Com­pany boards and con­flict of in­ter­est

Finweek English Edition - - INVEST DIY -

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.

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