“All our members share a set of challenges and opportunities related to strengthening their professions, keeping them relevant to the constituencies they serve, and attracting and retaining talent,” says Angela Cherrington, Chair of the steering committee of Independent Professional Bodies’ Forum. “One of our most important tools to do all this is the professional designations we award, and CPD is the way we ensure that designation holders have the right portfolio of skills at the right level— and that these skills are constantly refreshed and new ones added as needed.”

In terms of the Declaration, the individual members of the Forum are committed to being recognised by, and in good standing with, the South Africa Qualifications Authority (SAQA); maintaining professional standards and helping professionals attain that standard. Importantly, all the signatories undertook to professionally governing their CPD programmes in line with the National Qualifications Framework (NQF). Signatories also committed to making it as easy as possible for their members to access CPD.

SAQAs mandate is to recognise and perform quality assurance on professional bodies.

“Each professional body however remains responsible for ensuring that the CPD they offer is relevant to the changing needs of the particular profession—what this Declaration does is commit us all to a set of principles, and to aligning with the overall policy of SAQA,” she explains. “It’s all about ensuring that those holding our designations have credible, relevant and up-to-date skills. We are very appreciative of the close working relationship we have with, and the support of, SAQA.”

Members of the Forum are the Association for Skills Development in South Africa, The International Employee Assistance Professionals Assocation, the Financial Planning Institute of Southern Africa, the Institute of Bankers South Africa, the Institute of Business Advisors Southern Africa, the Institute of Directors in Southern Africa, the Institute of Internal Auditors South Africa, the Institute of People Management, the Insurance Institute of South Africa, the SA Board for People Practices, the South African Communication Industries Association, the South African Sports Confederation and Olympic Committee, the South African Payroll Association, The Marketing Association of South Africa, and The Institute of Risk Management South Africa.

I was very honoured to be elected as chair of the IoDSA board, and it is gives me particular pleasure to be writing my first communication to IoDSA members. Thank you for your confidence in me – I shall do my utmost to live up to the ideals of the organisation and to assist in taking the organisation forward.

In my view, there are two broad areas in which the IoDSA has an important role to play, and where I intend to focus many of my efforts.

One is the usefulness of the organisation to its members in helping them to build board careers and improve their skills and networks.

This is critical work. There is no doubt that the complexity and demands of the non-executive director’s role have increased greatly over the past few years. Nowadays, directors need a high level of governance expertise and a thorough understanding of the applicable legal frameworks, especially as directors are/can be held accountable by law for improperly made decisions.

In this context, we should all be aware that governance is a work in progress, not a state to be achieved. I believe, for example, that over the coming years we will see more emphasis on industry knowledge alongside director independence, board agendas shifting to include more focus on value creation and strategy, greater board diversity in various categories, and the need for specialist governance in areas such as cybersecurity, technology risk and remuneration. These and other developments will require directors to keep on learning and adapting. Of course, one of the best ways to prepare oneself for the demanding, but very worthwhile and fulfilling, role of a director is to apply for the Certified Director or Chartered Director (SA) designation.

But the IoDSA has a broader public role as well. It entails helping to make governance in the public, private and non-profit sectors more effective, and also acting as an advocate for greater probity and morality in public life.

Of course, these are not watertight categories; by creating better directors, the IoDSA is also indirectly contributing to the creation of a better South Africa. 

These are lofty goals, but we should be aware of how important it is that we attain them. I look forward to working with all of you to achieve these goals and to experience the full impact of a world-class membership organisation.

“Mr Koko stands accused of influencing the awarding of lucrative contracts to a company in which his stepdaughter is a director. While we should be careful not to prejudge this specific case, conflicts of interest like this represent a major hazard for board members and executives, if they are not managed correctly from the start. All of us should see Mr Koko’s predicament as a wake-up call to make sure our own houses are in order,” says Natesan.

The first point to make is that a senior executive like Mr Koko is both an employee of the company; and a deemed director or prescribed officer in terms of the Companies Act. Such a person is thus bound both by the internal policies of the company and the legal requirements of the Act. As regards the former, it would be necessary to see whether any company policies were breached in the way the contracts were awarded, and whether Mr Koko was himself involved in this process, and whether he disclosed his interest appropriately.

“It needs to be made clear that claiming ignorance is not a good enough defense. As a senior executive, Mr Koko should have investigated actively the interests of any of his related parties, even to the extent of requesting them in writing to inform him if they had any interests in organisations doing business with the company,” she explains. “This would show that he took reasonably diligent steps to be informed. One should never lose sight of the fact that as a senior executive, he has to set an example to the rest of the organisation and protecting its reputation.”

Natesan notes that conflicts of interest are to be expected in business, and do not necessarily constitute evidence of any impropriety: the key issue is how they are handled. King IV thus recommends that members of governing bodies should declare their financial, economic and other interests, and those of their related parties, at least annually. In the same vein, each board or board-committee meeting should be prefaced by a formal declaration of any specific conflicts of interest relating to the agenda.

Professor Rossouw points to the fact that humans are naturally inclined to act in their own interests or in the interests of their immediate family and friends. While the Companies Act and governance codes like the King Reports are examples of legal and voluntary constraints to the pursuit of self-interest, they will ultimately prove ineffectual unless the individuals concerned act ethically.

“I find it significant that the very first principle of the King IV Code on Corporate Governance emphasises that members of governing bodies, both individually and collectively, should act in an ethical manner. In unpacking what is meant by ethical behaviour, the Code starts by focussing on the personal integrity of members of the governing body. They are reminded that as directors, they must act in the best interest of the company, and that they must deal with conflicts of interest appropriately. King IV sees integrity as a characteristic that should be cultivated and exhibited, so that directors develop the inclination to act in the company’s best interests, not their own” he says.

“By sensitising directors not only to actual conflicts of interest but also potential or perceived ones, ethics plays a crucial role in avoiding the reputational damage and financial costs when a conflict of interest is found, or even suspected not to have been handled correctly —as we see in the case of Mr Koko.”

“State-owned entities are key enablers of economic growth, particularly in South Africa, and the IoDSA has repeatedly argued that their lack of performance is linked to imperfect governance, particularly when it comes to appointing directors,” notes Parmi Natesan, Executive: Centre for Corporate Governance at the IoDSA. “We will certainly be making our specialist expertise in this area available to Government going forward, as it works to create the framework for appointing SOE board members.”

Natesan says that the IoDSA has already interacted with the Department of Public Service and Administration in this regard, and has made several recommendations for its consideration. As the torchbearer for corporate governance and the convenor of the King Committee, the IoDSA will certainly hold itself ready to contribute further as Government gets down to the details of the proposed framework.

The IoDSA has long argued that “board composition probably has the greatest single impact on the future success of an organisation”, to quote its recent board appraisals benchmark study.

Directors need to have the requisite knowledge, skills, experience and personal qualities, and should be appointed through a formal, independent process. This is critical in any organisation, but particularly for SOEs because of their influence on the rest of the economy, and the difficulty of keeping political and economic goals separate.

As the IoDSA has pointed out before, it is critical that the state as shareholder and the board understand their respective roles, and that undue political interference in the appointment of board members is avoided. Boards cannot be held accountable for the SOE’s performance if they are unable to exercise their judgement freely and in the best long-term interests of the organisation, Natesan says.

Another critical factor is the need for demonstration of appropriately skilled and experienced directors. To help resolve this, the IoDSA is playing a leading role by providing training related to each of the 20 competencies identified in its Director Competency Framework. It has also introduced the professional Chartered Director (SA) designation in 2013 and more recently the Certified Director designation, in a bid to professionalise the directorship role, providing directors with a way to ensure they build the right competencies; and organisations with a way to ensure they are getting the directorial talent their boards require to function effectively.

The final piece of the puzzle is regular, objective assessments of board performance.

“The IoDSA is committed to improving corporate governance across South Africa. Effective corporate governance can improve organisational performance over the long term, which has socio-economic benefits for the country as a whole, but it will also contribute to reversing the perception of corruption that is swamping our public life,” Ms Natesan concludes. “While the IoDSA is a non-statutory, voluntary body and cannot act directly to penalise improper conduct, we have a key role to play in building awareness, providing training and guidelines, and influencing governance policy. We believe this element of the Inclusive Growth Plan offers a great opportunity for us to do so.”

Once often seen as a compliance burden, corporate governance is maturing into a critical tool for building successful, sustainable organisations and nations – something South Africans understand better than most. 

When the Cadbury Report on corporate governance was released in the United Kingdom in 1992, closely followed by King I in 1994 in South Africa, corporate governance was understood largely in terms of the systems, processes, policies and structures needed to direct and control companies. While some organisations immediately understood the link between how an organisation was governed and its ability to deliver, most found it burdensome – another set of regulations with which to comply. These companies used to throw the darts (so to speak) first and then paint the target where the darts landed, because they had no clear idea of what they were aiming for.

Fast-forward to King IV that was launched in November 2016, where corporate governance is defined as the “exercise of ethical and effective leadership by the governing body” to achieve certain outcomes: ethical culture, good performance, effective control and legitimacy. We have thus moved away from a compliance mindset to the notion of board leadership to achieve desirable goals, i.e. knowing where the target is before throwing the darts.

Events in our country have driven home the message that corporate governance is critical. We know that without governance, leadership can degenerate into tyranny, fraud and personal fiefdoms. Equally, governance without leadership risks ineffectiveness, bureaucracy and indifference, to paraphrase Mark Goyder, the British governance expert and author.

There has also been considerable research linking effective corporate governance to significant, quantifiable benefits for organisations and countries.

One of these is foreign direct investment. An Organisation for Economic Cooperation and Development (OECD) research report by Maria Maher and Thomas Andersson on Corporate Governance: Effects on firm performance and economic growth concluded that corporate governance affects the development and functioning of capital markets, and “exerts a strong influence on resource allocation” in a world characterised by increasing capital mobility.

This is a hard lesson South Africa is busy learning after the country’s recent credit downgrades, with the possibility of more to come. As Arthur Levitt, Chairman of the US Securities and Exchange Commission said: "If a country does not have a reputation for strong governance, capital flows elsewhere.”

In short, corporate governance improves access to capital, and potentially its cost, for countries and companies, especially in the developing world, concludes an IFC study entitled Corporate governance matters to investors in emerging market companies, by Vikramaditya Khanna and Roman Zyla.

Research is also starting to emerge that links corporate value to corporate governance. A local study by Isaih Dzingai and Michael Bamidele Fakoya on the Effect of Corporate Governance Structure on the Financial Performance of JSE-Listed Mining Firms concludes that if mining firms comply with corporate governance codes, they will benefit as will the economy as a whole. 

Studies in the US, summarised in Jay Eisenhofer’s article, Does corporate governance matter to investment returns, found that: “the quality of a particular company’s governance practices and procedures positively correlates with both good corporate financial performance and shareholder value. Simply put, good corporate governance does in fact pay.”

Seventy-one per cent of South African directors believe corporate governance adds value to the business, the 2nd edition of the IoDSA Directors’ Sentiment Index Report reveals.

Of course, corporate governance also lowers the risk of corporate scandals and reputational risk.

To conclude: corporate governance comes about when the board exercises ethical and effective leadership to improve the organisation’s sustainability, which hinges on its ability to make good profits while being seen by society as a legitimate, responsible user of its common resources. As the performance of some of our state-owned enterprises and our government itself shows, without it the organisation is not profitable either to itself and its shareholders, or to society as a whole.

• Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
  Enquiries: info@iodsa.co.za. Better Directors. Better Boards. Better Business.
• First published in the Business Report
  

The reports also demonstrate the intimate connection between good governance and organisational performance and sustainability, adds Parmi Natesan, Executive, Centre for Corporate Governance, Institute of Directors in Southern Africa.

“It is common knowledge that SAA is in dire financial straits, and has been for some time. At such a time, more than ever, the board and especially its chair have a critical role to play in providing leadership in steering the organisation into calmer waters,” Natesan says. “Not attending several special board meetings at a time such as this is worrying, especially given that board meetings are typically scheduled around the chair’s diary in the first place.”

The law requires directors to exercise care, skill and diligence in their role. It is generally agreed that in this context, board members should not only attend meetings, but also prepare rigorously for them in advance, so that they can make a valuable contribution. If they cannot attend, they should furnish valid reasons and also consider making written input before the meeting.

Because board chairs play such an important role, various governance guidance documents elaborate on this responsibility. Providing overall board leadership and presiding over board meetings and ensuring that time in meetings is used productively, are just two of the many vital functions that simply cannot be exercised when a chair is repeatedly absent.

“It would also be interesting to know whether the SAA chair has a deputy in place, or a lead independent director, to ensure that meetings can proceed effectively in her absence,” says Natesan. “The troubles at SAA and other parastatals provide yet more support for what the IoDSA has always emphasised: the principles of good governance are integral to improved performance and sustainability. We hope the board will show the courageous leadership that is needed to pull the organisation back on track.”

“There have been differing public statements about this issue, and each one of them raises important questions about a key institution that is largely funded by public money and provides a service that is vital to the economy,” says Ms Natesan. “If unresolved, these questions could materially affect an organisation’s credibility and legitimacy with its stakeholders.”

When Mr Molefe’s bona fides were queried in the Public Protector’s State of Capture report in 2016, he stepped down very publicly, citing the “interests of good corporate governance”. There has however, been a failure to share what has changed since then to have convinced him and the board that his reappointment would now serve good corporate governance.

It has emerged that Mr Molefe was entitled to receive a very large gratuity in line with “early retirement”, even though he had stepped down under something of a cloud. “It is assumed that the board had a rational reason for accepting his request for early retirement, and that it was in line with company policy, but in the absence of any explanation, this action would seem to confirm the public perception that Mr Molefe is an individual who enjoys extraordinary rights.” Ms Natesan argues. “Accountability and transparency are even more vital when public funds are in question and the national interest adversely impacted.”

The same lack of transparency is evident now in the decision to reinstate Mr Molefe as CEO, she continues. If we are to take it that the board has reversed its earlier decision to accept Mr Molefe’s stepping down, which it is clearly entitled to do, the grounds for this should be articulated.

State-owned companies have a particularly strong need for transparency because the lines of accountability between board, shareholders and executives are somewhat less defined than in the private sector. The Minister, as representative of the shareholder, has a far greater say over executive appointments than the board, but as the King IV Report on Corporate Governance makes clear, good practice requires that the appointment of the CEO of a SOC should be a robust and transparent process that involves the the board to the greatest extent possible, even if the Minister representing government has the right to make the final appointment”.

Angela Cherrington, IoDSA CEO, says the sponsorship has been made to support a vital
sector of South African society. “These sponsorships are designed to strengthen non-profit organisations and their leaders and enhance their performance.”

The sponsorships cover director training for five people, a half-day governance induction programme for two organisations, and basic board appraisal for two organisations. Cherrington adds that many non-profits do not have the financial leeway to earmark funds for developing institutional capacity, primarily owing to the pressure to support their beneficiaries.

The three types of sponsorship cover key areas of the IoDSA’s expertise. Its board appraisal services offer independent, structured assessment of board performance across a number of categories by experienced directors. “These appraisals are designed to help boards identify areas that need focus, with the aim of developing practical improvement plans. Better board performance is ultimately reflected in better organisational performance,” Cherrington notes.

As the custodian of the King Reports on Corporate Governance™, the IoDSA is well-placed to offer deep insights into governance and its purpose.

“Boards have a critical role to play in ensuring that any organisation has the right strategy in place, and that it is on track to achieve its strategic goals,” Cherrington concludes. “Our hope is that these sponsorships will play a small part in helping the vital non-profit sector go from strength to strength.”

More information on the sponsorships, and how to nominate candidates, visit

http://bit.ly/2p8cY0I

“The parliamentary enquiry into the SABC demonstrates that the quality of governance exercised by the board has a knock-on effect on a company’s operational effectiveness,” Natesan says. “It’s also clear that board members must have certain knowledge, skills and experience in order to fulfill their responsibilities. To give one example, recent media reports indicate that some of the board members did not properly understand the Broadcast Act, and thus were not in a position to ensure the legal mandate was fulfilled. 

“However, board members cannot claim ignorance as an excuse, and the onus is on them to be properly informed prior to making decisions." 

This kind of situation can be avoided if board members are properly inducted onto the board, and proactively expand their knowledge of the company, the market/legislative regime in which it operates and developments in corporate governance. But they also need to have a good understanding of what their duties and responsibilities as directors are. 

Angela Cherrington, CEO of the IoDSA, says that because markets change so rapidly and are increasingly competitive, boards are under increasing pressure to maintain the right levels and types of skill, experience and diversity to keep the company on the right course. 

“Directors play a hugely important role, and their job is becoming much harder. The case for a new breed of professional directors is growing stronger by the day. Companies would be able to assess objectively what skills individuals have, and thus whether they would complement the existing board’s skills. As professionals, directors would also have to commit to a formal, ongoing programme of professional development,” she explains. “Professional directors would be bound by a code of conduct enforced by a professional body.”

In response to this growing need in corporate South Africa, the IoDSA launched a professional designation, Chartered Director (SA), or CD(SA). According to Cherrington, this initiative recognises that directors require specialist skills, experience and integrity alongside their purely business skills. The CD(SA) designation also gives directors a way to demonstrate their mastery of the director competencies, and to enhance them through a formal continuous professional development programme. They would have to subscribe to a code of professional ethics.

In addition, the IoDSA will soon be re-launching Certified Director, an interim designation on the pathway to CD(SA).  This re-introduction aims to capture those individuals who do not yet have the board experience to enter the CD(SA) process, but who have the knowledge necessary to start their directorship journey.

The IoDSA administers, and is the custodian of, the both designations. 

“We were delighted to see that PWC’s Non-executive directors: Practices and remuneration trends report for 2017 predicts that ‘non-executives will become specialised professionals’ in order to meet the challenge of increased business risk,” Cherrington concludes. “The CD(SA) designation provides a framework against which directors can be measured and grown, and it will increasingly become the gold standard for directors in both the public and private sectors.”

The King IV Report on Corporate GovernanceTM (King IV) was launched on 1 November 2016 by the King Committee and the Institute of Directors in Southern Africa (IoDSA), which owns the intellectual rights to the King Reports and the governance codes they contain. The King Reports, of which this is the fourth iteration, contain the philosophy, principles and leading practices for corporate governance in South Africa.

“The overarching objective of King IV is to make corporate governance more accessible and relevant to a wider range of organisations, and to be the catalyst for a shift from a compliance-based mindset to one that sees corporate governance as a lever for value creation ,” says Prof Mervyn King, chair of the King Committee on Corporate Governance in South Africa.

To make the Report more accessible, Ansie Ramalho, King IV Report Project Lead for the IoDSA, and the task team appointed by the King Committee, have introduced a number of innovations. They have broadened the language of the Report, ensuring that the vocabulary is no longer listed company and business-specific, and have provided supplements to make it easier to adapt the Code to different industry sectors, including government and nonprofits, and various organisation types. King IV also provides guidance on how to apply its practices proportionally, in line with an individual organisation’s size and resources, and the extent and complexity of its activities.

In addition, King III’s 75 principles have been reduced to a mere 16 in King IV, with an additional 17th principle which is applicable to institutional investors such as retirement funds and insurance companies.

At a deeper level, King IV has taken the decisive step of focusing on outcomes as a way of driving acceptance of corporate governance as integral to value creation by organisations characterised by an ethical culture, good performance, effective control and legitimacy.

Linking governance to outcomes should result in organisations practising quality governance. In this spirit, King IV emphasises not what practices have been implemented but rather what their impact has been on achieving the 16 principles. King IV has moved the regimen of “apply or explain” to “apply and explain”.

“Apply and explain” introduces a qualitative approach to the implementation of King IV’s recommendations. Governing bodies now have greater flexibility in how they implement the recommended practices to achieve the goals articulated in the principles, but they have to be transparent about how they did so. The intent is for the reader of the explanation to be able to make an informed decision about whether the organisation has or has not achieved the principles and realised the four outcomes of ethical culture, performance in a sustainable manner, effective controls and legitimacy.

Other important issues covered by King IV include the wage gap, shareholders voting on remuneration policies and their implementation so as to trigger engagement with the company and the composition of the governing body.

“King IV is the product of wide consultation, and belongs to all South Africans – organisations and individuals – to whom good governance matters,” says Ramalho. “The wish of the King Committee and the IoDSA is that King IV be welcomed as making it easier to understand what the purpose of corporate governance is, and to apply it to achieve the creation of value. King IV aims to make corporate governance understandable beyond the circle of consultants, technicians and academics.

Prof King said it would be the committee’s greatest reward if King IV is adopted by all organisations across all sectors with a consequent consistent practice of quality governance. King IV will be available via app download from App Store or Samsung Galaxy Apps, or via a digital read-only copy from www.iodsa.co.za. Printed copies will be available for purchase through Lexis Nexis.

King IV closes the circle of integrated reporting that was started with the release of King III in September 2009. King III called on organisations to prepare an integrated report each year which would reflect the appreciation that strategy, risk, performance and sustainability are inseparable. This resulted in the founding of the IRC of SA to develop a framework for an integrated report. This framework later fed into the development of the International Framework released by the International Integrated Reporting Council in 2013. The release of King IV now closes the circle as it references the International Framework underpinned by the same thinking and terminology.

The IRC of SA expects that the practice of integrated reporting in South Africa will be widened following the release of King IV. This is because King IV’s five sector supplements recommend the preparation of an integrated report to organisations that may not have been preparing them in the past. The supplements cover: small- and medium-sized enterprises, non-profit organisations, retirement funds, state-owned enterprises and municipalities. At present integrated reports are common practice among South Africa’s listed companies and larger state-owned organisations, with some smaller state-owned organisations, municipalities and non-profit organisations also preparing integrated reports.
Integrated thinking extends the consideration by an organisation beyond only financial capital to all forms of capital that are integral to its future success, namely human, intellectual, manufactured, social and relationship, and environmental capital.

One of the benefits cited by companies - many listed companies are now into their sixth year of integrated reporting - is that the preparation of the report helps to embed integrated thinking in mainstream business practices. Other cited benefits of integrated reporting are that it has improved understanding of the true value drivers of the business, facilitated a longer term strategic view, improved risk management, and integrated information has helped decision-making.

In April 2014, the IRC of SA endorsed the International Framework as good practice on how to prepare an integrated report. Other information helpful to report preparers and users is available on the IRC’s website www.integratedreportingsa.org

• The IoDSA is a voluntary, non-statutory body, and membership is not required in order to practise as a director.
• IoDSA members are governed by a code of conduct, which is published on our website.
  The IoDSA board has the power to terminate membership of the Institute in its sole discretion if the member contravenes the code of conduct or brings the organisation into disrepute, or if it believes that his or her continued membership would be harmful to the interests and/or objectives of the IoDSA. The termination of membership is required to follow due and fair process.
• As a non-statutory body, the IoDSA has no additional legal authority or jurisdiction to take action against its members.
• Those members who hold the designation of Chartered Director (South Africa) can have their designation revoked due to misconduct and the will in turn be removed from the national register linked to Chartered Directors (South Africa).

The conference will be addressed by a number of prominent South African figures, including Chief Justice Mogoeng Mogoeng; Lynne Brown, the Minister of Public Enterprises; Reuel Khoza, president of the IoDSA; David Lewis, Executive Director of Corruption Watch; Thembekile Kimi Makwetu, the Auditor General; Mervyn King, the Chairman of the King Committee; and Ansie Ramalho, the King IV™ Project Lead.

 
An international panel of speakers includes Simon Arcus, CE of the IoD in New Zealand; Heloisa Bedicks, MD of the Brazilian Institute of Corporate Governance; Stan Magidson, CEO of the Alberta Securities Commission, Simon Walker, Director General of the IoD in the United Kingdom and Peter Dehnen, CEO of the German Directors Association.

“The app will reduce the paper generated by the conference while enhancing delegates’ experience,” Cherrington says. “Other green initiatives include sourcing produce locally, using beaded rather than real flower decorations, intensive recycling and providing carbon credits for purchase by delegates.”

The Institute of Directors in Southern Africa’s (IoDSA) Remuneration Committee Forum has released its fifth position paper called “Value creation and executive pay” on the practical measures that boards should take in order to link executive pay with the value they create for the company and all its stakeholders.

“Executive pay is one the most visible and criticised aspects of corporate governance,” says Ray Harraway, Director: Remuneration Services at EY and Chair of the Remuneration Committee Forum. “I don’t think anybody really objects to high executive pay so long as it is directly linked to the value that executives create for the company and its stakeholders. However, getting the link between pay and performance right is extremely difficult, and that’s the issue this paper aims to address.”

At the heart of this problem is the difficulty in understanding value creation. Before anything sensible can be said about executive remuneration, boards and their remuneration committees have to understand what, for the organisation, constitutes value—and how the company creates value. Once that is understood, the remuneration committee can begin to establish what the desired outcomes are, and what drivers are important in achieving them.

A major stumbling block is that, according to 2013 research by McKinsey, only 34 percent of directors surveyed agreed that the boards they served on fully understand their companies’ strategies. ¹ Such an understanding is a prerequisite for understanding what value creation looks like and thus, ultimately, how executives should be incentivised.

Overemphasis on outcomes at the expense of drivers is one of the common shortfalls of executive incentive schemes, Harraway says. Outcomes may take years to achieve, so they are an inadequate measure of executive performance over the short term, whereas drivers—those actions that lead to the desired outcome—can be better indicators of progress in the short term.

To be effective, incentive schemes need to be multifaceted. Both outcomes and drivers should play a role in the design of the schemes, as should a balance of short-term financial performance and long-term sustainability.

Thus, for example, while a rise in the annual share price is obviously important, it should not be at the cost of investment in R&D and training, which are vital to the company’s long-term sustainability. And profitability cannot be the sole financial measure used—the return on capital has to form part of the equation when assessing executive performance and how it contributes value creation.

Parmi Natesan, Executive Director at the IoDSA and a member of the King IV drafting team, adds that one of the fundamental shifts in King IV is to make the performance/value creation aspect of governance more explicit.

“Setting remuneration levels is never going to be an easy exercise, and nor will it ever be a simple matching of actions and results, so the remuneration committee will always need a certain amount of business acumen as well as discretion. Nonetheless, if the value-creation levers are well understood, the committee will be better placed to incentivise the right kind of executive behaviour,’ says Harraway. “For instance, if there is a conflict between actions that might result in lower profits in the short term but are likely to drive long-term value, the incentives should default in favour of the latter.”

The paper “Value creation and executive pay” can be downloaded by visiting http://bit.ly/29jnAG6

Photo caption: Ray Harraway, Chair of the Remuneration Committee Forum at the Institute of Directors in Southern Africa, says few object to high executive pay so long as it is directly linked to the value that executives create for the company and its stakeholders.

^{1McKinsey, “Improving board governance: McKinsey Global Survey results” (August 2013), available at http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/improving-boardgovernance-mckinsey-global-survey-results.}

• In the main, directors are negative about business conditions, with the impact of red tape and the government on business attracting the most negative ratings.
• On a positive note, directors are largely optimistic about the ability of good governance practices to add value to the organisation.
• Unethical behaviour (bribery and corruption) are the primary governance challenges facing industry, closely followed by a lack of sustainable thinking and a lack of understanding of the overall benefits of governance.
• As regards directorship in South Africa, directors are more positive than negative, particularly with regard to the expected impact of continuous professional development on the board. The latter was particularly evident in the public and nonprofit sectors, where positive expectations relating to this factor were significantly higher as compared to the total sample.

The Guide is designed to give companies a guidance for setting non-executive directors’ fees, the time commitment, and number of meetings appropriate to their specific needs.

The Guide also indicates the average size of the various board committees. Other important and useful information includes the factors driving fee increases for non-executive directors, supplementary fees, expenses and/or benefits provided for them, and how companies structure fees for their board members.

“Non-executive directors have a critical governance role to play, and they bear the same level of risk as executive directors in terms of the Companies Act. The conversation around the fees should therefore never overshadow the focus on the bigger picture – appointments resulting in a balanced and competent board,” says Parmi Natesan, Executive: Centre for Corporate Governance at the IoDSA.

At the most general level, she notes, non-executive directors are chosen to provide objective criticism and advice, but they are also valued for the business experience they bring to the board – experience that could help make the company’s success more likely. Increasingly, too, directors with specific skills are sought to complement the skills already offered by other directors, both executive and non-executive.

“Choosing, managing and rewarding non-executive directors with the right skills is essential to creating boards that have the right mix of skills to make a difference,” Natesan says. “To attract the right individuals, therefore, companies need to be sure that they are paying competitive rates – and receiving good value from their non-executive board members.”

Natesan points out that non-executive directors’ fees are not intended simply to cover their attendance at meetings, but also the time commitments for preparation and follow up as well as to stay up to date with developments within the company.

“The Guide will help directors and potential directors to benchmark these time commitments. It will naturally also help Boards to propose realistic and competitive fees for shareholder approval,” says Ray Harraway, director at EY and Chairman of the IoDSA’s remuneration committee forum.  

“A company’s directors are the ultimate custodians of the shareholders’ investment and their important role is now well regulated. In parallel, all directors are vulnerable to risk and liability– companies need to reward them appropriately for the increased time and effort the role demands. Benchmarking is an essential tool in doing so, and thus in creating an effective board.”

The Guide can be downloaded from http://bit.ly/NEDfees2016

MMI Holdings, Institute of Directors, and USB Executive Development partner with The Directors Event. 

Johannesburg, 15 March 2016

MMI Holdings, the Institute of Directors in Southern Africa, and USB Executive Development have cemented their support of The Directors Event through partnership. The Directors Event, now in its second year, is brought to you by MMI Holdings, in association with the Institute of Directors in Southern Africa (IoDSA), and USB Executive Development (USB-ED).

The Directors Event is an extension of the Sunday Times Top 100 Companies, and facilitates an opportunity for government, industry, academic and civil leaders to debate topics of national importance and discuss solutions in a public forum. More than 200 executive level delegates are expected to attend the event at the Sandton Convention Centre on 8 April. Jeremy Maggs, Iman Rappetti, Bruce Whitfield, Andile Khumalo, and CNBC’s Bronwyn Nielsen will be moderators in four debates around Innovation, Healthcare, Education, and South Africa’s global competitiveness. Twenty experts and thought leaders in their respective fields will participate in the panel discussions.

Vuyo Lee, Group Executive: Brand, Corporate Affairs and Transformation, MMI Holdings, says the company decided to maintain its headline partnership of The Directors Event based on the success of the inaugural event last year. “The opportunity to sponsor the inaugural Directors Event allowed us the chance to liaise with several brilliant minds who are actively involved in making South Africa great, in order to approach the country’s most pressing problems with the frankness and openness it required. Together, we sat around the boardroom table and looked at systemic crises such as economic inequality, job creation, resource depletion and environmental degradation in South Africa. It didn’t end there – some of our country’s finest minds then set out to identify solutions and act upon them. We look forward to seeing what the 2nd annual Directors Event brings.”

The Institute of Directors of Southern Africa supported The Directors Event in 2015, and has renewed the engagement in 2016. Angela Cherrington, CEO of the IoDSA says, “We found the openness of the conversations encouraging and the interest in talking through practical solutions was a positive step.” She says the IoDSA believes The Directors Event is relevant to businesses and business leaders in SA today as “we all need to take responsibility for our own continuing professional development regardless of where one is in their career. The world and business is changing so rapidly, and events like this keep us attuned to changes in thinking.”

This year, The Directors Event has also attracted the support of USB Executive Development who attended the event in 2015 as delegates. “It is an opportunity to network and have meaningful conversations in an alternative setting. With the credible sponsorship of Sunday Times, our business developers who attended agreed that the topics were well chosen and facilitated. It led to honest discussions with refreshing direct approaches not clouded in philosophical debate. For this reason we decided to not only exhibit and attend but also become a partner in 2016,”says Brigitte Roediger, Director: Marketing at USB Executive Development Ltd.

Trevor Ormerod, GM Sales and Marketing at Times Media believes “the leverage that the Sunday Times Top 100 Companies offers in drawing the country’s leading do’ers and thinkers together at The Directors Event, creates a very powerful opportunity for the media and business to work together and drive a prosperous South Africa. We also feel very privileged to hold the relationships we do with MMI, IodSA and USB-ED in making The Directors Event a staple in SA’s business calendar.” 

For further information: www.thedirectorsevent.co.za ; Twitter: @DirectorsEvent #TDE2016