Boards of Directors The Intrusion of Anti Corporate Governance Issues

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Boards of DirectorsThe Intrusion of Anti
Corporate Governance Issues

• Presented By
• Pat Mahony FCIS
• CEO Mauritius Institute of Directors

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The Old versus The New

• Directors were
• Untouchable
• The Final Authority
• Not to be challenged
• Now they are not!

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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

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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

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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 .

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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

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Sectional Title Trustees

• Lets 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?

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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?

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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

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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?

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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?

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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

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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

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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?

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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

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The Lenders 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?

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The Lenders Representative

• If it is a contractual term to have a
  representative of XYZ on the Board of ABC lets
  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?

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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

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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?

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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

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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.

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Finally

• Any questions?
• Thanks for listening