How many boards can one non-executive director serve properly?
Boards must keep an eye on this issue to ensure their non-executive directors are neither overextended nor too isolated.
Almost 30 years into our democracy, South Africa remains one of the most unequal countries in the world. The World Bank last year rated South Africa as having one of the highest, persistent inequality rates in the world, with a consumption expenditure Gini coefficient of 0.63 in 2015.
According to the World Bank, as much as 68% of the country was living below the upper-middle-income country poverty line two decades ago, falling to 56% between 2005 and 2010. This figure then moved slightly upwards to 57% in 2015 and was projected to have reached 60% in 2020.
It is concerning that, at the highest level, the people nominated to serve on company boards consistently seem to be selected from the same pool. It means those board members end up with significant industry clout.
Are their other directorships taken into account when they are appointed?
And, if so, that lens should also include a consideration of potential conflicts of interest, not just experience.
Parmi Natesan, the chief executive of the Institute of Directors South Africa, recently raised this question after numerous media reports about the luxurious mansion inhabited by the previous chairperson of the National Lotteries Commission (NLC).
As previously reported by GroundUp in Daily Maverick, non-profit organisations that received lottery grants contributed millions of rands, directly and indirectly, to help to pay for the lavish R27-million mansion of NLC boss Alfred Nevhutanda.
Natesan points out that Nevhutanda is a director of “at least 40 companies, including some involved in mining, investment and communications”. She adds: “While I can’t comment on this specific case as I don’t have the facts, it does raise a perennial issue that boards need to keep in mind — just how many boards can an individual sit on and still discharge his or her duties with sufficient care, skill and diligence? Forty sounds like too many, but what is the correct number?”
Natesan believes there should not be an inflexible rule because individuals’ capacities and available time differ; and, well, the truth is that some sectors and industries are more demanding than others.
The King IV report, which recommends best-practice governance rules, simply states that candidates for election as non-executive directors should declare their existing professional commitments and supply a statement that confirms they have sufficient time to fulfil their responsibilities as a member of the board.
However, Natesan points out that non-executive directors have an increasingly important role to play and can face potential personal liability for not fulfilling their duties. “While it is true that non-executive directors should be experienced in the particular industry in which the company operates, they should be wary of overextending themselves, either by taking on too many appointments or taking on appointments in too wide a range of industries,” she says.
Internationally, it seems as though four board appointments are becoming the accepted norm in the US and Europe, whereas 1.3 board appointments are the median in Australia.
Locally, PwC’s “Non-executive directors. Practices and fees trends report” for February 2022 states that global advisory firm Institutional Shareholder Services advocates directors holding five or more mandates should receive a negative vote from shareholders. The PwC report shows the majority of South Africa’s 1,247 non-executive directors hold only one board position, with 207 holding two and 84 holding three. Thirty-four held four board seats, with the most held by any one person being six (two individuals).
A white paper by Gibs business school in 2020, written by Mpho McNamee, Tendai Mhizha and Cara Bouwer, states that extensive research has been conducted on the impact of holding multiple directorships on businesses in regions such as the US and Europe. In the US, the National Association of Corporate Directors recommends that senior executives and chief executives hold no more than three board positions outside their executive roles and the Council of Institutional Investors (2016) recommends that directors with full-time jobs serve on a maximum of two boards.
“In some cases, boards prefer non-executive directors to serve on more than one board to gain experience,” Natesan says. “At the moment, it seems as though South African directors are not indulging in serial directorships to the extent that they cannot discharge their duties adequately — the former chairman of the National Lotteries Commission excepted, of course. Boards must keep an eye on this issue to ensure their non-executive directors are neither overextended nor too isolated.” DM168
This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.