OVER the years there have been a number of scandals involving top management. There have been instances where they eventually become major shareholders in entities they are entrusted to run. One of the major avenues that have been used is the share-buyback option, which allows management to own shares in entities. This week our senior business reporter Melody Chikono (MC) discussed this and other issues with corporate governance expert Canaan Dube (CD). Below are the excerpts of the interview:
MC: Let us take a look at share buybacks. How have these contributed to senior management becoming major shareholders of companies they are supposed to be running?
CD: An animal called a company is a legal fiction; it has the capacity to own land, property; capacity to sue or be sued just like a natural person. I am giving you this background because there are three layers in the structures of this legal fiction. The first is the ownership level. The actors are providers of capital and there is no restriction as to who can own shares in a company. I will come back to this in a moment. The second layer is management and these are the users of the capital and the third layer is the board, which offers oversight on how the users of capital do so in known ways and principles as well as to protect the providers of capital.
MC: Are there times when one person can occupy three layers?
CD: There are many instances where we have one player occupying all the three layers. That is being part of management, being a capital provider and being part of the board. This is where you have seen indigenous-owned banks running into problems in the past because we could not have an owner who managed and led all levels playing out in one person. That is what led to the collapse of the banks. The interesting bit, which you have brought up is, when a person is both an owner, a manager and a board member, he is entitled to remain an owner but your question is can he or she in terms of succession planning put in somebody who is related to him or her by some form of definition . The quick answer is, he should not. First of all, recruitment of managerial skills should be merit based and it cannot be a genetic hand out by the person leaving senior management. When you talk about merit-based appointments, it then means that you cannot hand-pick. Some robust process has to be followed where the best in the market must be given the opportunity to take over. If by some coincidence somebody related to the person leaving is the best the market can offer then well and good but a robust process must be followed which delivers the best.
MC: Back to buybacks, when should this happen?
CD: Coming back to the issue of buybacks, which is the next interesting development which is taking centre stage in listed entities. At managerial level there is a need to attract and keep good skills. For the users of capital to deliver value to the providers of capital, they must get the best but the best in class can be stolen from your company by competing organisations.
The argument against mobility of skill by those who engage and spend money in training is that employers should compensate appropriately. So compensation has taken three dimensions - salary, incentive bonuses and most importantly what is called share options, which we call share buybacks.
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Share options are the right to exercise your interest in buying a share in the company at a predetermined price. That is an avenue very much used by listed entities to attract members of senior management and retain them up until retirement. And you can only retain them by saying here is an option you can exercise but you can exercise by a certain given date.
The argument is how many shares? The jury is still out, you can get as much as you want but it is the function of the board, which says we are giving you share options allocated as follows for example 10% but in that 10% cap, so much of it goes to senior management, so much of it goes to middle management and so on. However the tendency has always been to give a lion’s share to senior management. But the worry is that if this trend continues, will that not lead to employees taking over from the initial holders of capital?
MC: Yes, that is the question. How safe is this option? Does it not lead to employees eventually taking over the company from the owners?
CD: It is a possibility but it depends on the number of shares approved by the board to go via the share option route. In my little experience we have been guarding jealously the need to avoid dilution of existing shareholders so we would always say we must sanction share options which do not dilute unduly existing shareholders and many events after exercising that option. We still have to go back to an AGM where existing shareholders will have to agree to this share option scheme. It is good to invoke share options to retain good skills and value but a balance must be struck to avoid dilution of existing shareholders.
Legal structures, which exist at the moment are guaranteeing that balance as well because in the end a share option scheme which allows senior management to exercise a right given to them at a predetermined price to buy shares is under the control of the existing shareholders who might object or reject at an AGM.
MC: You say the existing legal structures are guaranteeing that balance. Is that to say we do not have instances where these senior employees are by-passing the legal options available by virtue of having weak boards, corruption and poor corporate governance issues?
CD: There are possibilities. Possibilities of a board that is not too strong, a board that does not appreciate the need to be ethical, which just goes with the wind and grants whatever the senior management demand but despite the weak board, despite corruption involving the board members any share option scheme is subject to approval by the existing shareholders.
Let me give you an example, if you and I are shareholders but not part of the board and the board misbehaves with the CEO and gives him share options which are diluting existing shareholders, that will flop because it will not sail through without going through the AGM where you and I will have a chance to ask why we are being diluted and get a justification.
MC: In your experience, how effective are these boards in gatekeeping the issue of share options in companies?
CD: They are effective but the degree to which they are effective depends on how they are composed. If it is composed of people who are not independent, they can be swayed, they can’t be gatekeepers of corporate governance. But you will see that modern corporate governance philosophies demand that the board be composed of independent board members who are not part of management and who have got independence in thoughts, action and beliefs.
MC: So what are the legal structures that currently exist in relation to this?
CD: I can only relate to companies that I have worked with. In almost all there is a board, which is chaired by a non- executive board member, members who are independent, non-executive commanding the majority and invariably we have one or two members from the management, which are the CEO and the FD. At the second level we have the CEO, who is in charge of the management and the lower level which is the most important level are the shareholders who come through as pension funds, institutions and sometimes individuals.
MC: What can you say about corruption in relation to share buybacks?
CD: Corruption comes at two levels. The first one comes when the CEO is both an owner and a board member. There is too much power concentration in one place and he has sway over each of the three levels. Where we have what we call executive chairperson of the entities is a dangerous situation, the CEO doubling as board chair, he is actually controlling board, management and sometimes owners of capital.
That is why the issue of Sydney Gata attracted so much attention when he was appointed as (Zesa Holdings) executive chairperson, they say you cannot manage and lead at the same time.
The second is where the CE is the majority shareholder, who controls the owners of capital and the management and also ultimately is the chairperson of the board. In such a situation that one person is only answerable to himself. That is where corruption and uninformed decisions bordering on improper dictates take place.
MC: What is the impact of that on entities?
CD: It just goes one way in short.
MC: You gave an example of why most indigenous banks are compromised. As a corporate governance expert what do you think are the missing links in Zimbabwe entities leading to this?
CD: The banks are now regulated by law and the amendments to the banking sector are now very clear as to the levels of how many shares one can hold, what shares and who can lead. You are not allowed to have predominant power. I expected that law to be extended to all entities, especially listed entities.
MC: Why would you want the laws to be extended there? What are the existing regulatory gaps?
CD: If you go to the listing rules of listed entities, some attempts have been made but the interventions are not running deep enough as compared to what has been done on banks. If you look at the listing requirements now, you cannot have an aboard chair of an entity that is not independent by definition provided in these rules. You can’t also be a member of the audit committee which looks at the financial health of the organisation.
Also the chairperson cannot be there but that does not stop the chairperson from becoming a member of other committees. How can a chairperson sit in a committee which reports to a full board, which he chairs? That again is the opportunity to influence decision-making at committee levels and board level. So the idea for me is once you are chairperson, be independent and never perambulate at sub-committees.
Generally, there is a misnomer in the way companies are run in a way that corporate governance is seen as superior to personal governance.
I believe personal governance should influence corporate governance and should take centre stage as corporate governance is a subset of personal governance.
