MTN demonstrates link between board composition and financial performance
Monday, 27 May 2019
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 affect 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.