There’s an air of weary resignation about the draft King V code’s recommendations on director independence. As though the drafters are thinking: “Surely this isn’t necessary? Surely this is tantamount to repeating the bloody obvious?”
But repeat it, they do. And on this issue repetition is necessary. It probably doesn’t help that the King committee keeps providing escape clauses. In governance that’s referred to as “substance over form”.
Take a look at the recently released draft. It is a tad more prescriptive in its analysis of independence. It now requires the board to consider nine factors when categorising a non-executive director as independent. The factors include a two-year cooling off period (if the director has previously been an executive of the company), any entitlement to remuneration contingent on the performance of the company and if the director has served on the board for longer than nine years.
As King committee chair Ansie Ramalho said at a recent presentation of the draft King V code, all these factors must be considered on a substance over form basis. This is the same basis on which a director’s independence is considered under King IV.
But here’s the fun part. All these “substance-over-form” assessments are done by the boards themselves.
Anyone sense a problem here?
It’s not as though a director deemed non-independent must immediately depart the board. The only consequence is that they have to be reclassified as non-independent directors. As such they cannot sit on the audit committee. And the majority of the members of the nomination and remuneration committees must be independent.
By contrast, governance codes in the UK and some EU countries actually prohibit directors from serving longer than a nine-year term.
The lack of vigour from the King committee reflects the uncertain ground on which it finds itself. It evidently realises it cannot push its luck by insisting on something the corporate community might push back against. As Ramalho told participants at the recent presentation: “We need to appreciate we must present a code that is as easy to use as possible … but we must understand we have no control over whether it gets implemented or not.”
The lax approach is a shame, particularly when you consider that the outstanding corporate scandals of recent years – Steinhoff, African Bank, Tongaat – might have been averted if the directors had exerted more independence over their domineering CEOs. It wasn’t a shortage of board skills that did for these companies, it was a dire shortage of independence.
The recidivists
What must be particularly frustrating for the King committee is that it’s a clutch of recidivists that necessitate the constant reminders about the need for independence. And, with the exception of one or two in the finance sector, these recidivists are predominantly in retail.
At Mr Price, Nigel Payne, a former member of the King committee, is described as independent and is in fact the chair, despite being on the board since 2007. At The Foschini Group (TFG) Michael Lewis is classified as independent and is also the chair, despite being closely attached to the group since 1998. The average tenure of other “independent” directors at TFG is about 20 years.
Over at Pick n Pay, Hugh Herman was lead independent director until he retired from the group in 2022 – after 46 years.
At Truworths where Michael Mark has been CEO since 1998, all of the non-executive directors are described as “independent” though four have served with the group for well over nine years, including two who have been on the board for almost 30 years. Here’s how the Truworths board describes the situation: “All non-executive directors, including the chairman, are independent in terms of the King IV definition and the guidelines outlined in the JSE listings requirements.”
It goes on to say that the independence of all, “but in particular long-serving, non-executive directors, was again formally assessed by the board during the reporting period, as recommended by King lV. Based on this assessment … the board confirms that all non-executive directors are correctly categorised in terms of the said definition and guidelines as independent.”
As far as the Truworths board is concerned, “the qualifications, experience, personal characteristics and integrity” of the directors, and the fact they had no conflicts with the company, ensured their judgment was “exercised independently and in an unfettered manner”.
It may be no coincidence that, with the exception of Mr Price, these retailers seem only able to produce poor to patchy earnings performances. For a while Pick n Pay was thought to be facing an existential crisis; some think it still might be.
Setting an example
The good news, as Ramahlo also pointed out, is that “most organisations in South Africa are well intended”.
There are companies – like Sibanye-Stillwater – that believe tenure is a serious consideration when it comes to determining a director’s independence. In a recent Sens announcement, it informed shareholders that four of its 11 non-executive directors were no longer regarded as independent and have been classified as merely non-executive directors. .
Richard Menell, Tim Cumming, Keith Rayner and Jerry Vilakazi have each been on the board for 12 years and are no longer regarded as independent. The board’s decision to use 12 years as a cut-off instead of nine was largely determined by the fact that Sibanye was unbundled out of Gold Fields and listed in 2013. Staggering the appointment of directors at that stage was not an option.
James Wellsted, head of investor relations and corporate affairs at Sibanye-Stillwater tells Currency that changes were made between 2017 and 2021. “So there has been a transition, but in order to allow for this transition to occur in an orderly fashion, without six directors who joined in 2013 all having to depart at the same time in 2022 [nine years tenure], it was decided to extend the period to 12 years. This allows for an orderly and smooth transition, retaining some institutional memory during a period where we are onboarding a lot of new directors.”
As Wellsted explains, Sibanye-Stillwater is a young and complex company, so “it would have been extremely disruptive having a significant number of directors leaving at the same time.”
The reclassification means there have been some changes to the committees. The most significant is that Rayner, Menell and Cumming will all retire from the audit committee. In addition next year Cumming will also step down as chair of the remuneration committee.
Meanwhile the JSE – appropriately enough given it’s the source of the only regulatory muscle the King code has – is doing its best to set a good example.
Suresh Kana, who like Payne was also a member of the King committee, will be retiring from the JSE board at the AGM in May. That’s when he’ll hit the nine-year mark. This continues the JSE’s practice of only having independent non-executive directors on its board. “The board extends its grateful thanks to Dr Kana for his extensive contribution, unstinting service and wise counsel over the past nine years,” says the JSE. It has a really top-notch list of names on its board, so no signs of a shortage of talent.
Eventually the laggards in the retail sector might catch on.
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