Coming to grips with effective governance issues in emerging economies can often be a landmine with intense pressures compounded by a host of factors. ?An active, well-informed, and independent board is necessary to ensure the highest standards of corporate governance,? acknowledges in its annual report, Infosys Technologies, one of India?s leading technology companies.

Of topical importance to Mauritius and other emerging economies, ensuring and improving the effectiveness of boards is a top priority for corporations all over the world. In most emerging markets, the regulatory and other bodies that act as bulwarks against corporate malfeasance, i.e. financial and securities regulators, stock exchanges, the judicial system, institutional investors, equity analysts, accountants, and an ever-investigative media, are either still relatively weak or lack the much-needed critical mass. In these circumstances, the most effective line of defence may well be your board.

Mervyn King, the governance guru, has observed that foreign capital literally flows to places that ?exude a perception of good governance?. Improvement or reform of governance practices has consistently underscored the market value of companies in emerging economies. Make no mistake about the issue of a sound, well-functioning board and its clear link to the cost of capital.

Global investor opinion surveys by various research institutions have shown that equity investors would pay a premium of as much as 20 to 40 per cent for emerging market companies which have strong boards of directors. South Korean and Indonesian companies whose board-effectiveness ranking rose from a mere median to the top quartile saw their market value increase by a stunning 15 percent!

The hurdles to good governance

What could be the factors in emerging economies that impede the inception of higher standards of good governance practices and norms? There is admittedly a wide range of cultural, legal, structural, and operational issues rarely encountered in more developed economies that impedes progress at the board level. Attempts to import best practices from Western countries tend to be understandably shunted on one side.

Governance changes that are accepted locally in principle, like more independent directors, the introduction of board committees and the development of written board charters, can in fact turn out to be superficial exercises in practice. As a result, boards in emerging economies rarely get to grips with the real core issues, such as strategy, leadership and risk management, or with issues like communication strategies and the flow of information.

Consistent surveys and leading research companies have identified some of the main culprits that significantly influence the effectiveness of corporate boards in emerging markets: poor delegation, a high concentration of ownership, weak recruitment processes and a shortage of experienced directors, lack of clear direction, poor information flow, stifling cultural traditions, and inadequate legal frameworks.

?Recruiting intelligently, independent-minded, and committed directors, structuring meetings to allow meaningful discussion, and arming directors with relevant knowledge, all contribute to a strong board culture.?

■ Corporate governance and high concentration of ownership

The concentration of ownership in the hands of a dominant shareholder, whether it is the state or family is a worrying phenomenon in emerging economies. Such examples would be the Mittal family holding 90% of the shares of their steel business or the only 6% to 22% of listed companies held by diffused ownerships with no controlling shareholders in Thailand and Malaysia. Here, the board can only be limited to playing its role as a toothless watchdog with no power to remove directors but just focusing on compliance and protection of minority shareholders against possible expropriation.

However, all is not lost. Governments in emerging markets are trying to improve the governance of state-owned enterprises, starting at the top with the board of directors. In Singapore, where government-owned enterprises have long embraced the virtues of good governance, some companies are now exemplars.

China and Malaysia recently launched high-profile initiatives to improve the governance of their state-owned companies. In Malaysia, these initiatives have materialized into the creation of a Management Leadership and Directors Academy to enhance the skills of board members and the development of a policy manual to help the boards of state-owned companies become more effective.

But getting family-owned enterprises to support board reform is often more difficult. Many successful family-owned businesses in emerging markets are still run by the original founder who, having built the business from scratch, can be reluctant to devolve authority to a professional board. As the control of such companies passes to a younger generation that is usually more familiar with modern corporate governance practices, the level of support for effective and professional boards usually rises.

■ Lack of knowledge of the business and no experienced directors

Directors should understand the business they are charged with running. What are the competitive advantages of the corporation? What are its unique attributes? What separates it from its competitors? What are the hurdles facing the corporation in creating enhanced value for shareholders?

Every public company should ensure that its directors have the benefit of an ongoing education program relating to the specific business of the corporation, not only the property, plant and equipment side of the business, but also understanding the risk factors and challenges facing it, and how the particular company deals with those risks.

Clearly, a board must know the expertise of each of its members and of its corporate officers. Similarly, each member of the board should understand the other directors? and officers? limitations. Without this fundamental knowledge, it is difficult for a board of directors to effectively delegate responsibility to individual directors, create effective committees and confidently rely on the input and contributions made by individual directors.

Board members should provide sound business advice and real expertise as well as engage effectively in group settings. Irani, an executive of the Tata Group, has noted that the problem is not ?the number of independents but the quality of their contribution.?

Unfortunately, a lack of professionalism and rigour in recruiting board members means that most boards in emerging markets fall short of Irani?s aspirations. Many companies undertake little or no analysis of the skills and experiences that board members must have to carry out their responsibilities and either do not vet candidates thoroughly or have them thrust upon them.

■ Directors are too interventionist or too passive

Most boards in emerging markets fall into one of the two traps: they are either too interventionist or too passive. As a result of an undefined division of responsibility between the board and management, a shortage of management talent, and poor prioritisation among tasks, many boards in emerging markets end up spending too much time on operations, investments, financing, and other short-term matters. They therefore do not devote enough attention to long-term topics, such as strategy, chief executive officer (CEO) succession, and leadership development.

Clearly boards have, subject to certain limitations in corporate legislation, authority to delegate, but under effective corporate governance approaches, they cannot merely delegate and forget. A board?s fiduciary duties cannot be delegated.

Delegation should be to those best equipped to discharge the delegated responsibilities so that individual directors do not find themselves outside of their range of skills such that the work they may be doing is less than what is expected by the board. Directors must stay apprised of their delegation and as a board provide support and oversee delegated work by all committees.

Corporate legislation provides that directors may rely on expert advice in the discharge of their duties. In that regard legal, accounting and other professional advisors can serve as valuable tools in providing focused information in their respective areas of expertise as a basis on which boards or committees can make decisions. The need to effectively understand and build the various rules and guidelines into a corporation?s procedures and governance approach may require a board to seek appropriate advice in that regard.

In family companies, the family?s view on potential CEO successors usually prevails, but the board can still play a constructive role by formalizing the succession-planning process and providing greater objectivity in evaluating promising family and non-family executives.

?The reasons for limited information flow can be manifold: in some companies, management wants a pliant board and keeps non-executive directors in the dark.?

■ Misguided board focus

The evolution of the necessary culture at the board level as being driven by the legislative duty to act honestly and in good faith with a view to the best interests of the corporation is of paramount importance. Each of the directors must feel they have the necessary trust, respect and candor to effectively contribute in all areas of corporate governance, particularly where the corporate governance function is delegated to a committee.

It is common for boards to convene up to 20 times per year, devoting five to seven hours at each sitting, because very few matters have been delegated to management. Areas that would normally be management?s prerogative are often handled by boards in emerging markets because experienced executives are in short supply or boards do not fully trust the executives they actually have. In many instances, overly enthusiastic and dominant directors are to blame for a board?s encroachment on management?s turf.

In some cases, non-executive directors who serve on the audit committee have been known to regularly visit managers at business units to oversee and check the effectiveness of financial controls, thus bypassing the Chief Internal Audit who has primary responsibility for this function. Is it surprising that many dedicated directors are thus driven to resign out of frustration with the board?s poor focus because their time is not utilized in a more effective and efficient way?

At the other extreme, some boards abdicate their responsibility for strategy and performance, talent, and risk management to executives or controlling shareholders. While it is management?s responsibility to develop detailed plans in these areas, the board should provide meaningful input. In some boards, directors will have to really rack their brains to recall any discussion of strategy, performance management, or talent development.

■ Poor information flow

Obviously, in order to establish an approa-ch to corporate governance, directors need to understand what is encompassed in that term, particularly in connection with new rules and guidelines which are issued by the securities regulators from time to time. Education for directors is important in this regard with keeping a finger on the pulse of developments in corporate governance. Information has always denoted power.

Real independence comes from possessing deep and reliable knowledge. But boards in emerging markets often receive too little of it-or the wrong kind. Directors complain they have to do their own research into competitor analysis, research articles on their industries and recent developments, which would help us fulfill their basic responsibilities.

In some companies, the board receives stacks of data but little useful information that would assist in constructive discussion and decision-making. Some directors would vouch for statements like: ?I get a thick binder before every meeting with no reports that we require. Instead, we get a lot of paper on a building up for renewal, while a one-page summary with key information on customer financials and relationships would have been enough.?

The reasons for limited information flow can be manifold: in some companies in emerging markets, management wants a pliant board and keeps non-executive directors in the dark. Of course, a director in such situations can in theory resign ? and some do ? but as a practical matter, in emerging markets too many non-executives treat their positions as sinecures.

In other cases, management may not know or understand the type of information that is most useful to the board, perhaps because of poor communication on the board?s part about what it would find most helpful or management?s failure to grasp the board?s need for high-level, synthesized information.

■ The inherent dangers of complex cultural traditions

There are few effective boards that reflect a culture in which ideas flow freely, where constructive dissent is encouraged, and the level of respect and trust among members is high. Recruiting intelligently, independent-minded, and committed directors, structuring meetings to allow meaningful discussion, and arming directors with relevant knowledge, all contribute to a strong board culture.

However, healthy board dynamics connote lively discussion, exchange of ideas and passionate debates; this may not fit well in cultures where open disagreement is frowned upon or seniority and hierarchy guide relations in all spheres of life. In some countries, for instance, it is difficult for a young director to challenge openly a more senior one, regardless of the merits of the argument. The same holds true in many parts of Asia. In these countries, boards use other means, such as expressing concerns in writing or in private dinners with the chair, to encourage the exchange of ideas and to handle disagreements.

Family-owned companies in emerging markets face a similar challenge when a family member chairs the board. Other directors, executive or non-executive, often defer to the chairman in such situations. To build a vibrant board culture, the chairman could allow non-executive directors to speak up first, give them opportunities to confer on their own, and appoint non-executive directors with high social and business standing.

■ Legal regimes in a constant flux

In countries where the police are at best mediocre and whose actions are dictated from ?above? and the judicial system corrupt, it is no wonder that faced with the choice of divulging commercially sensitive information to independent directors, with no assurance that it will not leak, or of keeping them in the dark, some companies in emerging markets will inevitably choose the latter course.

This reluctance to share information is especially understandable in countries where the courts are so inefficient or corrupt that the company, its shareholders, or other stakeholders and even the regulators are in effect discouraged from taking action against directors suspected of bad conduct.

In most emerging markets, as in developed ones, intense pressure from regulators, investors, and the ever-investigative media have put corporate boards in the spotlight. But directors and other stakeholders face unique challenges in emerging markets. Companies will thus create a vibrant and constructive board environment only if they understand and address the structural, cultural, legal, and operational issues specific to them.

On the other hand, the board must be satisfied it understands everything it is asked to deal with and that management has carried out the appropriate due diligence in coming to its recommendation to the board. The board can demonstrate diligence by asking management the right questions and going through a series of procedures designed not to shift liability, but rather to demonstrate diligence in the discharge of the role the directors play.

A director is typically not a member of management and ought not to take on a management role, but only has a responsibility for oversight and needs to demonstrate from a diligence perspective that such oversight is carried out in a manner consistent with his or her statutory duties and obligations.

Dr Dinesh Moonshiram Landmark Management & Tech Consultants Ltd