THE ROLE OF 'INDEPENDENT' DIRECTORS

14.02.2004

Whenever ethical behaviour breaks down in the business world and integrity is diluted, there is a clarion call for better corporate governance and it soon becomes a magic mantra. As part of this debate, much attention has been paid to the scope of what 'independent' directors can contribute towards fulfilment of their fiduciary duties towards stakeholders and especially, the interests of minority shareholders. It is in this context, that I must mention the excellent symposium on this subject, as part of the CEOs conference held at Sharm Al Sheikh in Egypt last week. The Institute of International Finance's (IIF organized) events are generally of high quality, in terms of both the content, speakers and the audience. This year's conference was, to an extent, disadvantaged by the logistics of reaching Sharm Al Sheikh, which despite being a sea-resort, is only just about well connected with Cairo by commercial (non-chartered) flights. A few of the participants chose to drive down from Cairo but that was an alternative that was neither well known nor within the time span available to others. The Red Sea backdrop does provide a tremendously placid ambience and Sharm's resort hotels and hospitality sector, especially for a developing country such as Egypt, are of a very high standard. Sadly, the overall time and effort required to reach Sharm might have clearly been off-putting to many registered participants and therefore, resulted in some toll on their attendance by speakers and among the anticipated audience.

The Egyptian Minister, Dr. Youssef Boutros-Ghali's opening address was a little tiresome in terms of repeated mention and emphasis of the same points on privatisation and the dialogue between the Government and industry. He was also somewhat short-fused and hectoring; as demonstrated by his curt response to a provocative question from a member of the audience. Risk management and the new Capital Accord dominated this year's sessions and given the inconclusive status of Basle II, turned out to be an overkill. The two interesting cameos were the sessions on corporate governance and the lunch speech by Mr. Jonathan Fletcher, Deputy Director (IMF). There was a lively debate as to who the independent directors are and should be and whether they can alter the course of corporate culture.

It was felt that in this region, family businesses tend to be predominant. In the GCC, 'independent' directors are not a requirement as part of the regulatory code and rarely therefore, volunteered. Sometimes, minority shareholders are represented or the existing Boards bring in either representatives of their major customers and / or professionals on board, such as lawyers etc. to guide the course of Board discussions.

Let alone family businesses, most, if not all corporations in the GCC, are not used to appointing independent directors. Again, should independent directors be those that are appointed to represent minority shareholders, or should they be non-shareholder representatives merely to bring the right balance? They may well be experts in certain aspects such as law, finance, technology etc. and therefore, not at the beck and call of the majority shareholders, and intellectually can withstand any such pressures, both because of their capabilities and credibility.

However, is their independence somewhat diluted if their sitting fees are determined by the management of the company? In the GCC, the directors are paid reasonable fees and these are disclosed in the audited financial statements. In the UAE, there are restrictions on the number of directorships a person can hold.

The Institute of International Finance (IIF) formulated a Corporate Governance Code drafted by an eminent Committee that dwelt in the main, on (a) the structure and responsibilities and (b) the Board of Directors and Accounting and Auditing. The IIF Code included the following :

• That independent directors should be re-elected every three years for a maximum of three terms. 
• Non-management directors should hold periodical meetings without the management directors. 
• Audit committees should meet as frequently as the main board of directors and the number of all committee and board meetings should be made public, with the frequency of attendance by the members. The audit committee should approve any other services provided by the external auditors as well as the fees. 
• All compensation schemes for full time and part time executives of a company, should be fully disclosed and the senior executives should certify the financial reports before submission to the regulatory authorities. 
• The code of business conduct and ethics for all management and employees, should not merely be adhered to, but also the code and its performance disclosed to the shareholders.

A survey of the CEOs at last month's World Economic Forum at Davos, showed that a majority believe that corporate reputation is a more important measure of success than stock market performance or profitability or return on equity (ROE). Indeed, 59% of the respondents believe that good reputation accounts for two-fifths of a company's market capitalization and the majority (77%) attributed this importance as having increased in the last two years. Mr. Donald Johnston, Secretary General of the Organization for Economic Co-operation and Development (OECD) stated that a new initiative by his organization for its thirty-odd members, clearly wished to see the Board of Directors as the first line of defence or the "watch-dog" i.e. not only the external auditors. He was in particular, keen that the information flow to the Chairman and Directors should be independent of the management, so that they can make informal judgements. He added that "too many Board members are not really independent. They are only toadies". Mr. John Chamers, the CEO of CISCO was happy that he was not also the Chairman of his company. He added that the current Chairman is his best advisor and his best critic!

It is in this scenario that the institution of independent directors need to be viewed. They should perhaps, have the CFO and the compliance officer of an organization preparing quarterly (signed) reports as required by them that are also reviewed (not audited) by the auditors.

Good corporate governance requires an independent audit committee, a compensation committee and a governance / performance committee and in the case of financial and technology companies, finance, credit and technical committees of the boards of directors. There are multiple board sittings of this nature and the amount of homework that an independent director has to do becomes considerable.

There was a suggestion made that the position of independent directors should be a full time career opportunity, for those that have considerable experience. I believe that there is considerable merit in this idea; in that the vast pool of exposure and experience gained in corporations and in the business world, can be put to good use.

It was sad to hear that the surveys done by both McKinsey and by the Institute in the MENA region, reflected a fairly poor state of affairs in this region, as far as corporate governance and compliance of best practices are concerned. The principal of McKinsey & Company in Washington D.C., Mr. Greg Wilson's speech at the conference, was clearly one of its highlights, as he combined the innate incisive presentation skills of a seasoned consultant with considerable authority and knowledge of the subject. Some directors do not complete their due diligence on the documentation given to them, and often, do not ask the right questions, until the matter becomes a problem or a crisis.

Of course, as Mr. Michael Tomalin observed, the MENA region is not necessarily homogenous and indeed, in private conversations, it was felt that on the one hand, the Lower GCC had more to do with South Asia, and on the other, the Northern Gulf with the Levant and Egypt. Therefore, MESA (Middle East & South Asia) including the GCC, Iran and Iraq at some point in time in the future, might have more commonality than elsewhere.

All in all, the Institute's management was sensitive to the needs of the audience in that it had put together a few thoughtful touches that were noticeable during the course of the two-day conference. This is perhaps a testimony to the fine leadership of Mr. Charles Dallara. His colleague, Mr. Howard Handy is responsible for the MENA region. Such conferences therefore, tend to be not merely networking opportunities, but also an occasion to look at issues such as the new Capital Accord, corporate governance, regulatory issues and the developments in the right and regional perspectives

The author is General Manager of Emirates Bank. However, the views expressed in this article are not necessarily shared by the Bank.

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