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