Board Appointment: Between Competence and Loyalty

People have always criticized Shareholders for overweighing loyalty and under weighing competence in the appointment of Directors. Some analysts have an inappropriate conclusion that Shareholders choose the directors they can control over people who will produce quality contributions to corporate performance. In making choices, shareholders face a difficult decision in the relative valuation of competence and loyalty in appointing or retaining a Director. The question is that what is more important? Competence or loyalty.

Shareholders hold directors in absolute trust by entrusting them with their hard-earned capital. The capital has a cost, which the shareholder will continue to bear. However, the behaviour of directors may reduce the burden or complicate it. Apart from the regulatory requirement to appoint directors, shareholders need support in the execution of a company's strategies to achieve corporate goals. Shareholders need competent Directors to achieve organizational goals; therefore, imposing other factors over competence could be counterproductive. Likewise, Directors are required to act in the best interest of all Shareholders. Even though Directors' nominations are confirmed and voted at the general meetings, super shareholders always have the edge over other Shareholders in the appointments of the Directors.

If Shareholders require the competence of Directors to achieve corporate goals, how can another factor be more critical than it? The recent recommendation that the board should comprise more non-executive and independent directors is to ensure that the directors are not biased towards a set of Shareholders. Does this recommendation necessarily protect the Shareholders? What about the trust issue of Directors? The second question is, can the regulators protect the interest of Shareholders more than the Shareholders themselves? Even the recommendations of the regulators are not watertight? An independent Director on a Board could be dependent on other Boards. Can human beings consistently ignore the use of information that is helpful to him or her? What happens to the trade secret an independent Director gathered on a Board when he or she concludes his or her tenure?

To what extent can the corporate governance code protect the interest of Shareholders in the hands of exited Director with a vital piece of information. What is the guarantee that a Director will use his or her competence in the best interest of the Shareholders? When this happens, the benefits of competence are eroded. Will a Director abuse privileged information or act against the interest of Shareholders if he or she is loyal to the Shareholders? Will incompetence or disloyalty harm Shareholders more? Can Shareholders successfully buy the skills his loyal Directors lack? Or can a company and its Shareholders survive the disloyalty of the Directors?

There will no be a need for the Agency Theory if the Directors will always act in the best interest of Shareholders. Shareholders must do what is necessary to minimize agency costs, in my view. However, the extent to which some shareholders protect themselves against Directors in Nigeria is mounting pressure on good corporate performance. Competent Directors are often time deprived of the opportunity to apply their knowledge when some Shareholders perceive that their interests may be harmed. Do you know that many Shareholders have reduced their Directors to mere 'Servants'. Some Directors are given letters of resignation along with the letters of appointment by some Shareholders. Are there no better ways to minimize agency costs without going this far?

Are Shareholders wrong in preferring loyalty to competence? Is there is a limit to the pursuit of loyalty by Shareholders?