By Rob Worthington-Smith
30 April, 2018
Boards need to make strategic decisions about how to employ financial capital in the best interests of their shareholders, employing the company’s business model (or indeed modifying it if necessary) to build the value of all the six capitals to deliver a sustainable return on investment. The primary roles of the board include:
- Participation in formulation of strategy,
- Counselling management on the execution of strategy,
- Monitoring management performance, and
- Scanning the operating environment for compliance with regulatory and legal requirements and the emergence of risks and opportunities inherent in the company’s strategy and positioning.
Aligning the interests of leadership with interests of minority investors
It is crucial that the balance of power on the board and the executive leadership is in balance in order to best take advantage of the leadership’s collective wisdom and acumen, while ensuring that power is not concentrated within one (or more) individuals, raising the risk of corruption, or actions not in the interest of the company and its shareholders (particularly minority shareholders). Companies with relatively concentrated shareholding or with multiple classes of shares which concentrate control in certain individuals or groups also present a heightened materiality.
Entrenched boards and management teams also present a form of ‘key-man risk’, especially where charismatic or long standing leadership (who often forgo the management systems and controls befitting large and complex companies) depart, leaving companies exposed to governance challenges. Thus, power on the board and the executive leadership needs to be kept in balance in order to best take advantage of the leadership’s collective wisdom and acumen, while ensuring that power is not concentrated within one (or more) individuals, raising the risk of corruption, or actions not in the interest of the company and its shareholders (particularly minority shareholders).
Roy Anderson rethinks boards in Financial Mail, 26 April, 2018
Writing in the Financial Mail, Roy Anderson, a director with over 30 years’ experience on the boards of nine companies listed on the Johannesburg and London Stock Exchanges, offered his opinion on what questions to ask when evaluating current governance practices. Here are some questions he raised:
- Is there a balance of power on the board?
- Do boards have the appropriate knowledge, skill and experience?
- Should the CEO make written declarations about compliance with the ethics policy the financials and internal controls?
- Should the full board have access to the internal and external auditors?
- Should long tenure be considered when classifying directors as independent?
- Should consideration be given to the number of boards on which directors serve?
- Should non-executive directors meet separately?
Andersen argues for a different kind of balance on the board as necessarily envisaged by King IV. He argues for the balance between industry and operational knowledge. For example, loading the board with chartered accountants may not be sufficient when the questions that need to be asked relate to operations and industry. He closes by emphasising the importance of non-executives asking the right strategic questions with a fresh perspective and solid understanding of the industry and the business.
See his full article at: https://www.businesslive.co.za/fm/opinion/on-my-mind/2018-04-26-roy-andersen-rethinking-boards/
The FarSight Model of Leadership Maturity
From our research into decades of corporate reporting, and noting the significant difference between how mature leaders report against these five actions compared to immature leaders, FarSight developed a model for assessing leadership maturity in terms of how well companies respond to their most material issues. Every two months we analyse a sector of around eight companies on the JSE and submit our findings to the asset management industry through our channel partner, Legae Securuties, the first B-BBEE Certified Stock Broking firm in South Africa. Summaries of these findings, and how the model works, can be found at www.FarSightFirms.com
* Rob Worthington-Smith is the founder of FarSightFirms.com. The FarSight model analyses leadership maturity based on the IIRC’s Integrated Reporting Framework, an international standard designed to guide companies towards better reporting of their value creation story. In the SA asset management market, FarSight has an exclusive working partnership with Legae Securities.
