A RETIRED appellate court judge who subsequently assumed the role of a defence counsel once cited his own judgment as a precedent to substantiate the point that he was postulating. In doing so, he went on to quote his former self as the “learned judge”, thus, drawing laughter from the audience.

Such is the characteristic of role reversal – people find themselves in an unthinkable and a dramatically different situation from what they are accustomed to, and attempt to figure out how to make it work. As the American psychodrama specialist, Anne E Hale laconically puts it, “role reversal conceptually represents a transcendence of self or self-component”.

In the football world, for nearly the entirety of the Premier League era, Liverpool were trailing Manchester United until recent years whereby the balance of power has shifted to Liverpool. It is a peculiarity of English football that the two mammoth clubs never seem to be going head-on for dominance at the same time. As one waxes, the other inevitably wanes. Of course, we are also not starved of accounts concerning role reversal in the political realm. Well, domestically at least!

While there are a litany of commentaries relating to role reversal in various areas, much more can certainly be explored in the space of corporate governance. In recent times, we have been availed to headline news concerning unexpected changes in the head-honcho positions of several large corporations.

Rather surprisingly and interestingly, we are witnessing independent directors of these corporations being catapulted as the managing directors/chief executive officers (CEOs).

For example, Nike had in late October 2019 appointed its independent director cum audit committee member, John Donahoe as the CEO, thereby, necessitating him to relinquish the former position. There are also a few examples of such transitions on the local front.

It is perhaps more common to come across instances of CEOs becoming independent directors post-retirement and after observing a mandatory cooling-off period in the corporations they helm.

The converse is arguably contrarian in nature and somewhat nuanced as it is not envisaged in the laws and regulations of most jurisdictions.

For starters, the Listing Requirements by Bursa Malaysia Securities Berhad impose a mandatory cooling off-period of two years for former executives including CEOs to become an independent director for the same corporation but there is no similar measure for independent directors to become a CEO of the same corporation.

Corporate governance conservatists have called out against the appointment of former independent directors as CEOs of the same corporation on grounds that the board, particularly the other independent directors would have developed a strong relationship and sense of familiarity with the said individual and as such, this may potentially dilute the challenge process between the board and management.

Of course, the premise of the aforementioned argument hinges on the oft-cited reasoning of “independence in appearance” whereby the other independent directors may be perceived to become “too trusting” of their past peer who is now the CEO and therefore, risk being patronised.

This can however be negated if the board members possess the right moral fibre and remain impartial in mind to evaluate the performance and wellbeing of the company without undue influence of their past ties with the newly minted CEO.

It is also put forth that the transitioning of independent directors as CEO of the same company represents a fallacy in the bench strength or the broader, succession planning programme.

Commentators argue that this goes to show that the CEO selection process did not receive the perpetual front-burner attention from the board which in turn necessitated an improvised fixture in the form of boardroom “musical chair”. Such a change also does not bode well in terms of signalling to senior management and this could potentially be morale sapping.

Alternatively, if it was consciously earmarked that the independent director would take the helm of management at a predetermined date, this would leave the concerned individual in a potential conflict of interest position during his or her tenure as an independent director.

Proverbially speaking, the individual would be “treading on thin ice” in terms of independence – a situation that is analogous to the individual dual hatting as the prosecutor and defence counsel. The situation would be even more starkly confounding if the concerned individual is also part of the nominating committee that is entrusted to oversee succession planning of senior management personnel.

In addition, it is posited that CEOs who are past board members of the same corporation may have a tendency to defend past decisions or actions that they were part of and therefore, may be reticent to drive drastic reforms or major strategic shifts in the company.

Flowing from this, the CEO may be conservative in his or her approach and would opt to bank on “tried and tested” modalities. The concern here is that the CEO may be looking at matters in the rear-view mirror and assume that what made money over the past ten years or so will make money again.

On the other side of the vein, unorthodox corporate governance thought leaders contend that the move of transitioning an independent director to a CEO may represent a viable proposition, particularly if the individual has proven leadership capabilities, niche industry experience and established business network in that segment.

This is even more so in the case of individuals who have a great sense of purpose, drive and passion in relation to what they can do for the company.

In such a scenario, it can be argued that the company is able to get an accomplished executive who is not only familiar with the company’s credos and esoteric workings of the boardroom but also brings an outside perspective in terms of day-to-day management and operational outlook. In short, the company is said to be in a good stead to reap the benefits of both worlds.

It is worth noting independent directors who become CEO of the corporation benefit from institutional or corporate memory and such an advantage is particularly compelling for companies in industries with elongated lead times such as plantation, infrastructure or life insurance.

Being seasoned individuals, they often have the accumulated wisdom, experience and finely-tuned intuition gathered from their understanding on the bases of boardroom decisions and this will help them to be better focused in driving reforms rather than expending unnecessary resources to reinvent the wheel.

Having a former board member of the same corporation as the CEO also helps with boardroom engagement. Through personal and informal dialogues, the CEO can better enlist the board members in key initiatives and address issues at the get-go stage. By fostering camaraderie with the individual directors, the CEO lessens the odds that they will blindside him or her and be disruptively involved in operational matters.

Simultaneously, better boardroom engagement helps independent directors to get close to the business and certainly, more informed independent directors are better placed to challenge management on issues of concern.

All in all, the situation of an independent director morphing into the CEO of the same corporation is multi-faceted and merits a thorough examination based on the unique circumstances of the company. As with many other corporate governance polemics, there is no “silver bullet” or “one size-fits all” solution to the issue at hand.

Hence, while we are clear that a prosecutor cannot act as the defence counsel simultaneously, the situation of a former judge citing his own judgment warrants further discourse.

This interview was first published in The Star on 17 February 2020. Read the full article here