MIDLANDS STATE UNIVERSITY

BACHELOR OF COMMERCE HONOURS DEGREE IN

BUSINESS MANAGEMENT

MODULE : INTRODUCTION TO CORPORATE GOVERNANCE

Question:
1a. "All Boards must have a good Board Mix". Discuss this statement in relation to its use and
application in Corporate Governance. (15)
b. "When boards become very cohesive, there is danger that they become victims of their own
closeness" discuss (15)
2. Discuss the applicability of the following theories of corporate governance in Zimbabwean
organisations
a) The Stakeholder theory (10)
b) The Ubuntu Governance Theory (10)
1a. "All Boards must have a good Board Mix". Discuss this statement in relation to its
use and application in Corporate Governance. (15)

According to Gabrielle O’ Donovan corporate governance is an internal system

encompassing policies, processes and people, which serves the needs of shareholders and
other stakeholders, by directing and controlling management activities, with good business
savvy, objectivity, accountability and integrity. A good board is a balanced team with
complementary skill sets and a culture that allows them to work together to make the most
effective decisions for an organisation. Sound corporate governance is reliant on external
market place commitment and legislation, plus a healthy board culture which safeguards
policies and processes, that leads to a board mix which is a group of people, institutionally
the body which mediates between shareholders and management and provides a natural focus
for legal rules addressing the first agency conflict. The Board discusses corporate governance
issues and creates a corporate governance committee with a corporate governance champion.

A good board mix consists of a mix of stable and new members, mutual respect, diversity,
strategic and operational thinkers as well as a balance between independent and interested
directors. Board mix also consists of fair and firm chair and also a balance of skills and
experience. A board should be balanced in order to be a good board mix, for example it
should be balanced in the size, skills and experience, the types of directors, balance of
independent and interested directors as well as diversity.

A diverse boardroom provides a diversity of thought. All board members bring their own
personal background and experiences to their position in the boardroom. Each individual
mind is capable of offering unique ideas, solutions, and strategies. For boards with a more
diverse membership, the breadth of personal experience is wider and more comprehensive.

A diverse boardroom helps address complex, corporate issues. According to a recent study by
Reynolds Associates, “A board needs to constantly challenge itself to keep pace with the
changing dynamics a company faces. This is best done through a robust dialogue of differing
views as long as they are offered respectfully and listened to carefully… having multiple
views on the possible outcomes of an action results in a more thoughtful decision-making
process.”

A diverse boardroom increases revenues. Companies with diverse boardrooms are out-pacing
more homogenous organizations in profit growth. According to a recent study from
McKinsey & Company, “For companies ranking in the top quartile of executive-board
diversity, ROEs (Returns on Equity) were 53 percent higher, on average, then they were for
those in the bottom quartile.”

A good board mix should not be dominated by a single individual or a group of individuals.
Boards should have an appropriate balance between Executive and non-Executive members –
it should have a good mix of coal face knowledge (the inside directors) and outside practised
abilities (the outside directors). Not less than fifty percent (50%) of the Board members
should be non-Executive directors, if their collective views are to carry weight in carrying out
their independence enhancing functions. Not less than thirty percent (30%) of the Board
members should be truly independent non-Executive directors with no material relationship
with the entity. The roles of Chairman and CEO of the entity should be kept separate. Boards
should operate through committees, e.g. nominations, audit, compensation all with non-
Executive Board members being in the majority and chaired by a non-Executive Director
who is truly independent in the sense already defined. The committee system of the Board is
healthy. It allows for a detailed analysis of issues and promotes well thought out
recommendations made to the full Board.

However, a board mix could have its drawbacks like it may cause a rise in conflicts and it
may be time consuming when trying to reach an agreement with all board members. Conflicts
may arise when there are different perspectives on issues for instance one would want to
bring in their individual insights that may be for their own interests.

Summing up the write up, all boards must have a good board mix as it increases revenues,
addresses complex corporate issues, provides a diversity of thought and it also improves
corporate governance.

b. "When boards become very cohesive, there is danger that they become victims of their own
closeness" discuss (15)
Conflict of interests by the board is a critical issue in corporate governance because
professional responsibilities are essential at this level, especially if the point of one's role is to
be an independent leader explicitly recruited to provide honest, impartial feedback. A
conflict of interest arises when someone’s personal interests clash with their professional
responsibilities. In this way, even though the company expects the person to act in its best
interest, personal bias means it may not be the case. This can arise strongly, often through
intent; it can also arise subtly, unlagged because people see the issue as minor or irrelevant.
Ultimately, conflicts of interest create severe risks to a company, which is why corporate
leaders and lawmakers go to such lengths to avoid them. The best way to do that is by having
a conflict of interest policy. Boards should also make sure that board members understand the
types of situations where they may be at risk of a conflict and how to respond if one exists.

A company’s prospects depend on its board and executives due to their role in crafting and
implementing company strategy. If anyone on either team is more concerned with their
personal interests than the company’s, strategy and success will likely suffer. The following
are examples of conflicts of interest at the board level. A director who uses confidential
information from board meetings to inform their personal investment decisions. In addition, a
director who uses connections made through their company to further their personal business
career. There are four tiers of conflict of interest in corporate governance.

Tier-I conflicts are actual or potential conflicts between a board member and the company.
The concept is straightforward: A director should not take advantage of his or her position.
As the key decision makers within the organization, board members should act in the interest
of the key stakeholders, whether owners or society at large, and not in their own. Major
conflicts of interest could include, but are not restricted to, salaries and perks,
misappropriation of company assets, self-dealing, appropriating corporate opportunities,
insider trading, and neglecting board work. All board members are expected to act ethically at
all times, notify promptly of any material facts or potential conflicts of interest and take
appropriate corrective action.

Tier-II conflicts arise when a board member’s duty of loyalty to stakeholders or the company
is compromised. This would happen when certain board members exercise influence over the
others through compensation, favors, a relationship, or psychological manipulation. Even
though some directors describe themselves as “independent of management, company, or
major shareholders,” they may find themselves faced with a conflict of interest if they are
forced into agreeing with a dominant board member. Under particular circumstances, some
independent directors form a distinct stakeholder group and only demonstrate loyalty to the
members of that group. They tend to represent their own interest rather than the interests of
the companies.

Tier-III conflicts emerge when the interests of stakeholder groups are not appropriately
balanced or harmonized. Shareholders appoint board members, usually outstanding
individuals, based on their knowledge and skills and their ability to make good decisions.
Once a board has been formed, its members have to face conflicts of interest between
stakeholders and the company, between different stakeholder groups, and within the same
stakeholder group. When a board’s core duty is to care for a particular set of stakeholders,
such as shareholders, all rational and high-level decisions are geared to favor that particular
group, although the concerns of other stakeholders may still be recognized. Board members
have to address any conflicts responsibly and balance the interests of all individuals involved
in a contemplative, proactive manner.

Tier-IV conflicts are those between a company and society and arise when a company acts in
its own interests at the expense of society. The doctrine of maximizing profitability may be
used as justification for deceiving customers, polluting the environment, evading taxes,
squeezing suppliers, and treating employees as commodities. Companies that operate in this
way are not contributors to society. Instead, they are viewed as value extractors.
Conscientious directors are able to distinguish good from bad and are more likely to act as
stewards for safeguarding long-term, responsible value creation for the common good of
humanity. When a company’s purpose is in conflict with the interests of society, board
members need to take an ethical stand, exercise care, and make sensible decisions.

The following example is about a conflict of interest and how it can be managed. A board
member works as an insurance agent outside of duties on the board. The organization places
their commercial insurance policies with the insurance agency where the board member
works full time. The insurance agency pays the insurance agent a commission for all new
business that the agent brings into the agency. The agency paid a commission to the agent for
the board bringing their insurance policies to the agency. In this situation, the insurance agent
has directly profited from his relationship on the board. However, this can conflict of interest
mentioned above can be managed. The insurance agent could refuse to accept a commission
or any other financial compensation for any insurance policies that the organization places
with the board member’s employer. The board member would also disclose the conflict
publicly to the board and abstain from voting on any matters related to the board’s
interactions and decisions with the insurance agency or policies. If the board member abstains
from a vote regarding this matter, it should be recorded as an abstention in the minutes.

The following is also another conflict of interest example and how it can be managed. A
board member serves on a board of directors for an organization that manufactures small
kitchen appliances. The board member sees that this is a profitable market and uses the
knowledge that gained from board experience to start up a company that manufactures the
same types of products. In this situation, the board member is now in direct financial
competition with the organization that he serves on the board of directors. It would be
extremely difficult for him to make unbiased decisions as a board member. In this case, there
is a direct conflict of interest which can only be resolved by the board member resigning from
his position on the board or dissolving his new small appliance business

References

1. A Wicks (2017)The Blackwell guide to business ethics, pg 17-37

2. J. Harrison – Quintana (2013) LGBTQ Policy Journal , Allianceforclass.org
3. M Kumaraswamy(2017) Focusing megaprojects strategies on sustainable best value of
stakeholders
4. R E Freeman, J S Harrison, AC Wicks, BL Parmar(2010) books.Com
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No. 1 (Mar., 2003), pp. 1-36 (36 pages) Published By: Cambridge University Press
6. Kay J. & Silberston A. National Institute Economic Review No. 153 (August 1995), pp.
84-97 (14 pages) Published By: Cambridge University Press
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