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Study focuses on board independence at SA's top firms
Author: Suzette Viviers, Nadia Mans-Kemp, Bridgette Luyt & Wesleigh Cadle
Published: 31/01/2020

​The following article entitled What study reveals about board independence at SA's top firms, written by Prof Suzette Viviers, Dr Nadia Mans-Kemp, Bridgette Luyt and Wesleigh Cadle, was published in Business Day on 30 January 2020:

Regarded as one of the biggest instances of private sector fraud in SA, the Steinhoff scandal of 2017 raises an important question: how essential are independent directors in keeping boards on the straight and narrow?

Though there is no universal definition, independence generally describes an individual whose only relationship to a company constitutes their directorship. Independent directors should ensure no one individual or group yields unfettered power over the board.

They also play a critical role in managing conflicts of interest affecting board members and safeguarding the interests of minority shareholders and other stakeholders who may not be represented on the board.

As articulated in King IV, all directors have a duty to act with independence of mind in the best interests of the organisation. Given the emphasis King IV and other corporate governance experts place on director independence, we analysed trends in director categorisation at the 100 largest companies listed on the JSE between 2011 and 2017. The database consisted of 1,779 individual directors.

By using information disclosed in the companies' integrated reports, we also uncovered some interesting trends in director tenure, director overboardedness, CEO role duality and the status of the chair.

We found that the average percentage of independent directors increased from 53.16% in 2011 to 58.37% in 2017. This average remained above 50% throughout this six-year period. At face value, the sampled companies have improved independent oversight.

We also found that the average director tenure was 6.3 years, well below King IV's suggested nine-year term for independent nonexecutive directors. Average tenure, however, increased significantly over the research period and across all industries except technology.

The decline in average director tenure in the technology industry most likely reflects the high levels of employee turnover in this sector. A 2018 LinkedIn survey showed that the median employee tenure, even at the biggest technology firms, could be as short as one year.

Substantial talent turnover could also explain why average director tenure in the telecommunication industry was the lowest of all the considered industries (4.78 years, followed by technology at 5.67 years).

Directors in the consumer services sector had the highest average tenure (8.32 years), followed by those in industrials (7.86 years) and consumer goods (7.32 years) sectors.

As tenure increases, a director arguably gains more experience and sector-related knowledge. A longer tenure could, however, deepen the director's social interest in the company, which could in turn jeopardise their ability to remain truly independent.

The percentage of companies where average board tenure was less than nine years decreased sharply from 89% in 2011 to 77% in 2017. Though the presence of individuals who are more familiar with a company might be advantageous from a strategy development and oversight point of view, familiarity could also lessen impartiality.

“Overboardedness" can also impede a director's objectivity. The term generally refers to a situation where a director serves on three or more boards simultaneously. We not only evaluated the number of board positions held at JSE-listed companies, but also incorporated seats held at state-owned enterprises, unlisted firms and other entities such as industry associations and family trusts. Multiple board positions can enhance a director's skill set but also result in considerable time pressure.

The comprehensive measure of director overboardedness shows that the average director held 2.27 positions concurrently. Despite there being a number of highly overextended individuals (some holding up to 20 directorships simultaneously), most top 100 directors were not overboarded. The average number of positions held did not increase significantly over the study period either, nor did it differ significantly across sectors.

The number of overboarded boards (directorates where more than half of its members were classified as overboarded) dropped from 91% to 71%. Timerelated challenges might have contributed to this decrease.

Corporate governance best practice proposes a split between the roles of CEO and board chair. The percentage of companies where this split occurred, however, decreased from 46% to 30%. Rising CEO role duality is disconcerting as the chair is supposed to monitor the decisions and actions of the CEO. In cases where the roles were split, more than two-thirds of chairs were independent nonexecutives.

Though the sampled companies reported having more independent directors serving on their boards, average director tenure increased significantly over the research period. CEO role duality also occurred in two-thirds of the companies, raising concerns about structural independence. We propose that nomination committees cast their nets wider to identify eligible board candidates.

Once appointed, these individuals should not shy away from asking difficult questions, particularly at boards where the CEO is also the chair. This calls for courage, as highlighted by Winston Churchill: “Courage is what it takes to stand up and speak; courage is also what it takes to sit down and listen."

Finally, shareholders are encouraged to take a more active stance when electing or re-electing the agents who represent their economic interests.

  • Prof Suzette Viviers and Dr Nadia Mans-Kemp are academics of the Department of Business Management at Stellenbosch University, and Bridgette Luyt and Wesleigh Cadle were postgraduate students in the Department in 2019.
  • Photo by Bloomberg