Strategy & Operations » Governance » Blame game

THE CONTINUING fallout of bad news from or about the Rugby Football Union (RFU) – board sackings, resignations, umpteen reviews, leaks and public recriminations – has focused my attention on aspects of governance that must be in place for a company to be able to cope effectively with bad news.

Many of the RFU’s difficulties stem from a fundamental conflict between the legal duties of a board to act in the best interests of the body as a whole and the de facto representation of different constituencies with conflicting vested interests inherent in the way in which the council is elected.

In sporting bodies and companies alike, even minor difficulties can easily spin out of control and lead to undesirable outcomes without clearly understood responsibilities and accountabilities to deal with the existence of constituencies. This is especially clear when a company’s financial viability is threatened by actual or potential breaches of borrowing covenants.

The clarity of the law requiring all directors to owe their duties of care to the company does not sit easily with the feeling of obligation to vested interests experienced by some directors. Directors who are also major shareholders, or were appointed on the recommendation of major shareholders, can find this particularly challenging. Rationalisations such as “what’s good for me, a major shareholder, must be good for all the shareholders” are not correct in all circumstances. Where, in reality, some directors are on a board to represent certain interests, it is incumbent upon those directors to declare those interests. The chairman or senior independent director must ensure that such conflict is recognised by the board whenever decisions are being made, or discussions held, on matters that could reasonably be seen as affecting those interests.

A common example is when a director is, in effect, representing a major shareholder who is also a major lender, and the lender’s risk appetite and mindset dominate the shareholder’s and the appointee’s thinking. When this situation continues after a refinancing involving any sort of debt/equity swap or other compromise of interests, the rules of engagement are set out in shareholder and lender agreements. These usually have an endgame, which covers all eventualities. But board unity can still disintegrate quickly if things go wrong, and even the people for whom the advisers are working may not be viewed equally by all parties.

The shareholder/lender scenario can lead to board observers being appointed but most boards will resist this on the grounds that it loses any sight of what such observers report back to their appointers.

What all this really amounts to is how to achieve the proper dialogue between the board and those who appoint it. This has proved to be a minefield for the RFU and for many companies – notwithstanding clear rules of engagement for listed companies. The answer lies somewhere in clarity of responsibility, and a focus on business objectives and strategies for achieving them as the basis for all shareholder communications. Perhaps a topic for another month. ?