CORPORATE GOVERNANCE: By Michael S. Olympios
Chief Consultant, Allied Business Consultants
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It is not surprising that few if any boards fail to respond to external pressures for change. For one thing, the pressure is hardly felt but in reality boards in
It is often argued, and rightly so, that the strength of the board lies with its ability to fire the CEO. One cannot suggest however that boards of directors in
Unfortunately, we have seen many companies accomplishing poor performance without any changes in their management. When one looks close at the landscape of boards in the major countries, there are ample examples of boards taking matters in their own hands.
Shareholding structure is probably the best explanation we can offer for this behaviour. More than 98% of listed companies in the CSE are family controlled so one cannot expect independent directors who are often invited by the CEO to turn against him. Instead, these directors prefer to get out of the door without making much noise if they realise that things are getting out of hand.
Deciding whether to unseat a leader poses a dicey dilemma for directors. Wait too long, and they risk letting a bad situation get worse. Act too quickly, and they may short-circuit a potential recovery and create a demoralizing power vacuum. But in other countries more directors are struggling with the issue at a time of growing board authority, increasing investor impatience and shrinking CEO tenure.
In markets where regulation has real teeth directors often appear reluctant to take action. Board members feel uncomfortable pushing aside a chief executive whom they chose and learned to like. But directors tend to lose confidence and replace a chief executive when they see serious ethical lapses.
Among other factors that can tip the balance are a pattern of business mistakes, concealing critical information from the board and an extensive exodus of senior management. They are less likely to change leaders simply because a few institutional investors gripe about a depressed share price.
There are vague notions of monitoring the CEO, of company oversight and of providing advice, or of being in on the big decisions, but no explicit attention is devoted to what role the board should play to meet its responsibilities and take corrective action if the CEO fails to meet reasonable investor expectations.
Boards require independence and leadership. When these two elements are not sufficiently present, directors find it tough to respond to CEO related issues if they feel their own seat is threatened. For as long as their reputational risk is not threatened independent directors will keep quite. Otherwise they will flee.
Investors and analysts should be wary of sudden departures of non executives. And they should not expect them to tell the real story behind their decisions. Instead, they should follow the old Wall Street saying “shoot first, ask laterâ€.
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