Roger Barker, Head of Corporate Governance, Institute of Directors
Roger Barker, Head of Corporate Governance at the Institute of Directors, discusses with Ernst & Young the role of the non-executive board in striking the balance between developed and rapid-growth markets.
EY: What are some of the governance issues that companies are likely to encounter when investing in rapid-growth markets?
Roger Barker: When companies invest in emerging markets, one of the common issues they face is that it's often not possible to enter without forming a partnership with a local enterprise. Companies may have to form a joint venture, an alliance, or enter into a distribution agreement with a local firm in order to gain access. This may require some kind of formal corporate arrangement or it may simply mean that you need to work through intermediaries in the local market.
This can create all sorts of governance issues. If you're investing through your own company, you can transfer a certain corporate culture and an understanding about behavior, conduct, and what is appropriate. But if you are working with another company in a joint venture arrangement, for example, that is more difficult. You're therefore in a novel situation where you have less control, and where all sorts of difficulties can arise.
Another issue is the whole challenge of bribery and corruption. Even if you are operating through intermediaries or agents of some kind, you can potentially be held responsible for their behavior if it transpires that you haven't put adequate procedures in place to ensure that they don't operate in a corrupt way.
How should CFOs interact with the board when outlining their rationale for investments across developed and rapid-growth markets?
I think it's absolutely right that a key executive in the organisation like the CFO brings strategic ideas to the board based on their expert knowledge of the business and all the information that they're getting about the growth prospects in different markets. The board then plays a key role in challenging those strategic ideas and has to somehow find a way to form a judgment about how viable those ideas actually are.
What are the obstacles that boards face in reaching that judgment?
One may be a lack of expertise in those markets among the non-executive directors. The composition of the board may not reflect the new markets into which the company is planning to invest. In those circumstances, it is very important for the board to seek external advice, rather than rely exclusively on the proposals and justifications coming from the CFO and other executives.
In the longer term, if the strategic direction of the company is likely to involve a major shift towards rapid-growth markets, then the board may want to think about the skills and experience it needs in future to reflect that new international mix. There has been a significant trend towards greater international diversity on non-executive boards over the past decade or so, in the UK and elsewhere.
What are the challenges that can prevent board members from getting the information they need to evaluate a particular strategy, particularly in rapid-growth markets?
The big challenge that faces a non-executive director is getting hold of information about what's happening on the ground in a way that doesn't undermine the executive management who are actually managing the operation. This is always a tricky balance to strike.
Non-executive directors have to develop those information flows and that will involve them going out to visit these countries. It will involve establishing contacts with various individuals in the management structure, people they can speak to directly, and utilizing the internal eyes and ears of the company from functions like internal audit.
They also have to utilize external sources of information. This might include consultants and analysts who are looking at these markets and assessing how the company is performing in those countries.
How should CFOs communicate with investors about their investments in rapid-growth markets and what are the challenges associated with that?
Most investors recognize that these markets have tremendous growth potential. So the key thing for CFOs is to demonstrate to investors that they are capable of exploiting that potential. Often, the key issues in terms of being able to get a return out of that strategy are related to corporate governance. We all know that these economies will be an important part of the investment mix, so the question is whether a company's corporate governance is going to be robust enough to extract the financial return for getting involved in those markets.
It's also very important in the eyes of investors that the non-executives, particularly independent non-executives, appear to be fully persuaded that the chosen strategy is the right approach. Because after all, those independent non-executives are the people on whom the shareholders are relying to exercise independent judgement on what is being proposed by the management. It's fine for the CFO and CEO to say that these are great plans, but investors will find it much more convincing if the Chairman and the other non-executives are also behind a particular strategy.