Photo: GCIS
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The recent announcement of President Ramaphosa’s new cabinet provides a good opportunity to reflect on the critical role of ministers in the governance of the public sector. Parmi Natesan, CEO of the Institute of Directors in Southern Africa (IoDSA), says that the work the IoDSA has done in the public sector over the years reveals some common governance challenges.
 
“We have conducted training and board evaluations, and performed governance advisory functions for public sector entities over many years, and there are common governance challenges that crop up,” she says. “Based on this, we have some constructive advice to the new cabinet, that will hopefully help them avoid these common pitfalls.”
 
The first point to make, Ms Natesan believes, is that ministers should realise the extent of the power they have as representatives of the sole shareholder, enabling them to play a much more active role than shareholders in the private sector. It is thus very important that they understand their role fully, and beware of allowing only political or other considerations to guide their actions.
 
“Boards are only as good as the people who serve on them—therefore one of a minister’s key responsibilities is to appoint effective and ethical individuals to the boards they oversee. This is absolutely critical for the success of these entities,” she explains.
 
Because of their overwhelming power, ministers should be careful not to undercut the boards they appoint and thus rendering them ineffective. A board that cannot set its own course cannot in the end be held truly accountable, she argues. She cites a recent editorial in the Financial Mail saying that the current CEO of Eskom is leaving the job “not because he has failed in his duties, but because the shareholder would not let him and his team do the job for which they were hired.”[1] Governance best practice, as enshrined in the King Codes, is that boards, including those in the public sector, should be in a positon to exercise their judgement independently without undue influence, in the best interests of the organisation, and to the benefit of all stakeholders—not just the shareholder.
 
“This relationship between an all-powerful shareholder and an independent board is a delicate one, and ministers should try to get it right. Only then can they truly hold a board accountable for its decisions and the performance of the organisation--without encroaching on its role,” she says.
 
Another common governance challenge is that the minister often appoints senior executives directly, thus creating a lack of clarity in terms of reporting lines, and making it difficult for boards and management to work constructively together. Management should be accountable to the board. The board should therefore be intimately involved in the nominations and appointment process, even if the minister makes the final decision.
 
“In announcing his new cabinet, President Ramaphosa said that his government will only succeed if the ministerial appointees are ‘capable, efficient and ethical’.[2] The IoDSA salutes him for making the link to ethical and effective leadership as espoused by King IV —it is a very good start to what we hope will be a successful term in office – and we are here to offer our help,” she concludes. “We congratulate the new ministers, and wish them well in the huge task they have before them. Public sector entities have a vital role to play in our country, and getting them back on track will be central to achieving the desired goals. If they make ethics and effectiveness the cornerstone of what they do, the omens look good.”
 
ENDS

 MEDIA CONTACT: Stephné du Toit, 084 587 9933, [email protected], 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 Southern Africa Company Page  

[1] “Why Phakamani Hadebe really threw in the towel”, Financial Mail (30 May 2019), available at https://www.businesslive.co.za/fm/opinion/editorial/2019-05-30-editorial-why-phakamani-hadebe-really-threw-in-the-towel/.
[2] “Cyril Ramaphosa's new cabinet, in his own words”, TimesLive (29 May 2019), available at https://www.timeslive.co.za/politics/2019-05-29-in-full-cyril-ramaphosas-new-cabinet-in-his-own-words/. 

Governing bodies, and the role they play, are under the spotlight like never before. How should members of governing bodies ensure that they are covering all the bases?
 
By Parmi Natesan
 
Thanks to the litany of recent governance failures, and the high-profile scandals in the private and public sectors, governance has shot up the public agenda. One of the common conclusions to be drawn is the truth of the old adage that “the fish rots from the head”. For those in leadership positions, and particularly those on governing bodies, the pressure is mounting as the court of public opinion, as well as the courts themselves, should increasingly hold them accountable for the shortcomings of the organisations they lead.
 
The question this raises, of course, is what issues should governing bodies be considering to ensure that they are on the right side of history?
 
A paper by the Corporate Governance Network, a special interest group of the Institute of Directors in Southern Africa (IODSA) sponsored by PWC, argues that these issues can be grouped into three broad themes: introspection about the governing body itself, understanding the context in which the organisation operates, and realising their organisation’s place within (rather than without) society.
 
The first theme, Looking within, acknowledges that the governing body will not fulfill its corporate governance mandate, or indeed its other roles, if it does not have the proper skills and experience to draw on.
 
The central issue here is the quality and composition of the governing body. Because of its key roles in setting strategy and ensuring governance, the governing body is often seen as one of an organisation’s “most critical strategic assets”, according to Vanguard CEO, William McNabb (Vanguard is a major US investment fund). It’s thus vital that it has the right mix of skills and experience in the light of its current and future needs. Succession planning and the management of talent and skills are vital components of this.
 
Director independence is clearly a critical enabler of an effective governing body. Governing body members have to be able to exercise judgement effectively—and be seen to be able to do so.
 
A final issue within this theme is the need for the governing body to pay more attention to how it oversees corporate culture. It is clear that corporate culture both on the governing body and the organisation as a whole provides the growth medium for certain kinds of behaviour—good and bad.
 
Steering through choppy waters
The second theme that should concern governing bodies relates to the business and socio-political environment in which the organisation operates. As a general observation, it is clear that organisations have to deal with unprecedentedly swift change. Innovation and its flipside, disruption, have become the defining characteristics of the 21st Century. The acronym VUCA—volatile, uncertain, complex and ambiguous—is often used to characterise the modern business environment and its risks.
 
This change frequently comes on the back of technological advances which often have unintended and unanticipated consequences. At present, cybersecurity and privacy threats are among the most serious, but governing bodies must ensure that they are equipped to govern all risk in this shifting context.
 
A related issue is how to define and ensure long-term value creation and sustainability. Risk is one factor, but others include investment in R&D, corporate culture, incentives and skill retention. At the same time, environmental, social and governance (ESG) factors are becoming more important to stakeholders, among them institutional investors.
 
The final theme relates to the rebuilding of trust within the broader context. Governance failures and irresponsible business practices have eroded the trust that stakeholders have in organisations—corporate governance has a critical role to play in rebuilding that trust. Issues that need attention in this context include the governance of ethics, stakeholder communications and crisis management, remuneration, and fostering trust between the governing body and management.
 
While this set of issues is by no means intended to be exhaustive, grouping them into themes will prompt governing bodies in creating their own long-term agendas.
 
Whatever the specific issues that are identified by individual governing bodies, they are bound to present a daunting prospect. A second Corporate Governance Network paper on the importance of mentorship for governing bodies, and how to make it happen, offers part of the solution. By learning to leverage the experience of others, whether governing body colleagues or not, governing bodies can avoid making the same mistakes and benefit from others’ successes.
 
ENDS
 
 MEDIA CONTACT: Stephné du Toit, 084 587 9933, [email protected], 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 Southern Africa Company Page  

Recent reports show that MTN’s share price jumped 2.78% on the JSE when it announced changes to its board. The link between the share-price rise and the news that the board was being strengthened makes an important point that is often missed, says Parmi Natesan, CEO, Institute of Directors in Southern Africa.
 
“Research shows what most shareholders probably instinctively know: that the experience, expertise and ethics of board members directly affects the quality of their investment in the company,” she says. “The MTN case provides an example of how board changes can impact the market. Shareholders should bear this in mind, and ensure that boards not only have the right skills, but also that well-thought-out succession and rotation plans are in place.”
 
One research paper into the correlation between board composition and financial performance of listed companies concludes that “board structure does play an important role in influencing firm performance. The evidence in this study points to that fact that there is a need to monitor and organise the different elements of a corporate board to ensure good corporate governance practises are upheld”.
 
The announcement by MTN that sparked the rise in its share price had several elements, Natesan says. The first was that Mcebisi Jonas, the former deputy finance minister, would take over the chairmanship of the board from Phutuma Nhleko, who is due to step down in December.
 
“There are two important things to notice here: Mr Jonas will have the benefit of more than six months shadowing the highly regarded outgoing chairman. He is also not coming in as a total neophyte, having been appointed as a non-executive director in May 2017. This suggests a board that plans ahead, and understands the prime importance of succession planning for the Chair role.”
 
At the same time, she points out, announcements were made relating to the appointment of a new lead independent director from 15 December 2019, as well as the appointment of two well-respected and experienced individuals from Nigeria and Kenya. The orderly rotation of the lead independent director again suggests an understanding of the important role this individual can play in good governance, while the appointment of directors with strong reputations in their home countries could be seen as a move to reduce the risk of further fines from African governments.
 
“In fact the article quotes a portfolio manager as speculating that MTN might have received such fines because it had weak relationships with key stakeholders in these jurisdictions. Plugging that gap again talks to a reassessment of the balance of skills and experience needed on the board, followed by appropriate action,” she says.
 
“Finally, the same announcement also advised that three directors would step down in December, and a further two in 2020. This is a board responding to changed circumstances, and that has a long-term plan for rotating directors: the phased replacement allows new blood, while balancing the need for continuity and the retention of institutional memory; in contrast to the panicky, wholesale rotation of entire boards we sometimes see.
 
“The conclusion is inescapable: boards play a critical role in a company’s ability to achieve its goals and produce value for shareholders, and there is a link between board composition and financial performance,” she concludes.
                                                                                                     
ENDS

MEDIA CONTACT: Stephné du Toit, 084 587 9933, [email protected], 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 Southern Africa Company Page