KK is a large listed company. When a non-executive directorship of KK Limited became available, John Soria was nominated to fi ll the vacancy. John is the brother-in-law of KK’s chief executive Ken Kava. John is also the CEO of Soria Supplies Ltd, KK’s largest single supplier and is, therefore, very familiar with KK and its industry. He has sold goods to KK for over 20 years and is on friendly terms with all of the senior offi cers in the company. In fact last year, Soria Supplies appointed KK’s fi nance director, Susan Schwab, to a non-executive directorship on its board. The executive directors of KK all know and like John and so plan to ask the nominations committee to appoint him before the next AGM. KK has recently undergone a period of rapid growth and has recently entered several new overseas markets, some of which, according to the fi nance director, are riskier than the domestic market. Ken Kava, being the dominant person on the KK board, has increased the risk exposure of the company according to some investors. They say that because most of the executive directors are less experienced, they rarely question his overseas expansion strategy. This expansion has also created a growth in employee numbers and an increase in the number of executive directors, mainly to manage the increasingly complex operations of the company. It was thought by some that the company lacked experience and knowledge of international markets as it expanded and that this increased the risk of the strategy’s failure. Some shareholders believed that the aggressive strategy, led by Ken Kava, has been careless as it has exposed KK Limited to some losses on overseas direct investments made before all necessary information on the investment was obtained. As a large listed company, the governance of KK is important to its shareholders. Fin Brun is one of KK’s largest shareholders and holds a large portfolio of shares including 8% of the shares in KK. At the last AGM he complained to KK’s chief executive, Ken Kava, that he needed more information on directors’ performance. Fin said that he didn’t know how to vote on board reappointments because he had no information on how they had performed in their jobs. Mr Kava said that the board intended to include a corporate governance section in future annual reports to address this and to provide other information that shareholders had asked for. He added, however, that he would not be able to publish information on the performance of individual executive directors as this was too complicated and actually not the concern of shareholders. It was, he said, the performance of the board as a whole that was important and he (Mr Kava) would manage the performance targets of individual directors. Required:
(b) Assess the advantages of appointing experienced and effective non-executive directors to the KK board during the period in which the company was growing rapidly. (7 marks)
参考答案：
Advantages of appointing non-executives to the KK board The case discusses a number of issues that were raised as a result of the rapid expansion. An effective NED presence during this period would expect to bring several benefits. In the case of KK, the NEDs could provide essential input into two related areas: monitoring the strategies for suitability and for excessive risk. In monitoring the strategies for suitability, NEDs could have an important scrutinising and advising role to fulfil on the ‘aggressive’ strategies pursued by KK. All strategy selection is a trade off between risk and return and so experience of strategy, especially in risky situations, can be very valuable. NEDs could also monitor the strategies for excessive risk. The strategy role of NEDs is important partly because of increasing the collective experience of the board to a wide range of risks. With KK pursuing an ‘aggressive’ strategy that involved the ‘increasingly complex operations’, risk monitoring is potentially of great importance for shareholders. There is always a balance between aggression in a growth strategy and caution for the sake of risk management. The fact that some of the other executive directors are both new to the company (resulting from the expansion) and less experienced means, according to the case, that they may be less able and willing to question Mr Kava. Clearly, an effective non-executive presence would be able to bring such scrutiny to the board. They may also place a necessary restraint on the strategic ambitions of Mr Kava. They could provide expertise on the foreign investments including, in some cases, country-specifi c knowledge. It is careless and irresponsible to make overseas investments based on incomplete intelligence. Experienced NEDs, some of whom may have done business in or with the countries in question, could be very valuable. Experienced NEDs capable of offering specifi c risk advice, possibly through the company’s committee structure (especially the risk committee) would be particularly helpful. Investors are reassured by an effective non-executive presence on a board. The fact that investors have expressed concerns over the strategy and risk makes this factor all the more important in this case. An experienced and effective NED presence would provide shareholders with a higher degree of confi dence in the KK board so that when large overseas investments were made, they would be more assured that such investments were necessary and benefi cial. Finally, through an effective nominations committee, the NEDs could have involvement in the recruitment and appointment of executive and non-executive directors through the nominations committee structure. Specifi cally when the business is growing the need for new people is at its height and the appointment of specialists at board level in such periods is strategically important. Through the use of contacts and through the experience of recruiting directors for many years, experienced NEDs could make a worthwhile contribution. [Tutorial note: this is a case analysis task. Do not reward the four roles: people, strategy, risk, scrutiny unless clearly used to analyse the case]