It’s a habit in many countries to appoint people who have irrelevant qualifications or unrelated business experience to Boards and then be happy that these independent directors will increase the effectiveness of the Board. Little does the nomination committee realize, Boards could be composed by high quality individuals, who are outstanding in their respective fields and yet, could lack the necessary knowledge to perform their tasks as members of a specific board.
Imagine an ex-serviceman like an army lieutenant being appointed to the Board of a bank and therefore serves in the risk committee or the investment committee. He may have been useful in a security company or a hotel operating in a conflict zone or even in logistics. Now, someone reading this post can always say that an army person can contribute to the logistics or security aspects of a bank, but do you need a Board level person for such activity would be my concern.
This is common even in developed countries. As anybody who know something of Board appointments would say, it’s all based on connections to the ‘old boys club’. Relevant experience and qualifications are well documented in the nomination committee policies, and that ends there. In the case of JP Morgan’s 2012 loss it incurred a loss of several billions of dollars as it overlooked the warnings about the risks involved in the trading system. It emerged that none of the three directors on the board’s risk-policy committee had worked as a banker or had any experience in wall street in the past 25 years, and that one of them was a museum director. Similar instances of Boards lacking adequate knowledge to prevent a crisis situation can be traced to many other frauds.
Such cases clearly underline the significance of the quality of board committees because members of the different committees are expected to have the necessary and relevant knowledge to perform their functions effectively. Nomination committees should not be paying lip service to governance and simply act as agents of the shareholder who appointed them. Such people will not ask the right question nor will they have the answer. Would Peter Drucker’s warning become true?i.e, “The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong question”
To overcome this problem, quality of people on Boards need to be enhanced by appointing people with appropriate industry and professional background. Additionally, diversity of gender, age or socio economic status also can improve collaboration between members and board effectiveness. A strong Board and a proactive company culture will develop processes to manage diversity to boost Board effectiveness.