Board independence: King IV recommends a balanced approach
Thursday, 23 January 2020
South African boards should be looking carefully at King IV’s guidance on board composition and director independence rather than simply trying to impose a one-size-fits-all rule, says Richard Foster CD(SA), a governance advisor, professional non-executive director and Institute of Directors in Southern Africa (IoDSA) facilitator. An overemphasis on independence can actually rob boards of institutional knowledge and experience.
The issue of director independence recently hit business headlines with no fewer than eight members of the Comair board resigning in the past year. The departure of at least four of them has been linked to concerns about their independence expressed by Bidvest.
“Principle 7 of King IV was carefully constructed to indicate that optimal board composition required a balance to be struck between knowledge, skills, experience, diversity and independence.
Independence has to be seen within the context of the total composition of the board and its ability to achieve the goal of good governance,” he says. “King IV”s approach is pragmatic and outcomes-based and does not lay down a fixed rule that no director can be considered independent after a nine-year tenure.”
By contrast, the governance codes in the United Kingdom and certain countries in the European Union both prohibit directors from serving longer than a nine-year term.
King IV specifically states that independent non-executive directors may serve for longer than nine years if a vigorous assessment is conducted annually to establish that the director “exercises objective judgement and there is no interest, position, association or relationship which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making” (Recommended Practice 29).
“The litmus test must always be the individual director’s contribution to the board, not his or her length of service,” Foster argues. “By the same token, a wholesale rotation of the board unless particular circumstances dictate risks losing institutional memory, which in turn could compromise the board’s ability to govern effectively.”
Another consideration is that long-tenured directors can actually make a positive contribution to the organisation’s performance. Research shows that in the United States, where there are no explicit term limits for directors, 24% of independent directors have “continuously served in the same firm for fifteen years or more”. The research shows that firms with one such long-tenured director “exhibit superior performance, a lower risk of outside litigation, and higher disclosure and information acquisition”.
Foster adds that there are no hard-and-fast rules. Some directors can retain their independence over many years, while others remain valuable but might need to be reclassified simply as ‘non-executive” over time.
Given the concern that many institutional investors feel about the independence of non-executives, Foster says that boards should take steps to evaluate the independence of long-serving directors rigorously and to communicate both their methodology and the reasons for their conclusions.
“Disclosure is one of the pillars of King IV because it supports the imperative to apply the practices, not for their own sake, but to achieve the outcomes outlined in its 17 Principles,’ he says. “Having a good succession plan in place is further evidence of ongoing and meaningful evaluation, as are structured opportunities for key institutional shareholders to meet with independent directors.”
Vikeshni Vandayar, Executive: Governance and Corporate Services at the IoDSA, says that the Institute is currently developing an online tool that organisations can use to probe the independence of their governing bodies. “Assessing independence is part of our board appraisal process, but we have realised that there is a need for a standalone product to guide boards. There are many dimensions to independence, and they are affected by the legislation and governance codes that apply.”