South Africans are busy learning the hard way that both private and public entities can be hijacked if governance is weak
South Africa has been hit by a spate of serious corporate governance lapses both in the public and private sectors which points to gaps in the way corporations choose to organise their process of governance. Billions of rands have been lost a significant number if livelihoods have been negatively impacted.
The most recent example will be the Steinhoff International scandal which represents what is generally considered to be one of the worst kind of corporate corruption to hit South Africa. The following article touches on key points that should help close the corporate governance gaps that allow for this kind of lapses.
By Parmi Natesan and Prieur du Plessis
Effective boards make for successful companies, so it’s worth investing time and resources in maximising board performance.
Over the past months, we have looked at the various dimensions of board effectiveness in some depth. Here are the main points from this series ̶ we hope they will act as a useful reminder both of why an effective board is so important and how to create one.
Governance is important because it supports corporate value.
After a few glasses of wine, people often explain something by saying “It’s a process” with an air of one imparting great wisdom. But, when it comes to corporate governance, it really is. Once seen as a set of burdensome regulations, corporate governance is emerging as a critical tool for keeping organisations on course. South Africans are busy learning the hard way that both private and public entities can be hijacked if governance is weak, and that the consequences are institutional malfunction and the withdrawal of investment. Well-governed organisations and countries are much more successful in the long run.
Make sure you have the best possible team.
There is a lot of misinformation about diversity, and many organisations do apply diversity codes thoughtlessly. Like does call to like, and this translates into people hiring within their own networks, but in today’s multicultural, global environment we cannot afford this luxury. A variety of skill sets, viewpoints and experience is needed, and diversity targets should be used intelligently to obtain the best possible team on the board, and elsewhere.
Director due diligence is vital.
As argued above, board composition is critical. Equally important is that it is vital that prospective directors’ qualifications, expertise and experience are thoroughly vetted. It’s also important to be sure they have the time and commitment necessary to do a good job.
Prospective directors should also do a thorough due diligence on the organisation: is it sound, and do its ethos, culture and vision strike a chord?
Understand what characterises a good director.
Directors stand at the apex of the corporate organogram. They therefore need to be both good decision makers and ethical people ̶ the tone of an organisation is always set by the top.
Directors also need to be multifaceted people, with a wide range of skills and qualities, but there are core ones that all directors should have. These include understanding what their role entails and governance best practice; deep experience in the relevant sector as well as in life generally; the ability to influence people, and to be influenced; and enough time to do the job properly.
Directors must be clear about their duties and responsibilities to avoid financial liability.
There is clear consensus of what a director’s duties are. They are primarily drawn from common law and have been codified in the Companies Act and King Reports.
Directors discharge these duties by performing their functions. It is critical that they operate in good faith, in the best interests of the company, and with proper care, skill and diligence. These qualities must be the litmus test for everything a director does.
Keep on learning.
In today’s fast-moving, complex business environment, directors must embark on a well-structured programme of continuous professional education. Today’s skills are not tomorrow’s.
Choose the right chair.
Boards are made up of individuals: chairs must turn them into a team that makes decisions. They also oversee the development of an annual work plan, and generally the administrative back end of the board.
They also represent the organisation at shareholder meetings and provide the link between the CEO and the board. So important is this role that it is now becoming commonplace to provide a lead independent director to complement it. King IV recommends that this director serves as a sounding board for the chair and represents the chair when he or she is not sufficiently independent.
Make sure that board committees work well.
Board committees are indispensable because they provide a specialist group to focus on important issues. The Companies Act stipulates that audit and social and ethics committees must be established, but others can be created as needed. Boards must ensure people with the right skills sit on them, that their work is evaluated and that their input is used effectively by the board.
Oversee the CEO effectively.
High-performing CEO, high-performing organisation: it’s as simple as that. It follows then that one of the most important functions a board can perform is to choose the right CEO, and then to ensure he or she performs as desired.
King IV suggests a formal framework for the delegation of authority to the CEO, and a sustained focus on role clarity. A regular and effective evaluation of the CEO’s performance is a key tool for helping boards discharge their obligation to ensure the organisation is properly led.
Make sure the board is continuously improving.
Quite simply, the board’s performance directly affects the organisation’s performance. It is no surprise, then, that shareholders and other stakeholders are increasingly interested in how well boards perform ̶ and smart boards are taking proactive measures to understand how well they are doing, and to improve.
King IV specifically recommends a board evaluation every alternate year, to allow boards enough time to respond appropriately. The best approach is to integrate board evaluations into a programme of continuous professional development.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
This article was lifted from the IoDSA website.