Cayman Island Companies should Broaden the Board

Cayman Island Companies should Broaden the Board

Directors can be a bothersome lot, as Morgan Stanley and Goldman Sachs have recently discovered.

The US Securities and Exchange Commission has leveled accusations at a former member of the board of directors of Goldman Sachs, namely Rajat K. Gupta. The accusation is that whilst he was on the board, he helped insider trading. Additionally, a second Goldman Sachs director, Howard Davies, the former head of the London School of Economics, has resigned his seat upon the board do to his dealings in Libya.

This news puts both companies back under the microscope for the first time since the international financial crisis, as Morgan and Goldman were the only two US investment banks to actually survive the crisis comparatively unscathed. They survived because they conceptually had far better corporate governance than their competitors.

So what has changed since the crunch, how have companies, including Cayman Islands companies altered the boardroom?

An raised level of scrutiny and observation has certainly led major companies to restructure their boards. Goldman reduced the number of director by one to 11 and changed three directors. Morgan also has three new directories. Additionally, other major ventures have made changes. Both Citigroup and the Bank of America now have almost entirely new directors.

Within each of these companies, and indeed, across all of corporate America and other business havens such as the Cayman Islands, the trend is to now recruit directors who have experience of controlling a company.

The changes which Goldman has made to its board reflect this trend in its entirety. The
three new directors are: James J. Schiro, who was a previous CEO of Zurich Financial Services, H. Lee Scott, ex-CEO of Wall-Mart and the previous head of Arcelor Mittal, Lakshmi Mittal. These are all highly experienced and talented individuals.



The chief financial officer of the National Association of Corporate Directors (NACD) has said that membership of a board should take up just 225 hours per calendar year. Making directorship much more of a job than a networking tool.



If directors are not becoming a lot more consciences, is more change required?

Many companies may have changed their board members and shifted the overall focus, but the type of person employed as a director has stayed pretty much the same. Most are men, and almost all have operational experience.

In spite of the lessons learned during the financial crisis, a board member cannot be expected to evaluate complex scenarios alone. This is especially true of financial institutions, where the directors job is more akin to monitoring the company than driving it. Firms who expect more from their directors would end up with a board full of mathematicians and no operational expertise. Companies such as General Motors have followed this compliance orientated board approach, as they were previously unwilling to challenge the decision of directors and paid the price in the crisis.

If we require monitoring and compliance checks, is it still right to elect a board from the same peer group?

Although there have been dozens of studies into the effectiveness of board make up, it still remains unclear whether independent directors actually add value at all. Although it has been deduced that the decision making process often benefits from independent directors. Cayman Islands companies included. Additionally, it has been proven that separating the roles of CEO and Chairman can have a advantageous effect. Another proven statistic is that a board comprising of more than 40% women will lower the market value of the company.

One of the things that experts do agree on is the fact that having a board comprised of people from different backgrounds can and does add value. The idea is that this distinct mix will bring a different style of thinking and decision making to the game. Although it should be noted that a board is something like a group of fellow workers, and too much diversification of membership can ruin the harmony. The problem lays in the fact that many boards are still comprised of people from the same peer group.

As companies across the globe, including the Cayman Islands rush to employ a board comprised of people with operational experience, they are not considering the fact that this may stop the board functioning in a concrete fashion.

Most banks in America are currently trying to determine if the board should come from operational backgrounds or from operational backgrounds in the financial sector.





For all companies, Cayman Island based ones included; it could be time to ask their recruitment consultant to shift the focus when seeking new board members for consideration. The SEC now states that skills, qualifications and other attributes must be divulged as to why a certain director was chosen. But let us not forget that operation experience may be valuable but so is critical thinking, an analytical mind and the ability to communicate and make a actual contribution the management of the company.


Linda is an author currently writing about http://www.caymanislandsdirectors.ky/ and Fund Managers.