Af­ter Stein­hoff, some hard ques­tions need to be asked about the rules gov­ern­ing boards and their di­rec­tors. Here’s a start

Financial Mail - - ON MY MIND -

The devel­op­ments at Stein­hoff have shone a spot­light on the role of the board — es­pe­cially of nonex­ec­u­tive di­rec­tors. Many di­rec­tors have wondered how it’s pos­si­ble that such events could hap­pen at a firm with a good track record and an ex­pe­ri­enced board.

First, we must ac­knowl­edge that de­spite hav­ing King 4 and in­te­grated re­port­ing prin­ci­ples, as well as re­quire­ments for ethics poli­cies, boards are be­ing caught out. But if it is ac­cepted that King 4 and other rules en­cap­su­late best prac­tice, the fo­cus has to shift to how these prin­ci­ples are im­ple­mented. Of course, the nonex­ec­u­tives don’t have in­depth un­der­stand­ing of the com­pany, as they don’t run the day-to-day busi­ness. But they also of­ten don’t have ad­e­quate in­dus­try knowl­edge. This must change.

There’s ob­vi­ously no golden key to pre­vent gov­er­nance fail­ures. But, in eval­u­at­ing our cur­rent prac­tices, these ques­tions are a good start:

Is there a bal­ance of power on the board?

A warn­ing sign of a board that could be in trou­ble is a chair or CEO who is overly dom­i­nant and dic­tates to the board rather than let­ting them pro­vide coun­sel; they are de­nied the time to ask seem­ingly “stupid” or naive ques­tions.

Con­sider the bal­ance be­tween the num­ber of nonex­ec­u­tives and ex­ec­u­tives. King 4 sug­gests the ap­point­ment of two ex­ec­u­tive di­rec­tors (CEO and FD), with the ma­jor­ity of di­rec­tors be­ing nonex­ec­u­tives. Per­haps by in­creas­ing the num­ber of ex­ec­u­tive di­rec­tors, board con­ver­sa­tions and de­ci­sions would be bet­ter in­formed.

Do boards have the ap­pro­pri­ate knowl­edge, skill and ex­pe­ri­ence?

Com­pa­nies must scru­ti­nise the com­po­si­tion of their boards. Boards of­ten com­prise a large num­ber of char­tered ac­coun­tants who are great at ask­ing the right ques­tions about fi­nan­cial re­port­ing and com­pli­ance, but boards need to con­sider whether they have the skills to ask wider, prob­ing ques­tions about the oper­a­tions and in­dus­try.

Should the CEO make writ­ten dec­la­ra­tions about com­pli­ance with the ethics pol­icy, the fi­nan­cials and in­ter­nal con­trols?

The US’S Sar­banes-ox­ley Act re­quires the CEO and CFO to cer­tify that the fi­nan­cial re­ports fairly present the fi­nan­cial con­di­tion and oper­a­tions of the com­pany. But they must also cer­tify that the in­ter­nal con­trols are ef­fec­tive. A sim­i­lar re­quire­ment in SA could en­hance trust in fi­nan­cials.

Should the full board have ac­cess to the in­ter­nal and ex­ter­nal au­di­tors?

Only au­dit com­mit­tees have ac­cess to both in­ter­nal and ex­ter­nal au­di­tors. But it might help if the full board has sim­i­lar ac­cess, in pri­vate ses­sions, at least an­nu­ally.

Should long ten­ure be con­sid­ered when clas­si­fy­ing di­rec­tors as in­de­pen­dent?

The in­de­pen­dence of di­rec­tors is not nec­es­sar­ily linked to ten­ure; in­de­pen­dence is a state of mind. Though long ten­ure is use­ful from an ex­pe­ri­ence point of view, this should be bal­anced with the need to have fresh eyes pro­vid­ing dif­fer­ent per­spec­tives. The reg­u­lar ro­ta­tion of board mem­bers would be ad­van­ta­geous.

Should con­sid­er­a­tion be given to the num­ber of boards on which di­rec­tors serve?

Con­sid­er­ing the com­plex­ity of large com­pa­nies, board mem­bers should be lim­ited to serve on, say, a max­i­mum of four boards.

Should nonex­ec­u­tive di­rec­tors meet sep­a­rately?

Strong con­sid­er­a­tion should be given to nonex­ec­u­tives scru­ti­n­is­ing the key take-outs from board meet­ings away from the pres­ence of ex­ec­u­tives.

At its core, King 4 refers to bal­ance on the board, but I am ar­gu­ing for a dif­fer­ent kind of bal­ance: the bal­ance be­tween in­dus­try and op­er­a­tional knowl­edge.

There is an in­her­ent ex­pec­ta­tion that nonex­ec­u­tive di­rec­tors are there to ask the right strate­gic ques­tions, against which di­rec­tors test their de­ci­sions. For this to hap­pen, they need to un­der­stand the in­dus­try and the busi­ness, and of­fer a fresh per­spec­tive. If this is not hap­pen­ing, why were they ap­pointed in the first place?

Un­der­ly­ing all of this is the fidu­ciary duty, with the onus on each di­rec­tor, to ap­ply his or her own mind on an on­go­ing ba­sis.

Nonex­ec­u­tive di­rec­tors need to un­der­stand the in­dus­try and the busi­ness, and of­fer a fresh per­spec­tive

123Rf/paul Fleet

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