Corporate governance ­ Selection of directors

Vindel Kerr, Contributor

The number of companies that have been brought to public attention over the last few years for the improper management of their affairs leading to either de-listing from the stock exchange and/or financial bankruptcy is cause for concern.

Most unfortunate in these circumstances, is the fact that shareholders are the last to know of problems that usually have their genesis over several months or few years. Would the process of director selection be of any significance to averting these crises? This article seeks to merely examine the importance of director selection in the general process of good corporate governance.

Principle number two of the Commonwealth Association on Corporate Governance Guidelines states that, "the board should be composed of persons of integrity, skills, objectivity, having the experience and commitment to attend and participate actively at monthly meetings and those of the monitoring sub-committees". This is simply saying that persons selected to boards should have a blend of knowledge and good qualities and be led by a capable chairman who possesses the critical leadership skills to bring out the best in each director.

When there is not this level of prudence and objectivity in the selection of directors, many of these individuals end up being "boardroom squatters" or "corporate social loafers".

The resultant effect is the short-changing of shareholders' value. Don't be fooled, many of these directors are not just there for the resume-enhancing effect of these appointments, the fees and other benefits associated with the board appointments are sometimes not easily resistible.

Information provided by Paul Fisher, Corporate Secretary, CIBC Canada at a recent Seminar here in Jamaica titled: "Effective Corporate Governance", suggested that directors of top Canadian firms are paid up to Cdn.$120,000 per annum.

Unfortunately, whether or not these men and women performed, they are paid at the expense of shareholders.

Law Professor Janet Dine of Essex Law School, in a paper entitled, 'Corporate Governance, Cadbury and Friendly Societies', wrote, "if fees are paid they should reflect the time that non-executive directors commit to the corporation and the particular responsibilities related to size, complexity and diversity of the societies' business."

It should be quite convincing that in charting a path for good corporate governance, shareholders should ensure a proper director selection process to avoid the propensity for "cronyism" and "tokenism".

For any sound corporate governance process, director selection must be managed by critically assessing the skills, knowledge and track record of the person to be selected against the nature, purpose and activity of the company in question. Also, while the author does not subscribe to the process of board nominations originating from the chief executive officer and/or chairman, where such nominations are made, those involved should justify their decisions to shareholders in the appropriate settings.

While the Companies Act of Jamaica provides the chairman and board the power to nominate and select directors, ultimately, shareholders as the owners of the corporation, have the authority and discretion to appoint or remove directors, but this must be done through a transparent process at properly constituted meetings.

Given the increasingly competitive global environment and with the many, and varied, demands placed on corporate boards, it is no longer sufficient for directors to simply regard their position as honorific with no special duties or responsibilities. Therefore, it can only be re-emphasised that a director's role is an onerous task which carries with it significant responsibility and personal liability.

In concluding, there is no doubt that much more is needed regarding significant changes to the Securities Commission's Act and the Laws governing the Jamaica Stock Exchange, to provide them with more power. These institutions should be given the "teeth" to facilitate their handing down financial punitive actions against both delinquent companies and the directors alike. In spite of some of these more obvious concerns, it is proposed that a process of effective director selection be the precedent in setting the stage for a comprehensive Code of Good Corporate Governance in Jamaica. Shareholders, it is time to wake up!

* Vindel Kerr is a management consultant, teaches, and has scholarly interest in corporate governance.

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