Corporate Governance, the Boardroom & Beyond

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By FBNQuest

In February 2021, shareholders at an aerospace company, Boeing, filed a lawsuit against the company’s board of directors, arguing that the board had failed in its oversight duty by not holding Boeing accountable for safety before and after the crashes of two Boeing 737 MAX airplanes that killed 346 people in 2018 and 2019. The lawsuit sought to hold the directors responsible for the resulting loss of billions of dollars in value.

These are dynamic times. The events of the past decade have led to a focus on various parts of corporate governance, yet, many boards of directors are unclear about their role in the company’s governance structure and are asking what they should be doing in critical areas of oversight (such as strategy and risk), and social responsibility.

Learning from Governance Breakdowns: As seen in the lawsuit against Boeing, shareholders wrote, in a 120-page filing, that “safety was no longer a subject of board discussion, and there was no mechanism within Boeing by which safety concerns respecting the 737 MAX were elevated to the Board or to any board committee.”

In another governance spat, Howard Schultz (Chairman of Starbucks and former U.S. presidential candidate), announced that despite the many thousands of managers and executives in the company and the tens of millions of dollars the company proudly spends on leadership development, Starbucks was not considering any internal candidates for its next CEO appointment.

Disappointed shareholders quickly noted that the Starbucks board had failed to deliver on two governance issues, internal leadership development and CEO succession planning.

These two test cases offer an opportunity to re-hash the crucial guiding principles for corporate governance:

The board approves corporate strategies as a basis for sustainable value; selects a CEO, and oversees the CEO and senior management in running the company’s business, which includes allocating capital and evaluating risks; The Board sets the corporate tone for ethical conduct.

Management develops and implements corporate strategy, also steering the company’s business under the board’s supervision, with the objective of ensuring continuous long-term value creation.

Management, under the oversight of the board and its audit committee, produces financial statements that fairly present the company’s financial condition, needed to assess business soundness and risk appetite of the company.

The audit committee of the board retains and manages the relationship with the outside auditor, and oversees the company’s risk management and compliance structures.

The nominating/corporate governance committee of the board aims to build an engaged and diverse board, and actively conducts succession planning for the board.

The compensation committee of the board develops executive, performance-based compensation policies regarding the CEO and senior management in order to support the company’s long-term value-creation strategy.

The board and management engage with long-term shareholders on issues and concerns that are of widespread interest to them and that affect the company’s long-term value creation.

Governance Keeps Evolving: In his groundbreaking 1970 article, Nobel Prize-winning economist, Milton Friedman, stated that companies had no social responsibility beyond making money for shareholders. This principle of shareholder priority guided generations of business executives, Board members, and policymakers who ensured that companies single-mindedly viewed profits as their sole objective. But Mr Friedman eventually turned out to be incorrect.

A recent “Beyond Business” panel discussion, hosted by The Wharton School of the University of Pennsylvania, focused on how boards are redefining corporate governance to maximise a company’s social impact while balancing the needs of all stakeholders such as employees, customers, suppliers and the community in which the company does business.

The panellists also added that even a quick look at the makeup of modern boards reveals how significantly they have changed. Environmental damage, social and racial injustice, gender inequality, the COVID-19 pandemic, technological disruption, and other pressures are pushing companies to take a broader look at their purpose and mission. Boards now take on members with specific expertise in areas such as impact investing, human resources, auditing and accounting, crisis management, and AI.

In Conclusion

Unsurprisingly, a 2022 Global Trends in Corporate Governance report (which interviewed over 50 global institutional and activist investors, regulators, advocates, advisors, pension fund managers, proxy advisors, and other corporate-governance professionals) identified the following corporate governance trends as impacting boards and directors in 2022 and beyond:

Improved Board-effectiveness practices become the norm as investors and other stakeholders recognise that good composition, refreshment, and evaluation practices result in improved corporate performance and decreased exposure to risk.

More assertive, demanding investors who feel empowered to demand action and disclosure on a growing number of topics, and, with failure to meet those demands, more likely than ever to vote against companies and individual Directors at annual shareholder meetings.

Urgency regarding equity and diversity initiatives both in the enterprise and the Boardroom, as evidence, mounts that diverse organisations outperform others and stakeholders request quick progress.

Higher standards for corporate attention to the climate as the impact of climate change on individual businesses and society become apparent, many stakeholders now expect companies to play a role in de-carbonising the global economy.

FBNQuest is a leading Merchant Banking and Asset Management group in Sub-Saharan Africa that delivers a wide range of financial services through various businesses – corporate and investment banking, investment management (asset management, alternative investments, agency services and trustees) and institutional securities (structured products, fixed income, currencies & treasury and equities)

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