In this blog, we continue to expand on the importance of corporate governance. We will discuss the factors for consideration in the composition of a governing body, i.e. the board that has primary accountability for the governance and performance of a company. Here are eight factors to consider when assembling a board.
- Determine the size of the board
The Companies Act, 71 of 2008 (“the Act”), requires a board of a company to have a minimum number of directors, yet enough directors to satisfy the requirement to appoint sub-committees. It is useful to consider:
- the needs of the company in its industry;
- the requirements for a quorum at a meeting; and
- the collective knowledge, skills, experience, and resources to conduct the business of the board.
- Have a good mix of knowledge, skills, and experience
When assembling a board, the goal is to have positive interaction between individuals, each of them bringing their different skills, experience, knowledge, and background to the board.
- Have a good mix of non-executives and independent non-executive directors.
Non-executive directors play a vital role on a board. They bring their objectivity when dealing with various matters facing the board. These directors are not involved in the day-to-day management of the company, and when they act, they do so independently of management.
According to the King III Code on Corporate Governance™ (King III™), an independent non-executive director should be independent in fact and be perceived as such by a reasonably well-informed outsider. An independent director should also be independent in character and judgement, and there should be no relationships or circumstances that are likely to affect or could appear to affect their independence. King III™ states that independence is the absence of undue influence and bias. It can be affected by the intensity of the relationship between the director and the company as opposed to any particular factor such as length of service or age. You can find the full definition of an independent non-executive director in King III™.
Ensure that most of the directors on the board are non-executive directors and that the majority of those directors are independent.
- Consider the appointment of executive directors to the board
In terms of King IV™, as a minimum, the chief executive director and at least one other director should be appointed to the board depending on the size and what is right for the organisation. As of June 2009, companies listed on the Johannesburg Stock Exchange (JSE) must appoint a financial director to the board. The appointment of these directors will ensure that there is more than one point of contact between the board and management.
- Ensure a balance of power
The board should have a balance of power to ensure that no individual director or block of directors is in a position to exercise dominance over the decisions made by the board. This is an important requirement because without that balance of power, directors may be coerced into decisions they would otherwise not have made.
- Promote diversity on the board
In the interest of good governance, the board should promote diversity on the board and specifically look at factors such as academic qualifications, technical expertise, industry knowledge, age, culture, race, and gender. The JSE has amended the listing requirements for listed companies. It is now compulsory to have a policy for the promotion of gender diversity and a policy for the promotion of race diversity at board level. Boards should set targets for race and gender representation and measure against the set targets.
- Rotate directors regularly
The Memorandum of Incorporation usually allows for at least one-third of board members to retire by rotation on an annual basis, and they may be re-elected provided they are eligible. In determining the eligibility of a board member, the board may consider aspects such as past performance as a director and contribution during meetings. The board may also have a programme in place that ensures rotation of non-executive directors, to retain valuable skills and knowledge on the board.
- Implement a succession plan
A succession plan will outline the process that boards and committees need to follow to replace the board chairman, non-executive or executive directors and committee members. This may come about either because of an existing vacancy or to plan for the future vacancy of a position. This plan will ensure that the board is prepared for an unplanned succession or emergency. King IV™ suggests that the succession plan include the identification, mentorship, and development of future candidates.
At Okina Company Secretarial Services, we emphasise the importance of a well-composed board with members who can add value and are suited for the positions. As experts in corporate governance, we can advise on all aspects of good governance, including board composition and administration, board evaluations, and induction of new directors.
We hope you feel inspired to let us help you make your next board meeting flawless.