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board designations

The Governing Body (GB) is responsible for the governance of an organization. Companies Act (2008, Section 66 (1)) vests the governing body (board of directors) with the legal responsibility and accountability for the management of the organization.

King IV endorses a unitary governing body consisting of executive (employees of the company) and non-executive members (independent external members). In contrast a two-tier system of corporate governance has two boards namely a management board and a supervisory board.

A unitary governing body does recognize the role of an Executive Committee which is responsible under the CEO for executive functions but accounts to the Governing Body through the CEO.

Executive Directors are involved in the day-to-day management of the company or being in the full-time salaried employment of the company (or its subsidiary) or both defines the director as executive.  King IV advocates for the independent directors being the majority of the GB. It also provides for at least two executive directors namely the CEO and at least one other executive director. Unlike King III, the current Code does not prescribe who the other executive director should be.

Non Executive Directors (NED) are not involved in the management of the company and are independent of management on all issues including strategy, performance, sustainability, resources, transformation, diversity, employment equity, standards of conduct and evaluation of performance. An individual in the full-time employment of the holding company is also considered a non-executive director of a subsidiary company unless the individual, by conduct or executive authority, is involved in the day-to-day management of the subsidiary.

According to King IV some non executive directors may be considered as independent if there is no interest, position, association or relationship which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making in the best interests of the organisation.  Independence should be both in fact and in perception of a reasonably informed outsider.

King III puts it in more detail as follows: An independent director should be independent in character and judgement and there should be no relationship or circumstances which are likely to affect, or could appear to affect this independence. Independence is the absence of undue influence and bias which can be affected by the intensity of the relationship between the director and the company rather than any particular fact such as length of service or age.

The Companies Act (2008) does not use the terms ‘executive’, ‘non-executive’ or ‘independent non-executive’ directors. In fact at law both executive and non-executive directors are treated equally in terms of statutory accountability. It reminds me of a situation where an executive director in an NGO wanted only non executive directors listed in a litigation case against the organizations because of a faulty belief that as an executive he was exempt.

It is critical to understand that at law and in accordance with the fiduciary duties of directors, all directors should exhibit independence of thought and action in the exercise of their duties irrespective of the designation according to Codes of Governance. An executive and/or representative directors should put the interests of the organization above the desires of the shareholders or any other parties. Shareholders and principals often make the mistake of imposing their views on the representative director BUT the director has statutory and personal liability for his/her actions and decisions. S/He cannot cite the instructions or expectations of the principal as a defence at law. A member of the GB must act independently and in the best interests of the organization itself.

From the foregoing, it follows that the board designations we use are often misleading in that they imply some members should be independent while others should not. As we have seen all should demonstrate an independence of mind and action.

corporate directors’ challenges

Business by definition requires taking up risk in order to exploit opportunities for growth. This creates another challenge of estimating the risk that can be taken within a growth strategy to increases value.

I remember one Board on which I sat struggling to decide whether to assume the risk of investing in an industry that we had no core competencies. It looked lucrative but the Board after much discussion; decided that we had no risk appetite for this kind of investment. subsequent events proved that our decision then was wise. But at the point of making the decision we also had an apprehension that we could be missing a great opportunity.

The balance between risk appetite which is normally driven by the executives to grow the business and risk tolerance which is normally fronted by the Board needs to be struck. The Board should not unnecessarily be too conservative and still expect returns on investment. and yet it should not be too risky that it destroys value.

Related to the previous dilemma is the fact that one chooses to either have organizational performance and growth or choose compliance with corporate governance codes and regulatory requirements through form filling. Compliance has to be balanced with performance. Some Boards are too focused on complying with boundaries imposed by regulators and codes that they dare not take any risks to growth the business. Acting in the best interests of the organization-which is one of the key roles of the Board – means that the Board should take appropriate risks to ensure sustainability and viability of the corporation. Viable sustainability and business continuity are critical aspects that require mindful consideration rather than just form filling to ensure compliance.

Governing bodies have to manage the often conflicting interests of the stakeholders. Often the interests of the equity shareholders and of other stakeholders may conflict. These will need to be managed. While equity providers are keen to see returns on investment, other stakeholders like the surrounding communities are keen to see meaningful investment in the community. After all the community is the ultimate licensor of the business. If the community withdraws its support and license the organization cannot be sustainable in that area. A more challenging dilemma for governing bodies is when the interests of the shareholders like a desire for dividend declaration, conflicts with the interests of the corporate. In cases like this directors have a legal obligation to serve the interests of the corporation. The moral hazard is that by choosing the interests of the organization, the governing body risks the censure of the shareholders since they serve at the pleasure of the shareholders.

The final challenge is that of speaking up and expressing a contrarian view without being perceived as toxic. It’s easy to drift into groupthink because members want to fit in. The desire to please others can cause a member to suppress their divergent view which would have been beneficial to the organization. It’s important for the governing body to allow for robust discussion and to entertain divergent views. It’s better to have a diversity of opinion rather than to have uniformity at all times. Learning to disagree and expressing a divergent point of view without being disagreeable is critical.

Despite all these challenges it is fulfilling to see an organization grow and thrive as the governing body works closely with management.


Challenges that Corporate Directors Face

While governing corporations is an interesting proposition, directors often have to make difficult choices and trade offs. Some times they have to make judgment calls with minimal information. In the next two posts I discuss some of the challenges governing boards have to deal with.

The challenge of being involved enough in the business to understand its model and be able to supervise without micromanaging or being too involved in operational matters. I want to emphasize the fact that the role of the governing body is to set, approve and monitor execution BUT not to be the executives. If the directors get too hands-on and become heavily involved in operational matters, they can easily get their hands dirty. As a consequence of too much involvement they lose the objectivity required of directors. Unless of course the directors are executive directors. So the governing body has to balance the need for proximity to business dealings with the need to have an arms length relationship with the organization that engenders objectivity. The Board must remain as “external insiders” to achieve this.

A related challenge is that the governing body should be adequately informed for them to be able to make sound decisions and yet as externals they rarely have sufficient information. To complicate matters the Board is dependent on information provided by the very management they are supervising. The net result is that if the governing body does not maintain professional skepticism it can be provided with information that places it in a position where it simply rubber stamps the desires of management. This in my view means that the governing body has no effective control of the organization. It is important for members of the governing body to be sufficiently informed and aware of the industry within which the company operates. A director needs to keep informed from independent sources. I remember one Company had a public relation department that ensured great press coverage keeping the Board happy. Years later disgruntled executives exposed a scheme whereby the PR Department bribed journalists to provide raving reviews.

Non executives directors are by definition not full time staffers and therefore not in constant touch with the organization. This poses the challenge of what to monitor and how exactly to monitor it. They have to be sufficiently in touch to have a feel of what’s happening internally without setting up a spy system. The related challenge is how much access can one have to middle and higher level executives without undermining the role of the CEO.

These challenges are real and need to be navigated in a balanced manner.

ethical and effective corporate leadership

Now having dispensed with those formalities let us continue looking at the definition.

“Corporate Governance -is the exercise of ethical and effective leadership by the governing body towards achievement of the following governance outcomes: ethical culture, good performance, effective control and legitimacy.” King IV Report.

The Governing Body is expected to exercise ethical and effective leadership.

Effective leadership is seen as leadership that adequately accomplishes the desired outcomes and performance with minimum expenditure of time, resources, waste and effort. A governing body has exercised effective leadership when it has achieved the strategic goals cost effectively, and timeously. That is why Boards are responsible and accountable for corporate performance. The governing Board is supposed to be results-driven. The organization has to create and maintain value to all stakeholders. It is the responsibility of the governing body to ensure that value is created and not destroyed through the policies and strategies that the organization adopts. We will take a closer look at Board responsibilities to the organization in a later blog.

I have observed that often Boards will take the credit for great performance and yet blame management for poor performance.

Leadership requires taking responsibility of both successes and failures.

Indeed there are management systems that try to frustrate the Board by giving it misleading information or through powerful CEO who intimidate the Board.

The fact is that a Board which has no control over the management is a poor and ineffective Board. It is used only to rubber stamp decisions made elsewhere.

I once sat on a Board of an NGO where management reported primarily to parallel internal Executive Committee structures led by the Group CEO. Because of those parallel and non accountable structures the Board could not assert its control, and direction on the management. This is very unwise because the legal liability rests with that Board. The net result was consistent strategy and financial underperformance. In hindsight the Board should have asserted itself or if it could not, it should have gracefully considered resigning. It is critical in corporate governance that the Board has effective control of the direction of the organization so that it is accountable for the organization.

Whenever you have one party being in control and another being accountable for what they do not control and direct, you have a recipe for corporate disaster.

Ethical leadership of the governing Board primarily implies that the governing Body is responsible for creating an atmosphere and culture within the organization that favors ethical behavior.

According to King IV ethical corporate leadership is characterized by integrity, competence, responsibility, accountability, fairness and transparency.

If there is rot in the organization that persists, the responsibility lies with the governing body. Full stop.

Most corporate governing bodies operate like some governments where one observes significant levels of corruption and yet the President makes noise about the corruption without holding the responsible ministers and technocrats to account. That is irresponsible.

One reason that governing bodies often wink at unethical behavior maybe that they are mesmerized by the supposedly good performance of executives or that they are too nice to hold people to account. I have discovered that one does not sit on a governing body for purposes of being liked. It’s not a beauty contest or popularity contest. A board member has a duty of care to the organization. If he proves negligent in this duty, he can attract criminal/civil censure.

While a governing body can delegate execution, it cannot relegate its responsibility or delegate its accountability.

We live in an era of radical transparency where any corporate mistake will be flighted on social media and the reputation of the organization destroyed within hours. It is therefore important for the governing body to be transparent and fair in its dealings with all stakeholders. There is also increased stakeholder activism to contend with.

Suffice to say that it is important that the governing body takes control of the ethical and effective leadership of the organizations. No excuses!

debunking some corporate leadership myths

In the last blog we established that the governing body (or board of directors for corporates) has legal responsibilities to exercise leadership over the organization or else face the possibility of legal liability as censure.

A common mistaken assumption is that if one is a Trustee or Board member of  a non governmental organization without pay, then they are exempt from legal liability. This is untrue. Your legal responsibility and the resultant liability exist irrespective of whether you are paid or acting pro bono. That is why it is important to demonstrate competency and skill in your directorship. Many directors or Trustees operate on the basis of herd mentality. In other words they flow with the team especially in the non profit sector. However this does not absolve you of personal liability.

A director should exhibit independence of thought, professional skepticism and competency in analyzing and discussing matters for the good of the organization – and I dare say for the director’s good as well since board negligence can lead to litigation. In SA in particular a director may be hauled before the courts and designated as a delinquent director. The case of the former SAA Chair is a case in point. Once designated as delinquent you can easily be barred from serving as a director for a period ranging from 7 years to for life.

It should be emphasized that while the Board acts corporately as a Team, each director personally owes the organization a duty of care and duty of good faith. The painful part of this potential liability is that since its joint and several, litigants prefer targeting the wealthier Board members to recover the full amount. After all the wealthier board members are likely to have more to lose from a potential litigation. If invited onto a Board do a due diligence on both the organization and the other Board members to ensure you limit your exposure.

Some people feel that they are covered by Directors indemnity insurance. Tis insurance will not cover for willful misconduct, breach of trust, reckless trading, acting outside your range of authority and being party to fraud. It is therefore important for directors not to take comfort in so called indemnity insurance. If you serve on a governing body, govern or if it is impossible to do so consider resigning.

I once served on a Board of a financial institution. At some point the CEO openly ignored the Board’s decision on a critical matter that was detrimental to the interests of the organizations because of an emotional bond to an executive who was destroying value. When the Board could not take a meaningful position to correct the anomaly and it became evident that the CEO was overbearing on the Board, I opted to resign. In my resignation letter I clearly explained my reasons for resigning. At times we need to make decisions based on principle.

When you structure your business corporately, be aware that the moment you have a minority shareholder or a substantial public interest in your business or potential impact on the community by your business then corporate governance issues kick in. Many SME bring on board smaller equity partners and continue to operate as if they are sole owners. The moment you issue shares to another party, you now have responsibilities to those shareholders to consider in every corporate decision you make.

In the next blog we will discuss the matter of ethical and effective leadership.

corporate leadership

I am preparing for certification in Corporate Governance with IoDSA. In that process I will be sharing my thoughts on corporate governance based on the King IV Report and the South African Companies Act 2008. While this is primarily as part of my studies, I certainly hope that this will help some of my readers. I have served on numerous Boards over my time and so will use some of my experiences to illustrate concepts.

In the next few posts we start be interrogating the definition of corporate governance. Many definitions have been proferred but I believe that the King IV Report one is quite succinct and user friendly.

“Corporate Governance -is the exercise of ethical and effective leadership by the governing body towards achievement of the following governance outcomes: ethical culture, good performance, effective control and legitimacy.” King IV Report

The corporate governance is really an exercise of leadership by the governing Board (Board of Directors, Trustees etc). This definition clearly places the leadership responsibility of the corporation in the hands of the directors.

Leadership of the organization is not vested in the shareholders or the management. It is vested in the Board.

I remember reading of a business leader and major shareholder who claimed that he employed and paid the Board and so he was not going to be hamstrung by the Board. I have also heard sentiments expressed in non governmental organizations that the Board is simply advisory. This is a major misunderstanding. The Board exercises leadership of the organization.

Leadership means to govern, direct, control within the context of fiduciary duties of the directors/trustees (members of governing body) to the body corporate. Fiduciary duties refer to the duty of acting in good faith towards the organization. Put in another way fiduciary duty means a legal obligation of one party (the governing body) to act in the best interest of another (the company) when entrusted with the care of the corporate’s assets.

The primary responsibility of the governing body is to act in the best interests of the organization AND not necessarily in the best interests of the shareholders.

Remember that the organization is a separate legal person from the shareholders.  

When the interests of shareholders and the organizations diverge, the Governing Body is legally bound to act in the best interests of the organization.

(We will examine this duty in depth later on)

From the foregoing it is clear that the leadership of the organization does not lie in the management or the shareholders. But actually lies in the governing body i.e. the body of directors or trustees. Shareholders entrust the leadership to the directors while directors appoint and are responsible for management to whom they delegate certain leadership responsibilities. Yet many governing bodies do not actually exercise leadership of the organization.

To emphasize the leadership responsibility of the governing body of organizations, notice that at law, the legal liability of the organization is broken down as follows: shareholders’ liability is limited to their shareholding, management’s liability is limited to their levels of authorizations or negligence WHILE the liability of the Board members is unlimited.

In other words the greatest legal liability for a corporate body’s failure lies with the Board members both individually and jointly.

As an aside it is important for Board members not to treat their responsibilities lightly as they can expose their personal wealth at risk for the liability coming from their Board seating.

I once served on the Board of a non governmental organization which had a rental dispute with its landlord and was in arrears. As directors we were sued in our personal capacity while the management (who in effect were responsible for the delinquency) were not included in the litigation. Fortunately we managed to negotiate and get the organization to pay its obligations. If it had failed to do that all the Board members were to be personally liable for the organizations’ rentals.

It is also important to be cautious about the Board seats that you accept. Do proper due diligence. Otherwise you are putting your own wealth at risk if you seat on a Board that does not exercise leadership on the organization

In the next post we will take a closer look at the nature of this leadership.

semper fidelis – always faithful

We have journeyed together the last few posts as I sought to articulate my personal values. Today I articulate my last value.

Semper Fidelis – I am always faithful to God. I am faithful to my wife, others and my calling.

Our God is a faithful God. He is a covenant keeping God and remains true to His Word, His promise and His people. Over the years He has shown Himself faithful and true to His promises and His Word to me.

I have passed through the fire and sometimes through the hot burning deserts of life, but through it all He has been faithful. I have passed through mountain top thrilling experiences as He showed Himself faithful even in good times. I can testify that He is faithful both in good and bad times. The good times have been a result of His faithfulness to bless me. The bad times have been testimony of His faithfulness to sustain me in challenging times.

I can say without fear of contradiction that my God is semper fidelis. Always faithful!

Since I have been a beneficiary of His faithfulness and am in covenant with Him, I swear my oath of allegiance to Him as well. I will be semper fidelis to my God. Always faithful.

Though I may stumble yet I will rise up and pursue Him. Always faithful. My prayer and my desire is that I remain faithful so that on the last day I can hear those sweet words, ‘Well done good and faithful servant. Enter into the joy of your Master.”

I am a partaker of His divine nature. I will be semper fidelis to my wife, my call and to others. I fully plan to be found faithful in accomplishing my calling and realizing my potential in the pursuit of the assignment of God in my life.

I commit 100% to covenant faithfulness to Christ and to Audrey. In this commitment I will uphold and adhere to the “no exceptions” rule.

Whether people applaud or critique, my aim is to be found always faithful to the One who called me. So help me God.

I learned the hard way that if I allow an exception in exceptional circumstances it is much easier next time to break the commitment again. Semper Fidelis.

May those who transact with me in this life find me faithful.  May I be a faithful ambassador of my King in my relationships with Him, with my wife, with others and in pursuit of my life assignment. So help me God!

Semper Fidelis. Always Faithful.

Semper Reformanda – always reforming

Your core values are your fundamental beliefs that serve as guiding principles regulating your behavior. They highlight what you stand for.

Simply, core values guide your behaviors, decisions, and action.

When you know what you value, you can live in accord with those values leading to greater fulfillment. When you violate your values it creates internal tension. The tension triggers destructive habits, regressive behavior and personal demotivation.

Values aren’t selected; they’re discovered. We don’t choose our values. Our values reveal themselves to us.

Scott Jeffrey

We have been exploring my personal values with the hope that, this will help you explore your own. My next value is:

Semper Reformanda– I am a reformer and will always be transforming and reforming.

I am called not to accept the status quo that is contrary to God’s Word or God’s purpose for my life. Rather I am called to change and reform situations that do not align with God’s will for my life or His will for His Kingdom.

I am a reformer. I help transform situations and circumstances. I refuse to be under the crcumstances.

If my circumstances do not align to God’s Word, I work to reform the situation.

I am always reforming as I am changed from glory to glory by God’s working in me.

I believe that God is working in me as He continuously transforms me through His Word. I am renewed and transformed daily as I look into the mirror of His Word. I do not want to become a monument. So I am constantly stretching myself.

I am assigned by God to reform situations in church, finance and education. These domains cannot remain the same because I am placed within them as  a reformer and catalyst for change.

As I am reformed, I reform my circle of influence.

As I learn, I change. In fact I do not believe that it is possible to have learned if there is no change that results from the learning. Many people are educated but not learned. If there is no change and no transformation as a result of information, then learning has not happened.

Semper Reformanda– I am always reforming.

One more value left – and it will be your turn to reflect on yours. Its your turn Champion!

coram deo – under the gaze of god

Coram Deo– I live in the presence, under the authority, and to the glory of God. I walk in integrity and live by principle.

Coram Deo is the concept of living in the presence of, before the face of, under the authority of God, and to the honor and glory of God. To live in the presence of God is to understand that whatever I am doing and wherever I am doing it, I am acting under the gaze of God. There is no place so remote that I can escape His penetrating gaze.

To live all of life coram Deo is to live a life of integrity. It is a life of wholeness that finds its unity and coherency in the fear of God.

A fragmented life is a life of disintegration. It is marked by inconsistency, disharmony, confusion, conflict, contradiction, and chaos. 

Being a person of integrity means that I do not compartmentalize my life into spiritual and secular.  What I do in my secular vocation is guided by my spiritual outlook.

I am basically a spiritual being. My doing comes from my being.  I cannot divorce who I am, from what I do. My behavior is informed by my identity.

Even when I do what others consider mundane, I do it for God’s glory because all of life is spiritual at its core.

I demonstrate integrity by living a life of consistency. It is a life that is open before God. It is a life in which all that I do is done as to the Lord.

It is a life lived by principle, not expediency; by humility before God, not defiance. It is a life lived under the tutelage of conscience that is held captive by the Word of God.

I choose, even when it is politically incorrect, to live Coram Deo, in the presence of God and to God’s glory.