M has recently joined the board of X Company, a main listed confectionary manufacturer. The company was established as a family business over a century ago and members of the founding family still occupy lots of the senior board positions. When directors are because of retire they are usually replaced by other family members. The Board is reluctant to make any external appointments, M being an exception.
M has noted that there are seven executive board members and only two non-executive members. On doing some homework about every of the directors, M discovered that all of the directors were from same backgrounds.
At the first board meeting after M's appointment, the board papers for discussion were handed out at the initial of the meeting. The agenda included discussion of a main contamination issue that had occurred in single of the manufacturing plants but when this point was to be discussed at the meeting it was discovered that the board papers for discussion had been omitted. One of the major institutional investors had expressed concern over the incident. At the subsequent board meeting the executive chairman commented that the company had outperformed in its sector in the past year and that the shareholders should therefore trust him to run the company as he sees fit.
Analyse the corporate governance issues facing X Company.
There are a number of corporate governance issues facing X Company:
Insufficient number of non-executive directors (NEDs)
One of the principles of governance is that listed companies should be led by an effective board with a balance of executive and non executive directors like that no individuals or small groups can dominate decision making. It is doubtful that in X Company two NEDs are sufficient to bring sufficient scrutiny to the executive board. It would suggest that the family members may have the ability to dominate.
Senior board positions are based on family membership
A principle of governance is that appointments to the board should be made in a formal, rigorous and transparent manner typically by a nominations committee. Senior positions in X Company appear to be based on family membership rather than getting the correct person.
Poor diversity and external expertise
Whilst experience is very significant on a board, governance also calls for the appointment of new members with diversity and external expertise in order to bring in fresh ideas. X Company has poor diversity of backgrounds amongst members which might decrease the level of debate needed when analysing strategic decisions.