Directors Don’t Like Goodbyes

a1_b“Parting is such sweet sorrow” (Shakespeare)

One of the predicted negatives from the Companies Act (the Act) and the King Codes was it would be difficult to find directors. The Act and King Codes put extensive liabilities on directors, encouraged annual appraisal of directors, term limits for directors and recommended strong codes of conduct to ensure directors fulfilled their fiduciary roles.

Non-executive directors seemed particularly vulnerable as they are not part of day-to-day operations, have to wade through extensive board packs before each meeting and attract the same liabilities as executive directors.

It thus seems intuitive that directors would be reluctant to serve with the introduction of all these governance measures.

The predictions were wrong – directors are staying put

Research done in the United States contradicts this and shows that directors are keen to remain in office for as long as possible. It seems the prestige and access to high-power networks outweighs the negatives.

Directors in America feel more than one in three directors should be replaced but the research shows that only 15% of directors were appointed in the last two years.

Which directors should you replace?

  • The first category is directors who arrive at meetings unprepared – these reportedly account for 25% of boards of directors.
  • Second is the one upmanship category. They always have to show up other members leading to dysfunctional boards.
  • Next come those who don’t speak up. Many of these feel the chief executive (CEO) should go but don’t say a word about it.
  • Then there are the over-controlling CEOs who are afraid of board oversight and divide and rule the members of the board. In similar vein, CEOs who become Chairperson smother the new CEO as they believe only they can effectively run the company.
  • Finally, there is the “old guard” who believe their experience is vital to the board but, over time, lose the ability to think independently and to voice contrary opinions.

You have to question just how effective the governance is in these organisations. Correctly applied, appraisals, strict enforcement of term limits and codes of conduct should weed these categories out.

It would appear that directors agree that weaker members should be replaced, but they do not see themselves as being a weak link – it is always the other director who should go.

It is important that governance is not just a box-ticking exercise. There is a strong argument that new blood brings new energy and ideas to a board of directors. Jack Welch, the long time CEO of General Electric, maintained that getting rid of non-performers greatly enhanced the organisation.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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