SLID training for directors

The Sri Lanka Institute of Directors launched the first of their six modular series of their program on Contemporary Views on Corporate Stewardship and Board Room Governance recently.

It was a full house that interacted enthusiastically with the panelists on the topic of “A Dynamic Board of Directors.”

SLID Vice President and JKH Group Finance Director Ronnie Peiris was the Challenger that evening. He led his panel with style and panache, questioning and provoking thought, and initiating discussions based on their experiences.

The powerful personalities that formed the panel were MAS Investments Non Executive Director Sharmini Ratwatte, CIC Lawyer and Non Executive Director Harsha Amarasekera, Brandix Group Finance Director Trevine Jayasekera and Dialog Axiata Group Chief Corporate Officer Kavan Ratnayake.

Giving an overview to the topic Peiris said in the past as long as the company produced results there was little interest in the composition, duties and responsibilities of boards of directors.

Today however, Boards and the process of corporate governance are under scrutiny.

Many people believe that just following the multitude of laws, rules, regulations, codes and best practices, is sufficient.

The personal qualities of directors, their behaviour, their professional competence, moral standards, integrity and ethics, play a significant role to his contribution to corporate governance.

In the early days the interests of the company were synonymous with those of its shareholders. In today’s complex social, economic and political environment, the concepts of social responsibility and sustainable development are important determinants of corporate behaviour. Boards of directors must be aware of the wider responsibilities to shareholders, stakeholders and society.

“The tone of a Board must be created at the top. The Chairman and CEO play a defining role in this endeavour. Earlier the role of the Chairman and CEO were combined, however, there is an increasing trend to separate the two roles.

Often boards of directors comprise of heavyweights who tend to be opinionated. It is extremely important that board members treat each other with utmost respect in order that free discussion and debate on issues take place.

A vibrant board with mutual respect for each other could contribute to better decisionmaking and to good governance” continued Peiris.

The right balance struck by a board, Jayasekera observed that one must have the right team, ‘not a team of champions but a champion team.’ In selecting a champion team, experience, expertise, and requisite skills were important considerations.

The company should be viewed from the risk, operational and strategic perspectives. Directors getting more involved in operations, was attributed to the fear factor arising from the ultimate responsibility carried by the board.

Jayasekara further asserted that a proper balance may be achieved through appointing independent directors, although difficult, due to shareholder and other stakeholder interests also commanding attention.

“The board papers must be structured in such a way that you can get out of the operational issues and into more strategic discussions. First, put the process right. Second get the structure and your people right. It cannot be said that you are not responsible for the operations, but only for the strategic oversight, because they are joined at the hip. If the process is not in place the effectiveness of the board, will be restricted to just ‘Board’ and the ‘Vibrant’ part of it will gradually disappear.”

Ratnayake felt that the main role of the board is to pick the CEO, select a good management team, put in place a system of values and corporate culture, and most importantly, to formulate strategy .

The board should concentrate on the ‘big picture’ guiding the team and ensuring the right people are in the right place.

In addition, a huge element of trust between members of the board must exist, but it should not amount to being ‘yes’ men.

Amarasekera too observed that the primary responsibility of the board was to set strategic policy. A pro-active board should go beyond that, and exert influence on management to adapt to changing environments, be more dynamic and aggressive, to motivate and drive management teams to take up new challenges and opportunities that arise.

He contended that the aggressive, proactive companies of today will be the giants of tomorrow. In this context he believed strategy was the key, with governance, meaning risk management, taking second place.

Often the board was quite removed from management. In a rapidly evolving environment a closer interaction with management was important. Interaction helped the board to have a clearer view and exert pressure on management when necessary to move pro-actively.

This, Amerasekera believed was the way boards should be structured for tomorrow’s challenges. Boards must be agile, available, and must be able to second guess management in areas such as “are we heading in the wrong direction? Is the business we are in now the correct business to be in? Are we diversifying enough or perhaps too much?” These questions need to be answered and not always at the Board level alone.

Ratwatte agreeing with all of the previous speakers took up the point mentioned by Jayasekera of the board and management being ‘joined at the hip’.

The board of directors in her company are appointed for periods of three to nine years, which she contended makes them effectively a team. Therefore she thought, they needed to invest the kind of time such that they are joined at the hip to management.

“A passion for the organisation and its goals must be instilled in the board as much as in the management team. It is the Chairman’s role to bring it together in terms of the operational vs. carrying the can. If the two are to work as a team, responsibilities need to be allocated, with the board playing a more strategic and futuristic role. That is when a company has a vibrant board that can evaluate itself at the end of the year.”

“The distinction of “we” the Board, and “they” the Management, or between Executive and Non - Executive Director is not acceptable. This tends to look in the opposite direction and it’s very detrimental to the strategic goals. The board oversees and challenges with the wider experience it has and not with a view to criticizing or being negative” detailed Jayasekera.

“Ultimately, an Executive and Non-Executive Director must accept the same responsibility. Independent Directors have the right to consult independent advice, for example in relation to a project on which he has little knowledge.” Ratnayake thought that a key part of building trust and ensuring Independent Directors understand the business is the on-boarding process where a good scientific orientation is conducted to encourage them to interact with not only the CEO but also with personnel several levels down. “This deepens the level of trust” he noted.

Amarasekera thought that there was insufficient brainstorming between boards and management, because our boardroom culture is structured around the formal Board Meeting with its limited agenda.

He advocated the Board and the Senior Management adjourned casually for a weekend and brainstormed ideas. He felt that a throw away idea of one person would be picked up by another and could finally end up as an expansion or a new project. He has not seen this initiative from any board.

“In my experience the situation in private companies is different to that of public companies. In private companies the Management is often represented on the Boards and they will get involved in formulating strategy” observed Ratwatte. “If the Board is concentrating on strategy and governance, they would have less focus on brainstorming and a vision of where they are heading.”

Jayasekera felt that there was much energy and drive in private companies, and things get done faster because one or two key people were the main drivers. These people would get the whole Board engaged in achieving their objectives. Sometimes it can be detrimental because it is shareholder driven and not stakeholder driven.”

A participant remarked that a Board was as vibrant as its Directors are fearless in contributing to discussions. However, few have the courage to speak out. Where the Chairman and CEO are separate the Board is more vibrant.

In the light of making decisions in the best interests of the company and the need for unanimity in decisionmaking, appointments to the Nominations Committee is of utmost importance. How are Directors brought in? Are names proposed and the majority say “Aye”?

Amerasekera noted “there is a misconception in Sri Lanka that the role of the Independent Director is that of a watchdog, ensuring the Company has conformed to all legal and statutory obligations.

There are some Directors who are totally silent. There are also Directors sitting on strong Boards where nothing goes past without them having their say. In the better managed companies plans are well thought out and prepared that at Board level a mere nod was sufficient. Yet in other companies many of the decisionmaking processes are put to the Board before the actual decision is taken. This is the point at which one can judge the vibrancy and independence of the Board, and also whether the Board is willing to go with the management. To contribute, one needs to have the information, to have got engaged in the business of the company and not be afraid of appearing ignorant.”

Peiris recalled the International Board of a mining company that he worked for. “None of the Directors knew mining and had their skills in areas not even related to mining.

In Sri Lanka we hear it said that Boards must consist of those who know the business, but I disagree. You should have people with common sense who ask the questions you had not thought of.

Ratwatte defined a Non Executive Director, as someone who has a passion for the business, brings in diversified skills, fearless, investigative and asks the right questions, not afraid of appearing ignorant. A number of start-up companies who could not afford full time professionals could benefit from having non executive Directors on a consultative basis.

“You need to bring them in, groom and give them a good roundup of the business and they will bring in a different value to the board for sure” Jayasekera added.

Amarasekera said “the bottom line is the quality of the Independent Director. It is increasingly difficult in Sri Lanka to pick them because of prohibitions. Limitations are set on the number of boards they can sit on. It is no longer prestigious. Now it is a task, and an obligation. A seat on the Board carries certain legal obligations and the level of experience and expertise requires to be properly remunerated.