HUMAN CAPITAL

All on board?

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In today’s rapidly changing business environment, congruency in board decision-making and direction is imperative. But with stringent government requirements and a changing market, independent thinking can, and should, be used to to tackle the bull by the horns.

This is according to Amrop Landelahni CEO, Sandra Burmeister, who believes that taking an independent stance and engaging on the hard questions is crucial for a principled and effective board of directors.

Burmeister says South African company boards face similar challenges as boards across the globe. These include increased risks inherent in the environment, stringent government requirements, as well as competitive pressures. She also indicates that increasing board diversity can be a challenge, while shorter tenure of board members disrupts continuity and leads to a loss of institutional memory, whereas CEO succession accounts for yet another problem facing boards today.

According to her, the average length of holding shares in listed companies is dropping, and in markets such as the UK it is now less than a year. She says this militates against shareholder activism and means that shareholders, who should be holding the board to account, are not directly concerned with whether there is an effective board in place for the long-term.

“In tough times, board members turn to people they trust, which can lead to a board of individuals who know each other really well, and are completely aligned. There is not enough independent thought and diversity to challenge the status quo. Boards need to appoint directors who are engaged enough with the business to add value, and independent enough to make decisions in the company’s best long-term interests,” she says.

Formulating strategy

Burmeister further highlights that boards are under pressure from sceptical investors, tighter government controls and escalating labour demands. She says one of their prime responsibilities is to formulate strategy for the long term and to do this, directors need to be able to navigate shifting and uncertain circumstances.

This she says, means being able to evaluate risks without access to full information and using a balance of evidence together with instinct as well as being comfortable with ambiguity. It also means considering different perspectives, seeking innovative ideas, and exploring opposing views so as to make effective decisions.

“Boards need a balance of experience, skills and personal qualities. Committees required for good governance include social and ethics, remuneration, and audit and risk. To fill these portfolios demands a sound understanding of commercial and financial risk, human resources expertise and a broad social agenda. We must go further than looking at skills. We need board members who are engaged, can ask the right questions, challenge decisions and engage in robust debate.

“Across the globe, boards have become smaller. Particularly in the United States, independent directors have tended to serve on a smaller number of boards. As a result, board members tend to rotate across a series of boards. In South Africa, with our race and gender diversity legislation, the trend is somewhat reversed. We see directors holding multiple board positions. In both cases, few boards make an investment in nurturing up-and-coming new talent,” she says.

In difficult times

Burmeister refers to back to 2008 when the market crashed and says that directors were replaced by veterans who had been through difficult economic times before. The argument she says was that they really understood the company, knew how to cut back, and could turn the business around. According to her there is some merit in this approach, but says that “too many of us look in the rear-view mirror, believing what worked before will work again.”

“Now there’s a call to arms. Innovation and new thinking are what is needed. This means looking forward, so we can build board muscle over a period of time. Only by appointing a diverse range of directors can the board advance as a forward-looking unit, concerned with developing strategy, rather than devoting its time to analysing past performance,” she says.

Burmeister goes on to highlight failures in governance, both here and abroad and says that locally, in the private sector and among state-owned enterprises, a lack of governance has caused instability within the board itself and among the executive team. Burmeister also points out that sound governance demands a balance of experience, skills and personal qualities.

“As McKinsey states, effective directors do not simply attend three or four board meetings a year. Instead they are, ‘engaging between meetings, engaging with strategy as it’s forming, engaging on talent, engaging the field and engaging on the tough questions’. Where boards are not achieving this degree of engagement, or – on the other hand – where they get too heavily involved in the day-to-day operations of the company, corporate governance fails,” he says.

Looking at how independence in the board assists with the evaluation of risks, Burmeister says that it allows the board to assess risks broadly and consider those that do not emanate from the immediate company environment. Independence and diversity also guards against ‘group think’ and brings independence of judgement and a challenging mindset to assessing risk.

She also says boards should study external shifts in the landscape, and consider broad risks such as cybercrime, strikes and protest action while also ensuring a robust crisis-management system is in place to deal with these and other, unanticipated risks, should they occur.

Burmeister further places emphasis on the importance of innovation and new thinking and says, “New thinking is required at corporate and government level. In an environment where the market is consolidating and becoming more competitive, a forward-looking board is needed to help the business and the executive team achieve its objectives. Boards should also guard against replacing the CEO instead of applying their minds when the company is not doing well. We’re living in challenging times. More than ever, executive teams need engaged boards to help them navigate through a fundamentally changing global environment.

“Robust questioning is critical for an effective, fully-functioning board. The challenge is combining hard questions with robust, engaged relationships. We can well ask why board directors did not challenge decision making during the 2007/2008 financial crisis. Boards hold an oversight role and a strategic one. It should be in their DNA to question, debate and consider alternatives. That is the only way to avoid blind spots in board thinking. Ultimately, it is the chairperson’s task to harness this energy, ensure a diversity of opinion and bring board members together to make the best possible decision under any given circumstances,” she says.

Only by considering different perspectives and being able to evaluate risks in a shifting business environment, can board plan an effective strategy to ensure the company’s long-term sustainability and profitability, says Burmeister. According to her, “Bad governance is bad for business and limits the ability to maximise new opportunities across all spheres of operation: local, African and global.” She says good governance and transparency in business dealings benefits our economy in terms of trade and investment and also influences how our companies are perceived from affair and facilitates doing business on that African continent and across the globe.

“It’s important to increase diversity and at the same time ensure board members have the requisite skills, experience, and personal attributes such as a challenging mindset that fosters robust debate. Too often board appointments are made at the last moment. Instead the chairman should consider the shape and form of a winning board that can set the company’s strategy for future success,” Burmeister concludes.

 

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