Do shareholders play a role in the selection of board members?

Yes.

The Board of directors must work in the interests of shareholders. For this to happen, shareholders have a final say in the board’s appointment. Board members provide oversight and strategic leadership to the business or entity on behalf of the owners.

The issue is how are board members selected.

Many boards have a nominations committee. Usually, this committee proposes candidates for board appointments which the shareholders elect from. For example, if one vacant board position is available, two or three names may be nominated for the shareholders to select from.

The problem arises if any shareholder asks how the nominees were identified.

Board members represent the interests of shareholders. This means the board is accountable to the shareholders. It is therefore critical for the shareholders to manage the board appointment process.

Some companies ask the retiring board member to nominate someone they think is good to take their place. Other companies use the services of respective professional associations like the Institute of Certified Public Accountants of Uganda or Uganda law society to provide names for possible appointments on boards. Once names are received, they are evaluated, and the top candidates elected.

But board appointment is beyond skills and competence, it is about loyalty to the shareholder interests. To this end, shareholders are increasingly giving more attention to the board appointment process. They no longer want third party involvement in the selection process. This calls for a more transparent process.

The names of the board members whose terms are expiring within the next 12 months, for example, are presented to the Annual General Meeting (AGM) and new board member nomination forms issued. The terms of new board members appointed as specified in the organization’s constitution or memorandum and articles of association disclosed. All terms of nomination are specified. The process is managed accordingly and at the following AGM, new board members are elected by the shareholders according to their voting rights and the new board members resume their offices immediately.

Where some shareholders are unable to make it, company law provides for proxies to elect on their behalf.

Keep in mind that a public company may have diverse shareholders. Depending on the rules, equity holders of more than 51% have may have more seats on the board. For this reason, board composition should be discussed and agreed early on – does it depend on percentage shareholding or defined shareholding such that majority shareholders do not have the power of veto.

What I have learned

Shareholders must make the final call in board appointments. Shareholders invest money to get the business running, and the board provides strategic leadership for the organization’s oversight and long term sustainability The board does everything on behalf of the shareholders. If the board is incompetent or unable to supervise and direct the executive, the business could collapse.

We know that executive management benefits a lot from the business since their earning is instant. Immediately one gets a job, they start earning salary and benefits. For the shareholders, they wait for the dividends which sometimes never come! For that reason, shareholders must keep a close on the executive. The concept of micro-monitoring comes in handy. You want to have real-time access to reports to ensure that the business is doing well and no one is committing fraud since such eats directly on the shareholder’s capital.

To be continued.

Copyright Mustapha B Mugisa, 2020. All rights reserved.

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