Company boards and conflict of interest
The Curro/AdvTech deal (or possible deal, maybe it ’s a hostile takeover?) has got me t hinking about boards of directors. But first I want to stress that I don’t want to make this a rant against t hese t wo companies; t hey merely triggered the thought process.
So let’s just paint the picture: board members are elected by us as shareholders at the annual general meeting (AGM) to run the business on our behalf. As such, we do not need to concern ourselves with the day-to-day running of the company we have invested in. We elect a board of directors and leave everything to them.
The board will appoint a CEO, audit committee, remuneration committee and the like as they delegate the day-to-day running of the company.
Importantly, a board will consist of executive and non-executive directors. Executive directors will work at the company while non-executives will not. This is important as the non-executive directors are outsiders in a sense, and are a more independent part of the governance and f unctioning of the company.
A board will also propose issues to vote on at an AGM, such as dividends to be paid, the issuing of new shares, share buybacks and other corporate issues.
If we, as shareholders (owners of the company), are not happy with the board and how they’re running the company, we can vote them out at the next AGM.
But here’s my issue. What happens when a board makes an important decision t hat its members may be conf l icted with? The f i rst issue is remuneration. Shareholders vote on the board’s remuneration at the AGM, but this is a non-binding vote. In other words, even if 100% of shareholders vote against the remuneration, the board members can ignore the vote and pay themselves anyway.
The second issue is takeovers. A third party comes along and makes a proposal to the board to buy out the company. This has an impact on the directors: their jobs may not survive the takeover, so surely there is a conflict of interest there.
Sometimes (remember t he deal between Adcock Ingram and Bidvest and t he one bet ween Protech and Eqstra?) the board members elect not to put the takeover proposal to shareholders as they do not consider it a fair offer. But shouldn’t we get to decide that? After all, it is our company and this is an incredibly important decision.
Importantly, the board is not legally required to put a proposed takeover to shareholders if it does not consider it a fair offer. But we should change it so the board is legally required to put any firm, unconditional offer to shareholders? Here I am only referring to firm solid offers, not vague talks about maybe making a firm offer. But simply any firm offer to buy out the listed company should always be put to a shareholder vote.
Now, I understand t hat t his i s a lengthy process that incurs costs. But that’s not the issue. The issue is shareholders being able to decide if they want to sell their stake to the proposed buyer or not. This is just good corporate governance.
The counter argument is to either trust the board or fire them at the next AGM. But firing the board doesn’t help me sell to the possible buyer who may be long gone by the time the next AGM rolls around.