Aubyn Hill
AS A former CEO of companies, I subscribe to the principle that the board of directors must represent all shareholders of a company and look after their interest, while the management of a company is responsible to the board of directors. Equally important, the management of an enterprise must be given autonomy and authority by a board of directors, but the board should hold management's nose to the grindstone by setting clear targets and measure constantly management's performance against these agreed targets and objectives.
Management should be compensated well, but when the CEO and his team fail to make important targets and meet clearly defined and agreed to objectives the board of directors is obliged to remove the CEO and maybe others of his or her team. There is a delicate balance that must be maintained between the board's role of overall governance, policy setting, CEO evaluation and compensation - and that of the management's role, headed by the CEO, where the management is given full autonomy and responsibility to run the affairs of the company on a day-to-day basis. Recently, there has been a lot of talk about under-performing CEOs who are maintained by compliant boards largely put in by these CEOs. Complaints have also been fairly common about the level of some CEOs compensation in relation to their performance.
A NEW FORCE IN CORPORATE GOVERNANCE
In the past few months here in Jamaica we have had a lot of discussion about pension funds management and the role of the private sector in the proper management of workers' money. As more attention is given to this pool of funds, many are going to come to realise what a formidable force pensioners' savings are in any open economy. Indeed, pension funds such as CALPERS of California and the American Federation of State, County and Municipal Employees (AFSCME) have used their mountains of pensioners' cash to become activists in demanding that the management of companies in which they invest perform to a consistently higher standard. If the required results are not forthcoming, pressure is put on the board of directors to change management. Whether we like it or not, given our proximity and our open economy and bearing in mind the fact that we operate in a globalised world with immediate access to information, pension fund managers in Jamaica are going to be much more active than they have been in the past in demanding higher and better performance from companies in which they invest pensioners' cash.
At present pension fund managers invest substantial amounts of money in real estate, and that has proven to be an excellent avenue for many reasons. These investments increase the housing stock of the country - and we certainly need more and better housing in Jamaica. In the process pension fund investments in residential (and some commercial) real estate help the construction industry which in turn is a major employer of skilled, but largely unskilled, labour in Jamaica.
More and more, however, I believe pension fund managers will be investing in the equities of companies, and because they have a fiduciary duty to their pensioners, they will have to become more demanding of CEOs and boards of publicly traded companies, and some privately held ones, in which pension funds cash is invested.
CEOS AND BOARDS - RESPECT DUE!
Smart CEOs and responsible boards of directors will begin - now - to adjust their behaviour to the new and large reality that is pension fund money. They should better take steps that will enhance their short term and long term performance and become even more vigilant at finding new sources of sustainable revenues and profits. They will have to squeeze inefficiency out of their operations and productivity will have to be increased by a much more intense, measured and monitored training of their employees and investment in new equipment and technology. CEOs may have to go back to their shareholders (in time more and more pension funds) to secure more equity but in order to do that they will have to have clear business models and business plans backed by credible and empirical performance.
CEOs that are riding on the fact that the board is largely appointed by them and is generally under their control, or because they have had an excellent track record in the past - beware! Take a note out of the once almost all-powerful chairman and CEO of Disney - Michael Eisner. While American law treats shareholder inspired (as against board initiated) votes for directors on a board as merely "precatory" - that is, as advisory only - when 45 per cent of the votes cast by Disney shareholders did not support the re-election to the board of entertainment firm's then boss, Michael Eisner, it marked the beginning of the end of Mr. Eisner at Disney. Though he and the board would have been in their full right to ignore this "advice", the board was forced to act to separate the two positions held by Mr. Eisner pushing him up to the largely ceremonial position of non-executive chairman and appointing a new person as CEO of Disney. Michael Eisner had ruled the Disney company for twenty years almost as an unchallenged emperor. Activist shareholders and the power of pension funds are bringing significant changes to the corporate landscape in America and, in time, I expect that this powerful pool of funds and brighter and more demanding pension fund managers will pose a similar set of challenges in the corporate landscape here in Jamaica. In a good sense, excellence depends largely on thoughtful, firm and balanced agitation for better performance.
Aubyn Hill is the CEO of Corporate Strategies Ltd., a restructuring and financial advisory firm. Respond to: writerhill@gmail.com
