Failure is not a word most high-achieving CEOs and board members of any public company would want to be associated with. However, fear of a term can create the impression that it is something that strikes at random, without warning or merit. With failure, this is certainly not the case. Failure does not just happen; it is caused, often by the very people paid to prevent it. A recent case demonstrates this well. Afren is an independent oil and gas company listed on the London Stock Exchange and, at one time, a FTSE 250 company with a portfolio of oil production, development and exploration assets in Nigeria and the rest of Africa. In spite of such notable advantages, however, the company has seen its market capitalisation dip by over 90 percent in the last year, in the wake of a serious scandal involving tens of millions of dollars in alleged unauthorised payments.
For any failing board, there are always indications of
impending danger
Clear in hindsight
As it grapples with its current difficulties, it is quite amazing that the company was not subjected to greater scrutiny earlier than now. There were primers that indicated issues early on; the company’s major producing assets are in Nigeria, with its corporate head office in London, and its CEO and COO in the US. One struggles to see the cost efficiency in such a business model, and it may well have helped to mask the workings of the payment scandal now enveloping the company. In July 2014, Afren suspended and subsequently dismissed both its CEO and COO, and is considering legal action. Many have suggested that the company’s problems are fundamentally down to a weak board.
Furthermore, the damage is not only limited to the company itself and its traditional stakeholders. In the same month, the Financial Times referred to Afren as the model for African companies seeking to raise debts or equity in Europe, with the damning opinion that now “investors will distrust Africa.” Many have since linked Afren’s scandal to other contentious corporate scandals at emerging market companies listed on the London Stock Exchange, which, it is felt, have tarnished the reputation of the City of London. In reality, however, there was little African about Afren. There were very few Africans on the board and the key roles of CEO, COO and Finance Director (FD) were not held by Africans. In spite of these facts, damage has been done to all African businesses seeking to globalise and list on Western exchanges.
Warning signs
For any failing board, there are always indications of impending danger. Let us call these ‘dangerous currents’. The track record of the FD of a public company is particularly important. Failures in the review and maintenance of internal financial control systems and processes, and the absence of a firm cost control structure are indications of governance failures that should be readily detectable. One of the most common dangerous currents is that of an FD with a history of association with a failed business. Such an FD ought to put any effective board on notice and help it to review the key competences of its members, though ideally the issue should be picked up in the vetting and selection process.
Another frequently observed dangerous current is a situation in which senior managers are unable to discuss their concerns freely with the board. This creates a discussion vacuum, often resulting in ordinarily questionable behaviours being normalised. Common examples include isolated teams being rewarded selectively and disproportionately above everyone else, and the CEO not being open to questioning by the board. Boards fail when individuals who are propelled by greed are allowed to take charge. When they fail, dreams are destroyed, hopes are lost and jobs evaporate. And it is usually due to the actions of a few who will, in all likelihood, walk away from the disaster without any serious scars.