate Governance to Myanmar at the Inya Lake Hotel in Yangon on September 2, 2016.
Andre Wheeler is CEO of Wheeler Management Consulting Pty Ltd t/a ASIA PACIFIC CONNEX