What’s on the boardroom agenda for 2018?
Thursday, 15 February 2018
By Parmi Natesan and Prieur du Plessis
Some of the country’s senior directors indicate what South African boards should be focusing on this year ̶ and how King IV can help put the country and its business community back on track.
Although hopes are high that this year will be better ̶ politically and economically ̶ than 2017, there’s no disguising the reality that South Africa continues to face a daunting array of challenges. As directors are charged with interpreting the current context and creating the right strategy to achieve success, we asked a few of the country’s senior directors where they believe boards should be focusing their attention in 2018.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
Perhaps unsurprisingly, the majority of our informal poll saw the stagnant economy as a primary challenge. However, they each situated growth within slightly different contexts.
Simon Susman, chairman of Woolworths, put it in a nutshell: “The key issue for South African boards will be how to generate growth in a deeply uncertain economy.” For him, the corollary of this challenge is how to find or nurture the right leadership talent to deliver growth in these adverse conditions. In one of our columns last year we went so far as to say that “Arguably, the most important function a governing body performs is appointing and managing the CEO” ̶ and it’s just more important than ever when growth is elusive.
Desmond Smith, former chairman of Sanlam, highlighted our projected low rate of growth within the context of the global business environment. “Uncertainty about where the rating agencies are heading is adding to the problem,” he observed. Boards have the added complexity of the international scene, and specifically how international players view the goings-on here.
Jannie Durand, CEO of Remgro, was worried about the impact of low growth on transformation, another perennial hot potato. “If a company does not grow organically it needs to look at efficiencies and cost-cutting. This leads to job losses and makes the transformation of the company more difficult,” he pointed out.
Hester Hickey, non-executive director of various listed companies, linked growth to sustainability ̶ a timely reminder that growth at all costs is an increasingly risky approach, even though it may seem attractive when business conditions are poor.
It’s probably not overstating the case to say that sustainability continues to be a concept that is poorly understood in South Africa. Boards must lead the drive to unpack the many layers of meaning contained in that one word, even as they deal with the difficulties caused by low growth and uncertain politics.
Of course, growth isn’t the only focus area for boards, and Smith also highlighted some other key ones: political and social uncertainty and unrest, regulatory changes, risk management and corporate governance.
As regards risk management, it seems boards need to continue deepening their understanding of risk and how to mitigate it. Smith mentions cyber risk, and there is no doubt that this is a poorly understood area and yet one that creates significant vulnerability. Business depends almost completely on digital platforms, and this has prompted the creation of sophisticated criminal networks. The Cape water crisis is another topical risk that needs to be properly planned for. Others exist, and should not be ignored.
The governance risk looms ever larger
Some of the biggest risks, though, are related to corporate governance, Smith’s final focus area. The Steinhoff debacle is top of mind, and there is the unwelcome suggestion that similar exposés will follow: boards bear the ultimate responsibility for failures of governance, and all boards should take the opportunity to do some soul-searching.
This leads us very neatly into our second question, “Do you believe good governance, as articulated in King IV, can benefit South Africa? If so, how?”
Wiseman Nkuhlu, who was recently appointed chairman of KPMG, and was a director of several other companies, said (presumably with Steinhoff in mind) that: “Non-executive directors should be more robust in engaging CEOs and executives on major corporate decisions, growth strategies, acquisitions and compliance with laws and regulations. Recent corporate scandals have tended to happen in companies led by experienced directors.”
His direct response to our second question was succinct: “Most definitely, if it is practised as intended, ethical and effective leadership as highlighted in King IV should be uppermost in the minds of directors.”
The other directors we spoke to all broadly endorsed the importance of corporate governance both within the private and public sectors, as Susman pointed out, highlighting the importance of transparency. The current rash of corporate scandals, as well as the ongoing problem of corruption, was consistently linked to poor governance.
All saw positive value in King IV as a tool for achieving transparent and good governance. Smith highlighted its practical value: “It is far more practical than its predecessors with its principles-based approach and recommended practices. The introduction of the important principle of proportionality and the separate sectoral guidelines enables a far more diversified body of entities to meaningfully apply it ̶ including, importantly, SOEs and the rest of the public sector.”
But he stressed, as did others, that King IV can only deliver results if it is carried out in good faith, taking the spirit as well as the letter of the Code to heart. “The biggest risk is that it becomes a tick-box exercise,” said Durand, quite rightly.
Smith got to the crux of how good governance comes about: “It is essential that the essence of the Code as embodied in the principles be embedded in the DNA of entities and that they be held accountable for compliance.”
Yes, there are challenges ahead for boards, to be sure, but there are solutions on hand as well.
Better Directors. Better Boards. Better Business