Sunday, August 18, 2019 | ePaper

Non-executive directors in corporate boards

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Dr Dhiman Chowdhury :
Non-executive directors in large companies are either secretaries of various ministries, executives in government organizations or professionals, particularly chartered accountants. Although many of the non-executives in our companies have expertise but are not independent in the sense that they have positional power. Importantly, in a country with democracy and competitiveness score at the bottom its bureaucracy is not always merit based. So they are not sufficiently independent. Companies also want 'real life and real business experience' but this is one thing, independence is another. A practical (professional) non-executive will look particularly for the shareholders' interest like profit and wealth maximization. But companies have other stakeholders like employees, government and the society at large. An independent non-executive, in addition to owners' interest, will have to look for right amount of taxes given to the government, a good balance of executive and workers' remuneration, and environment friendly company practices. This vast task and social responsibility is hard to expect from a professional only. High intellect, independence from management and owners, and some global knowledge and culture are also necessary for this task. Governance is thinking of things, critical thinking, epistemic and adequate justifications, making of new ideas, independent reasoning, purifying reason (Immanuel Kant), greatest good for greatest number, and aesthetics or the sense of proportions. A full-time executive usually does not have time for thinking all these virtues. An intellectual, a celebrated professor and a lawyer, a social thinker who has enough time for thinking of things works as a part time independent board member for check and balance in governance.
I have browsed annual reports of the first 5 companies alphabetically from each industry such as pharmaceuticals, engineering, cement, food, and textile industry (Total 25 companies). None of the companies have non-executives from the universities where there are internationally celebrated professors. A celebrated professor does not have to follow hierarchy, has neither subordinates nor bosses, and does not work for profit for any particular organization. This environment helps make their mind more independent. Their main duty is thinking of things independently and make new ideas that nourish the greatest good for the greatest number. They are deemed socially obligated in diverse aspects of the public. University teachers have a social obligation to help other citizens both inside and outside the classroom-the academic profession should have higher ethical standards to seek social benefits in lieu of its own and, accordingly, university professors have obligations toward at least some segments of the community. That is why in UK and USA vis-a-vis professionals there are professors as non-executives in corporate boards.
A study by Bill Francis et al. published in Financial Management on September 2015 found that directors from academia served on the boards of around 40% of S&P 1,500 firms over the 1998-2011 period. This paper investigates the effects of academic directors on corporate governance and firm performance. They find that companies with directors from academia are associated with higher performance and this relation is driven by professors without administrative jobs. They also find that academic directors play an important governance role through their advising and monitoring functions. Specifically, their results show that the presence of academic directors is associated with higher acquisition performance, higher number of patents and citations, higher stock price informativeness, lower discretionary accruals, lower CEO compensation, and higher CEO forced turnover-performance sensitivity. Overall, their results provide supportive evidence that academic directors are valuable advisors and effective monitors and that, in general, firms benefit from having academic directors. Another study finds that firms with professor-directors do exhibit higher CSR performance ratings (donations, employee benefits and community diversity) than those without. However, the influence of professor-directors on firm CSR performance ratings depends on their academic background-the positive association between the presence of professor-directors and firm CSR performance ratings is significant only when their academic background is specialized (e.g., science, engineering, and medicine). Finally, this positive association weakens when professor-directors hold an administrative position at their universities. Professors provide three functions to biotech firms: (1) knowledge transfer; (2) signaling the quality of the firm's research to both capital and resource markets; and (3) helping chart the scientific direction of the firm. The likelihood of having professors on the board is however, affected by geographic proximity to a university and to an industry. It should however be noted that there are studies also which assert that business schools professors are, at worst, guilty of being active accomplices and co-conspirators in corporate scandals.
Our companies have chartered accountants as independent directors but they are partners of chartered accounting firms who do audit and consultancy work for various companies. Thus there are possibilities of conflict of interest between the company and the auditor director. Companies' boards also have non-executive directors from executives of banks, insurance companies and investment banks which also create conflict of interests. One important trend is that the chairman who is the largest shareholder has taken non-executive directors from affiliated institutions. Chartered accountant owners have taken non-executives who are also chartered accountants (and of practicing firms). Engineer owners have engineer non-executives. In one company, both the chairman (businessman and owner) and the non-executive are affiliated with the Aga Khan National Council.
In Bangladesh there is no practice of selecting non-executives by public advertisement that raises the question of independence and transparency of the selection process. Even the largest shareholders do it privately or by pressure from the largest institutional shareholders. In UK, public advertisement in national and international media is the normal practice. Public advertisement is essential for such a top level public job. International organizations both in the public and private sectors give international advertisements for the post of non-executives in globally reputed the Economist. Even small and medium businesses advertise in the local newspapers. In UK there is also a FT Non-executive Directors' Club for the training of aspiring and existing non-executives.
(Professor Dr Dhiman Chowdhury teaches Accounting in Dhaka University)

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