Appointment of Company Boards – Best Practise

The ongoing revelations at the Zondo Commission of Enquiry in South Africa (enquiry into “state capture”” and corruption in the public sector) and other fora appointed for such purpose has highlighted the critical importance of having the right board members at our SOE’s. The Old Mutual matter has also brought to light the fact that corporate SA is no better than our ailing SOE’s when it comes to governance malpractices. There is a long list of corporates recently found to be wanting in more ways than one, however, the corporates seem to be shielded from exposure, perhaps by virtue of their “private” nature. So, what must Shareholders do to avoid a repeat of the current quagmire?

1. Board Performance Evaluation, it would be tragic to replace boards on a wholesale basis without first performing a Board Performance Evaluation to determine gaps, areas of weakness and requirements of the entity. The Evaluation will assist the shareholder to have a clear understanding of the type of board members required for the entity.
3. Industry expertise, the Shareholder needs to understand the expertise required in that particular industry as well as the type of leaders required and then mix and match skills. This can be attained by reviewing the mandates of the organization and finding the skills to match that mandate. It does not make sense having 3 lawyers on 1 board, unless they all bring diverse industry-specific skills to the table.
5. Corporate Governance Review, the new Board must then perform a governance review to identify glitches and/or gaps in the governance environment within that SOE with an intention to ensuring a good corporate governance culture and consequence management where breaches ensue.
7. Board (and Management) Training, irrespective of the board experience that some board members may have, a properly structured training for board members and executives jointly must be implemented. Not only when the board is first appointed, but on an ongoing basis. I wrote in a previous blog how countries such as New-Zealand deal with board recruitment, vetting and induction of new board members. The idea here is that boards and management should get the same governance training to ensure that they have the same understanding on governance and not argue over interpretations.
9. Cancel Regulatory Boards, the current framework for appointing a board for all types of entities in unproductive and wasteful. Why should a Regulator, Rail Safety Regulator (RSR) or Civil Aviation Authority (CAA) for example have a board? Regulatory Authorities have “quasi-judicial” function and should be appointed on that basis along the lines of the Competition Commission for example. I recommend that all Regulatory Authorities fall under the control of the Minister of Justice. This will avoid a shareholder having to play a dual role as referee and player, this dilemma recently played out at the Department of Transport where a previous Minister had to “interfere” to prevent the RSR from suspending the Passenger Rail Authority of South Africa (PRASA) license due to safety concerns. The Minister was conflicted between his role as “Shareholder” in both PRASA and that of RSR. The Minister effectively prevented RSR from doing its job, which is strictly speaking illegal. To avoid this, all Regulatory Authorities must be reconfigured with a judicial status and composed of regulatory compliance and industry experts.
11. Establish a Shareholder Unit, both within the shareholder department and a universal government-wide Shareholder oversight unit. The current environment where SOE’s are acting in silos is one of our biggest weaknesses in our governance system. There is a lot of value lost amongst and within SOE’s due to non-collaboration and unnecessary competition amongst them. The shareholder Unit must also be responsible for recruitment, vetting and induction of new board members. Leaving recruitment of board members (as is currently the case) to Department officials is a recipe for disaster.
13. Develop a Shareholder Representative Framework, the shareholder representatives on SOE boards generally do not add value. The reason being that there is no clear framework on what they should be doing, saying or reporting to the Shareholder in respect of the board’s they sit on. Appointing junior officials to these roles also do not add value to the board’s pressing need for the Shareholder to act or respond to urgent matters. A clear framework will go a long way in dealing with the contradictions inherent in this role. Swift decision-making mechanisms must be implemented. This is key finding in most of the board performance evaluations we do for SOC’s.
15. Board performance management. This must be included in the Shareholders Compact “What cannot be measured cannot be improved”. The same way that the CEO’s and management are evaluated must apply to boards.  Everybody must be accountable and be evaluated for their contribution and effectiveness.

In conclusion, let’s make our corporate governance effective and practical by getting the right qualified people on the bus.

Ronny Mkhwanazi is a Corporate and Trade Lawyer at Mkhwanazi Inc., the firm specialises in Commercial Law, Corporate Law and Governance, International Trade Law, Advisory