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Shadow board

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Atty. Jun de Zuñiga

Atty. Jun de Zuñiga

In my previous article, I took up the issue on “shadow banking” which was defined as “credit intermediation involving entities and activities outside the regular banking system.” I mentioned that there is a need for stronger monitoring and oversight of this industry. For this article, I will discuss another “shadow” – that of shadow boards and directors.

From my reference materials, mostly of UK origin, I gather two concepts of shadow boards – one negative and the other positive. The first may be perceived as an instrument of circumvention or the antithesis of good governance. In this concept, a shadow director is deemed as a holder of controlling or majority stock of the corporation but who is not technically a director and does not openly participate in the firm’s governance, but whose directions or instructions are complied with by the employees and directors. It could work similar to “dummy” or “nominee” situations. The motive may perhaps be to escape the disclosure requirements of a directorship, to avoid accountability for corporate acts, to benefit from transactions to which he would not have qualified if he were a formal director under the arms-length rule, or simply to go around conflicts-of-interest situations. From the citations, however, there could be basis to consider him as a de facto director and be held equally liable for the obligations of the firm with the other de facto and de jure directors.

In these instances, the pressure is really on the elected directors as to how they will discharge their responsibilities since they can face liability for breach of duties. The liability is personal to them and cannot be passed on to the shadow directors. In other words, heeding the instructions of the shadow directors although these are questionable could lead to serious personal consequences against the elected directors. It is thus a matter of judgment on the part of the latter whether to act on the behest of the shadow directors or decline altogether the directorships offered by them.

The other concept of shadow boards is more positively assuring as it is characterized by transparency, soundness and beneficial advantage to the corporation. I am referring to a structure formally organized as a “shadow board” within the corporation which will meet separately from the regular board and provide support in governance, management strategies and succession planning. It can be composed of young executives, for example, selected from various sectors of the company, which will discuss the same topics that will be presented to the board. It enables senior managers to prepare for and be exposed to director and board level issues. At the same time, it increases diversity of thought within the company. It is described as more than just a leadership development program, as it equips participants with the right level of knowledge and understanding of board level education. Another feedback is that placing rising stars in a shadow board is one way to retain the brightest employees. This shadow board program is already well established in several foreign corporations and is offered also as a module in some training institutes.

In conclusion, a “shadow board” should be taken more in its positive meaning. It should be taken as an innovation in governance and organizational processes to complement leadership development. This is the definition that should adhere to this term in keeping up with progressive corporate trends.

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The above comments are the personal views of the writer. His email address is jzuniga@bsp.gov.ph

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