Handle with care: the case for appointing an alternate director

The recent SENS announcement by a JSE-listed company that it had appointed an alternate director raises an important issue: while the Companies Act allows for the appointment of alternate directors, is it good governance? Professor Parmi Natesan, CEO of the Institute of Directors in South Africa (IoDSA) says the pros and cons need to be weighed up carefully.

“In certain situations, the appointment of an alternate director may be necessary, but in the end, it should not be a common practice for a number of good reasons,” she says.

In terms of section 1 of the Companies Act (71 of 2008), an alternate director may be elected or appointed to substitute for a particular director of the company. As a director, he or she would have the same responsibilities as the primary director.
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This already points to a potential problem because it will be difficult for an alternate to be kept up to date with the company and its strategy, as well as its markets over extended periods. It’s, therefore, best to see the appointment of alternate directors as a limited measure to be taken in specific circumstances; for example, when a director is not available for a limited period owing to travel or illness, and he or she has special expertise that is considered crucial.

“In such an instance, an alternate with the same special expertise could play a valuable role in ensuring the absence of the primary director does not have a significant adverse effect,” says Natesan. “But the basic principle is that a director should only accept an appointment if he or she is fully committed and available to fulfil his or her responsibilities. Relying on alternate directors too heavily can create issues around accountability and interfere with board dynamics.”

In addition, Natesan adds, frequent use of alternate directors can lead to inconsistent decision-making and a lack of continuity in strategic oversight. Good governance depends on a board that works well together and whose members build up a deep knowledge about the company and its issues. It is not realistic to expect alternate directors to acquire this detailed, in-depth understanding through their sporadic involvement, even if they are on the distribution list for board-related communications, minutes and information.

When a board determines that appointing an alternate director makes sense, Natesan says that best practices should be followed. Clear policies defining the role, responsibility and limits of alternate directors must be drafted so they are properly integrated into the board’s activities. The need for such alternates should be regularly reviewed by the board—if the need becomes lengthy, then it might be time to consider a replacement.

A robust succession plan should be in place to replace any directors who become frequently unavailable with somebody with a similar skills profile who does have the capacity to serve fully.

“While alternate directors can provide a solution in certain situations, relying on them as a standard practice may not align with the principles of good governance. Companies should prioritise appointing directors who are fully committed and available,” concludes Natesan. “If alternate directors are used, policies must be in place and regular reviews should be conducted to determine if a more permanent solution is needed.”

ENDS

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