- 20 Marks
SCS – L3 – Q23 – Conflicts of interest and ethical conflict resolution
Question
Susan Kabwe completed a first degree in pharmacy programme abroad and returned to her native country Gambia with the hope of starting a pharmaceutical company. Gambia has been experiencing high graduate unemployment and Susan was very determined not to join the teaming unemployed youth in the country. Susan put together an excellent business plan and approached four other childhood friends who have also completed university to start Kabwe Pharmaceuticals Ltd for manufacturing of basic and essential drugs locally. After many months of hard work, the company finally commenced operations two years ago.
Susan Kabwe plays a dual role of the chief executive officer (CEO) and chairman of the Board of Directors, and the four other friends are all executive directors of the company. The board of the company is currently composed of five executive directors and two non-executive directors. The two non-executive directors are close friends of the executive directors without relevant work experience since they remained unemployed 3 years after completing university. There have been several board meetings held without the non-executive directors. This situation is largely due to a belief by the executive directors that non-executive directors are really not needed since they do not play any important role on the board. Susan and other executive directors participated in a seminar on corporate governance where the facilitator made the following statements on best practices of corporate governance:
“The roles of board chairman and chief executive officer should be held by two different individuals”
“The board chairman performs critical functions to ensure that the board functions effectively”
“The board should be composed of at least one-third of non-executive directors”
After the seminar the executive directors disagreed with some of the facilitator’s assertions. They claimed the statements are idealistic and not pragmatic. Susan Kabwe has approached you as a corporate governance expert to help provide clarity to the statements by the facilitator.
Required:
Discuss THREE justifications why the roles of the board chairman and chief executive officer should not be held by Susan Kabwe.
Answer
(a) Justifications for separating the roles of board chairman and CEO:
- Avoiding Concentration of Power: Combining the roles of chairman and CEO in one individual, such as Sarah Kweku, concentrates significant power, which can lead to unchecked decision-making. This may result in decisions that prioritize personal or short-term interests over the long-term benefit of the company and its stakeholders. Separation ensures a balance of power, with the chairman providing oversight and the CEO focusing on executive management.
- Enhancing Board Independence: The chairman’s role is to ensure the board operates independently and objectively, scrutinizing the CEO’s actions. If Sarah Kweku holds both roles, she may prioritize her executive agenda, reducing the board’s ability to challenge management decisions. A separate chairman fosters impartiality and strengthens corporate governance.
- Improving Accountability: Separating the roles ensures the CEO is accountable to the board, led by the chairman. If Sarah Kweku is both, it becomes difficult for the board to hold her accountable, as she effectively oversees herself. This can weaken governance structures and erode shareholder trust.
(b) Three functions of non-executive directors:
- Strategy: Non-executive directors should contribute to, and challenge the direction of, strategy. They should use their own business experience to reinforce their contribution. The most critical need is for an environment in which effective challenge of the executive is expected and achieved in the boardroom before decisions are taken on major risk and strategic issues.
- Scrutiny: Non-executive directors should scrutinize the performance of executive management in meeting goals and objectives and monitor the reporting of performance. They should represent the shareholders’ interests to ensure agency issues don’t arise to reduce shareholder value.
- Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust.
(c) The role of the Board chairman:
- Running the board and setting its agenda: The chairman should ensure the board focuses on strategic matters and takes account of the key issues and the concerns of all board members. He should ensure the contributions of executives and non-executives are coordinated and good relationships are maintained.
- Ensuring the board receives accurate and timely information: Good information will enable the board to take sound decisions and monitor the company effectively.
- Ensuring effective communication with shareholders: The chairman should take the lead in ensuring that the board develops an understanding of the views of major investors. The chairman is often the public face of the company as far as investors are concerned.
- Ensuring that sufficient time is allowed for discussion of controversial issues: All members should have enough time to consider critical issues and not be faced with unrealistic deadlines or decision-making.
- Uploader: Salamat Hamid