The end of rubber stamping

By Michael S. Olympios

Chief Consultant

Allied Business Consultants

In the old days, directors might approve a business plan within hours of hearing it. They saw themselves as sounding boards, not overseers — which often amounted to rubber-stamping management’s proposals after a few routine questions. That kind of board room culture was inherited throughout the decades across most boardrooms around the world. Luck of independence and independence rules however accounted for most of the scandals that send shock waves across the markets. Cases like Parmalat, WorldCom or even Globalsoft here in Cyprus shared a fatal common characteristic. Directors were hand picked by the dominant Chairman/CEO without any formal board scrutiny, meaning that an independent nominations committee was either totally absent or malfunctioning. This phenomenon ensured the undisputed loyalty of the newly appointed directors to the Chairman and at best minimized the prospect of challenging his decisions or practices.

Now directors are becoming more-aggressive watchdogs. Partly thanks to higher corporate governance standards and regulations they’re being more forward about questioning management’s proposals and following up on those plans to see how they’re progressing. Bank of Cyprus’s board of director is increasingly becoming a model for Cypriot companies for their commitment on their strategic goals and active role in the decision making.

Boards are even bringing in outside consultants and lawyers to help them digest complex business plans — and, in some cases, amend them. Unfortunately some companies in Cyprus, particularly those that are closely held still appear to pay lip service to independent scrutiny on significant corporate actions and have trouble challenging decisions of senior management since the management is entrenched in the board with most non-directors being appointed directly by family directors. These companies inherently carry a greater corporate governance risk and directors may find themselves cornered in a possible legal dispute with shareholders if they can’t prove that they took adequate care to protect their interests. To ensure that this event is avoided all directors must actively subscribe to the principles of accountability, probity, and transparency. The Commonwealth Association for Corporate Governance (CACG) has published the “Ten Directoral Duties” such as the duty of legitimacy, meaning that the board is operating within the law and the duty of upholding the rights of Minority owners. The newly formed banking group Marfin Popular has paid a lot of attention to minority shareholders’ concerns even though it could ratify the merger with the consent of a handful of large shareholders. Adherence in attitude and behaviour by each director to these ten long-tested concepts means that a board will be more firmly focused to deliver shareholder value, argues Professor Andrew Chambers in his book “Corporate Governance Handbook”. Mr Chambers argues that “these [principles] would also do much to rebalance unwise political initiatives and restore public trust, on both sides of the Atlantic.”

Challenging the management however is an area of some sensitivity, say directors and corporate lawyers. Unless the board is very careful, managers will think that they’re being second-guessed or even that the board doesn’t trust them. In addition board members have to be careful not to abuse their access and step into management’s shoes. With more board members taking an active role, the line between governance and management can seem fuzzier, consultants and some directors say. But at least we are heading in the right direction.

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