We have reviewed all the annual reports of the listed companies on LuSE in our circa 2015 analysis on our inaugural website, TFHZPC, and what we discovered was an interesting revelation about the composition of many of the boards of these premier companies. It is a common desire for many astute individuals to aspire to what many in the middle and upper class of Zambian society as the grand ascendency up the corporate ladder. Being nominated to a board in Zambia is as prestigious as a noble prize for societal accomplishment. However, it is sad when we hear echoes of desires to ascend to some illustrious boards as a means to financial gain. When signals of this are evident, we are left with no choice but present the case for corporate governance theory. A reminder of the responsibilities that are bestowed on nominees to boards.
The theories of governance include economic foundations, agency theory, stewardship theory, external pressures and stakeholder theory. Our discourse in this read centers around external pressures as this validates the reason why Zambian firms consider certain known personalities to sit on their boards. There is a fundamental expectation when a Zambian is nominated to a board. Regardless of whether the entity is independent or public, external pressures are centered on some of the corporate dilemmas of governance.
According to Thomas Clarke in his Theories of Corporate Governance book, he declares that there is a coherent stream of theoretical approaches that include institutional theory, resource dependency and network theory that are concerned with the external challenges of firms building relationships with their environments. What this means is that board selection to an extent is done on the premise that nominations will bring something to the boardroom that will enable them to address a known factor in the environment (external to the firm). No wonder known Zambians are seen to be sitting on multiple boards. A closer look at their resumes shows that they bring astute leadership to these board. Many firms are attracted to them because of what they believe they will bring to the table.
The characteristics that board composition bring to the table can also extend to issues that revolve around some of the forces of competition. For example, a board member may have some insight into a supply chain that would mean that the firm desires to ensure it reduces supplier power that can impact the firm’s margins. In addition, a board member may have access to markets that the firm desires to enter which implies that they can influence buyer power (only to the extent of scale).
Zambian board composition also takes into consideration resource dependency in terms of directors being able to connect the firm with external resources that can help overcome uncertainty. Thomas Clark argues that company board size and composition are rational organizational responses to the conditions of the external environment. Therefore, having a number of directors linked to the external environment can reduce the uncertainty that may arise in the course of the firm doing business.
Conversely, there is another dilemma of expectations from the composition of boards. Some will argue that selecting certain Zambians would imply that they will influence the strategy of the firm. However, separation of power dictates that there is a distinction between the board’s role and the management team’s role. For example, some companies in the insurance industry may demand for board composition of elites from the insurance industry. However, if the expectation of these board members is to influence strategy, they may find that the management team may be in conflict.
Finally, the need for social networks cannot be under scored. In times of fast changing technology and volatile economies, many Zambia firms can benefit from social networks that board composition can create. These would be non-legally binding relationships with external players such as institutions with in the firms industry (EIZ, ZiCA etc) that can serve as an early warning signal when environmental forces threaten value creation. That is why Clark insists that emerging conditions of hyper competition where rapid and flexible responses are necessary, the viability of network governance will become more significant as time goes on. This can only be achieved through social networks that the board creates.