Dr Dhiman Chowdhury :
Independent Nonexecutives. The role of independent nonexecutive directors (NED) in corporate governance has been well appreciated around the world. The corporate board around the world nowadays is composed of executives who are an organization’s internal and nonexecutives who are its external. NEDs do not take part in day to day activities of the company, they attend company board meetings usually once or twice in a month and particularly look at the strategic issues including if the executives are taking good care of the shareholders’ money. NEDs are usually distinguished lawyers, university teachers, social workers, and other intellectuals of independent mind who must be free from any undue influence from the management.
Growth of Nonexecutives in the Corporate Sector. The concept NED is new in Bangladesh, emerging in the late 1990s. Even in UK and USA, the birth places of corporate governance, particularly the role of NEDs, started in the late 1980s. To understand NEDs we need to know the uniqueness of public limited companies (plcs) compared to sole ownership and partnership business. In a plc, managers (the agents) run and control the business on behalf of and for the shareholders (the principals). That is, ‘agency relation’ or ‘separation of ownership from control’ is a unique feature of a plc. But in other businesses, owners and managers are usually the same persons. This unique feature has created a unique problem for these plcs – managers can misuse shareholders’ money. Millions of shareholders are far away from their business places and therefore management can take decisions for their own benefits and not necessarily for shareholders’ interests. Some of these misuses are taking excess salary and benefits, lavishly donating for charitable and political purposes (not from own pocket but shareholders’ money), being motivated by short-term benefits rather than taking adequate risks for long-term benefits of the business.
Independent non-executives are more important in the Public Sector than in the Corporate Sector. This paper argues that the inclusion of independent outside experts in various committees is more important in the public sector compared to private corporate sector. In the corporate sector, there are institutional shareholders who have large stakes in the companies and therefore, have higher incentives to monitor the management. But in the public sector, such an incentive for monitoring is largely absent. Also, shareholders in the corporate sector can simply ‘exit’ by selling their shares if the share prices are not satisfactory. Thus unlike the corporate sector, ministries and other government organizations do not have many control mechanisms available for pursuing the management for working in the citizens’ best interests. Therefore, inclusion of independent outside experts is a little hope left for good governance in the public sector. Need for non-executives in the Ministries. Public sector particularly the ministries have a bad name in governance in the developing countries. Here parliament is not fully functional. Political agenda, political recruitment and promotion of civil servants, life-time employment and absence of performance related pay create opportunities for ministers and secretaries to pursue self interests at the cost of citizens and to misuse of power. Importantly, since recruitment and promotion is largely influenced by politics and therefore is not merit-based, so the governance is not knowledge-based. My book on governance (Dhaka University 2004) revealed serious deficiencies in our ministries.
Expertise and Enlightenment are not the same. I would argue that skill and expertise are not sufficient for good governance. True ‘knowledge’ is necessary to overcome self interest and greed. Knowledge is more than skill and expertise. Governance is a broader concept which has to deal with many subjects and many disciplines of knowledge in addition to subject specific skill and knowledge. Here Frederick Hayek (1945) is very relevant who viewed that knowledge never exists in concentrated or integrated form. He even said that an economist only is likely to become a nuisance if not a positive danger (Hayek 1985). To achieve concentrated knowledge one has to travel around across all relevant subjects. But this is not possible even for an expert not to speak of a person of ordinary caliber. That is why in philosophy, knowledge is said to imperfect-imperfections of knowledge.
Corporate governance codes around the world normally defined independence where nonexecutives shall be free from management and shall not do any business with the companies (Cadbury Committee Report 1992). This definition however, does not capture the true meaning of independence; it is just a commercial meaning of independence. True independence has the following broader meaning. Let us ask a question-why, when, and how do we influence others? One way by information and knowledge, that is good. But we can also influence others out of self interest and specific single narrow identity. Religion, race, color, class relation-these specific single identities can influence transaction, interaction, behavior, and decision making. A single unique identity can be belligerent too. Amartya Sen has a book titled ‘identity and violence’ (Sen 2006). Self interest devoid of competition comes from narrow identity. Therefore, for free, fair, and independent decision one has to avoid narrow specific identity. An independent man has plurality of identities. He is at the same time a fan of folk and classical music, football and tennis, collectivism and individualism, he is a Bangladeshi as well as a Bengali, a poet and a philosopher, born in a liberal Hindu family but a non-ritualist, occasional beef-lover, a teacher and a researcher, a theorist and an empiricist. He surrounds to these diverse and collective identities and thoughts; none of these is taken to be his only identity or singular membership category. Again this is not the common peoples’ path. Majority people love to identify them with a particular religion, political party.
Majority people around the world are good but not necessarily enlightened. Governance is primarily meant for the enlightened who are wise having wisdom and epistemic knowledge. An enlightened person must practice, at the minimum, science, philosophy, literature, sports and music. Music and sports engage intelligence. In sports, there are people of diverse identities and different backgrounds: religion, culture, subject, and place. Each one is unrelated and independent from another, thus interaction and learning takes place in an independent atmosphere. Secondly, in sports, one learns to accept failures which are objectively determined. In art and music, one learns the sense of aesthetics, the science of proportion and beauty. Painting, dancing, singing, and designing all have to maintain a great deal of proportion. Secondly, art proper for example, abstract art, arouses imagination leading one to further thinking, evaluation, and assessment. “A man that hath no music in himself, nor is moved with concord of sweet sounds, is fit for treasons, stratagems, and spoils” (Shakespeare, Merchant of Venice, Act five, scene). But a good person does not necessarily have all these five virtues. A good person has justifications but an enlightened has richer or epistemic justifications. Governance is thinking of things, critical thinking, epistemic and adequate justifications, making of new ideas, independent reasoning, purifying reason (Immanuel Kant), greatest good for greatest number, and aesthetics or the sense of proportions. For enlightenment we need psycho-philosophical development together with skill and technological development. Technical skill alone is devoid of awakening of thought. Even an expert, not to speak of common men, does not necessarily have all the above virtues. Functioning parliaments around the world have a provision for independent MPs who have rendered distinguished public service or have distinguished themselves in the field of arts and letters, culture, science, business, and industry. Similarly, corporate boards in the US and UK are now dominated by independent directors who are experts as well as intellectuals.
UK Experience. The HM Treasury and the Cabinet Office has designed a code of good practice called corporate governance in central government departments in July 2011. Each department board (ministry) must have at least 4 nonexecutive members appointed by the Secretary of State with Cabinet Office guidelines. Department of Business, Innovation and Skills, a UK government department has seven nonexecutive members. The members have strong profiles like CBE, professor, business leader appointed by the PM, member and trustee of Royal Academy of Engineering and the National Marine Aquarium, director of the Environmental Association of universities and business, and CEO of MNCs. Department of Culture, Media and Sports has five nonexecutives. They have important status like Knighthood, chair of Public Service Strategy Board at the Confederation of British Industry. Executives of the above government departments earned from £150000 to £250000 and nonexecutives earned from £15000 to £50000 in 2012 (i.e.10% to 20% of executive salaries). Nonexecutives must have experience in managing complex organizations with strong commercial expertise. They look at the accountability of permanent secretaries, mechanisms for assessing their performance, strategy and deliverability of policies, reporting from the department on performance and how well the department is achieving its performance, financial management, internal control, annual report, allocation of resources, give support and guidance for operational business plan and recruitment of senior executives. Importantly, independent nonexecutives will see the aesthetic side of an institution, proportion maintained in allocation and distribution of resources, competitiveness maintained and epistemic justifications (pure reasons) are provided for doing things.
Other International Experiences. The ‘Brains Trust’ campaign 1932 of President Roosevelt, USA, invited academic intellectuals, primarily professors from the law faculties of the major universities, economists and political scientists as well to the highest offices in practically every administrative agency. Professors and historians were sent abroad as ambassadors. National Planning Board was replete with academics (Shils 1972: 167). International organizations like various organs of the United Nations- the World Bank, IMF, ILO are governed by both an executive board which carries out day to operations and an advisory board. The World Bank has an advisory Board of Governors, a policy making body, which delegates specific duties to the Board of Directors which is an executive body. The ILO has an Independent Oversight Advisory Committee which is a subsidiary body of the executive body. It serves in an expert advisory capacity and provides independent, external, senior level, expert advice to the Director-General on the governance process.
Limitations. In my Ph.D. thesis at Lancaster University I have found that if NEDs are not independent they can rather be dysfunctional for the organization. British NEDs who were previously executives in the same firm (the measure of dependence) rather collided with the executives (their friends) in increasing the latter’s remuneration. And for ministries, who will select nonexecutives? Again this process is not fully independent. The best possible way seems to be that the President will seek nominations from the celebrated academics, lawyers, scientists and others unaffiliated with any political party and who have expertise and who have brought name and fame for the country. Also, there will be open advertisements in the daily major newspapers inviting applications for the honorary positions. The President will select from these two panels.
Why do we need to Introduce Independent Nonexecutives in our Ministries?
(Dr Dhiman Chowdhury is Professor of Accounting, Dhaka University, Bangladesh, Email: dhiman_ chowdhury@y ahoo.com)
(Note: An earlier version of the paper was read in Business Faculty Seminar at Yonsei University, Seoul, Korea on 27 May, 2015 and a bigger version of the paper has been accepted for presentation in International Conference on Inclusive Innovation and Innovative Management at Valaya Rajabhat University, Thailand on November 25-26, 2015 )
