Gospel According to GaaS (5/25): Equitable Representation as the Cornerstone of Governance

We pay to be on the table, not to observe from afar and be at the mercy of others.

Types of Shareholders needed for Equity Representation

This is the fifth of twenty-five planned articles in our Governance as a Strategy (GaaS) series. The first article served as an introductory piece to set the tone of the conversation. The subsequent articles have detailed the “Trinity” — the foundational pillars upon which governance, regardless of geography or culture, must be built. These are Fairness, Accountability, and Transparency. They are interconnected and mutually reinforcing, making them indispensable. Governance cannot exist without all three.

I want to make it absolutely clear: Governance cannot exist without all three foundational concepts. The following articles will focus on the twelve “Pillars of GaaS”. These pillars represent the more tangible aspects of implementation compared to the Trinity. The first of these pillars is Equitable Representation.

Equitable Representation: A Communal Analogy

During festive periods in Nigeria, particularly amidst the harsh economic climate of recent years, people often contribute money to buy items in bulk. A notable example is when friends pool funds to purchase a cow, sharing the meat proportionally based on their contributions.

This process is fascinating and illustrative. Everyone assembles at an agreed-upon location, bringing containers that reflect their expected share based on their contribution. Some bring large bowls, others smaller ones, and some arrive without containers but still expect to receive some portion of the meat.

The venue is chosen to allow most people to observe how the cow is shared, ensuring fairness, accountability, and transparency. Priority access is given to the top contributors with the largest bowls, followed by those with smaller contributions. Smaller contributors can appoint a representative for their group.

This grassroots process reflects governance at the community level, rooted in equitable representation. It works because it is fair, accountable, and transparent.

Corporate Governance and Equitable Representation

There is a remarkable similarity between the above process and corporate governance, where the contributors of capital, shareholders, can be categorised into four groups as follows:

1. Core Shareholders: Stake of 10% and above (Very large bowls).
2. Significant Shareholders: Stake of 5%–9.99% (Large bowls).
3. Aspiring Shareholders: Stake of 1%–4.99% (Small bowls).
4. Retail Shareholders: Stake of less than 1% (No bowls, but open hands expecting a share).

Corporate governance can also be divided into three levels.

1. Shareholders: They meet at the company’s Annual General Meeting (AGM).
2. Directors: Appointed by shareholders during the AGM.
3. Executive Management: Appointed by the Board, often serving as Board members.

The Board of Directors is the central decision-making body responsible for resource allocation for shareholders. This is the “metaphorical” room where the beef is shared. This is the most important chamber where the beef (or cow) is distributed. This Board of Directors represents the interests of the shareholders with the greatest investment. For example, selecting four Directors representing the top four shareholders ensures that at least 40% of the Board’s members are shareholders. In contrast, picking four Directors from retail shareholders results in a maximum representation of only 4%.

Therefore, the maths is clear, straightforward board selection process should follow a clear, elimination-based strategy:

1) Core Investors: Core investors automatically receive board seats, and their shares are excluded from further rounds. If a core shareholder holds over 10%, any excess can be reconsidered in subsequent rounds as a significant, aspiring, retail, or core shareholding. If their total stake reaches 20%, they may take a second turn after all other core shareholders.

2) Significant Shareholders: Since significant shareholders individually hold less than 10%, they must combine with another significant shareholder to reach 10% and secure an automatic board seat. Once selected, their shares are excluded from further rounds.

3) Remaining Shareholders: Other shareholders are encouraged to form groups, with the group holding the highest stake selecting the remaining board seats. This elimination process continues until all seats are filled.

The goal of this process is to maximise shareholder representation on the company’s Board, with a target of achieving at least 55% shareholder interest.

Benefits of this method include:

1. Enhanced Representation and Stability: Maximising shareholder representation on the Board promotes company stability and ensures smoother Annual General Meetings (AGMs).
2. Incentives: By linking board seats to stock shares, shareholders are incentivised to participate and avoid dilution, thereby supporting the company’s growth and operational finance.
3. Aligned Decision-Making on the Board: A board with heightened shareholder involvement guarantees that resource allocation and decision-making are aligned with shareholder priorities.
4. Stronger Ownership and Engagement: This process cultivates a deep sense of ownership, motivating shareholders to be more actively involved beyond financial contributions.
5. Protection Against Board Takeover: It helps prevent board takeovers by any minority, majority, or independent parties; if such an action occurs, it would involve compensating shareholders for their seats.

Additionally, this framework fosters emotional buy-in and commitment from shareholders while respecting their diverse interests. It establishes a precedent for meaningful shareholder involvement in governance.

In conclusion, small bowl contributor(s) can not displace large bowl contributors from being at the forefront and having a vantage view when the meat is being shared; likewise, one large bowl contributor, if he is the only large bowl contributor, cannot single-handedly prevent other medium and small bowl contributors from observing how the meat is being shared. Equitable representation ensures a balanced, transparent, and fair allocation process, whether in a Nigerian community or a corporate boardroom.

Governance thrives when representation is proportional, inclusive, and fair. Equitable representation is not just a pillar of GaaS but the foundation of stability, growth, and shared success.

Once again, happy reading!