Meranth Governance & Compliance News
Nov. 2015
TRANSFORMING DIRECTORSHIP
Know Who You Are As A Director
It is no coincidence that the word ‘director’ is derived
from the Latin word ‘dirigere’ which means to guide or
to govern. Agency Theory states that in a relationship,
a principal hires an agent to do work or perform a task
that the principal is unwilling or unable to do. As such,
the shareholders of a company are the principals who
delegate to the board of directors, the agent, to perform
tasks on their behalf. Agents are supposed to act in the
sole interests of their principals. Thus, a director is
appointed to direct, manage and oversee the affairs of a
company (owned by the shareholders). He or she
stands in a special relationship to the company of
which they are a director and the main responsibilities
involve directing. This is known as a 'fiduciary
position'. Therefore, a director is required to act in a
manner which is legally appropriate to their role and
which places the interests of the company above their
own.
Who Is A Director?
The qualification as a director is one who is above the
age of 18 years and who is mentally sound. Most
importantly, it is one who has never been charged or
convicted of a criminal offence involving fraud or
dishonesty, nor has previously been a director or senior
manager of a company that became insolvent. In my
opinion, however, the most crucial qualification of a
director is a person of integrity, one who demonstrates
sound moral and ethical principles as a director.
Central to integrity, is honesty and trustworthiness.
Simply put, integrity is the ability to do the right thing
even when no one is watching. Furthermore, it is being
truthful with oneself as well as putting the interests of
others ahead of one’s own interest. The desired
outcome is seeking to make a positive impact in the
company or organisation in which they have a duty as
opposed to focusing on the cash or material gains from
sitting allowances and board fees.
What Does A Director Do?
Directors must ensure that the company does
everything that it is obliged to do by law and that the
decisions they make are in the best interests of the
company. An effective director is one who strikes the
optimal balance between the interests of stakeholders
(customers, employees, pressure groups etc.) as well as
achieves the desired wealth for shareholders. It should
be emphasised that the primary responsibility of
directors is to protect the shareholders’ assets and
ensure that they receive an appropriate return on their
investment.
If integrity is to prevail, then directors are to exercise
independent judgement, avoid conflicts of interests,
desist from accepting benefits or bribes from third
parties and declare their interests in any proposed
transaction or arrangement.
Directors are responsible for determining the
company’s strategic objectives with appropriate
monitoring and evaluation tools to ensure that
objectives are achieved. It is also the duty of directors
to prepare and present financial statements to
shareholders to inform them of the financial position of
the company.
Distinction Between An Executive Director And A
Non-Executive Director
There are basically two types of directors; the
executive director (ED) and the non-executive director
(NED). An ED is generally an employee with specific
powers of delegation by way of a resolution of the
board or under their service contracts. A NED,
however, is one to whom no executive powers have
been granted by the board. In spite of this, they can
vote at board meetings and have the same duties as
EDs.
A NED's role is less hands-on than an ED’s, who is an
actual employee of the company and accordingly will
have more detailed knowledge of day-to-day
operations than a NED. The benefit here is that a NED
can bring objectivity and an external awareness to the
board. Good corporate governance calls for the
presence of NEDs on a board. They are chosen because
they have a breadth of experience and specific skills
and also because they often bring specialist knowledge
to the board. Of the utmost importance is their
independence of the management of the company and
any of its interested parties. The makeup of a board is
usually that there are more NEDs than EDs, thus;
1/3ED + 2/3 NED = 1 Board
Director, Be On Guard!
Even though the financial implosions starting with
Enron and ending with Lehman Bros have significant
differences, it is generally concluded that there was
one common theme: the board, and in particular the
non-executive directors, did not have the necessary
information to carry out their oversight duties.
However, such information was known to various
members of management. In most cases, the directors
claimed that they were misinformed by the Chief
Executive Officer (CEO) or the Chief Financial Officer
(CFO). Fundamentally, a failure to establish a whistle-
blower system as an internal control measure
contributed to these corporate governance failures.
Hence, directors should not solely rely on unqualified
accounts as Enron and others did. Even though a
company may be receiving clean audit opinions from
its independent auditors, it should also develop other
appropriate management information systems to
provide the necessary level of assurance needed to
form the view that the company is being effectively
and efficiently managed.
Contact Details
5 Macos Place
East Legon
Accra, Ghana
E: afboateng@meranth.co
E: adjoahboateng@gmail.com
P: 054-328-8260
M: 027-411-8063
It should be remembered that failure to act in the best
interests of the company could lead to personal
detrimental effects such as personal prosecutions, and
therefore potentially a jail term, losing business
reputation and being disqualified from acting as a
director.
Challenging The Status Quo
Directors are collectively responsible for promoting the
success of the company by directing the company's
affairs. Non-executive directors are expected to
constructively challenge and help develop strategy, to
participate actively in the decision-making process of
the board and to scrutinise the performance of
management in meeting agreed goals and objectives.
Research has shown that the highest performing
companies are those governed by boards whose
directors are willing to challenge the status quo and
who see healthy disagreement as a key component of a
culture of continuous improvement.
A greater representation on a board of non-executive
directors who possess integrity, vigilance and
confidence improves the control and strategic functions
of a board. Directors should therefore strenuously
pursue the interests of the people they serve as this in
itself comes with benefits, such as, reputational gain.
In appointing directors, crucial elements in the
individual should be sought; a person who can help the
company attain its objectives and maximise
shareholder wealth. Warren Buffet put it succinctly
when he said, “In looking for people to hire, look for
three qualities: integrity, intelligence and energy. If
they do not have the first one, the other two will kill
you’.
Meranth Nugget: In considering director candidates,
it is vital for companies to understand how these
candidates can strengthen the board’s ability to advise
management and address shareholder interests.
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