Corporate governance is a set of relationships between a company, its management, the board, the shareholders and its stakeholders, and it provides the structure through which the objectives of a company are set and attained and its performance measured. The directors of a company, HOA or sectional title scheme are managers of other people’s money.
Should we expect them to watch over it with the same level of concern and professional vigilance with which a partner in a private company might?
The problem inherent in this question is that you cannot legislate for honesty. The best we can hope for is that through transparent and consistent administrative processes, ethics are instilled into the decision-making processes of those few who govern on behalf of the majority.
Frameworks for governance in South Africa are easy enough to find: the Constitution, the Companies Act, the King Report, Shareholders’ Agreements, Memorandum of Incorporation, PFMA-MFMA and the Public Enterprise Enabling Act are all guides that clearly reference what can be deemed ‘good’ governance.
So where does the process really start?
The responsibility is clearly vested in the board and, whether you are an executive, non-executive or ex-officio, all have same ultimate responsibility towards the shareholders.
A director would be deemed to have complied with the duty of good faith, care, skill and diligence if he or she: took all reasonable steps to be fully informed prior to making a decision; had the belief that the decision made was from a rational basis and was in the best interests of the company; were confident that there was no conflict of interest, or that any potential conflict was appropriately declared and considered by other members prior to making the final decision.
The thought-provoking point is conflict of interest, which, as it involves individuals, is largely subjective, and with those involved having to declare any conflict or recuse themselves.
In the end, we are reliant on an individual’s perception of their own sense of ethics and personal integrity, which is very difficult to legislate for, although the Companies Act does offer some clarity in its definition of independence:
- no employment relationship;
- not a major supplier;
- not a major customer; declaring shareholding or other affiliations.
The well-known King Report has expanded on the Companies Act by adding that ‘major’ is defined as anything above 50%, and ‘significant’ as 20% or above. It is recommended that former executives have a long cooling-off period before any involvement, and that long-standing relationships, professional acquaintances or affiliations must also be considered before deciding whether a conflict exists.
To accept a directorship, one must self-evaluate, and some questions that can be used as a guide are:
- Am I independent and without conflict?
- Do I have the expertise or skills required?
- Will I have the time expected?
- Do I understand my role?
- What induction do I require?
- What led to my possible involvement?
- What director’s indemnity insurance is in place?
- Once elected, a new director has a very important role, which must not be abdicated. Dissention has its merits in any decision-making process, and fear or pressure must not force an individual director to comply.
It becomes evident in smaller estates or companies that too much governance can kill creativity. One can easily ‘over’ govern a small company or development to the point where decision-making processes are slowed, creativity required for company growth dies, and within which environment a company can ultimately fail as a result of even the very best intentions. A small residential complex must not try and be ‘super governed’; so if a director with a strong corporate background enters the environment of a smaller enterprise, he or she would need to restrain themselves from burdening the company with unnecessary practices.
The following image shows, from a layman’s viewpoint, how a company needs to prioritise governance practices over time, based on its risk, and risk is closely related to the size, age or maturity of an undertaking.
Once the board has played its role, it must then allow the executives to deliver on their mandates, preferably within a clearly defined delegation of authority policy, and not intervene in the daily operations.
A board’s remaining at arm’s length has the added benefit of providing an objective and independent perspective.
The following illustration helps to offer an overall view of the role of everyone involved.
Ultimately the board has the responsibility of forming the strategy, and the policies then needed to be implemented, while it provides the oversight procedures or measures and the disclosure methods. The board committees formed specific to each entity will then be able to monitor execution by the staff or management team.
Most shareholders are interested in the non-financial aspects, i.e.: Did my board have a strategy, a mission and a goal?
These basic governance building blocks enable a board to make better decisions, while a clear strategy and relevant policies for oversight and disclosure provide the framework to enable effective tactical decisions down the line.
As Warren Buffet so eloquently put it: “Risk comes from not knowing what you are doing.”
Effective corporate governance increases value, improves access to capital, lowers the risk of reputational damage and improves overall decision-making capabilities. The increased effectiveness in the boardroom in turn translates to transparency, productivity and profitability.
The barriers to good governance are rife: the lack of independent thought, leadership or research, poor ethics, greed, conflicts of interest, a lack of courage, no measurable objectives and no accountability, to name a few.
Poor governance is a trap easily avoided when applying the basics, while procurement planning and controls, risk analysis, integrated reporting and the other complex governance matters can be cultivated as the company develops.
Start by implementing the basics and watch the tree of governance grow comparable to your company’s, HOA’s or sectional title scheme’s growth and maturity.
Feed it with ethics and transparency, and soon you will be resting in the welcoming shade of a system that not only protects it shareholders, but also its directors and executives.