Governance or box ticking?

There has recently been a spate of high-profile, well publicised cases where company directors have come under fire for inadequate corporate governance, resulting in company failures. A breach of duties is the term being used in the Mainzeal case, but does it run much deeper than that?

In a recent investor presentation,  Mainfreight Managing Director Don Braid outlined what I [we] believe to be a very compelling case to their approach to people and any board appointments. In their latest correspondence, Mainfreight mention the upcoming departure of Carl Howard-Smith from their Board of Directors. Howard-Smith has been a Director of Mainfreight since its listing on the NZX way back in 1996, and prior to that when it was a private company, so it’s fair to say he has had a significant influence on the success of the company. They note his length of tenure as a Director flies in the face of modern governance guidelines; an example of what they see as flawed thinking in terms of “best practice”.

So what constitutes best practice? The Institute of Directors refer to the code which ‘provides guidance to directors to assist them in carrying out their duties and responsibilities in accordance with the highest professional standards’. This description seems vague at best, and classic corporate speak at worst. Does anyone think that a week- long intensive company directors course prepares you for the rigour of the board room in a company that you may have little understanding of?

Clearly, there are a number of high calibre directors with many years of experience operating very successfully in our listed market, but among some companies there appears to be a worrying trend of ‘box ticking’ in order to satisfy the latest governance trends.

To my way of thinking, those board members with an intricate understanding of the business they are representing will undeniably be the most effective. An obsession with a broad mix of skills may seem reasonable on paper, but not if the core competencies are not there?

Citing the Mainfreight example again, they’re in the enviable position of having a board of directors with extensive company and sector specific experience, who, in many cases, have been with the business from the beginning. Their continued outperformance in the share price, over a long period of time, is therefore no coincidence.

Another consideration has to be the number of directorships at any one time. I fail to see how you can give the sufficient time and energy to drive commercial outcomes for that underlying business if you are on a board of ten companies.

Board of directors have major responsibilities and obligations to shareholders, so surely a core group of experienced members, all of whom possess a strong understanding and sector specific business knowledge, should be the minimum starting point. If this is overlooked at the expense of flavour of the month trends, fads and other worrying trends, then New Zealand businesses will be worse off than ever before.