Opinionista Johann Redelinghuys 26 August 2013

The right way is not always the best way

Best practice corporate governance, it seems, is not always best for business. Increasing evidence suggests that independence at all costs can undermine governance instead of ensuring it. There is now so much attention given to feeding the compliance beast that the essence of business gets lost in the King code fog.

Experienced board members often complain that the board’s contribution to the deliberations of company strategy and the effective management of risk are now playing second fiddle to the arduous machinations of complying with the rules and regulations of codified governance. A good example is the front-page breast-beating about the return to the MTN board of its retired CEO Phuthuma Nhleko. It is of course a cardinal sin for those wanting to operate on the high ground of board governance for a departed CEO to return to the board as chairman. They will cite a presumed inability to let go of the operational management and the difficult requirement to shape-shift into a non-executive body. Also, breathing down the neck of a new CEO doesn’t seem fair. If it is to be considered at all there must be at least a two-year cooling-off period before such a move could be considered. This, they believe, will disinfect and sanitise the mind of the departed CEO and prepare him for the new assignment.

As chairman, it is said Nhleko could create tensions with the present executive team, and will make it uncomfortable for current CEO Sifiso Dabengwa to operate with sufficient elbowroom. Nhleko is returning to the board within less than the prescribed cooling-off period and would not meet the necessary independence criterion.

Forget for the moment how many governance toes are being stepped on by this move and focus on the experience and knowledge that Nhleko brings to his appointment. Also consider how many chairmen of currently listed companies have no more than a superficial knowledge of the business they are directing. It is a regular cry of the executive members of the board that the non-executive directors, including the chairman, who preside over often-momentous decisions don’t really have a full understanding of the business. They participate in the board committees and study the board packs, but as non-executives they have at best a bird’s eye view appreciation of its workings and challenges. Yes, they are independent, but is the quality of their insight not limited?

Compare this to a chairman who has a distinguished track record of growth and development in the business and a wealth of industry experience. Of course he understands that the non-executive role requires a different approach and that he is absolutely not involved in the operational aspects of the company. Other chairmen with similar backgrounds have made the transition and added a rich knowledge base to their board’s effectiveness. Simon Susman at Woolworths, Mark Lamberti at Massmart and Graham Mackay at SAB come to mind

Implied in the various governance codes is the belief that independence makes for healthier and more impartial decisions and frees the board from any potential conflicts of interest. And there is obviously something to that, but a good understanding of the business must be at least as valuable if not considerably more so.

Some of the older hacks on boards talk about independence as a state of mind and an attribute of a directors thinking, rather than something that has to meet some compliance performance standard. A few years ago the media dug into Michael Katz for a supposed lack of independence when he had been on the Nampak board for 21 years. One of his peers on the board said at the time “there could not be a more intelligently independent board member than Michael!”

The question we have to ask is this: if the company and its investors trust the board members to exercise sound judgment in all other matters, why would they not trust a board member, who may at some given point technically lack the independence qualification, to make equally sound decisions and judgements?

There is a further dimension to the independence dilemma. It is the nine-year limitation for board service if a director is still to be deemed independent. With only four or five board meetings a year it could take as much as nine years for a person to get to grips with the problems of the company and the challenges it faces. And then they have to leave the board.

There are now numbers of senior board members due for the nine-year cut-off who have broad business skills and who make a considerable contribution on several levels. They are not only adding weight and experience to the board’s decision making, they are role models for the younger generation of board members who generally lack the breadth and the business experience

Having the various codes of board governance is necessary if a standard of conduct is to be generally understood. While those like the King code make no more than suggestions for the disciplines of governance, they are often treated like fixed regulations or laws and are meticulously adhered to. Would it not make for a better and more democratic system of governance if the individual board or board member should make the decision about matters of independence, rather than having to bow to the prescribed standard? And would it not better serve the needs of business in the end? DM



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