3 key factors of evaluation for boards of directors
Barloworld's Munya Gwanzura gives his take on what constitutes an effective board.
A board of directors plays a fundamental role in instilling and maintaining a culture of good corporate governance, which ensures that executives and employees act ethically and within the parameters of the law. However, what constitutes an effective board and what its composition should be elicits differing opinions, primarily because of the impact of changes in technology on corporate governance. A listed company, for example, will generally operate in a more formalised manner because it is highly regulated, while in comparison, a private company might operate less formally. That said, the criterion for determining what constitutes an effective board is generally the same for all companies.
Here are three key factors of what I believe constitutes an effective board.
1 Ethics and competency
The starting point is to ensure that board members are ethical, competent, and appropriately qualified people. I believe an effective board is one that consists of a diverse group of members with different qualifications (and not necessarily only degrees and professional qualifications), skills, and experience.
Furthermore, it is important for all members to be competent and au fait with their duties and obligations so that they can exercise the authority accorded to them responsibly. Central to this are the fiduciary duties that members owe to the company, primarily the duty to act in the best interests of the company at all times. This duty extends to various responsibilities such as how members should apply their minds to new policies and decisions of strategic importance presented to the board for discussion or approval. It also extends to more basic requirements like reading board packs, arriving on time for board meetings, disclosures of conflicts of interests, how members conduct themselves in public, and how members should generally act in a manner that is consistent with the esteem accorded to the role.
Ultimately, an effective board of directors should consist of a diverse group of members with relevant qualifications, technical competence, skill and experience, all of whom have a firm understanding of their duties and obligations to the company.
2 Openness to external advice
Effective boards are also those that are open to taking specific professional advice where required, often from lawyers, auditors, and accountants, however, they remain accountable to various stakeholders for the decisions taken that are based on such advice. Professional advice is an important ingredient in achieving effectiveness as it ensures that a board is exercising due care in the execution of its duties and not making reckless decisions that could negatively impact the company and decrease shareholder value.
In the United States, corporations generally have an in-house general counsel (usually a lawyer) who is not a voting member of the board but rather a special advisor to the Board. The general counsel primarily advises on regulatory issues, procedure, policy and corporate governance, with a view to ensuring that the board acts within permissible parameters. Some boards prefer to receive advice from outside legal counsel; however, we are seeing an increasing number of South African banks and other corporations opting for in-house general counsel in an effort to attain effectiveness and manage commercial and regulatory risk.
Boards of today are also slowly moving towards being more representative. Race, culture, and gender have increasingly become key considerations as companies strive to achieve a fair and equitable balance. This ensures that more groups are represented and diverse views are presented and debated by members. Diverse views also enable companies to make better and more effective strategic decisions for the benefit of all stakeholders; the result being that companies are able to continue to be commercially relevant in a highly competitive socio-economic environment that is in a constant state of evolution.
In South Africa, we are seeing more listed companies appointing younger chairpersons and CEOs, many of whom are women. In the political sphere, Ethiopia and Rwanda are shining African examples of what can be done to create a culture of inclusivity when there is a real and sincere will to do so. There is no reason why the same cannot be achieved in the commercial sphere where the benefits of doing so are immediate and tangible.
The winds of change are upon us and the days of only certain groups of people leading big companies and serving on boards are indeed numbered. A culture of diversity and inclusivity in businesses is a good building block for transformation. Implemented successfully, this will result in faster and more significant growth of the economy, which is desperately needed if we are to address the imbalances in our society and create jobs for the poor and marginalised.
Munya is the Head of Dispute Resolution at Barloworld.