Economic and business conditions continue to weigh on directors
Thursday, 21 November 2019
By Parmi Natesan and Prieur du Plessis
Directors occupy an apex position in the South African economy, and have a good vantage point from which to survey their particular industry sector and the economy as a whole. The Directors’ Sentiment Index, conducted annually since 2016 by the Institute of Directors in South Africa (IoDSA), aims to provide concrete data on what the members of governing bodies are thinking across the public and private sectors, SMMEs and non-profit companies.
The survey records how directors feel in respect of four areas: economic, business, governance and directorship. In addition, there was an opportunity to raise general concerns. They fell into several broad groups:
- Unfavourable context. Corruption and malfeasance in both the public and private sectors, unsurprisingly, are one major concern. Another is broad-based black empowerment, which many see as a barrier to business performance. Political uncertainty is also weighing heavily on directors.
- Lack of professional directorial skills. Incompetent directors hold boards back from making progress. An allied issue was the lack of skills transfer from established directors to the new generation.
- Boards themselves suffer from poor corporate governance. Some respondents felt many boards do not understand or adhere to the principles of King IV. Many directors feel they do not really have strategic control of the boards on which they serve, and that there is inadequate communication between the directors and stakeholders. Key issues are that directors in both the public and private sectors are not fully independent, and are not held fully accountable for their actions.
When one looks at the four research areas, it is immediately apparent that directors are generally somewhat negative in their outlook.
Economic: Since the last survey, overall sentiment has shifted from positive to negative, and is now on a level similar to 2017. The most negative ratings related to skilled labour and labour demands over the next 12 months, whereas the most positive ratings went to the projected health of First World countries.
The survey draws a distinction between a business and the industry sector in which it operates. In the economic area, South African economic uncertainty was the top factor impacting the economic environment ̶ the fourth consecutive year it has held this position. The effect of BBBEE emerged as the second most impactful economic factor for both the business and its industry sector, with the third factor being social and political unrest (industry) and lack of skilled labour (business).
Business. As regards their own businesses, respondents were more positive than negative in 2018, and this remained true in this survey. Again, the sentiment levels dropped to those of 2017. The highest negative ratings were given to the effectiveness and sufficiency of South Africa’s infrastructure, and the level of red tape and its impact on business. Nobody seems to believe that the deleterious effect of this red tape on business will decrease over the coming year.
A cause for optimism: respondents were most positive about the chances of business prospects improving. The business factors impacting both business and industry are poor economic conditions and poor consumer confidence.
Governance. Despite the concerns noted in the open-ended questions relating to governance, this area remains more positive than negative. Respondents felt that boards are providing ethical leadership. However, sentiment relating to the link between good governance and business performance has turned much more negative. The top governance challenge for individual businesses was identified as a lack of sustainable thinking, whereas unethical behaviour was identified as the top governance challenge facing the industry sector.
Directorship. In this category, too, sentiment remains more positive than negative. In fact, sentiment about directorship conditions has remained pretty constant since the first survey in 2016.
Respondents were least positive about the skills, experience and independence of directors. Not surprisingly, then, continuous professional development was seen as the intervention having the most impact on directorship. This was true for both IoDSA and non-IoDSA members. The biggest factor influencing an individual’s willingness to serve on a board was the ethical behaviour of that board (71% of respondents). The next most important factor, company reputation (49%), also speaks to directors’ growing awareness of the need to undertake a thorough due diligence before agreeing to serve.
Other key considerations were the competence of existing/fellow board members (46%), experience and competence (46%), and independence (43%).
As always, this survey provides a useful view of what South African directors see as the main factors affecting their ability to discharge the director’s role well. We hope that a growing number of boards will see a value in this survey, not least as a quick way of identifying challenges or issues they may not have detected.
||Dr Prieur du Plessis
Parmi Natesan and Dr Prieur du Plessis are respectively CEO and facilitator of the Institute of Directors (IoDSA); email: firstname.lastname@example.org