A board that can meet the demands of industry and stakeholders
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The role that the board of directors have in organisations has evolved beyond that of mere compliance. The changes are the result of modified regulatory frameworks, economic pressures and investor demands. Directors are now required to provide strong oversight, be active in decision-making, give strategic support to management, are responsible for corporate citizenship and to set the company culture all to the end that will create and preserve long-term value for stakeholders.
It is critical for directors to have a clear understanding of the role and responsibilities of directors in order to fulfil their given function and to avoid liability.
The success of an organisation or lack thereof, is dependent on the effectiveness of the board of directors. The consequences of directors not fulfilling their corporate governance duties have been clearly illustrated by a slew of infamous corporate scandals including Enron, Wells Fargo and Steinhoff.
Boards are not delivering on the core mission
It could be easy to limit the failure of boards to those who are highly publicised and believe that they are the exception. According to Barton & Wiseman “most boards aren’t delivering on their core mission” referencing the survey conducted by McKinsey & Company on directors’ understanding of company issues. The survey revealed that directors lack a strong understanding on core company issues.
The lack of in-depth understanding is not only troublesome for the company but expose directors to risk in their personal capacities. Legislation requires directors to be accountable to stakeholders for their decisions and actions taken. Directors can personally be held liable for any loss or damage as a result of failing to fulfil their fiduciary duty.
Role of the directors
The King IV report defines corporate governance as “the exercise of ethical and effective leadership by the governing body” that will lead to the outcomes of an ethical culture, good performance, effective control and legitimacy.
To this end, the King IV report sets out the primary role responsibilities of the board of directors to include:
- Steering the organisation and setting its strategic direction.
- Approving policy and planning that give effect to the direction provided.
- Overseeing and monitoring of implementation and execution by management.
- Ensuring accountability for organisational performance by means of, among others, reporting and disclosure.
Directors are required by the section 76 of the Companies Act, to exercise their powers and perform their functions:
- in good faith and for a proper purpose;
- in the best interest of the company; and
- with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions and having the general knowledge, skill and experience of that particular director.
In their article Walking the director talk, Natesan & Du Plessis draws special attention to the care and diligence directors are required to apply. They charge directors not to “blindly rely on board packs or other sources of information…[but] to take reasonable steps to ensure the information is accurate and they understand it.” They further encourage directors to keep accurate records of the steps taken in reaching decisions. This will allow directors to defend the decisions they believed were in the best interested of the company at the time in accordance with the legal principle known as the Business Judgment Rule.
Profile of a director
Considering the critical role directors play in a company, it is crucial for directors to possess the character, skills and competencies to effectively execute their duties.
ETHICS: It is essential for directors to lead ethically therefore the characteristics that they would require include integrity, competence, responsibility, accountability, fairness and transparency (King IV). Furthermore, directors need to have the courage to ask the hard questions, to offer a different point of view and to have an independent mind (Kajee).
TIME AND ENERGY: Directors need adequate time and energy to invest in actively participating as a board member. Directors should give enough time and focus to adequately prepare for board meetings, to attend board and sub-committee meetings and to apply themselves to the organisational matters on hand. It has been suggested that directors do not serve on more than two boards to safeguard the energy to actively and valuably contribute (Parsons & Feigen, Deloitte).
APPROPRIATE BUSINESS ACUMEN: Business and life experience provide directors with the wisdom and knowledge, and the grit to work through the highs and lows that the organisation will face (Natesan et al).
Competencies such as strategic and analytical thinking are valuable in creating and preserving value. Directors need to be strategic thinkers in order to be forward looking to produce long-term value. Analytical thinking enables directors to sift through the information presented to them in order to spot problems and find solutions. Although directors need not be financial experts, they do need to be financially literate to at least interpret the financial statements and to understand the financial consequences of decisions made (Sonnenfeld, Deloitte).
It is advantageous for directors to be industry experts that provide greater insight and knowledge in the relevant industry. Directors need to be acquainted with the relevant legislations and regulations governing the industry (Natesan et al, Deloitte, Sonnenfeld, Parsons et al).
INTERPERSONAL SKILLS: “Soft skills” such as strong interpersonal, communication and listening skills are critical as directors not only form part of the team of directors but need to engage various stakeholders and third parties such as analysts and media. Furthermore, directors need the ability to be influencers and must have the emotional intelligence to consider opposing views and where appropriate allow them to be influenced (Natesan et al).
BOARD OF DIRECTORS: An effective board of directors require more than just the right profile of directors. Although shareholders ultimately appoint the directors, it is the duty of the board to “ensure the proper mix of skills and perspectives in the boardroom” (Subramanian). Companies need to critically think and evaluate the appointment of directors in order to mitigate risk. Patrick Cairns, in his Moneyweb article on Steinhoff International, points out that the calibre of the individuals on the Steinhoff board is “exceptional” individuals. However, the shortcoming of the Steinhoff board is the lack in diversity of “different points of view, varying expertise and competing opinions”.
To maximise a diverse board with contributing members, it is crucial to create an environment of trust and candour where open dissent is valued. Directors should be able to raise opposing views, challenge beliefs and ask the hard questions without a fear of reproach. This is only possible in an environment of respect and trust. Sonnenfeld refers to “the virtuous cycle of respect, trust and candour” where good qualities build one upon another, which can be broken at any point. He describes the process as follows:
- Team members develop mutual respect;
- because they respect one another, they develop trust;
- because they trust one another, they share difficult information;
- because they all have the same, reasonably complete information, they can challenge one another’s conclusions coherently;
- because a spirited give-and-take becomes the norm, they learn to adjust their own interpretations in response to intelligent questions.
BOARD OF EFFECTIVENESS: Ana Dutra mapped the effectiveness of boards along a continuum from good to great. At the foundational level, directors are detached and only fulfil a compliance function, avoid strong positions and risk and operate reactively. On the other end of the continuum, boards are highly effective; directors not only ensure compliance but create forward-looking strategies and provide the oversight to ensure the effective implementation thereof.
Based on an article by Ana Dutra
According to a survey conducted by The Miles Group and The Rock Centre for Corporate Governance at Stanford University, boards generally fall short in the following key areas that will hinder effectiveness.
- Trust among directors are not high enough.
- Lack of regard for one another among directors.
- Lack of honest feedback to one another.
- Lack of alignment among directors, between the directors and the company strategy, and between the directors and management.
BOARD EVALUATIONS: Board assessments are the key to address barriers to effectiveness. These evaluations can serve as a great tool in determining areas of weakness and to create a platform for honest feedback and courageous conversations (Larcker, Miles, Griffin. & Tayan; Deloitte; Ernst & Young).
The evaluation of the board of directors is a critical success factor of effective governance. Having board evaluations that evaluate how the directors lead, manage and contribute, both individually and corporately, are becoming best practice. The New York Stock Exchange requires that the boards of publically traded corporation complete annual self-evaluations (Cebon, Larker et al).
In an environment where trust and candour are lacking, it would be advisable for the board to appoint a third party to conduct the board evaluations. This will encourage a greater willingness to give honest feedback on weaknesses. The evaluations should not just be quietly filed away but instead be made available to the chairperson of the board and to individual directors. Having evaluations with proper feedback can have the added benefit of underperforming board members not making themselves available for re-election (Subramanian).
- Reflect on the effectiveness of your company’s Board of Directors (tool available below).
- If you are serving as a director of a company, how can you increase your effectiveness as a director?
Barton, D. & Wiseman, M. 2015. Where boards fall short. Harvard Business Review. [Online] https://hbr.org/2015/01/where-boards-fall-short
Cairns. P. 2017. A Steinhoff lesson: Don’t neglect board diversity. Money Web. [Online] https://www.moneyweb.co.za/moneyweb-opinion/a-steinhoff-lesson-dont-neglect-board-diversity/
Cebon, P. 2017. The 3 Company Crises Boards Should Watch For. Harvard Business Review. [Online] https://hbr.org/2017/01/the-3-company-crises-boards-should-watch-for
Companies Act 2008. [Online] http://www.cipc.co.za/files/2413/9452/7679/CompaniesAct71_2008.pdf
Deloitte & Touche. 2013. Duties of Directors. [Online] https://www2.deloitte.com/content/dam/Deloitte/za/Documents/governance-risk-compliance/ZA_DutiesOfDirectors2013_16042014.pdf
Dutra, A. 2012. A More Effective Board of Directors. Harvard Business Review. [Online] https://hbr.org/2012/11/a-more-effective-board-of-dire
Ernst & Young LLP. 2015. Accelerating board performance – The importance of assessments. http://www.ey.com/Publication/vwLUAssets/ey-accelerating-board-performance-through-assessments/$File/ey-accelerating-board-performance-through-assessments.pdf
Kajee, S. 2017. 3 critical challenges facing South African directors. Institute of Directors Southern Africa. [Online] http://www.iodsa.co.za/news/245688/3-critical-challenges-facing-South-African-directors.htm
King IV Report
Larcker, D.F., Miles, S., Griffin, T. & Tayan, B. 2016. 2016 | Board Of Directors Evaluation And Effectiveness By The Rock Center For Corporate Governance at Stanford Graduate School of Business in collaboration with The Miles Group. [Online] https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-survey-board-directors-evaluation-effectiveness-2016.pdf
Larcker, D., Griffin, T., Tayan, B. & Miles, S. 2017. How Boards Should Evaluate Their Own Performance. Harvard Business Review. [Online] https://hbr.org/2017/03/how-boards-should-evaluate-their-own-performance
McKinsey & Company. 2013. Improving board governance: McKinsey Global Survey results. [Online] https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/improving-board-governance-mckinsey-global-survey-results
Natesan, P. & Du Plessis, P. 2017. Walking the director talk. Institute of Directors Southern Africa. [Online] http://www.iodsa.co.za/news/368171/Walking-the-director-talk.htm.
Natesan, P. & Du Plessis, P. 2017. Ten steps to boardroom excellence. Institute of Directors Southern Africa. [Online] http://www.iodsa.co.za/news/377956/Ten-steps-to-boardroom-excellence.htm
Parsons, R.D. & Feigen, M.A. 2014. The boardrooms quiet revolution. Harvard Business Review.[Online] https://hbr.org/2014/03/the-boardrooms-quiet-revolution
Sonnenfeld. J.A. 2002. What Makes Great Boards Great. Harvard Business Review. [Online] https://hbr.org/2002/09/what-makes-great-boards-great
Subramanian, G. 2015. Corporate Governance 2.0. Harvard Business Review. [Online] https://hbr.org/2015/03/corporate-governance-2-0.
The King IV Report on Corporate Governance for South Africa 2016. Institute of Directors in Southern Africa. [Online] http://www.iodsa.co.za/?page=AboutKingIV