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Boards of Directors The Intrusion of Anti Corporate Governance Issues. Presented By Pat Mahony FCIS CEO Mauritius Institute of Directors. The Old versus The New. Directors were – Untouchable The Final Authority Not to be challenged Now they are not!. The Strange Environment.
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Boards of DirectorsThe Intrusion of Anti Corporate Governance Issues Presented By Pat Mahony FCIS CEO Mauritius Institute of Directors Corporate Governance Conference 2009
The Old versus The New • Directors were – • Untouchable • The Final Authority • Not to be challenged • Now they are not! Corporate Governance Conference 2009
The Strange Environment • The Companies Act tells us who CANNOT be a Director • There is no prescribed academic achievement to become a Director • Membership of a professional regulatory body with a disciplinary code is not compulsory Corporate Governance Conference 2009
What we must remember … • There are Directors (formally appointed) of companies • There are those who are deemed to be Directors • There are other bodies where the leadership might not be called ‘Directors’ but where they perform the same functions eg • Trustees of Trusts • Boards of Pension Funds Corporate Governance Conference 2009
Example 1 – Sectional Title Developments • They have a ‘Body Corporate’ • This is equivalent to a Board of Directors • The Trustees of a Body Corporate are in effect Directors • SO FAR SO GOOD, BUT …. Corporate Governance Conference 2009
Sectional Title Trustees • How do they get elected? • Do Unit Owners ever bother to determine the governance credentials of their trustees? • Some Bodies Corporate might strike it lucky and get competent Trustees Corporate Governance Conference 2009
Sectional Title Trustees • Let’s look at just one of their duties: • RISK MANAGEMENT • Protection of the property • Insuring the entire complex • What if the Trustees did not take out full insurance and there is a fire? • Does the policy carry an excess on claims? Do owners know about this? • What if underinsured or ‘averaging’ applies? Corporate Governance Conference 2009
Sectional Title Bodies Corporate • How many of them have taken out Directors & Officers liability insurance (or have considered doing so) • Are the Trustees aware of their exposure? Corporate Governance Conference 2009
Example 2 – Pension or Retirement Funds • The Pension Funds Act Section 7A(1) says in regard to Boards of Trustees there should be equal representation of – • Employer-appointed • Employee-elected • Some fund rules might even provide for alternation of chairman from each side Corporate Governance Conference 2009
Pension Fund Trustees • One can expect that the Employer will appoint well suited people as their choice • Employees often elect their trustees for the ‘wrong’ reasons eg • Popularity amongst colleagues • Union affiliations • The point is: would you be happy to accept this? Corporate Governance Conference 2009
Pension Fund Trustees • Stop for a moment and consider this – • Are the trustees there to serve the interests of their constituencies or of the funds? • If Directors act as Boards (ie unified as one) should Trustees not do the same? Corporate Governance Conference 2009
Key elements of the judgement in Fisheries Development Corp vs Jorgensen & Another • A Director is not the servant or agent of the shareholder who procures his appointment • Duty of utmost good faith towards the company • Must exercise independent unfettered judgement • The company is his principal • Obliged in law to serve the best interests of the company Corporate Governance Conference 2009
So what this means is … • It does not matter where a Director / Trustee comes from • It matters where he or she is going to • The Corporate Governance Codes have a lot to say about Independent Directors • The real issue is whether or not they exercise independent thought and unfettered judgement Corporate Governance Conference 2009
Back to the Pension Fund Trustees • The election of Boards of Trustees might be FAIR in terms of representation of constituencies • But is it RIGHT? • Surely, the acid test is whether or not the Trustees have the necessary knowledge and skills and acts ethically and independently? Corporate Governance Conference 2009
Example 3 – Practice amongst Financiers • SCENARIO • Company ABC borrows money from XYZ • In terms of the borrowing contract XYZ might be entitled to appoint someone to the Board of ABC • At the very least ABC is obliged to provide XYZ with detailed financial management accounts Corporate Governance Conference 2009
The Lender’s Representative • Why is he there? • To get first hand (and early) knowledge of the financial status of the company and the security of their money • Might have the right to veto actions of the Board if these are not in the interests of the lender • What does this translate into? • Is the representative a de facto Director? Corporate Governance Conference 2009
The Lender’s Representative • If it is a contractual term to have a representative of XYZ on the Board of ABC let’s examine the corporate governance – • Should a creditor have a contractual right to appoint a director? • Is this something the share owners who are the ones legally allowed to appoint and remove Directors should first approve? Corporate Governance Conference 2009
Key elements of the judgement in Boulting v Association of Cinematograph TV & other • Director nominated by large shareholder to represent his interests • Nothing wrong with it – done every day • Nothing wrong so long as the director is left to exercise his judgement in the interests of the company • If he is put on terms that bind him to act in accordance of the shareholder who nominated him it is undoubtedly unlawful Corporate Governance Conference 2009
But there is more to it … • If a company gives a financier its management accounts in terms of a contractual obligation – • Is this FAIR towards other stakeholders? • Does it place the lender in a position of UNDUE PREFERENCE? • Does this limited ‘transparency’ make sense when viewed against JSE disclosure rules? Corporate Governance Conference 2009
So, the Bottom Line is… ? • Greater emphasis should be placed on competence and skills of Directors • An effective Board consists of persons who exercise good judgement and act independently • External interests must be set aside in exercising fiduciary duties towards the company Corporate Governance Conference 2009
It comes down to this: • Corporate Governance starts making its presence felt when you transform it into a set of behavioural reforms, interweave it with common sense and by simply asking whether what we are doing is right. Corporate Governance Conference 2009
Finally … • Any questions? • Thanks for listening Corporate Governance Conference 2009