Gov­ern­ing bod­ies’ role in ap­point­ing chief ex­ec­u­tives crit­i­cal

The Star Early Edition - - OPINION & ANALYSIS - Parmi Nate­san and Dr Prieur du Plessis Parmi Nate­san and Dr Prieur du Plessis are ex­ec­u­tive di­rec­tor: Cen­tre for Cor­po­rate Gov­er­nance and chair­per­son of the In­sti­tute of Di­rec­tors (IoDSA) re­spec­tively. In­quiries: info@ iodsa.co.za. Bet­ter Di­rec­tors. Bette

AR­GUABLY one of the most im­por­tant func­tions a gov­ern­ing body per­forms is ap­point­ing and over­see­ing the chief ex­ec­u­tive. Get­ting this right is crit­i­cal to the or­gan­i­sa­tion’s suc­cess. Chief ex­ec­u­tives are the su­per­stars of the cor­po­rate world, and the chief ex­ec­u­tive’s per­for­mance has a di­rect and sig­nif­i­cant ef­fect on the suc­cess of the or­gan­i­sa­tion he or she leads, both in the long and short term. How­ever, chief ex­ec­u­tives serve at the plea­sure of the gov­ern­ing body, which ap­points them.

It is thus up to the gov­ern­ing body to put in place the right pro­cesses and struc­tures for cre­at­ing and main­tain­ing a con­struc­tive and pro­duc­tive re­la­tion­ship with the chief ex­ec­u­tive, and more gen­er­ally with man­age­ment. One of the first things to get right is a proper frame­work through which the gov­ern­ing body del­e­gates au­thor­ity to the chief ex­ec­u­tive.

It is rec­om­mended that this frame­work be for­mal be­cause, as Prin­ci­ple 10 of King IV states clearly: “The gov­ern­ing body should en­sure that the ap­point­ment of, and del­e­ga­tion to, man­age­ment con­trib­ute to role clar­ity and the ef­fec­tive ex­er­cise of au­thor­ity and re­spon­si­bil­i­ties.” Get­ting this re­la­tion­ship wrong comes at a high cost.

This is il­lus­trated by the view that this lack of role clar­ity is one of the most im­por­tant rea­sons for the chal­lenges in so many of South Africa’s state-owned en­ter­prises.

Put sim­ply, be­cause their chief ex­ec­u­tives are ap­pointed di­rectly by the min­is­ter, rep­re­sent­ing the sin­gle share­holder, they tend to re­port back to, and feel ac­count­able to, the min­is­ter rather than to the gov­ern­ing body.

Once each party un­der­stands pre­cisely what its role is, it be­comes much eas­ier to build a re­la­tion­ship based on mu­tual re­spect, equal­ity and a sense of real team­work, al­ways with the fo­cus on the longterm in­ter­ests of the or­gan­i­sa­tion.

The re­la­tion­ship be­tween the gov­ern­ing body on the one hand and the chief ex­ec­u­tive and ex­ec­u­tive team on the other hand is an in­ter­est­ing one. While the ex­ec­u­tive team’s au­thor­ity is de­rived from the gov­ern­ing body, to which it must re­port, the ex­ec­u­tive team clearly has the ad­van­tage in terms of in­sti­tu­tional knowl­edge.

Gov­ern­ing bod­ies

Ex­ec­u­tives spend all their work­ing hours, and then some, do­ing the or­gan­i­sa­tion’s work, whereas the non-ex­ec­u­tive mem­bers spend in the re­gion of, say, 200 hours a year on it.

Worst case, un­scrupu­lous ex­ec­u­tives can con­trol their gov­ern­ing bod­ies by cu­rat­ing the in­for­ma­tion they re­ceive; more usu­ally, the in­for­ma­tion in meet­ing packs is likely to re­flect the un­con­scious bias of those who com­pile it.

In or­der to bal­ance this in­evitable bias, whether con­scious or un­con­scious, gov­ern­ing body mem­bers need both the will and op­por­tu­nity to in­ter­ro­gate in­for­ma­tion, ask for ad­di­tional in­for­ma­tion if re­quired, and even visit the or­gan­i­sa­tion and en­gage in­for­mally with se­nior and ju­nior man­agers.

They should also ar­range to have ses­sions with ex­ec­u­tive man­age­ment out­side of gov­ern­ing body meet­ings. Over­all, they must sat­isfy them­selves that the or­gan­i­sa­tion’s af­fairs are in­deed aligned with the strat­egy.

As noted above, the per­for­mance of the chief ex­ec­u­tive and that of the or­gan­i­sa­tion are in­ti­mately linked. It thus fol­lows that once the gov­ern­ing body has cho­sen a chief ex­ec­u­tive, it has to en­sure he or she re­mains an as­set.

Un­der­stand­ing this, it’s not sur­pris­ing that one of the most im­por­tant func­tions of the chair­per­son is to build a good work­ing re­la­tion­ship with the chief ex­ec­u­tive and, par­tic­u­larly, to lead the chief ex­ec­u­tive’s reg­u­lar, for­mal eval­u­a­tion process.

This process must be both frank and con­struc­tive, and is par­tic­u­larly valu­able for chief ex­ec­u­tives be­cause it pro­vides recog­ni­tion for ac­com­plish­ments and an op­por­tu­nity to un­der­stand the gov­ern­ing body’s evolv­ing think­ing and ex­pec­ta­tions.

It is also a vi­tal tool in the dis­charge of the gov­ern­ing body’s re­spon­si­bil­ity to en­sure the or­gan­i­sa­tion is be­ing well led.

Gov­ern­ing bod­ies also have an obli­ga­tion to think long term. In this con­text, and given the im­por­tance of the role, suc­ces­sion plan­ning for the chief ex­ec­u­tive is vi­tal. Thus, even though gov­ern­ing bod­ies some­times del­e­gate this re­spon­si­bil­ity to the nom­i­na­tions com­mit­tee, it should be a stand­ing agenda item for the gov­ern­ing body it­self.

Suc­ces­sion plan

A well-crafted suc­ces­sion plan has a num­ber of di­men­sions. At the very least, it should in­clude in­terim pro­vi­sion for some­thing un­ex­pected as well as a more care­fully staged han­dover in the nor­mal course of events.

Prefer­ably, the chief ex­ec­u­tive suc­ces­sion plan should be aligned with the gov­ern­ing body’s long-term strate­gic plan and, in a per­fect world should be en­vi­sioned as a pipe­line stretch­ing into the fu­ture rather than a plan for a sin­gle event.

As quoted in the Har­vard Busi­ness Re­view “7 Tenets of a good chief ex­ec­u­tive suc­ces­sion process”, ex­perts say or­gan­i­sa­tions should be look­ing two to three chief ex­ec­u­tives into the fu­ture, and have seven po­ten­tial chief ex­ec­u­tives of var­i­ous gen­er­a­tions within the or­gan­i­sa­tion at any one time.

Th­ese in­di­vid­u­als should be given a mix of on-the-job train­ing, in­ten­sive coach­ing, men­tor­ing and for­mal ed­u­ca­tion. This will not only give th­ese in­di­vid­u­als an op­por­tu­nity to de­velop their po­ten­tial and gain ex­pe­ri­ence at the gov­ern­ing body level, but will also give the gov­ern­ing body the chance to as­sess them at close quar­ters.

No­body likes sur­prises, least of all when they re­late to the most im­por­tant sin­gle po­si­tion within the or­gan­i­sa­tion. Gov­ern­ing bod­ies must make sure they are pre­pared for every even­tu­al­ity re­lat­ing to the top lead­er­ship, and that the suc­ces­sion is top of mind.

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