News Column

Tips On How to Select Competent Non-Executive Board Directors (3)

August 12, 2014

Mussa Assad

THE general lack of financial expertise on many board teams has been repeatedly cited as a contributing factor to the damage resulting from the global financial crisis.

Boards today are therefore increasingly looking for NEDs with strong numeracy skills, who can decipher complex share option arrangements and who understand debt and finance issues.

Financial literacy goes beyond just knowing what is going on in the markets; it is about understanding finance so that effective decisions about the business can be reached.

With investors and shareholders locked into a 24/7 trading cycle, it is imperative that businesses react swiftly to market events. During the financial crisis, many companies were slow to adjust to the unpredictable and volatile marketplace. Those whose board members had previous experience in difficult markets were undoubtedly better able to weather the storm.

This is one attribute I find lacking in many Tanzanian parastatal boards and if I had a way I would ensure that every board has a well rounded accountant in it as a member. Since I am myself an academic and a professional accountant I don't feel comfortable labouring on this point. It has been made.

Technological prowess NEDs today must be aware of the profound impact technology is having on all areas of commerce around the world. This is true across all sectors, not simply consumer-led industries.

The confluence of existing technologies (such as mobile networks, the Internet and video) and the evolution of new ones (such as material sciences and biotechnology) are likely to have profound implications for the way business is conducted in the next decade.

The fact that information proliferates and travels at unprecedented speed alters the manner in which boards traditionally make decisions. Thanks to the entrenchment of the 24-hour news cycle and the unprecedented interconnectedness of global markets, companies cannot afford to react to events at apace of their own choosing.

Today's NEDs must be able to make tough decisions in timeframes that would have been regarded as impossible only a few years ago. NEDs also need to understand the commercial impact of social networks, digital media, e-commerce, mobile and other technologies.

Online platforms are changing the way customers interact with brands and are therefore driving new business models. Understanding how they work is becoming essential to any boardroom discussion about corporate strategy.

As new technological platforms and trends inevitably emerge, NEDs will also have to stay continuously up to date and informed. One of the crucial effects of new technology, particularly social media, is that it shifts power into the hands of the consumer.

If boards are to stay abreast of the nuances of digital communication platforms, they will need NEDs with specific knowledge and experience to help frame strategic discussion around these areas.

Such candidates will likely come from the younger generations, the so-called "digital natives" who grew up in the era of online everything. Not every board member needs to be an expert, but this knowledge needs to be represented. The strategic importance of technological knowledge must undoubtedly be front-of mind for Chairmen.

As you might expect this trend is particularly pronounced in consumer facing sectors. Undesirable traits We can't discuss desirable traits and attributes of directors without covering the flip side of the coin - undesirable and damaging behaviours that can harm, or even derail, a NED.

Following here is a list of red flags: Big egos Boards have no need for NEDs who join to further a personal self-promoting agenda, enhance their political currency or who are motivated by status. That includes pushing political correctness on issues such as the environment, diversity and corporate social responsibility.

All NEDs should remember they are there to represent shareholder interests. I have seen many of these kinds of people in this country and they are still being appointed in Boards. It is embarrassing to recommend oneself to a directorship position but candidates keep engaging with Ministers and Permanent Secretaries "not to be forgotten" in such and such appointments!

Confrontational personalities Individuals who are challenging for the sake of it--or who believe this is what is expected of them--make poor NEDs. Dogmatic, inflexible opinions have no place in the boardroom and those who must win every argument will find the boardroom an unsatisfying place to be.

If your starting assumption is "nobody else knows and you know best" you should not be appointed to any boards. Lack of preparedness NEDs who do not fully commit to the role--which includes reading all materials in advance of the meetings and attending all meetings--will make little positive impact.

Board members also express irritation with those who display a lack of enthusiasm for the board business, such as by constantly checking messages or e-mails during meetings.

This is a current and ongoing disease that must be eliminated. You come to the Board and get paid well and you must devote time fully to the business of the Board. Shallow comprehension NEDs who do not make the effort to fully understand the business--often indicated by a lack of participation or asking the wrong questions during meetings-- will be ineffective.

Peers quickly divine who is not clear on the big picture. I have sat in a Board with a director who did not utter a single word in a whole year. One day a member out of curiosity asked him in a meeting "Chairman, what views has Mr X got on our conduct as a Board. Has he anything to say?"

He replied he had come to the Board to learn and there is a lot of things he had learnt in his time as a director. The next week I had gone to the Minister to seek his replacement and we got a really good chap in his place. Good riddance.

Five years on, some directors still recall the chap who used to come to meetings and insisted on getting his travel claims reimbursed instantly by the end of the meeting.

That was his main concern! A useless NED! Disrespect for boundaries Failing to understand the distinctions between the role of the NEDs and that of the executive team will cause conflict. Drifting into the realms of operational decision making, especially during crisis situations, will damage relationships with the CEO and others in senior management. This is a problem the Board led by the Chairperson must always seek not be involved in.

When you have separation of boundaries clear the Board can ask Management questions and get answers - otherwise it gets really muddy. However deep their skill set, exceptional NEDs are always seeking insight and support to be even better. Here are some suggestions. Prior to joining a new board, NEDs must take "due diligence" seriously.

This includes researching not only the company, but also individuals on the management team and the board itself. Brushing up on the industry sector, attending conferences, reading analyst comments and networking with other board members can facilitate this process.

Extensive reading--to ensure financial and political literacy--is essential for keeping abreast of corporate priorities. There is a critical need to carry on developing knowledge of the business and building relationships with key individuals throughout one's tenure as a director.

Time should be spent on site visits to factories, shops, offices, banks and other places of work. NEDs should talk to all layers of management, get under the skin of the company and take part in as many induction meetings or outside courses as they can. It is dangerous to assume that by the time people are recruited to boards they are so experienced that training will be redundant.

Methodical induction and proper training programmes, particularly for new NEDs, will improve the performance of individuals and the board as a whole.

An induction of several days is recommended to ensure new NEDs have a thorough understanding of specific company affairs and the varied aspects of their role.

Inductions should involve site visits and training on the specific legal responsibilities and ethics codes. They should also cover shareholder expectations and the company's governance priorities. More technical aspects--like financial details of audit and remuneration committees--require formal training by specialists.

I must at this point bring to the attention of readers the Institute of Directors of Tanzania [IoDT]. It is an institution that runs on a regular basis director training events that lead to certification after an examination.

I would have thought all individuals who seek to be and are actually directors in Tanzania would quickly get in touch with IoDT and attend the basic programme - Cerficate in Directorship [CertDir] - a five-day programme facilitated by very experienced individuals. A lot of old hands are, in my personal view, resistant to attending the certification programme.

I don't know the failure rate but it is a pleasant session with plenty of networking opportunities and almost guaranteed passing if you paid attention to the content delivered.

That is all. It is the chairman's role, to assess training needs, supported by the nominations committee and with appropriate advice, to define which new skills, knowledge, experience, personal contacts and other attributes future board directors will need.

This process not only encourages better recruitment, but also allows boards to communicate clearly with new candidates as to what is expected of them.

Mussa J. Assad is an Associate Professor Department of Accounting University of Dar es Salaam Business School

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Source: AllAfrica

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