One of the most persistent challenges relating to governance is the tendency to focus on form rather than substance. In line with King IV, it’s time finally to accept that governance is not an end in itself, but a tool for delivering outcomes, says Parmi Natesan, Executive: Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA) and Professor Deon Rossouw, CEO of The Ethics Institute.

“Organisations only exist in order to deliver on their purpose and, similarly, governance only exists in order to help them do that,” says Professor Rossouw. “Governance got a bad name because people persist in seeing it in terms of compliance, structures and policies. Of course, these things are important only as tools to help deliver outcomes.”

This focus on outcomes is very much a feature of King IV, which was designed to link governance practices with four governance outcomes, notes Ms Natesan. “The critical point is that structures need humans to give them life, to use them to deliver the desired results. Governing bodies must therefore ensure that the governance structures are indeed achieving the desired governance outcomes,” she says.

King IV identified four governance outcomes: an ethical culture, good performance, effective control and legitimacy. Boards can therefore measure whether the structures they have put in place, and the way they are being used, are effective by measuring the extent to which these outcomes are being attained.

Clearly, then, the personal qualities and actions of the members of the governing body are critical in ensuring that the governance objectives are achieved, that substance follows form. King IV retained the four cardinal values that should underpin good governance—responsibility, accountability, fairness and transparency (RAFT)—but added two further ones: integrity and competence. This recognises that governance structures will only be valuable if they are used by people who are prepared to put their own interests aside and act ethically in the best interests of the organisation, beyond mere legal compliance, and who have the requisite knowledge both of the organisation and the industry in which it operates.

“It is important to recognise that governing-body members have to cultivate these characteristics in order to make them instinctual,” Professor Rossouw argues. “People aren’t born with integrity, competence or any of the others, they have to be nurtured.”

As with any enterprise involving human behaviour, moving from form to substance is no easy task. Some guidelines for assisting are:
•    Select members of the governing body carefully.  It all begins with selection, says Professor Rossouw, so nomination committees must actively seek people with these cardinal virtues.
•    Orient new members properly. Once selected, it is vital that new members of the governing body are properly educated about what their new role entails, and continually reminded that they are there primarily to serve the best interests of the organisation, not those of any particular stakeholder.
•    Structure meetings carefully to ensure that members have the right types of conversation, and do not confine themselves to ticking the boxes. Courage becomes important here—not just moral courage but also the courage to take the right risks.
•    Hold members of the governing body accountable. There are several elements to this. First, peer pressure must be harnessed to create a positive atmosphere in which members continually assess their own performance and that of their fellow members. Courage will also be at a premium here but it is equally important the board is truly diverse, says Ms Natesan. This is needed to overcome the “buddy mentality” in addition to measures like gender, race and age. At the same time, though, it must be recognised that self-appraisal is no substitute for the stakeholders assessment of the extent to which the four governance outcomes have been achieved.

Ms Natesan stresses that there is not necessarily more unethical behaviour now, just that it is more visible—something she sees as positive. She argues that, going forward, how governing bodies disclose about governance and its results will become more and more important.

The disclosure must convince stakeholders not just that the right governance structures are in place, but that they are delivering results, she says. Looking forward, adds Professor Rossouw, as we move away from compliance to reporting on integrated performance, the triumph of substance over form will be shown when it is clear that the organisation has not only achieved its purpose in the past, but is well-positioned to continue achieving it into the future.

ENDS

MEDIA CONTACT: Juanita Vorster, 079 523 8374, [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 

One of the hardest issues facing remuneration committees is how to structure executive remuneration packages in such a way as to promote value creation, and reward performance that advances the organisation’s business strategy. All too often, the performance measures in the executives’ incentive schemes differ from those in the strategy. As a result, we find organisations asking executives to do one thing yet paying them to do another.

Speaking at the launch of a position paper authored by the Institute of Directors in Southern Africa’s Remuneration Committee Forum on Paying for sustainable performance, its chairman, Ray Harraway introduced the problem. “Over the years, our understanding of performance has deepened and broadened—financial performance alone is no longer considered to be a complete or adequate proxy for sustainable organisational performance.  The trouble is that organisations and their shareholders, especially institutional investors, find it hard to agree on what actually constitutes performance and thus what should be measured.”

As a result, many remuneration committees adopt remuneration policies and metrics that conform with industry benchmarks rather than the organisation’s unique strategy and the context in which it is operating. In other words, remuneration is often tied to metrics that do not actually create value for the organisation.
“This can be called the ‘strategy-remuneration’ gap,” Mr Harraway said.
Principle 14 of King IV spells out what remuneration committees have to aim for: The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.
The IoDSA paper proposes a three-step process to help remuneration committees bridge this strategy-remuneration gap:
Define the value outcomes. What these are and how they are measured will differ from organisation to organisation. Remuneration committees should consider measuring not just the outcomes, but the actions taken to achieve them, notes Tim Anderson, an independent governance consultant and one of the paper’s authors. “The reason is that outcomes can be achieved by ‘good’ or ‘bad’ actions and are open to manipulation” he explains. Clearly, remuneration should be linked to the positive actions.
Develop the strategy. This step confronts the question of how the organisation will achieve its defined value outcomes. The key step here is to identify the value drivers, the activities that will produce the desired value outcomes. It’s critical that each organisation positively establishes that there is a cause-effect relationship between value drivers and value outcomes.
A challenge here is to take into account the fact that long-term projects initiated during an executive’s term of office may only come to fruition long after he or she has moved on. This means that executives would have to be assessed throughout his or her tenure on meeting key milestones rather than on the final result.
Link to executive remuneration. The final step is to link the incentive design to the organisation’s strategy. In practice it is usually found to be the weakest of the three steps, and thus where remuneration committees need to do some deep thinking—this weakness is the origin of the strategy-remuneration gap. One key element is to ensure that the link between what is measured in determining remuneration is truly aligned with the business strategy but, counselled Mr Anderson, care must be taken not to include too many metrics.
“The skill comes in identifying the metrics that have the most impact on the organisation’s results—too many metrics and you risk confusing the executive and diluting the effectiveness of the remuneration design for creating value,” he said.
According to Chad Schaefer, People Advisory Services Africa Leader at EY (the sponsor of the forum), “Getting pay for performance right is hard, but it is the main task facing remuneration committees at the moment, especially given the high profile of executive remuneration. If you can credibly link the salaries and incentives you pay to performance and value creation, you can defend your remuneration policy successfully.”

ENDS

MEDIA CONTACT: Juanita Vorster, 079 523 8374, [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 

The first reports and disclosures in line with King IV principles are beginning to appear. King IV is effective in respect of financial years starting on or after 1 April 2017. It would appear that certain organisations still require a deeper understanding of the implications of King IV’s “apply and explain” approach, says Richard Foster, a governance advisor, professional non-executive director and Institute of Directors in Southern Africa (IoDSA) facilitator.

“King III’s ‘apply or explain’ regime had the unintended consequence of allowing organisations to adopt something of a tick-box approach to reporting and compliance. The new approach signals a decisive departure from that way of doing things because it requires organisations to explain how they have applied the 17 principles of King IV,” he says. 
“The idea is to give stakeholders a real idea of what the organisation is doing to embody the code and the quality of its governance—and how it is using the code to achieve all of this.”

The key here is the requirement to explain. Explanation means that stakeholders can easily ascertain whether the organisation is making satisfactory progress towards good governance. It also, to quote Professor Mervyn King, the convenor of the King Committee in his foreword to King IV, “encourage[s] organisations to see corporate governance not as an act of mindless compliance, but something that will yield results only if it is approached mindfully, with due consideration of the organisation’s circumstances.”Foster suggests the approach should be welcomed because it provides a great deal of flexibility in line with the principle of proportionality. Organisations are now free to adapt how they give effect to the Principles of King IV in line with aspects such as their risk profiles, level of complexity, resources, impact on the triple context and other specific circumstances—provided they explain clearly what their thinking was.
“Disclosure under King IV directs us away from a quantitative approach to compliance (‘We have implemented the following recommended practices’ or ‘We have implemented all recommended practices except’) to a qualitative one (‘In order to give effect to this Principle of good governance, we have taken the following actions’),” he explains.
“The Principles are generic and can be applied to any organisation, what’s unique is how each organisation crafts that application to achieve the goals or outcomes corporate governance: ethical culture, effective control, good performance and legitimacy.”
The challenge that organisations now face is that they have to engage deeply with the spirit of corporate governance, rather than its letter. That engagement, and the actions that flow from it, need to be informed by an ethical framework.
In practical terms, governance reporting in terms of King IV cannot be done satisfactorily in tabular form. Rather, a narrative approach, guided by materiality, should be used to explain how the organisation understands the Principle in its specific context and what it seeks to achieve; and then what practices were implemented in order to achieve the necessary application of that Principle.
King IV allows organisations to deliver their governance reports in various ways as best suits their circumstances: either as a standalone report, or as part of the integrated report or some other report as they consider appropriate for their stakeholders.

According to Parmi Natesan, Executive: Centre for Corporate Governance, the IoDSA has recently published its own governance report which can be used as an example of the envisaged approach.  A significant amount of time and thinking went into how we wanted to tell our governance story, to enable our stakeholders to make an informed assessment of the quality of the IoDSA’s governance.

“Reporting under King IV is all about understanding corporate governance and then explaining how you have implemented it; it’s not about keeping a register of which rules you have followed,” Foster concludes. “It’s highly flexible but it does require organisations truly to engage with what they are doing to improve governance, and what they hope to achieve.”

ENDS

MEDIA CONTACT: Juanita Vorster, 079 523 8374, [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 

When interviewing potential directors, nominations committees should not forget to investigate the hidden soft skills without which hard skills can prove less than useful, says Sarita Martin, a facilitator of the Institute for Directors in Southern Africa (IoDSA) and an independent non-executive director.

According to Martin there’s more to a successful board than just assembling the right skills, knowledge and experience around the table.  The dynamics around the boardroom table are influenced by the individual personalities on the Board.

“Boards often comprise a group of dynamic, highly accomplished individuals with strong views,” she comments. “If those individual directors are to deliver real value to their organisations through robust and productive discussions, they must have what have historically been referred to as the soft skills to operate within the context of the group, or one simply ends up with a set of individual opinions and no coherent decision.”

“Board members need to have the ability to be able to present their views in a respectful and coherent manner rather than be dictatorial.”

Read the room
The level of in depth discussion needed at board level is only possible if directors are able to listen well and are flexible enough to engage with others board members’ ideas to come up with new insights.

The courage to express one’s opinion while also engaging genuinely with other points of view is particularly difficult as today’s boards become more diverse from – among other things – a gender, age and cultural perspective. This diversity is obviously intended to provide the organisation with better visibility across the full socio-economic and political landscape, but it can mean that boards have to balance widely divergent points of views.

Often it is the body language and tone of voice of individual board members rather than their words that indicates their stance on a particular matter.

Replace “me” with “we”
Although eliciting the views of individual board members is crucial, it is important to remember that any board decision is a decision of the collective, of the majority of board members – the “we”.

An observation is that many of the new generation of board members may have no board or executive experience. In particular, they may be unaware of the protocol of board meetings, which is designed to support a non-adversarial atmosphere whilst promoting robust discussion and debate.

They may also not fully comprehend that the boardroom model is not a parliamentary one: the object is not to state one’s view as forcefully as possible and then vote, but rather to interrogate an issue from all angles in order to arrive at a decision in the best interest of the company.  

“It’s not who gets to make the decision, but the quality of the decision-making process itself. Directors have a fiduciary duty to act in the best interests of the company, not themselves or a certain viewpoint,” Ms Martin says.

According to Parmi Natesan, IoDSA Executive Director, “The personal and social competencies for directors are just as critical and the functional/technical ones. In the awarding of the Chartered Director SA designation, significant emphasis is placed on assessing these softer skills.  In addition, the IoDSA has also added two new programmes to its repertoire of director training – a practical boardroom simulation experience where delegates get to practices these skills; as well as a programme providing individuals who intend to become a non-executive director with a road-map to get there”  

Get it right, right from the start
So how do nominations committees set about establishing whether prospective directors have not only the correct understanding of how board decisions are reached, but the emotional balance and insight to handle difficult discussions in such a way as to promote the best outcome for the organisation? It’s not easy, Ms Martin acknowledges, because potential directors cannot simply be asked to take a psychometric test. However, typical interview questions can be used to probe these areas.

Understanding what motivates an individual to be a director in the first place can reveal how well he or she understands the role of the board. Nominations committees can assess during discussion with candidates about the business and corporate context how able the individual is to connect the dots to see the big picture. It also necessary to determine their understanding of corporate governance and how aware they are of current affairs.

Verbal communication skills, so important in a board interaction, can also be judged during an interview.

“Perhaps most important of all, nomination committees should look very carefully at what candidates have done in their lives and careers. This will not only show them whether the candidate possesses the requisite hard skills and experience, but also something about how they see themselves, and how they have displayed the ‘board temperament’ in the past.”

“Ensuring that board members are emotionally aware and possess the soft skills including good verbal communication and listening skills will assist in effective board dynamics and ultimately robust decision-making at a board level,” she concludes.

ENDS

MEDIA CONTACT: Juanita Vorster, 079 523 8374, [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 African Company Page