Can anyone still think that corporate governance doesn’t matter?

To many people, corporate governance may sound like a rather dull topic, and hardly something that concerns the average South African. Yet over the last few months, it has become an everyday discussion.

Most prominently, the corporate governance at state-owned enterprises like Eskom, Prasa and the SABC has come under extreme scrutiny. In all cases, what has been critical is whether the board has adequately performed the oversight role that it is meant to play.

An effective, empowered, independent board would not have allowed Hlaudi Motsoeneng to wreak the havoc that he did at the public broadcaster. And similarly, had the board at Prasa been up to its task, it would not have allowed billions to be spent on improper contracts.

Poor corporate governance has also been a big reason for the calls for change at Net1 UEPS following the mess with social grant payments. The huge payout granted to departing CEO Serge Belamant only confirmed that there were serious conflicts of interest at play.

There have also been growing concerns about executive pay at a number of listed companies, and whether boards are managing this well enough. Are they setting up the right incentives for management, are the targets they set demanding enough, and are they aligned to the interests of shareholders?

Dysfunctional boards

Under the South African Companies Act, directors have very particular responsibilities. Most prominently, they have a fiduciary duty to look after the assets of the company on behalf of its shareholders.

The Institute of Directors Southern Africa (IDASA) notes that the board’s duty is dualistic. It needs to look after the performance of the company in ways such as contributing expertise, formulating policy and providing strategic thinking. It must also keep the company under prudent control by judging, questioning and supervising management, and holding executives to account.

In the past, most, and often all, directors were part of the executive team. However, this has changed as the King reports on corporate governance have highlighted, and put in place, the requirement to have independent, outside directors.

This is meant to ensure that the relationship between the board and company management is a balanced one, which essentially means that there is effective oversight.

“If you look generally at some of the corporate governance controversies that have arisen over time, many have resulted from a dysfunctional board,” says Rob Lewenson, the head of ESG engagement at the Old Mutual Investment Group. “Either the non-executive directors do not capably hold management to account, or they are uninterested or conflicted.”

This is why ensuring the independence of the board is not just a tick-box exercise.

“It is important that there is a counter-balance between the board and company management,” Lewenson argues. “An effective, appropriately-experienced and diverse board, coming from independent viewpoints is the best way to ensure management is held to account for its practices and implementation of strategy in order to create long-term shared value.”

Managing conflicts

There have been some very telling examples in South Africa of where this simply didn’t happen. The Myburgh Report on African Bank found that the directors had breached their fiduciary duties, and had not held CEO Leon Kirkinis to account for decisions he made.

“Where you have a very strong figure who has led the company for a long time as CEO and a board that has much shorter tenure and may not be shareholders, it’s difficult to get that balance of power right,” says Brad Preston, the chief investment officer for listed investments at Mergence.

Managing this balance is not, however, always a simple matter.

“You want to have independent directors to guard against the potential conflict where the board is all aligned to the management team and there is never going to be robust discussion,” says Preston. “On the other hand, if you have an incredibly independent board that is not that invested in the business, it may not be as engaged or as strong.”

Getting the composition of the board right is therefore critical. And since it is shareholders that appoint the directors, it’s obvious that they too have to play their part.

This is why initiatives like the Principles for Responsible Investment have become more prominent and why more investors are insisting that the companies managing their money take corporate governance seriously. Ultimately, poor corporate governance presents a material risk to shareholders and their desire for long-term value creation, and a strong, independent board is the best defence.

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