Susie Kabe completed first degree in pharmacy programme abroad and returned to her native country Ghana with the hope of starting a pharmaceutical company. Ghana has been experiencing high graduate unemployment and Susie was very determined not to join the teaming unemployed youth in the country. Susie put together an excellent business plan and approached four other childhood friends who have also completed university to start the company for manufacturing of basic and essential drugs locally. After many months of hard work the company finally commenced operations two years ago.
Susie Kabe plays a dual role of the chief executive officer (CEO) and chairman of the Board of Directors and the four other friends are all executive directors of the company. The board of the company is currently composed of five executive directors and two non-executive directors. The two non-executive directors are close friends of the executive directors without relevant work experience since they remained unemployed 3 years after completing university. There have been several board meetings held without the non-executive directors. This situation is largely due to believe by the executive directors that non-executive directors are really not needed since they do not play any important role on the board. Susie and other executive directors participated in a seminar on corporate governance where the facilitator made the following statements on best practices of corporate governance:
- “The roles of board chairman and chief executive officer should be held by two different individuals”
- “The board chairman performs critical functions to ensure that the board functions effectively”
“The board should be composed of at least one-third of non-executive directors”
After the seminar the executive directors disagreed with some of the facilitator’s assertions. They claimed the statements are idealistic and not pragmatic. Susie Kabe has approached you as corporate governance expert to help provide clarity to the statements by the facilitator.
Required:
a) Discuss THREE justifications why the roles of the board chairman and chief executive officer should not be held by Susie Kabe. (9 marks)
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- Demands of roles. It reflects the reality that both jobs are demanding roles and ultimately the idea that no one person would be able to do both jobs well. The CEO can then run the company. The chairman can run the board and take the lead in liaising with shareholders.
- Authority/Dominance by an individual. There is an important difference between the authority of the chairman and the authority of the chief executive, which having the roles taken by different people will clarify. The chairman carries the authority of the board whereas the chief executive has the authority that is delegated by the board. Separating the roles emphasizes that the chairman is acting on behalf of the board, whereas the chief executive has the authority given in his terms of appointment. Having the same person in both roles means that unfettered power is concentrated into one pair of hands. The board may be ineffective in controlling the chief executive if it is led by the chief executive.
- Conflicts of interest. The separation of roles avoids the risk of conflicts of interest. The Chairman can concentrate on representing the interests of shareholders.
- Accountability. The board cannot make the CEO truly accountable for management if it is led by the CEO.
- Board opinion. Separation of the roles means that the board is more able to express its concerns effectively by providing a point of reporting (the chairman) for the non-executive directors.
- Control over information. The chairman is responsible for obtaining the information that other directors require to exercise proper oversight and monitor the organisation effectively. If the chairman is also chief executive, then directors may not be sure that the information they are getting is sufficient and objective enough to support their work. The chairman should ensure that the board is receiving sufficient information to make informed decisions, and should put pressure on the chief executive if the chairman believes that the chief executive is not providing adequate information.
- Compliance. Separation enables compliance with governance best practice and hence reassures shareholders.
b) Explain THREE roles of non-executive directors on the board. (6 marks)
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- Strategy
Non-executive directors should contribute to, and challenge the direction of, strategy. They should use their own business experience to reinforce their contribution. The most critical need is for an environment in which effective challenge of the executive is expected and achieved in the boardroom before decisions are taken on major risk and strategic issues. - Scrutiny
Non-executive directors should scrutinise the performance of executive management in meeting goals and objectives and monitor the reporting of performance. They should represent the shareholders’ interests to ensure agency issues don’t arise to reduce shareholder value. - Risk
Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust. - People
Non-executive directors are responsible for determining appropriate levels of remuneration for executives, and are key figures in the appointment and removal of senior managers and in succession planning.
c) Identify FOUR roles expected of Susie Kabe as the board chairman. (5 marks)
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- Running the board and setting its agenda
The chairman should ensure the board focuses on strategic matters and takes account of the key issues and the concerns of all board members. He should ensure the contributions of executives and non-executives are co-ordinated and good relationships are maintained. - Ensuring the board receives accurate and timely information
Good information will enable the board to take sound decisions and monitor the company effectively. - Ensuring effective communication with shareholders
The chairman should take the lead in ensuring that the board develops an understanding of the views of major investors. The chairman is often the public face of the company as far as investors are concerned. - Ensuring that sufficient time is allowed for discussion of controversial issues
All members should have enough time to consider critical issues and not be faced with unrealistic deadlines or decision-making. - Taking the lead in board development
The chairman is responsible for addressing the development needs of the board as a whole and enhancing the effectiveness of the whole team, also meeting the development needs of individual directors. The chairman should ensure that the induction programme for new directors is comprehensive, formal and tailored. - Facilitating board appraisal
The chairman should ensure the performance of the whole board, board committees and individuals is evaluated at least once a year. - Encouraging active engagement by all the members of the board
The chairman should promote a culture of openness and debate, by, in particular, ensuring that non-executive directors make an effective contribution to discussions. - Reporting in and signing off accounts
Financial statements in many jurisdictions include a chairman’s statement that must be compatible with other information in the financial statements. The statement provides an opportunity for the chairman to demonstrate that he or she is acting in the shareholders’ best interests, and to provide an independent view of the company’s affairs. The statement can also explain how the chairman is exercising his or her role and highlight other aspects of corporate governance that might be of concern to the shareholders.