Problem Boards or Board Problems?
@ the IERP® Global Conference, October 2022
Introducing the subject of the panel discussion, immediate past chairman of Sumitomo Mitsui Banking Corporation Malaysia Tony Chin said that locally, the Central Bank’s regulations set the gold standard for board members; this is slowly trickling down for adoption by other entities. “Boards meet only four or five times a year,” said Chin, who is now a corporate turnaround specialist. “Independent directors are basically part-timers. They are appointed to the board because of their particular subject matter expertise but generally, a lot more than just subject matter expertise is required, for you to be a valued contributor at board level.”
Identifying financial literacy as a key element of the decision-making process, he said this was relevant particularly where the quarterly accounts were involved. Board members have to be careful because although the audit committee and subject matter experts were available to deliberate on the accounts on behalf of the board, the board had to approve the accounts collectively. “Each and every board director is held accountable because it is signed off by the entire board,” he said. For every independent director, there are penalties and liabilities under the Companies Act. Under Central Bank regulations, each sitting director may be personally liable for up to RM20 million if found negligent.
There were other issues that boards have to deal with as well, he said, such as having the wrong people on board with the wrong mix of expertise. While boards require members who are good at ESG, cybersecurity and digitisation, for example, board members have to be subject matter specialists as well as generalists. Among the issues boards need to consider are the current market environment, geopolitics, the movement of foreign exchange, anti-money laundering, various emerging risks and the need for diversity. When all this is coupled with a board director or independent director being a part-timer, the difficulties increase.
A question directors should ask themselves, said Mohammad Ridzuan Abdul Aziz, Independent Executive Director, KAF Investment Bank, was how relevant they were to their boards. “This splits the issue of the individual sitting on the board, and the board collectively representing the tone from the top, with what the company is trying to do,” he said. “Directors should ask if they are relevant in terms of the business model of the company and where it wants to go. They should also eventually ask other board members and the firm’s C-level officers if they are still relevant in terms of what the company wants to do.”
Adding that directors needed to challenge themselves every time they discussed strategic matters, he urged them to validate their relevancy by questioning themselves. “For people who are really deep into digitisation, can you really relate to the programmers, for instance?” he said. “Do you know what the market is doing? What about your competitors? Where do you stand as far as knowing all these things, as an individual? When you hear other people saying things, do you listen because you want to know what is going on, or because you are on the defensive, and just want to rebut what they are saying?” He stressed the importance of this because it relates to the individual’s behavioural mindset.
Also important: what kind of action should be taken in terms of improving, how this should be articulated and shared with other board members. “As an independent director, you are not full-time,” he stressed. “You need to do a lot of your own homework. Check your facts; do analysis – knowing how to analyse is super-important.” Advocating extensive reading to gain different perspectives, he suggested thinking about how to respond and lead. “Ask if the company will still go in the direction that has been set,” he suggested. “Once you have validated yourself, and are in a position where you know what you are talking about, you can contribute in terms of how the company can move forward.”
Dato’ Megat Iskandar Shah, Partner at EY, pointed out that a common observation was that there were quite a number of dominant boards. Although board diversity was recognised and many boards were moving towards this, some were more receptive than others. “Diversity is good to have,” he said. “Different people have different views. Having diversity on boards gives a bigger picture, and different, wider views. Collectively, the board may be able to decide a better way forward. The role of the chairman therefore is to include everyone so that the collective decision will be more robust.” Chin added that the board is the right place to provide oversight, but a high level of trust was needed.
“Directors work with management but management is in the driver’s seat,” Chin remarked. “The trust level between board and management must be very strong – or you will have a board problem.” Executive chairman positions are usually full-time ones; it is typically the founder of the company who retains this position when the company is listed, he explained. But the executive chairman may pose myriad issues for the board because of vested interests, or if he/she was dominant and reluctant to take into account the views of independent directors. “Management can be very cowed by a dominant director, especially if it’s the executive chairman,” he said.
In Malaysia, Bank Negara has made it mandatory for the chairman of the board to be a non-executive director. Board evaluation runs on a three-year cycle, he explained further, with the evaluation in the first two years done in-house. In the third year, a third party is engaged to make an assessment. “With board dynamics, it is sometimes very difficult for directors to be upfront and criticise each other,” he said. “But when an independent party comes in, it becomes a lot easier for the board to make independent assessments and take (appropriate) decisions and actions.” On board diversity, he said the aim was to reach 30%.
Global studies have shown that at the 30% level, views will start to gain traction. But while the issue of diversity currently focused on women, diversity itself had many other connotations, including culture, experience and ethnicity. Addressing the issue of possibly having millennials on boards, he acknowledged that while they certainly were clever, and their participation at board level should be encouraged, the role of director nevertheless required a wide range of expertise attainable only through experience.He suggested that they first gain experience through technology companies; their added value then would be as subject matter experts in that field.
From there, they could be nurtured as generalists by others on the board before upgrading to more significant roles. Ridzuan stressed the need to ensure that capabilities and expertise were aligned with the company’s requirements. A proper structure was required for millennials, for instance, such as a junior director’s position with a mentor for proper guidance, to avoid imbalances in directorship dynamics.Lauding the move for women to take up 30% of boards, he said this should be done on the basis of meritocracy, not exclusively for the sake of having women on boards.
“Meritocracy is super-important as part and parcel of how diversity is formulated, so that we can have alignment as well as advantage. The different kinds of diversity can be added to what we want to achieve with the company,” he said. Megat pointed out that while hiring on merit was a straightforward solution, the necessary talent may not be readily available.Chin agreed, illustrating with an example of how guidelines introduced by Bank Negara for risk management in information technology (RMIT) required banks to appoint a Chief Information Security Officer (CISO).
“There was a mad scramble in the industry to find the talent because it was a new area, and there was hardly anybody with the full requisite suite of skills,” he said. “And for those who did have the skills, you had to pay a lot to get the talent!” Boards are confronted by varied challenges every day; board members have no choice but to constantly learn, relearn and unlearn, and get used to having to constantly catch up with developments in their respective industries and environments. There is no right or wrong way to approach the problems that confront boards today, but an effective board will have to train its focus on making an impact and maintaining the organisation’s sustainability so that it can continue creating value for shareholders and stakeholders alike.