Boards and Governance
© 2019 CMC Today and Leon Theron CMC-Candidate, South Africa
The Context of Business Leadership and Governance
Global business leaders very often adopt a bull-into-a-china shop approach to leading the business that they been appointed to (or chosen to or created). Forcefulness, seat-of-the-pants decision making, belief in own capabilities, disregard for advice from others, are but a few of the traits of these leaders, who I will refer to as bulls.
We also find a sprinkling of greedy, dishonest, conniving and cheating business leaders. The gruesome stories of Enron, Lehman Brothers, Steinhoff, VBS Bank, Bosasa come to mind.
We will refer to the leaders of these business leaders as cows.
Bulls and cows have a common misunderstanding of business performance: they do not understand that long term sustainable business performance is a direct consequence of honesty, ethical behaviour and the embracement and protection of all the capitals of the business (financial, manufactured, intellectual, human, social and relationship capitals). Rather, bulls and cows are short term operators and believe that the main purpose of the business is to fatten their own wallets.
There is another category of business leader: the calf. Here we have to do with the leader of the small or mid-sized business, most often led by the founder (or son-of). The founder is neither a bull nor a cow, but also does not believe in or understand the close link between governance and performance. He/she has always been the commander-in-chief and believes that the employees do not have leadership capability, the business is too small to warrant the creation of a governance structure or whatever reasons block the calf from appreciating the ability to improve business performance by adopting solid governance principles.
The Corporate Governance Mystery
The King IV Report on Corporate Governance in South Africa, defines corporate governance as the exercise of ethical and effective leadership by the governing body towards the achievement of the following outcomes:
- Ethical culture
- Good performance
- Effective control
This short definition contains a few loaded concepts:
First, ethical and effective. Generally, business leaders will consider ethical to be a soft concept but will agree that effective is an accepted business issue. However, King IV places these two concepts in conspicuous proximity. Why? Does unethical imply ineffective? Is being ethical the same as not being unethical? Does ethical imply effective?
Second, practicing ethical and effective behaviours leads to the achievement of two very important business outcomes viz. good performance and effective control. There can be no doubt that these are outcomes that all businesses should be striving for.
It is my contention that bulls do not run effective companies. They often shine for several years, have spectacular success and then fade away. Cows, by design, run unethical companies and survive only until their foul deeds are exposed. Calves, on the other hand, do not have the time or inclination to bother with corporate governance issues. The outcome of the calf approach is that small and mid-sized businesses have a short lifespan or, even if they survive over a long period, they seldom thrive, merely hobbling from one crisis to the next.
The relationship between ethics and performance can also be illustrated by the model proposed by Lord John Moulton:
- Law and legitimacy mean obedience to the enforceable
- Ethics entails obedience to the unenforceable
- Free choice is the realm that business leaders in a capitalist society enjoy. This entails the complete freedom to choose
Crafting an Effective Corporate Governance Capability
The fulcrum for the establishment of corporate governance is mostly and simply found in the board of directors of a company. The Companies Act (Act 71 of 2008) compels the appointment of directors to each company in South Africa. A board of directors is thus not a nice to have. The Act provides extensive direction on the qualification of directors, the functioning of the board and the responsibilities and personal liability of the directors and principal officers.
The very first and most simple step on the governance journey is to appoint a capable board of directors. The board members should provide race, gender and age diversity. Consideration must be given to the representation of major stakeholders, including employees and shareholders. Also, the appointment of independent non-executive directors to the board will provide a high degree of balance and experience to the board.
As suggested by the University of Stellenbosch Business School, the following are the essential behaviours of the board and the board members:
- we need independence of mind combined with working together with others;
- we need robust debate combined with civility;
- we need diversity harnessed by inclusivity and respect;
- we need transparency combined with trust;
- we need the board to enjoy the fullest expression of the know-how and character of every board member.
The Companies Act provides clear prescriptions for the activities of a board of directors. Sections 66 to 78 determine who should be appointed to the board, how the meetings need to be conducted, the conduct, responsibilities and liabilities of directors. Part 5 of King IV report provides practical recommendations to address leadership, ethics and corporate citizenship; strategy, performance and reporting; governing structures and delegation; governing functional areas and stakeholder relations.
Corporate Governance: So What?
King IV states that the outcome of ethical and effective leadership is good performance. How tangible is this statement? How will it affect your pocket?
One parameter that gives a clear indication is the investment trends in the USA. In a sophisticated and large market such as the US, most business investments are made by large investment firms. The US Forum for Sustainable and Responsible Investment has been tracking investment trends in America for the past 10 years. The forum has now reported that sustainable, responsible and impact investing (SRI) assets now account for $12.0 trillion—or one in four dollars—of the $46.6 trillion in total assets under professional management in the United States. This represents a 38 percent increase over the previous year.
How does this trend relate to companies in South Africa? The value of your business, as measured by a potential investor or buyer of your company, is a simple barometer of your most recent performance and your future expected sustainable growth. Investors in America are moving their investments to companies that practice sustainable, responsible and impactful leadership conduct. If American investors value well-run, well-governed business highly, surely this also reflects the value of any South African company.
Plea and Promise
This is a sincere request to all bulls and calves leaders: make a decision today to change the governance model in your company. It is not a complex matter – all it needs is sharp focus, the inclusion and trust of your executive team and, if needed, input from your external advisors.
I can guarantee that, if implemented accurately, your governance model will result in 10% improved financial performance as well as amazing energy from your key executives, within a period of 24 months.
Lord John Moulton (1844-1921) was at one point judged to be one of the twelve most intelligent men in the UK. He was awarded the Knight Commander of the Order of the Bath, the Knight Grand Cross of the Order of the British Empire, the Etoile Noir of France, the Belgian Order of Leopold and was the last person to receive the Order of the White Eagle before the collapse of the Russian monarchy.