UCT Council reports demonstrate the importance of following good governance practices—IoDSA11/10/2022 Reports of the unfolding developments at the University of Cape Town suggest deviations from governance best practice, says the Institute of Directors in South Africa (IoDSA). These include that the UCT Council “was split down the middle about the need for an independent judicial commission of enquiry into allegations of mismanagement and poor corporate governance”,[1] and that potentially implicated members of the Council were allowed to cast a vote in the matter. A key principle of good governance is that individuals on governing bodies need to be aware of conflicts of interest, and declare them upfront. Conflicted governing-body members should then recuse themselves from any business or decisions that relate to their conflict. King IV makes this very clear. Principle 1 of King IV is that “The governing body should lead ethically and effectively”, with Recommended Practice 1 (a)(ii) reading: “Members of the governing body should avoid conflicts of interest. In cases where a conflict cannot be avoided, it should be disclosed to the governing body in full at the earliest opportunity, and then proactively managed as determined by the governing body and subject to legal provisions.” An IoDSA guidance note goes on to advise that “A key function of a chair is to manage conflicts of interest. It is not sufficient merely to table a register of interests. All internal and external legal requirements must be met. The chair must ask affected directors to recuse themselves from discussions and decisions in which they have a conflict unless they are requested to provide specific input, in which event they should not be party to the decision.” In this instance, if the reports of potentially implicated Council members being allowed to vote on a matter that concerned them intimately are true, this would constitute a departure from governance best practice. Certainly, a large section of the Council seems to believe that such an unethical decision was taken, and has gone public with its disagreement. This in turn is attracting unfavourable media attention, and may imperil the ability of the governing body to function effectively in the future. Whatever the rights and wrongs, the very existence of such a profound split in a governing body on such an important matter is also a concern. “In serious and high-risk deliberations by governing bodies, it is critical that all members are fully informed, and that discussions are debated thoroughly and ultimately culminate in a decision that has the backing of the entirety, or at least the vast majority, of the governing body which is collectively responsible,” concludes Ms Natesan. [1] Andriaan Basson and Marvin Charles, “UCT crisis deepens as 13 top council members slam ‘irregular, flawed’ meeting”, News 24 (7 October 2022), available at https://www.news24.com/news24/southafrica/news/breaking-uct-crisis-deepens-as-13-top-council-members-slam-irregular-flawed-meeting-20221007. ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors South Africa Company Page Facebook: Institute of Directors South Afric
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The Minister of Public Enterprises, Pravin Gordhan, has made headlines by announcing that the board of Eskom would be reconstituted and renewed. According to Parmi Natesan, CEO, Institute of Directors in South Africa (IoDSA), the moves to renew that Eskom board should prompt corporate South Africa to ensure that its own boards are fit for purpose, and have the right combination of skills, knowledge and experience to add value to the company. The first step is to assess urgently exactly what skills are needed. Business/financial skills are clearly important, but so are specialist, industry-specific skills—like engineering/energy in the case of Eskom. “Some have commented with disappointment that the country’s sole energy utility had virtually nobody on its board who has domain expertise in its core business,” she says. “This is a basic shortfall that every company should guard against when assessing their board skills matrix.” Boards also need individuals who are skilled in developing and monitoring strategy, and who understand how to monitor effective governance frameworks. More generally, she points out, directors also need to possess skills relating to directorship itself. The IoDSA has long advocated the professionalisation of directorship in response to the increasing importance of the board’s role, and the fact that directors can be held liable in law for their actions. Its Directory Competency Framework provides a guide to the professional skills a director should acquire, and its two professional designations—Certified Director and Chartered Director (South Africa)—provide a structured programme for attaining them, and ensuring they are kept up to date. A particular challenge for public-sector boards is that directors are often replaced as a whole collective unit, leading to a calamitous loss of institutional knowledge and inevitably creating a leadership vacuum until the new board can get up to speed. A programme of staggered rotation, such as is generally followed in the private sector, makes much more sense from multiple points of view. Ideally, the Minister would follow the wise advice of King IV and exercise his power of appointing board members in line with the boards, and ultimately the company’s needs, and not purely in terms of political affiliation. “Boards (and those appointing them, in this case Ministers) should regularly evaluate what skills are needed and whether the Board as a collective in fact possesses them, and then take steps to close any gaps,” Ms Natesan comments. The IoDSA strongly urges boards and shareholders to use this opportunity to take a long, hard look at their board composition, and then take any necessary remedial steps if necessary to make improvements.” ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa On one level, the Zondo Report reads like an over-the-top morality tale about the perils of poor governance. In this morality tale, the villain is frequently the chair of the captured state-owned enterprise (SOE). This is particularly ironic because it is the chair who is supposed to be the apex of the governance structure, the very person charged with ensuring the organisation is run on ethical and effective lines, says Parmi Natesan, CEO, Institute of Directors in South Africa (IoDSA). “When one reads what went wrong at South African Airways, South African Airways Technical, the Passenger Rail Agency of South Africa, Transnet and others, it seems that a chair played a crucial role in either facilitating corruption or actively participating in it,” she says. “The Zondo Report is at once an indictment of these leaders but also a powerful demonstration of how important the chair’s role is—and thus how important it is to understand how chairs are supposed to act.” The final Zondo Report contains two graphic illustrations of the ways in which chairs can cause damage. In relation to the former chair of South African Airways, the report says: “Ms Myeni knowingly misrepresented to the Minister of Public Enterprises that the Board of SAA had taken two decisions when it had not. Those misrepresentations caused financial losses to SAA. It is likely that her conduct constitutes the crime of fraud.”[1] In relation to another SOE chair, it states, “Ms Yakhe Kwinana, received payments from JM Aviation around the time that these decisions were taken. The payments were likely kick-back payments to these officials.” As a leader of the governing body, the chair plays a crucial role in the ability of the organisation to set and realise its strategic goals. The chair should be independent and non-executive. In line with its non-prescriptive approach, King IV does not provide detailed guidance on what the proper role of the chair should be; that has been fleshed out in Practice Notes created by the IoDSA.[2] The chair’s core role is to lead the governing body. The performance of the governing body is thus ultimately the responsibility of the chair; conversely, the chair needs to enjoy the confidence and support of his or her board colleagues. As such, he or she is accountable to the board. “Clearly, an incompetent or unethical chair can compromise the whole governance structure. In that case, though, it becomes incumbent on the board to raise the alarm even if, as in the case of our SOEs, best-practice governance is not followed because of the overwhelming power of the state as the sole shareholder,” she explains. Given the importance of the chair’s role, King IV took the innovative step of recommending that a lead independent director be appointed in every case, even if the chair is deemed independent. According to Ansie Ramalho, Chair of the King Committee, the thinking of the King Committee was that a lead independent was necessary to strengthen the effectiveness and independence of the board. Having a lead independent director offers support for the chair in that the incumbent in this position could serve as a sounding board if called upon by the chair. At the same time, having the position in place is a mitigation against the possibility of a rogue or domineering chair, says Ramalho. In particular, the lead independent oversees the regular evaluation of the chair’s performance, and acts as a conduit between the rest of the board and the chair in the event of there being an issue of some sort between the chair and board. “One might well imagine that if the SOE boards had a strong lead independent director, there might have been some change of reining in rogue chairs,” Ms Natesan ends. “In any event, a read through of the Zondo Report is convincing evidence that it’s vital to have a good governance structure in place, and that begins with the right chair.” ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa [1] Judicial Commission of Inquiry into State Capture Report: Part VI. Vol 4: All the recommendations, p 4, available at Home - Commission of Inquiry into Allegations of State Capture [2] IoDSA, “Practice Notes. The role of the chair and lead independent” (22 September 2022), available at https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/562ED5CF-02E8-4957-97C8-D3F0C66A7245/King_IV_Practice_Note_on_Role_of_Chair_and_LID.pdf. In its final report, the Zondo Commission repeatedly comments that directors of the various captured state entities have not been properly held accountable for the massive damage they have caused to the organisations they were supposed to serve, and thus indirectly to the country as a whole. The Institute of Directors in South Africa (IoDSA) strongly endorses these observations. “The issue of director accountability is one that the IoDSA has been raising in public forums for a number of years. In a letter to the Commission in September 2021, we specifically raised the point that not only do our leaders need to be held accountable, the process of doing so must be swifter,” says Parmi Natesan, CEO, IoDSA. “We recommended the establishment of a constitutional means of alternate dispute resolution to facilitate prompt and effective consequence management both for transgressing directors and those charged with exercising oversight over them.” In its final report, the Zondo Commission maintains that legal processes typically only manage to identify “egregious abuses of public power” when the perpetrators or those that protect them are out of power. The Report also makes the point that the delayed legal process is a “cumbersome, time consuming [sic] exercise”. It therefore recommends that the Companies Act’s 24-month time bar relating to delinquency directors should be extended. This would allow prosecution of, amongst others, the 2014 board of Eskom and two erring South African Airways directors.[1] One of those two directors, Dudu Myeni, the former chair of South African Airways, was declared a delinquent director in 2020 but, says Ms Natesan, only after an extremely time- and resource-intensive process. As a result, director accountability remains rare. The Report then makes a more sweeping recommendation that Government “give consideration to the creation of a statutory offence rendering it a criminal offence for any person vested with public power to abuse public power vested in that person by intentionally using that power otherwise than in good faith for a proper purpose” [emphasis in original].[2] “The IoDSA certainly supports the idea that the 24-month time bar should be extended to allow for holding the numerous defaulting directors identified in the Report to be investigated and prosecuted if necessary. Furthermore, we strongly believe that a more streamlined and rapid process needs to be found,” Ms Natesan says. “An excellent short cut would be to mandate that all directors have to belong to the professional body for directors, so that they could be disciplined under a Code of Conduct and barred from serving as directors if they are found to be in breach of their duties, without the long delays inherent in the legal process. “The benefit would be that the transgressing director would not remain in office while the legal process takes its course—something that would surely have contained the damage caused to SOEs like Eskom and SAA.” ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa [1] Judicial Commission of Inquiry into Allegations of Capture, Corruption and Fraud in the Public Sector Including Organs of State, Report: Part VI, Volume 4: Summary of Recommendations 37 (p 95), 12 -3(p 3) and 119 (p 43), available at www.statecapture.org.za/site/files/announcements/672/OCR_version_-_State_Capture_Commission_Report_Part_VI_Vol_IV_-_Recommendations.pdf. [2] Ibid 119 (p 43), 122-6 (p44). In its final report, the Judicial Commission of Inquiry into State Capture (Zondo Commission) recommends the enactment of legislation to establish a professional body for public procurement officials.[1] While there is no doubt this is a good move, the Institute of Directors in South Africa wishes to express its disappointment that its recommendation for a similar enforced body for directors was not acted on. “We wrote to the Commission in September 2021 setting out the compelling reasons to recommend the establishment of a statutory professional body for directors. By not doing so, we believe that the Commission missed a historic opportunity to alter fundamentally the governance landscape of the country for the better,” says Parmi Natesan, CEO: IoDSA. “The Commission’s reports uncover all too clearly the massive damage that incompetent and unethical directors can wreak, and the smoking ruins of our vital state-owned enterprises are visible all around us.” A mandatory professional body for directors would have the benefit of requiring that directors would have to keep their skills updated via a rigorous process of continuous professional development. The professional body would also be able to keep its members abreast of developments in governance best practice. Equally important, members of such a professional body would be bound by a code of conduct, in terms of which they could be rapidly disciplined and even have their membership terminated. Termination could in turn signal to the market to not appoint them as a director. “As we now contemplate the possibility of years of litigation to bring the main actors in state capture to book, establishing a mechanism through which unethical or incompetent directors could be swiftly and relatively inexpensively held to account looks very attractive,” she observes. The IoDSA further argues that alongside a statutory professional body for directors, there should be enforcement of formal director designations registered with the South African Qualifications Authority (SAQA). Such formal designations would provide a way to ensure that directors have the necessary competencies to serve as a director based on rigorous testing against a formal competency framework. Designation holders who fail to keep their skills updated in line with the CPD framework would have their designations removed, reducing their attractiveness to companies. The IoDSA already owns and awards two SAQA-recognised director designations—Certified Director (SA) and Chartered Director (SA). “Directorship is now a serious profession that requires individuals to possess a definite set of skills and competencies, and the ability to provide strong leadership based on sound ethical principles,” Ms Natesan concludes. “While this was not covered in the Commission’s final recommendations, the IoDSA will continue to lobby for directorship to become a regulated profession, providing both the public and private sectors with a growing pool of properly qualified individuals who have committed to ethical leadership and have signed on to a solid code of conduct.” ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa [1] Judicial Commission of Inquiry into Allegations of Capture, Corruption and Fraud in the Public Sector Including Organs of State, Report: Part VI, Volume 4: Summary of Recommendations, 62, p24, available at www.statecapture.org.za/site/files/announcements/672/OCR_version_-_State_Capture_Commission_Report_Part_VI_Vol_IV_-_Recommendations.pdf. The Institute of Directors in South Africa (IoDSA) broadly welcomes the recommendation to establish a Standing Appointment and Oversight Committee to strengthen the process of nominating and appointing directors of state-owned enterprises. The recommendation was made in the final volume of the report of the Judicial Commission of Inquiry into State Capture (Zondo Commission).[1] “We are totally in agreement with the Zondo Commission’s statement that appointments to the boards of state-owned enterprises (SOEs) must be ‘justifiable based on their skills, expertise, experience and knowledge’[2], and that the state, through the responsible ministers, has signally failed to appoint the ‘right kind of people’[3] to the boards of SOEs,” says Parmi Natesan, CEO, IoDSA. “This is an issue that the IoDSA has repeatedly raised, and which is covered in King IV. The notion that board members should be appointed based on the needs of the organisation is revolutionary in the South African context, where political appointments have effectively collapsed the public sector.” Principle 7 of King IV states that: The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively. This goal is particularly hard to attain for SOEs because the state, as the sole shareholder, has the power to make appointments unilaterally. In the sector supplement for SOEs, King IV advises SOEs and executive authority to collaborate in the nomination process and to make it transparent. King IV requires the nomination of any board candidate to take into account the needs of the governing body in terms of skills, knowledge and experience, the governing body’s diversity, and whether the candidate meets the “appropriate fit and proper criteria”.[4] Ms Natesan argues that these criteria should include the IoDSA’s Director Competency Framework.[5] Given the reality that the state has power that shareholders in the private sector do not, the Zondo Commission’s recommendation that a committee be set up to govern the process of nominating and electing SOE board members is a good one. In fact, in a letter to the Commission in September 2021, the IoDSA recommended the establishment of a consistent and transparent nominations process that included a nominating panel comprising representatives of appropriate stakeholder interests. “The Commission’s recommendation is actually much stronger because it seemingly envisages that the proposed committee would have the power to control the nomination process even against the wishes of the executive in order to secure the future of the SOE,” Ms Natesan says. “Our only disappointment is that the list of persons to serve on the oversight committee does not include a representative of the IoDSA, preferably somebody who holds one of our SAQA-registered directorship designations and who would be in a position to provide expert input on the directorship role and the competencies required.” ENDS [1] Judicial Commission of Inquiry into Allegations of Capture, Corruption and Fraud in the Public Sector Including Organs of State, Report: Part VI, Volume 4: Summary of Recommendations 247, p 181, available at www.statecapture.org.za/site/files/announcements/672/OCR_version_-_State_Capture_Commission_Report_Part_VI_Vol_IV_-_Recommendations.pdf. [2] Ibid 6, p 2. [3] Ibid 112, p 41. [4] IoDSA, Report on Corporate Governance for South Africa 2016, p 15, available at https://www.iodsa.co.za/page/king-iv. [5] Available at www.iodsa.co.za/resource/collection/56E77A6D-56E7-46EF-86EF-B425DD00EA9B/Director_Competency_Framework.pdf. MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa Auditor General’s local government report: local government should be professionalised, says IoDSA21/6/2022 The recent report on local government by the Auditor General, Tsakani Maluleke, is a timely reminder of the prevailing dysfunction in municipalities across the country, and the catastrophic impact that is having on all South Africans. The Auditor General is right to lay the blame squarely on the shoulders of municipal leaders, says Parmi Natesan, CEO, Institute of Directors in South Africa (IoDSA)—but perhaps we also need to be talking about professionalising municipal management as well. “There’s a reason that King IV’s first principle concerns leadership because ultimately everything stems from what goes on at the board or council. Principle 1 speaks to the absolute need for ethical leadership, while Principle 10 deals with the imperative to delegate the council’s authority to a competent municipal manager on whom it can rely,” she argues. “King IV’s sector report on municipalities further recommends that councils ensure they have access to ‘professional and independent guidance on corporate governance and its legal duties’ (King IV, p 85).” The theme of the Auditor General’s Consolidated General Report is “Capable leaders should demonstrate change by strengthening transparency and accountability”. The corollary is that we have now to ask whether municipal councils and audit committees have the right leadership of ethical and effective leaders. What criteria are used to appoint municipal councillors and do we know precisely what competencies they need to have in order to discharge their duties properly? she asks, noting that, as the Auditor General pointed out in her report, senior municipal management has been dilatory at best in implementing the detailed recommendations contained in previous reports. Ms Natesan concurs, saying that this state of affairs seems to be the result of decades of incompetence and even criminal behaviour. “However, as noted, the buck stops with the municipal council. Councils are gravely at fault because they do not hold senior management to account for how they fulfil their duties, and they should, in turn, be held accountable,” she says. Constitutionally, the national and provincial governments are bound to assist in strengthening and supporting municipalities to operate effectively (Constitution of the Republic of South Africa, 1996, s154(1)). Section 139 sets out how, in extreme cases, provincial governments can intervene in local government. But, says, Ms Natesan: “Given that these interventions do not necessarily seem to solve the problem, not least because everything is so politicised, are we now not overdue in simply professionalising local government? Municipalities are where most of the really important service delivery actually occurs—or doesn’t occur. As we seem to be entering a period of unstable municipal coalitions that could make the council’s leadership role even less effective, building up a cadre of professional municipal officials who have current and relevant skills, and who can be held to account rapidly via a professional code of conduct might something to seriously consider at this point.” ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa Comair returned to the headlines by advising on 1 June that it was voluntarily suspending its flights until the funding necessary to resume operations had been secured. What has got customers hot under the collar, though, is that it had advertised a one-day sale on the previous day (31 May). While one has to have sympathy for Comair as it struggles to recover from the pandemic and the recent suspension of its licence in March, this “perfect storm” points to some governance lessons, argues Parmi Natesan, CEO, Institute of Directors in South Africa (IoDSA).
“At this stage, it is not clear whether this was simply a disastrous example of the left and right hands not knowing what either was doing or an indication of a more serious ethical breach. But either way, irate customers are putting the blame on the board and the CEO,” she says. Scenario 1—perhaps the most likely—is that the operational teams, such as marketing and sales, introduced the sale to try to get more passengers back into their planes to make up for revenue lost during the suspension of the airline’s licence in March. Because the CEO and his or her executive team are responsible for day-to-day operations, the board would probably not have known the specifics (like the date of the sale) of this operational activity. However, it should have foreseen that, at a time of financial instability, the relevant operational decision-makers were properly briefed. Senior management, serving as the link between the Board and the company’s operations, should certainly have been extra vigilant at this time. “King IV[1] clearly states that ´The CEO should be responsible for leading the implementation and execution of approved strategy, policy and operational planning, and should serve as the chief link between management and the governing body’ (Recommended Practice 77),” she notes. “At the same time, the board has an overall responsibility to govern risk (Principle 11) and, knowing that funding was an issue, should have ensured that operational actions and decisions were informed by an understanding of the current financial risk.” The less likely second scenario, in which the board did know that a sale was planned and cynically allowed it to go ahead, presumably in order to take in some much-needed cash, would imply a serious breach of ethics. King IV is clear that ethics is at the centre of good corporate governance, as shown by the fact that ethics are the subject of Principles 1 and 2. It further makes the point that ethical leadership specifically “involves the anticipation and prevention, or otherwise amelioration, of the negative consequences of the organisation’s activities and outputs on the economy, society and the environment and the capitals that it uses and affects” (King IV, p 20). Another important point made by King IV is that the organisation receives its social licence to operate from its internal and external stakeholders and society at large. This licence is thus a direct by-product of how good a corporate citizen it is. “Already on social media one can see people questioning the ability of Comair to operate successfully again,” Ms Natesan observes. “Whatever the truth of the matter, one thing is clear: Comair has aggravated one of its most important stakeholder groups—its clients—and if it does return to service, the board will have its work cut out to repair a severely damaged reputation alongside all the other challenges it faces.” [1]IoDSA, Report on corporate governance for South Africa 2016, available at https://www.iodsa.co.za/page/king-iv. ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa The news that John Lamola will assume the roles of both Executive Chair and CEO of South African Airways (SAA) suggests that the state has not learned the lessons of the past few years regarding the importance of good governance, says Parmi Natesan, CEO, Institute of Directors in South Africa (IoDSA). As the Zondo Commission’s reports show, governance lapses in terms of appointments, oversight and accountability are some of the fundamental causes of the implosion of our key state-owned enterprises, among them SAA.
“It is disheartening that the state seems to have overlooked governance best practice as espoused by the King Report on Corporate Governance,” she says. “This departure from governance best practice is all the more surprising in light of the Zondo Commission’s assertion that the way in which board and senior executive appointments were made simply cannot continue.[1] “Appointing the right calibre of person is one element but another, as King IV clearly outlines, is that it is vital to separate the roles that appointees must play in order for the organisation to function optimally. CEOs and chairs fulfil distinct, complementary roles and combining them is not ideal—especially in the case of the national carrier which has a long road to travel to re-establish its bona fides.” King IV Principle 7 states that The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively. Recommended Practice 31 states that the chair should be an independent non-executive director, while Recommended Practice 34 specifically says that the CEO of the organisation should not also chair the governing body.[2] According to Muhammad Seedat, Chair of the IoDSA Board, there are very good reasons for the clear separation of the roles of chair and CEO advocated by King IV. They may be summarised as follows:
[1] Judicial Commission of Inquiry into State Capture Report: Part IV(4) at 2500, available at https://www.statecapture.org.za/. [2] IoDSA, Report on Corporate Governance for South Africa 2016, p 54, 57. ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa The recent suggestion by PSG CEO Piet Mouton that the requirement to disclose executive pay should be made optional raises important questions about an issue that consistently attracts controversy. This follows news reports of Sibanye-Stillwater CEO Neal Froneman receiving R300 million in remuneration for 2021, most of which related to conditional share proceeds.
“The issue of executive pay is highly complex, and quoting the data disclosed in the annual report without the necessary context can be misused by various stakeholders to further their own interests; this, however, does not mean that disclosure of executive pay is unnecessary,” says Dr Ronél Nienaber, Chair: Remuneration Committee Forum, Institute of Directors in South Africa (IoDSA). “Transparency is key to good governance globally, and thus to attracting investment—remuneration committees have to ensure absolute clarity in the remuneration reports when they describe how they reached their remuneration decisions, specifically indicating the alignment between performance outcomes and reward outcomes. Fair and responsible remuneration have to be demonstrated within the context of building value not just for shareholders but for the broader stakeholder community, including workers and the communities in which they live.” She notes that South African companies, in contrast to countries that have similar disclosure requirements but are operating in well-developed economies, face the additional challenge of a persistently worsening socio-economic divide, providing a context in which executive pay can be leveraged by unions to justify pay demands. Executive pay is not the cause of unemployment and poverty in our country; indeed, high-performing executives play a crucial role in creating jobs, growing the economy and alleviating poverty, and should be rewarded accordingly, she says. Dr Nienaber argues that remuneration committees need to ensure that targets linked to the variable pay plans are within management’s control, verifiable, relevant and with sufficient amount of stretch. Where there is significant upside at the end of the performance period due to tailwinds, the committee needs to give careful thought on how to handle this and ensure consistent decision making over time. The remuneration committee would also need to have a strategy for dealing with the opposite case in which a dip in prices would have eroded share values and so reduced executive performance bonuses. In each case, the remuneration committee would need to show how these facts were factored into their deliberations and ultimate decision. For example, in the case of Mr Froneman, it is clear that he has benefitted from the positive effects of the resources boom on the share price. Ideally, the remuneration committee should clearly explain why it did not intervene to cap the benefit caused, in part, by the commodity cycle. Such a conversation would include the investments made by the company into society more broadly, with the aim of showing how the benefits from the macroeconomic context have been distributed beyond the fortunate few. It is also clear that there is a huge need for initiatives to educate the workforce as well as other stakeholders, including the media, on how executive remuneration is constructed and approved. It should also be recognised that the disclosure of executive pay, albeit necessary, infringes on executives’ right to privacy, creating enormous security risks for them and their families. Pay disclosure may ultimately detract from the attractiveness of these positions. “Nevertheless, one of the fundamental characteristics of good governance is transparency. Whatever difficulties transparency raises, we need to acknowledge that the need for disclosure has undoubtedly meant that remuneration committees have been giving this important matter more consideration when they are making their decisions, and that’s to everybody’s benefit,” adds Parmi Natesan, CEO of the IoDSA. “Disclosure, well done, builds trust in the long run.” ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa |
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