• VINCIA CLOETETHE ENRON failure, together with other high-profile corporate collapses and ubiquitous national headlines on corporate scandals has resulted in calls for better corporate governance.
The common governance practice of combining the positions of chief executive officer and chairperson of the board – a situation commonly known as CEO duality – is but one aspect that requires a great deal of attention.
The biggest challenge with CEO duality is that it is difficult for a chief executive officer who is also chairperson to perform his duties in an objective manner – devoid of undue influence and bias which can be affected by the intensity of the relationship between the director and the company. Conferring both the CEO and chairperson roles on one person clearly also involves concerns about corporate performance, and monitoring and evaluation of top management and boards.
The independence of directors (including chairpersons) of public enterprises is considered critical – the appointment of the board by the state makes board independence more difficult and even more necessary.
Public enterprises may suffer from undue hands-on and politically motivated ownership interference, leading to unclear lines of responsibility, a lack of accountability, and efficiency losses in the corporate operations. The rights of the government as the shareholder of such enterprises are exercised by the relevant minister who, in most instances, acts as a shadow director (which can be equated with a puppeteer pulling the strings behind the scenes) without the appropriate levels of accountability as suggested in NamCode or King IV. As directors (chairpersons) owe their positions to the minister, by whom they are appointed, they are easily bound to give effect to the minister’s will.
Further corporate governance difficulties derive from the fact that the accountability for the performance of public enterprises involves a complex chain of agents (management, board, ownership entities, ministries, the government and the legislature), without clearly and easily identifiable, or with remote, principles. Parties have intrinsic conflicts of interest which could motivate decisions based on criteria other than the best interests of the enterprise and the general public, who constitute its shareholders.
Bias and subservience are especially pervasive in the case of CEO duality.
Good corporate governance is paramount to the success of public enterprises, and to protect and advance the interests of the country and its citizenry. The NamCode and King IV recommend that a board comprise a good balance between executive, non-executive directors and independent non-executive directors under the leadership of a capable, independent non-executive chairperson.
Different types of directors each bring a different area of focus to the board, and such composition inspires independence. Executive directors have an intimate knowledge of the workings of the company. Non-executive directors may have a better understanding of the issues facing the group as a whole. Independent non-executive directors bring a totally unclouded, objective viewpoint to the board, as well as experience gained at other enterprises, and the board should comprise a majority of them.
The chairperson should not also be the CEO. The differences between the leadership structures are the key concerns that drive segregation of those positions – while the chairperson is required to retain an objective viewpoint of the affairs of the company, the CEO is often required to become intimately involved in developing and executing management plans for the company.
The quintessential chairperson is one who is truly independent and without conflict of interest.
Independence is, however, thwarted where the member of a board has been in the employ of the organisation as an executive manager during preceding three financial years (retired/erstwhile CEO), or is a related party to such executive manager; and where the appointee is a member of the governing body or the executive management of another organisation which is a related party to the organisation. At a minimum, a CEO and at least one other executive should be appointed as executive directors to ensure that the governing body has more than one point of direct interaction with management.
Role separation ensures checks and balances; allows interrogation and encourages debate at board meetings; helps the chairperson maintain a long-term perspective and spurs synergy in that the CEO focuses on running the business, while the chairperson discharges board responsibilities. There is a positive correlation between separation of roles and monitoring and evaluating the performance of top management and board. A positive nexus also exists with the market-based measure of a corporation’s performance.
In situations where the independence of the chairperson is questionable or impaired and bias exists at appointment, the board should appoint an independent director as a lead independent non-executive director (LID) – usually the deputy chairperson. The role of the lead independent non-executive director and deputy chairperson, if one is appointed, may be combined. A lead independent non-executive director should be appointed for as long as bias endures. The role of such a director would be to act as the ‘independent conscience’ of the chairperson, i.e. to ensure that all decisions of the chairperson are justifiable from an independent point of view.
The concept of chairperson of the board is a general governance requirement, and as such the Companies Act, 2004; Public Enterprises Act, 2006; and various enabling legislation are silent on its intricacies. Therefore, where the NamCode or King IV sets a bar higher, the organisation should strive to achieve the higher aspiration in the interest of sound governance. Implementing a higher standard than that required by law will still be compliant with the minimum requirements thereof.
