Tuesday, June 2, 2009

Independent directors (and related matters)

Corporate Governance is an aspirational principle to engender greater integrity, truthfulness and, yes, transparency in companies. The idea is to ensure that companies provide accurate financial and operational information which are timely. This information, it is hoped, will enable everyone having some financial interest in the company to form an accurate view of what's going on in the company.

That's the theory.

Such an aspiration is, then, balanced against the need for companies to maintain some secrecy so that competitors will not be able to take advantage of the competitive edge that companies have against such competitors.

That's the dilemma for everyone who has a stake in the company but, who are not involved in the management and operations of the company.

Open the windows. Draw the blinds.

In the governance of companies, public companies, listed or unlisted, GLCs and PLCs - the apex management body is the Board of Directors.

Within the Board of Directors, there are Executives and Non-executives.

Executives are the people in power. They call the shots. They sign the cheques. They decide on the life and death of everything that a company does. This includes the decision as to who are appointed as Non-executives.

The Minority Shareholders Watchdog Group (MWSG), with the encouragement of the regulators, are trying to create a pool of Independent Non-executive Directors.

This is a good thing. It is a necessary development. It is something to push for. It is consistent with the aspirations of Corporate Governance.

Is it a panacea?

Obviously not.

But, it's something that is better to have than not to have.

I have told everyone who is prepared to lend me an ear that companies are dictatorships. The Executives are all-powerful. None may oppose.

This will not change. Not even with a pool of Independent Non-executive Directors. Not even if GLCs and PLCs are obliged to appoint people from a pool based on the cab rank principle, i.e. first-come-first-served basis.

There are ways for the Executives to neutralise the Independent Non-executives. There are many, many ways.

But, it's something that is better to have than not to have.

The principle is that of having checks and balances. The principle is to have constant audits.

NOTE: A timely development. The SC and Bursa just announced "CG Week". Read here.
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Which leads me to wonder about the constitutional structure of a nation like Malaysia.

There is a Monarch or Head of State, an Executive (Cabinet and Civil Service), a Legislature and, a Judiciary. These institutions are intended to audit each other. They are intended to be checks and balances against each other.

Constant audits are necessary.

Even a country with a strong record of quashing dissent has acknowledged the need for audits. Read here.

The greatest audit is in the ballot box. Even then, as with the corporate context, there are ways to neutralise the ballot box.

But, it's something that is better to have than not to have.

As always, in discussions of this nature, Charles de Secondat, Baron de Montesquieu who wrote the Spirit of the Laws, is accorded the privilege of the last word:

When the legislative and executive powers are united in the same person, or in the same body of magistrates, there can be no liberty; because apprehensions may arise, lest the same monarch or senate should enact tyrannical law, to execute them in tyrannical fashion.

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