MANAMA: Independent board is the first step towards good corporate governance.
This was the key message at the 8th Corporate Governance Workshop hosted by Wafq Fund which attracted 29 participants. Themed ‘Are all the independent directors truly independent’ the event was attended by Chairmen, Board members and CEOs of Waqf Fund member institutions.
Dr. Nabil El-Hage, an expert on corporate governance and a former professor of Harvard Business School, led the workshop. He presented four cases and an article during the session, including the case of an insurance company, a Big Tech company, a toy manufacturer and a GCC-based family owned conglomerate. These cases presented real life situations for independent directors and invoked interesting discussion among the participants about how they would respond. Another topic discussed was directors’ diversity and business expertise. The key lessons learned from these case studies are mentioned below:
1. Independence is essentially a state of mind, but the importance of structures and incentives cannot be ignored. If an independent director is paid in equity then his independence can be compromised.
2. If a person is an independent director on the parent company’s Board he may be nominated as independent director for its subsidiary’s Board, but not its associates. Nevertheless, it is not a clear-cut situation.
3. When a CEO nominates his father’s best friend as Chairman of the company or his own best friend, he may not be breaching any law or regulation but the nominees may not be considered as truly independent.
4. Regulators may need to place a ceiling on the number of years a person can remain as an independent Board member of a company. To be more effective companies may use a search firm to look for independent directors.
5. Independent directors should not be afraid of asking tough questions especially when there is a whiff of self-dealing or when the CEO’s or CFO’s actions raise questions about their duty of loyalty.
6. It is important to design the CEO’s performance incentives (Key Performance Indicators) correctly and carefully in order to elicit the kind of behavior that the Board wants to encourage. People do what you pay them to do.
7. To be effective on a Board the independent director needs to build rapport and form alliances with other Board members (remember Warren Buffet’s quote – ‘Boards are 50% business enterprises and 50% social clubs’).
8. The job of an independent director becomes more difficult if other directors are conflicted or do not fully appreciate what is going on (due to lack of understanding of the business).
9. The independent director should reassess whether he/she wants to remain in the Board in certain situations, e.g. overly defensive CEO while the other Board members are overly protective or accept management viewpoint unquestioningly.
10. An independent director must be clear in his mind about his reasons to join a Board, what he is willing to do and what he is not willing to do.
11. Regulators may consider taking a more proactive role to increase the effectiveness of independent directors.
12. Diversity of opinions, backgrounds and perspectives on a Board is a very welcome thing and should always be encouraged.
13. Board members must remember their duties of candor, care and loyalty – always make full disclosures, always be informed, always put the company’s interest first.
14. When a company becomes insolvent or approaches the “zone of insolvency” the directors need to prioritize the creditors’ interests ahead of the shareholders’.
15. Boards can rely on the management for facts, but they are entitled to question the management’s judgment.
The Waqf Fund, which hosted the workshop, has been serving the Islamic finance industry in Bahrain since 2006. It offers several programs targeted to Islamic finance practitioners, Shari’ah resources and other stakeholders. The Waqf Fund has 22-member institutions including the Central Bank of Bahrain.
