South Africa’s economy is struggling. Several factors are behind the decline. These include severe power cuts affecting all spheres of the economy, rising inflation, rising food prices, the effects of the conflict between Ukraine and Russia, which led to rising fuel and energy prices globally, rising interest rates, prolonged strikes and high unemployment.
Another threat to the South African economy is the number of businesses that have closed following the COVID-19 pandemic. Data from Statistics South Africa shows that business liquidations increased by 44.8% in the year to August 2022. The data also shows that in June 2022 there were 145 liquidations (vs. 132 in June 2021) and that the number of bankruptcies in South Africa has increased. to 165 in July 2022 and to 239 in August 2022.
These challenging operating conditions require strong boards with a diverse set of skills and backgrounds. Under the Companies Act, the ultimate power in a company rests with the board of directors and not with the shareholders.
The COVID-19 pandemic has highlighted the need for boards to be able to lead institutions under difficult circumstances. There are four things companies should do to build board strength during tough economic times.
Assess if a refresh is needed
Companies need to assess whether they need to refresh their board and management. Bringing in new independent non-executive directors with new perspectives and expertise can strengthen the board and prevent complacency.
Non-executive directors are not involved in the day-to-day management of the company’s affairs and are not full-time employees. They are independent if there is no interest or relationship that could unduly influence or bias their decisions.
South Africa’s King IV report on corporate governance recommends that the majority of board members be non-executive directors and most of them be independent. This promotes objectivity and reduces the possibility of conflicts of interest.
In my research, I discovered that South African companies law does not cap the length of time a director can serve on a board. A director elected by the shareholders may serve on a board indefinitely or for a term specified in the company’s constitution, if any.
Corporate governance experts argue that long-serving non-executive directors are so embedded in the business that they lack independence, which ultimately leads to unsatisfactory business performance. Activist shareholders in South Africa have shown their disapproval of long directorships. They pressured long-serving non-executive directors to resign. Companies should consider whether their non-executive directors have served too long and are still independent.
Directors have a legal obligation to act in good faith and in the best interests of the company. Boards should therefore strike a balance between directors with experience and knowledge of the business and directors with specialist skills. Companies can even appoint experts to their board committees to advise them. The Companies Act allows this as long as they are not disqualified from being directors and do not vote.
Power company Eskom’s board of directors recently suffered a major shake-up as part of the government‘s strategy to find solutions to end South Africa’s energy crisis. All the directors and the chairman have been replaced, with the exception of one non-executive director. Five directors now have technical expertise in engineering, energy policy, electricity delivery and accounting.
The new board has 13 directors compared to the old board of just six directors, who have been criticized for their lack of engineering expertise.
These sweeping changes have strengthened the board by introducing a more diverse range of skills and expertise. It is hoped that the upheaval will allow the council to find effective solutions to end the energy crisis in South Africa.
Assess board performance
Boards of directors must assess their strengths and weaknesses if they are to govern the company effectively. At least once a year, companies should assess the performance of the board as a whole, its committees, individual directors and the chairman of the board.
Companies should reflect on the outcome of the assessments and use it to strengthen the board. For example, if some directors lack governance experience, they should be mentored or encouraged to take training. To maintain a strong board, all directors need to keep up to date with new laws. They must also commit to continued learning and development.
During my research, I found that the King IV report on corporate governance leaves a lot of room for board performance evaluation to be conducted internally.
In my opinion, companies should instead opt for the evaluation to be carried out by external third parties, as this increases its objectivity and impartiality.
Pay more attention to risk monitoring and risk appetite
The board must take calculated risks. It must balance the risks with the potential opportunities, in a responsible and not reckless way.
In times of economic downturn, the board should review its risk appetite. If risk appetite is too conservative, it can limit a company’s options in a suppressed economy. Companies must therefore consider accepting a level of risk that they might have considered too high when the economy was performing better.
Many companies delegate risk governance to the audit committee. Due to the complexity of the risks, the King IV report recommends having a dedicated risk committee. In the current economic downturn, this has become more important than ever.
Improve internal processes and procedures
Boards should assess whether their internal policies and processes are effective. If not, they need to improve them so that the board can function optimally.
Directors must have access to complete and accurate information needed to make effective decisions. The Chairman of the Board must ensure that the Board’s agenda is complete and well organized so that Board meetings are productive and effective.
Directors should meet more often in difficult times. This will allow them to engage in more thoughtful deliberations, explore different options, and weigh competing considerations.
A company with a weak board is a weak company. A strong board of directors is key to a company’s success in tough economic times. Companies must take urgent action to strengthen their boards if they are to survive in these uncertain times.