By Michael Janse van Vuuren, Suzette Viviers and Nadia Mans-Kemp
Corporate scandals highlight the importance of monitoring mechanisms to constrain opportunistic managerial behaviour. In relation to internal mechanisms, King IV recommends that boards mainly comprise independent non-executive directors (NEDs), have an independent chairperson and that a lead independent director should be appointed.
Although a largely independent board can considerably improve monitoring, the presence of independent NEDs is no guarantee that a company will engage in ethical and sustainable business practices. A delicate trade-off furthermore exists between experience and objectivity.
By virtue of their voting power, ordinary shareholders occupy the middle ground between internal and external monitoring mechanisms, such as auditors. Yet the following questions arise: Do South African companies apply the King IV board composition guidelines and do shareholders of JSE-listed companies actively use their voting power to enhance board independence. The authors analysed voting data on director elections and re-elections at JSE-listed companies from 2014 to 2020 to address these questions.
A significant increase was noted in the appointment of independent NEDs and chairs at selected JSE-listed companies since 2014. As expected, very few shareholders (only 4%) opposed director election resolutions. In instances where shareholders voted against the election or re-election of directors, the boards were typically large (12 or more directors) and included several long-tenured members.
Plans are underway in the United States to ensure that shareholders’ views are more accurately represented among those elected to corporate boards. Most of the opposition locally has occurred when investment syndicates pooled their votes to replace incumbent directors. Scholars who have compared the board structures of bankrupt companies found that such companies had noticeably more ‘interdependent’ directors than a matched sample of ‘surviving’ companies. These directors meet the traditional independence criteria but are distinguished from independent outside directors based on their appointment date. Whereas independent outside directors are appointed before the current CEO’s appointment, interdependent outside directors are elected during the CEO’s current tenure. When re-electing independent NEDs, shareholders (or their representatives) should therefore account for the relationships between nominees, CEOs and other board members.
A concerted effort by shareholders to question evident weak corporate governance practices, such as a minority representation of independent NEDs on a board or the absence of a lead independent director, has never been more urgent than now. Shareholders of locally listed companies should take their responsibility to monitor board composition and performance more seriously and promote change through carefully considered voting and other public forms of shareholder activism.
Other capital providers, such as debenture holders also have a role to play. The more dubious practices are highlighted, the greater the probability of change. Concerned parties should realise that they can influence the policies and practices of investee companies, regardless of the size of their investment. As the African proverb says: If you think you are too small to make a difference, you have not spent a night with a mosquito!
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