The risk of false comfort

African Bank’s example provides food for thought on corporate governance: is it time to get rid of nonexecutive directors?

The most frequently quoted section of John Myburgh’s report on African Bank is the description of former CEO Leon Kirkinis’s personality. Kirkinis is hubristic, says the report. Making sure to avoid uncertainty, Myburgh goes on to explain: “Hubris often indicates a loss of contact with reality and an overestimation of one’s own competence, accomplishments or capabilities, especially when the person exhibiting it is in a position of power.” Just in case there was still some doubt about this, Myburgh adds that Kirkinis believed he was right; everyone else was wrong.

Hands up anyone who thinks the description of Kirkinis could be applied to any one of a dozen CEOs. Is an overestimation of one’s own competence, accomplishments and capabilities not a prerequisite for clawing one’s way to the top of the corporate heap? And doesn’t it go a long way to explaining why CEOs, after looking deep into their hearts, truly believe their competence, accomplishments and capabilities are what make them worth the staggering sums of money they’re paid?

Of course few executives take it to quite the extremes Kirkinis evidently did. It may be that they are faced with more effective boards than he was; their boards may contain members who rein in their executives’ worst excesses. Or it could just be that those other executives still have some contact with reality.

Compared with the scalding dished out to the executive directors, African Bank’s nonexecutive directors (NEDs) got off quite lightly. Myburgh says the boards of Abil and the bank “generally were a party to the conduct described in the findings”, which were essentially about breaching fiduciary duties and acting negligently and recklessly. He does not allege that all board members were responsible for the conduct. Fortunately for the NEDs, he said he had not had the time or the capacity to look into each board member’s conduct and to ascribe individual responsibility.

African Bank shareholders may have taken comfort from the presence of a board that ticked the boxes in our wideranging corporate governance code; a board that had the requisite board committees monitoring executives as they conducted the intricate business of running a bank. Of course it’s now evident that this comfort was misplaced.

How could it have been otherwise? Few people needed Myburgh’s report to find out about Kirkinis’s ebullient personality. It was always going to be a challenge for NEDs to rein him in. NEDs are required to devote only a few hours a week to their board duties. How were these people going to have any restraining effect on the “robust” individual who lived and breathed African Bank?

The paradox, and source of failure of the NED role, is that NEDs are most effective when their CEO “allows” them to be that. Of course if a CEO is “allowing” the NEDs to play a useful role, it’s very likely the NEDs’ restraining influence is not needed.

So perhaps this is as good an occasion as any to consider a view that is gaining some traction among international corporate governance analysts: it is time to get rid of the NED role.

African Bank is an extreme situation and no policy should be based on such a unique (hopefully) set of conditions, but increasingly it does seem NEDs and board committees are being used by executives to justify positions they are determined to take regardless of how good they are for the long-term interests of the company. This determination, combined with the dominance of institutional shareholders, is why rogue executives are able to wreak such damage.

In the absence of NEDs providing an unrealistic level of comfort, shareholders would be forced to play a closer monitoring role. Alternatively, if NEDs are to remain, their numbers must be boosted by representatives of the workers, who aren’t as easily able to walk away from the consequences of having rogue executives.