Four ways companies can strengthen their boards to weather tough economic times – SABC News

South Africa’s economy is struggling. A number of factors are behind the decline. These include severe power outages affecting all sectors of the economy, rising inflation, rising food prices, the fallout from the Ukraine-Russia conflict, which has led to higher global fuel and energy costs, interest rate hikes rates, prolonged labor strikes and high unemployment.

An additional threat to the South African economy is the number of companies 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 there were 145 liquidations in June 2022 (compared to 132 in June 2021 d.) and that the number of bankruptcies in South Africa increased to 165 in July 2022 and to 239 in August 2022.

These difficult working conditions require strong boards with a diverse range of skills and experience. Under the Companies Act, the ultimate power in a company rests with the board of directors, not the shareholders.

The COVID-19 pandemic has highlighted the need for company boards to be able to manage institutions through testing circumstances. There are four things companies should do to strengthen their boards in tough economic times.

Consider whether a refresh is needed

Companies should consider whether they need to renew their boards and management. Appointing new independent non-executive directors with fresh perspectives and new experience can strengthen the board and prevent complacency.

Non-executive directors are not involved in the day-to-day management of the company’s business and are not full-time employees. They are independent if there is no interest or relationship that is likely to unduly influence or cause bias in their decisions.

The South African King IV Corporate Governance Report recommends that the majority of board members be non-executive directors and that most of them be independent. This promotes objectivity and reduces the possibility of conflicts of interest.

In my research, I discovered that the South African Companies Act does not place a limit on how long a director can serve on the board. A director elected by the shareholders may serve on the board indefinitely or for a term specified in the company’s bylaws, if any.

Corporate governance experts argue that long-serving non-executive directors are so tied to the company that they lack independence, ultimately leading to poor company performance. Shareholder activists in South Africa have shown disapproval of long director tenures. They have 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 duty to act in good faith and in the best interests of the company. Therefore, boards must have a balance between directors with experience and knowledge of the company and directors with specialized experience. Companies may 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 not voting.

The board of energy company Eskom recently underwent a major shake-up as part of the government’s strategy to find solutions to end South Africa’s energy crisis. All directors and the chairman were replaced, except for one non-executive director. Five directors now have technical expertise in engineering, energy policy, electricity supply and accounting.

The new board has 13 directors, compared to the previous board of just six directors, which was criticized for its lack of engineering knowledge.

These sweeping changes strengthened the board by bringing in a more diverse set of skills and experience. It is hoped that the shake-up will enable the board to find effective solutions to end South Africa’s energy crisis.

Rate the performance of the board

Boards must assess their strengths and weaknesses if they are to manage the company effectively. At least once a year, companies must evaluate the performance of the board as a whole, its committees, individual directors and the chairman of the board.

Companies should consider the outcome of the evaluations and use it to strengthen the board. For example, if some directors lack management experience, they should be provided with mentoring or encouraged to undertake training. In order to maintain a strong board, all directors must keep up to date with the new laws. They must also commit to continuous learning and development.

In my research, I found that the King IV Report on Corporate Governance leaves plenty of room for internal evaluation of board performance.

In my opinion, companies should rather choose to have the assessment done by external third parties, as this increases its objectivity and impartiality.

Pay more attention to risk oversight and risk appetite

The board must take calculated risks. It must balance the risks with the potential opportunities in a way that is responsible, not reckless.

In an economic downturn, the board must reassess its risk appetite. If the risk appetite is too conservative, it can limit the company’s options in a depressed economy. So companies have to consider taking on a level of risk that they may have considered too high when the economy was performing better.

Many companies delegate risk management to the audit committee. Because of the complexity of the risk, the King IV report recommended the creation of a special commission on risk. In the current economic crisis, 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 in order for the board to function optimally.

Directors must have access to complete and accurate information necessary to make effective decisions. The board chair should ensure that the board agenda is comprehensive and well organized so that board meetings are productive and efficient.

Directors should meet more frequently 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 is a key component to a company’s success in difficult economic times. Companies must urgently take steps to strengthen their boards if they are to survive these uncertain times.

Rehana Qasim, Professor of Company Law, University of South Africa

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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