Wednesday, January 26

Flaws in South Africa’s approach to tenure of company directors


Activist shareholders in South Africa have disapproved of directors’ lengthy terms on the boards of directors of listed public companies. Have exercised Pressure on the resignation of directors with a long time.

Boards with many directors with many years of service are seen as entrenched, hence the growing call from activists for refreshed.

The tenure of the director attracts attention all over the world. The concern is that directors will lose their independence by getting too close to management if they serve too long on the company’s boards of directors.

These are, in particular, external directors, also known as independent non-executive directors.

Non-executive directors do not participate in the day-to-day management of the company’s business and are not full-time salaried employees. They are independent if there is no interest or relationship that could unduly influence or cause bias in their decisions.

Independent directors protect the interests of shareholders, manage conflicts of interest and ensure compliance with the law. They play an important role in detecting fraud and mitigating business corruption.

To promote objectivity and reduce the possibility of conflicts of interest in South Africa, the King IV Corporate Governance Report recommends that the majority of the board members be non-executive directors and that the majority of them be independent.

South Africa Companies act grants original powers to directors to manage the business of the company, unless this is restricted in the company constitution. The directors delegate particular responsibilities to the executive directors. The non-executive directors, in turn, control the executive directors and exercise their supervision.

The concern is that if managers stay in their positions too long, they lose this supervisory ability because they become too familiar with the company and its ways.

The situation in South Africa points to the need for change. Some independent non-executive directors have served on the boards of directors of companies listed on the JSE for 46 years. One study found that 27% of the non-executive directors on the boards of directors of JSE-listed companies have worked for nine years or more. Other study found that directors in the consumer services sector had the highest average tenure, followed by the industrial sector and then the consumer goods sector.

The South African Companies Act does not set a limit on how long a director can serve on a board. A director elected by the shareholders can serve on a board indefinitely or for a period established in the constitution of the company, if any.

Under the King IV Corporate Governance Report, Non-executive directors who have served for more than nine years are classified as independent if the board of directors concludes each year that they are independent. When a non-executive director has served on the board for more than nine years, a summary of the board’s views on his or her independence must be disclosed to shareholders.

In Myself investigate Regarding the mandate of directors in international jurisdictions, I found that the board’s mandate approach can be divided into three categories. South Africa could learn from them. It should review and modernize its approach to tenure of directors to suit international developments. This will alleviate growing concerns of shareholder activists about the prolonged tenure of directors.

Are longtime directors independent?

It is controversial whether directors lose their independence if they serve too long on the company’s boards of directors. This is because research on this topic reveals conflicting results.

Some studies Show that longtime directors become friendlier to management and can no longer monitor management’s actions objectively.

Other studiesHowever, show that senior managers are in a stronger position to oversee management. This is because they are less vulnerable to peer pressure and less likely to be controlled by management.

It is argued that limiting the tenure of the director increase board diversity and attracts new perspectives and skills to the board. On the other hand, it is argued that long-standing directors have vital experience, knowledge of the industry and a better understanding of company strategies. This may be lacking with newly appointed directors.

In my opinion, the optimal tenure for a director varies by industry and company. The length of a director’s stay is not necessarily a bad thing, as long as the director can remain independent.

But the view that longtime directors are so entangled with the company that they lack independence is gaining traction among corporate governance experts and activist shareholders.

Directors stay in other countries

At one end of the spectrum are jurisdictions that do not impose any limits on how long a non-executive director can serve on the board. This approach is adopted in the USA.

At the other end of the spectrum are jurisdictions that impose a strict cap. For example, the European Commission recommends that European Union companies limit the mandate of non-executive directors to 12 years. This is made in France.

In the middle is a third category that says there should be a limit on the tenure of the director, but that can be extended if the shareholders agree.

For example, in Singapore and Hong Kong, independent non-executive directors can remain on the board after nine years if the shareholders approve. In Malaysia, shareholder approval is required after 12 years. In India it is needed after only five years. India introduced this requirement due to high levels of corruption in its economy and to ensure that independent directors remain independent.

Weaknesses in South Africa’s approach to directors tenure

In Myself view South Africa’s approach to directors’ mandate reveals three weaknesses.

First, it does not give shareholders any formal voice on keeping independent non-executive directors on the board after nine years.

Second, the board of directors may disclose to shareholders only a summary of its views on the independence of a longtime non-executive director. This may not give them enough information.

Third, the board does not need to hire independent outside facilitators to assess the independence of a non-executive director after nine years, but it can do this assessment itself.

Action

South Africa should not impose a strict limit on the tenure of directors because the types of business that companies conduct are very diverse. We must not ignore the variations between different industries. A strict limit will also deprive companies of the expertise of seasoned directors.

Instead, shareholders must be involved in the decision to keep independent non-executive directors on the board after nine years.

Involving shareholders in this decision will encourage active shareholder participation. It will give shareholders the opportunity to evaluate the independence of the directors. It will also improve the reputation of companies and improve investor confidence. And it will avoid a situation where shareholders publicly challenge boards on the long terms of its directors and press directors give up.

Disclosure and transparency are strongly emphasized in the King IV Report. Therefore, the board of directors must make full and adequate disclosure to shareholders of the reasons for concluding that long-serving directors are independent.

And, to improve objectivity, independent external experts should participate in the assessment of the independence of non-executive directors each year after they have served for nine years. This especially applies to publicly traded companies and state-owned companies.

Finally, companies should work with shareholders and outside experts to review their approach to tenure of directors.The conversation

Rehana cassim, Associate Professor of Company Law, University of South Africa

This article is republished from The conversation under a Creative Commons license. Read the Original article.


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