One of the things usually approved at the constituent board meeting after every company AGM are the boad of directors’ ‘Rules of Procedure’.
What looks, and is often perceived, as a formality, at close look though carries not just formal weight, but indeed formulates – directly or between the lines – the duties of the board.
Very roughly speaking, these ‘Rules of procedure’ can take one of two approaches (a number of samples valid as of 2021 AGM season are listed at the end of this post):
- Either, the formulations stick to mere formality aspects: key focus areas the board needs to take decisions on, how this happens, how often they meet, decision quora, etc, as well as what formal responsibilities the board takes upon itself (such as e.g. for the financial position).
- Sometimes, in addition to the formalities mentioned in the previous point, there is additional explicit wording as to in what or whose interest the directors are to act.
This aspect again, if present at all, typically takes one of two views:
The directors are required to act- Either ‘in the interest of the company’
- Or ‘in the interest of both, the company and shareholders’.
Notable Absences
There are a number of interesting aspects that stand out by their notable absence of being mentioned:
- At no point preference is given to shareholders over ‘the company’.
- If anything, in about half of the cases the company itself, and its survival, is given preferences over anything else. This is to a certain extent not bad news: it allows the liberty to assume that the long-term survival and success of a company is entirely and totally within the remit of such rules.
- At no point is there a mention or enshrinement of ‘growth’ as a purpose or ‘raison d’etre’.
- Of course, that may well be contained in the companies vision (and/or mission) for example. Yet, the vision of the company is a matter for the board to be responsible for.
Hence, if or indeed if not, ‘perpetual growth’ itself and as we know it, is enshrined in the company’s vision, is NOT an unavoidable requirement that previously has been set out as a prerequisite for the board to be responsible for.
- Of course, that may well be contained in the companies vision (and/or mission) for example. Yet, the vision of the company is a matter for the board to be responsible for.
- At no point there is reference to the company’s role (or its responsibility) within society and/or the country it is located in.
- The sole interests enshrined, as per above, are either the company, or else the company and its shareholders.
- At no point quarterly reporting cycles are explicitly required.
- Instead, the rules most commonly refer to applicable law, stock exchange rules, bylaws etc.
Hence, despite it being 2021, and a time when even some of the world’s largest companies – including the globally largest asset managers – have spoken on behalf of and signed on to ‘stakeholder capitalism’, stakeholders of any type remain eerily absent from such instructions given to Board of Directors!
Which is just as interesting as ‘growth’ and ‘share price’ being two equally eerily absent terms …
Unspoken assumptions: When going by the rules can get interesting
As mentioned above: most of the Rules of procedure at no point force, or even require, ‘optimisation of share price’ or ‘perpetual growth’ or any other of the traditional corporate success measures presumed to be at the centre of attention for boards.
Both formulations most commonly encountered (‘in the interest of the company’, ‘in the interest of both, company and shareholders’) at least in principle allow the board sufficient leeway to exercise their fiduciary duty to their best possibly ability. And with (merely) the best possibly outcome for the company in mind.
Maybe more explicitly: In no moment do these rules at the present exclude considerations for stakeholders, the environment or indeed society at large, or mid- and long-term value preservation for the company.
If indeed a board is to act ‘in the interest of the company’ … stakeholders, society, the environment, resource access etc should be of primary concern to a board.
As it stands, shareholders will sooner or later suffer unless these fundamentals are considered ‘OK’ and aligned so as to preserve the value of the company going forward.
Conclusion
The fact that for many companies pure growth remains the wholly grail around which all thinking takes place, a result of external pressures onto the company, is the result of traditional thinking in the board consequence of board members’ track record bias (also here), boards’ lack of capability and their lack of ideas of how to define ‘success’ more appropriately for a company in its long-term trajectory.
None of this is rocket science – fortunately.
All of it requires change though – unfortunately.
And change – of any kind – is often seen from outside the company as a weakness or a tendency towards instability.
Nothing could be further from the truth. Change is inherent in adopting to new circumstances that every year are brought upon us.
Change is what a company needs to undergo constantly in order to survive and remain successful.
It is more than just time to have a much more critical read of boards ‘Rules of procedure’ and maybe bring them into the 21st century – with a few small but essential updates.
Further Reading: Sample ‘Rules of Procedure’ as at 2021 AGM Season
