Business Maverick


In the boardroom play, who ultimately appoints the cast? Shareholders must step up

In the boardroom play, who ultimately appoints the cast? Shareholders must step up

The responsibility for ensuring that company directors are appropriately skilled and equipped to fulfil the task at hand in the best interests of the company falls squarely in the shareholders’ script. 

The concept of distinguishing between so-called ownership of companies on the one hand and management of companies, on the other hand, has been fiercely debated over centuries by academics, lawyers, businessmen and the like. 

The same holds true for the notion of capitalism and the perceived consequences brought about by the single-minded pursuit of profits.

In both instances there always were, and probably always will be, the followers and the critics. Then there are those who seem to offer nuanced versions of these ideologies. 

The purpose of this article is not to delve into who is right and who is wrong. At the same time, and in the interest of transparency, allow us to disclose our discomfort with the notion of “ownership” of companies, a term still being frequently used in our boardrooms today. 

This discomfort is based on, among other things, the argument that a legal person, like a human person, cannot be owned and does in fact exist in its own right. At most, shareholders have an interest in the company that is composed of specific statutory and other legal rights, powers, and potential benefits.

Unlike the human person, however, our legal person is without several critical human attributes such as a soul, eyes, ears and hands, to name but a few. It is therefore (sometimes unfortunately) completely dependent on a human person or persons to share with it these attributes and to look after and manage its affairs. 

It is for this reason that the board of directors, whether made up of a single director or multiple directors, is referred to as the controlling mind of the legal person, the company. Therefore, whether or not you are aligned with the theories briefly referred to earlier, we can all agree that directors play a critical role in the success, or lack of success, of a company.

A fair question to be asked then is how the directors end up being directors of a company. Phrased differently, who puts the controlling mind of the company in place?

In response enters a key stakeholder of the company, its shareholder, or shareholders, on centre stage. When it comes to the hiring and firing of directors, the controlling mind of the company, the shareholder plays a leading role. This is probably one of the most fundamental rights of a shareholder vis-à-vis the company. 

If this is the case, it begs the next question: why then does it seem, on the surface at least, as though they are not doing a very good job of this? One only has to look at the results of global studies done on corporate failures to appreciate the role of the directors in the demise of the business. Newspaper headlines and the subject matter of pertinent lawsuits tell a similar story.

The answer is probably that things are not as simple as they seem.

In our many years of experience in boardrooms, good and bad, it has become obvious that there are several dynamics at play in this often-theatrical drama. For one, shareholder apathy in the listed environment has for a long time been widely criticised, not only in South Africa but also on the global stage. 

More recently, we have seen some exceptions to this with large institutional investors such as BlackRock and others using their vote to not support the re-election of one or more directors who they accuse of not pursuing a particular subject matter or strategy, such as climate change. Such an approach is obviously to be supported, as long as the relevant subject matter is in the long-term interest of the company and not driven mainly by a shareholder agenda for short-term gain.

In addition, there are some institutional shareholders who have adopted policies around the re-election of directors of investment companies, prescribing for example the maximum director tenure such shareholders would support. Again, a rigorous application of mind by the shareholder to the re-election of a particular director is to be welcomed with the caveat that an inflexible approach can potentially weaken a board with the forced departure of one of more experienced, value-adding directors.

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This is especially true where more than one director has exceeded the prescribed tenure while the board has at the same time not been proactive and vigilant in its succession plans.

Now enters another strategic actor in our play, the board of directors itself. Again, in the listed environment, it is common practice for the board to identify, recruit and appoint suitable candidates to fill board vacancies and to then introduce such newly appointed directors to shareholders at the first annual general meeting for formal election by shareholders.

In addition, the rotation practice expected from listed companies whereby a specified number of directors must stand down and offer themselves for re-election by shareholders gives shareholders an opportunity not to re-elect individuals they believe are, for whatever reason, not suitable to continue serving in the position. 

In terms of relevant governance practices, the board is expected to indicate whether it supports the re-election of a particular director based, among other things, on the performance of the individual as a member of the board.

In other words, while shareholders do have the ultimate power to appoint or elect directors and even remove non-performing directors, the board itself also plays a pertinent role, especially so in the listed environment. 

The scoreboard shows us that neither shareholders nor boards are unfortunately always bringing their best performance to the table.  Even more concerning, often to be found in the unlisted environment while also having been witnessed in the boardrooms of listed entities, are shareholders who abuse this power to introduce individuals as directors who they expect to drive a very specific shareholder agenda that is not necessarily in the long-term sustainable interests of the company.

While we do not profess to have all the answers, there are some pertinent considerations we wish to highlight for purposes of the drama script.

Let’s start with the board itself which needs to appreciate the importance and relevance of its composition and that needs to take proactive steps to ensure that the company has the best possible controlling mind there is.

Whether this is done, in the listed environment, through the filling of vacancies or the recommendation for re-election of directors retiring by rotation, or whether it is done, in the unlisted environment, by deliberate engagement with shareholders, the board can steer the outcome of the ultimate shareholders’ vote. 

Establishing an appropriate skills matrix for the board, following a transparent and professional recruitment process with the support of a nominations committee, adopting an effective induction and ongoing development programme as well as timely succession plans and, finally, regularly evaluating its performance and that of its individual members, are all essential tools in the board’s armour. 

These all call for a deliberate and conscious application of mind and constructive engagement, not only in the boardroom, but also between the board and shareholders. An effective board is, after all, not an informal process.

At the same time, shareholders must accept responsibility for the way in which they exercise their rights, including the right to elect and remove directors.

It is necessary for shareholders to appreciate that directors are ultimately accountable to the company, whether they are perceived as representing one or more shareholders or other stakeholders of the company.

Thus, ensuring that those being appointed, elected or re-elected as directors are appropriately skilled and equipped to fulfil the task at hand in a diligent, informed manner and in the best interests of the company, falls squarely in the shareholders’ script. 

However, for the shareholders to be nominated for an Oscar in this role, the performance of the supporting actors — the board of directors — is of equal importance. 

This is truly a team effort and, if we get the cast wrong, our brilliant storyline may just end up in the trash can. DM/BM

Michael Judin is a partner at the law firm of Judin Combrinck Inc. He is a member of the King Committee on Corporate Governance for South Africa, was a member of the task team that wrote King IV, is the legal adviser to and a director of the American Chamber of Commerce in South Africa and the lead non-executive director of a company listed on the JSE. He is the non-executive Chair of the Advisory Board of Hospice Wits, the non-executive Chair of the Conscious Leadership Academy and an honorary life member of the Institute of Directors of South Africa.

Annamarie van der Merwe has been a corporate lawyer and company secretary of companies in the listed environment for more than 30 years. She was a longstanding member of the King Committee on Corporate Governance for South Africa and was actively involved in the writing of most of the King Reports and, in particular, the preparation of the King IV™ Report as part of a dedicated task team mandated by the King Committee for this purpose. She is executive Chair of FluidRock Governance Group and is a non-executive director of a number of companies, including Pick n Pay Stores Limited, the Bureau for Food and Agricultural Policy NPC (Board Chair) and Vastfontein Community Transformation NPC (Board Chair).


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