Source: Shareholders must demand accountability | The Financial Gazette March 23, 2017
By Allen Choruma
DIRECTORS and executives remuneration is increasingly coming under scrutiny as shareholders demand accountability and full disclosures in an effort to strengthen good corporate governance and enhance performance of companies they are invested in.
The recent corporate governance lapses at CBZ Holdings (a leading diversified financial services group in Zimbabwe) which were reported extensively by the press over the past few weeks, have ignited debate over directors and executive compensation, a highly controversial corporate governance subject.
CBZ Holdings
The CBZ Holdings’ (CBZH) non-executive chairman Elliot Mugamu, unceremoniously resigned recently from the Zimbabwe Stock Exchange (ZSE)-listed diversified financial services group, having buckled under pressure from major shareholders on corporate governance lapses.
It was reported that the chairman of National Social Security Authority (NSSA), a significant shareholder in CBZH holding at least 10 precent in issued equity, wrote to CBZH on November 25, 2017 calling for the convening of an Extraordinary General Meeting (EGM) and demanded an explanation on a number of corporate governance issues including: The independence of the board of directors (in particular the group chairman), payment of minimal dividends to shareholders, the company’s remuneration policy (on directors and executives), payment of excessive packages to its directors and top executives (resulting in shareholder value being eroded), inter alia.
The Government of Zimbabwe, another significant shareholder in CBZH, reportedly weighed in demanding improved board oversight and accountability and proposed to put a cap on quarterly board fees and sitting allowances for directors, which government considered hefty and unsustainable.
Government also demanded that the bank’s “fat cat” executive salaries and “extortionate” perks were not above board and needed to be reviewed downwards given the prevailing economic environment in Zimbabwe.
Here is the juicy part. According to the above cited media reports, CBZH’s non-executive chairman received hefty board fees and perks as follows:
•Board quarterly fee: US$40 000.
•Perks to the tune of US$18 902,35 (medical aid, security guards, fuel, wi-fi, newspapers, DStv subscriptions, motor vehicle expenses etc) in 2016.
•Use of a company vehicle (Mercedes Benz).
The question is: Why would a non-executive chairman get paid these lavish perks as if he were a full time executive?
Why buy a non-executive chairman a Mercedes Benz? This is absurd to say the least and compromises the independence of the chairman and the rest of the board.
The major shareholders, government and NSSA, eventually agreed with CBZH to defer the EGM, but pushed for the reduction of board fees as follows: Quarterly fees chairman maximum US$6 000; ordinary director: US$4 200 and sitting fees; chairman — US$800 and ordinary director, US$650 respectively.
The lapse in good corporate governance at CBZH is scandalous and leaves one wondering why the board failed to question these excesses in directors and executive compensation?
Such corporate governance failures result in the board losing the credibility it may have enjoyed.
It looks like the CBZH board is merely clutching on the last straw, which may give in as shareholder activism tide heightens.
In the developed world, corporate governance failures at CBZH are scandalous to an extent that the whole board would quietly resign to save face.
This is, however, a rarity in Zimbabwe, given the prevailing harsh economic conditions.
In the United States, the remuneration of directors and top executives of publicly listed companies is fully disclosed and can be accessed by shareholders and investors on the companies websites, under investor relations. In Zimbabwe, it’s the opposite.
The question to ask is: Why are we witnessing a surge in these corporate governance failures in Zimbabwe in both the private and public sectors?
Systemic governance challenges
The excessive directors and executive remuneration exposed by CBZH shareholders are not only peculiar to CBZH.
A lot of organisations in Zimbabwe, if a survey was to be conducted, will be found to be doing exactly the same thing, if not worse.
Corporate governance failures reported at CBZH are just a tip of the iceberg of governance challenges faced by most organisations in Zimbabwe.
These governance challenges are systemic and have shown their ugly head across all sectors, both private and public.
It’s a whole system that is not functioning well in terms of adhering to principles of good corporate governance.
The harsh economic environment prevailing in the country has also compromised that independence of directors.
Directors need the fees they receive from boards for sustenance. Hence they no longer ask probing questions on their remuneration, even if some realise its excessive.
Executives on the other hand “pamper” directors so as to compromise their independence and effectiveness for their own benefit. It’s a game.
The audit reports issued by the auditor general, Mildred Chiri, clearly show that these systemic corporate governance failures are also widespread even in the public sector.
We are talking of a whole governance system in both the private and public sectors that has crumbled and needs to be overhauled.
There are many organisations in which non-executive chairpersons and other directors receive hefty perks as if there were executive managers.
Some organisations even allow their executives to “double dip” by paying them board and committee sitting fees, yet they are full time salaried employees.
All these corporate governance scandals are also happening under “the nose” of regulators such as the Reserve Bank of Zimbabwe (RBZ).
One wonders why the CBZH corporate governance lapses went undetected by the RBZ surveillance radar.
Could it be that regulators are not doing their jobs effectively? Could it also be that regulators view such issues as internal matters to be resolved between shareholders and their boards? Below we take a wider analysis of the problem.
Agency
The root of the corporate governance challenge we are witnessing also emanates from the nature of the legal relationship that exists between directors and shareholders. Under common law, the relationship between these two parties is one of agency. The shareholders are the principals, while directors are agents. Management are delegated by directors to run operations under the directors’ oversight. The principal and agent relationship in turn creates fiduciary responsibilities between the parties.
Fiduciary duties
The fact that agency exists will always provide an indication of a fiduciary relationship.
A fiduciary, under common law, is a person who is obliged to discharge a responsibility of trust towards another. Directors are fiduciaries and owe a fiduciary duty to shareholders.
Directors are expected to:
•Act in good faith.
•Protect the interests of principal (shareholder).
•Avoid situations of a conflict of interest.
•Not to profit at the expense of the principal.
•Fully disclose his/her activities and not act secretly.
From the above exposition, it is clear that where a fiduciary relationship arises, it requires a degree of trust and loyalty between the principal (shareholder) and agent (director).
It is understood that directors and management should be compensated for their efforts in order to attract necessary expertise and skills and incentivise them to perform better.
At the same time, directors and executives have a corresponding duty to increase value to shareholder investments and assets.
However, instead of protecting the interests of the shareholders, some directors simply exploit the trust for their own benefit, at the expense of the principals that appointed them.
Ownership and control
The corporate governance challenge here is also that of ownership and control.
The separation of those who own the company from its control creates some corporate governance challenges and potential conflicts.
Shareholders are the owners of the company.
Directors ordinarily (in our context) are not the owners of a company.
They are appointed by the shareholders to superintend over the companies on behalf of shareholders.
Directors in turn appoint executive management to run the company operations. Good corporate governance advocates that there is separation of ownership and control of a company.
In some instances, directors and management can exploit this arrangement (separation of ownership and control) by taking advantage of their positions to enhance their personal interests.
Some have taken advantage of the fact that they control the company and use this to achieve their selfish goals at the expense of shareholders.
It is presumed under common law that directors as fiduciaries will act in good faith at all times and in the best interests of their principals.
This is not often so as was exposed above. Where directors breach their fiduciary duties, by acting outside their fiduciary duties, then we have a corporate governance challenge.
This corporate governance challenge manifests itself through corruption, self-aggrandisement, hefty allowances, lavish lifestyles, indulgence in excesses by directors and executives at the expense of the principals, who will ultimately bear the cost and suffer some pecuniary loss.
Shareholder activism
Lack of shareholder activism in Zimbabwe (especially institutional investors) has allowed some unscrupulous directors and executives unlimited access to company resources, without accountability.
Shareholder activism is required to ensure that directors stay on course and act in good faith at all times.
Interventions by NSSA and government in CBZH should be viewed positively. Had it not, been for shareholder activism, the “fat cat’ directors and executive perks at CBZH could have continued unabated.
This is how shareholders should act in order to protect their rights and interests in companies where they are invested.
It is hoped that this is just the beginning.
Shareholders in other companies should follow suit and bring directors and executive to account and fully disclose their remuneration and perks in an effort to enhance good corporate governance.
Conclusion
In conclusion, in the case of Robinson vs Randfontein Estates Gold Mining Company, Innes CJ (as he then was) remarked: “Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other expense or place himself in a position where his interests conflicts with his duty.”
If people who are put in positions of leadership across all sectors in Zimbabwe take these principles to heart, and lead by example, we will cease to have the corporate governance challenges and numerous corporate scandals that we are currently facing in Zimbabwe.
Allen Choruma can be contacted on e mail: kuumbameats3@gmail.com
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