Boards of DirectorsThe Intrusion of Anti Corporate Governance

Issues

Presented ByPat Mahony FCIS

CEO Mauritius Institute of Directors

1Corporate Governance Conference 2009

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

• 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?

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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 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?

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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?

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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

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