The board of directors

Size and composition of the board

The minimum number of directors is respectively one for a private, and two for a public company. The maximum number of directors is determined by the company’s articles of association. In order not to become unwieldy and ineffective, most boards of public companies are between eight and twelve directors with sixteen being the optimum number recommended for the boards of banks.

King II recommends that the positions of chairperson and chief executive officer of the company should be separated, alternatively that the board appoint a lead independent director who will bring a level of autonomy to board discussions. It also recommends that a board have a majority of non-executive directors. These directors should be totally independent from any significant business relationship with the company since their role is to bring to the board independent judgment and broad business experience.

Role and function of the board

In terms of King II, the board’s role and function is to:

• provide strategic direction to the company
• retain full and effective control of the company
• ensure compliance by the company with all laws and regulations
• communicate with stakeholders in a transparent manner
• delegate appropriate powers to management and monitor the exercise of that delegated power on an ongoing basis
• reserve certain powers to itself as a board where this relates to issues which are material to the company, for instance a change in the strategic focus of the company’s business
• have unrestricted access to company information and records
• agree on a procedure to allow directors to obtain independent professional advice where necessary
• review the size and composition of the board in terms of the mix of skills and diversity and decide on the optimal composition required to ensure the board's effectiveness
• identify and monitor key risks and ensure that the company has effective systems of internal control to manage risk within acceptable parameters
• identify key performance areas for the board and management
• identify and monitor non-financial aspects relevant to the company and its stakeholders and ensure that the company conducts itself as a responsible corporate citizen
• record the facts and assumptions which lead it to conclude that the business will be a going concern in the next financial year (and if not, what steps the board is taking to ensure that this status will be achieved)
• explain the effect of all resolutions required to be passed at shareholders meetings
• ensure the chairpersons of the audit and remuneration committees and as many directors as possible attend shareholders meetings to answer questions about the state of the company
• provide biographies of all directors who are to be appointed at an AGM
• seek the optimum balance for the company between conformance with the dictates of good governance and performance

Characteristics of an effective board

Although directors act in concert as a board, each director is individually responsible for being as effective as he can be. Directors must ensure that they:

• devote adequate time and attention to their duties
• have a good working knowledge of the company, including its organisational structure, management, internal financial controls and its products or services
• prepare adequately for board meetings by working through board and agenda papers
• ensure that management reporting is presented in a clear and easily understood format containing all necessary information about the company that directors need to know
• actively participate in corporate planning including budgeting, strategic planning and cash flow projections
• have access to the entire management team and obtain information from them firsthand where necessary
• assign specific areas of responsibility to management to ensure individual accountability of each manager
• oversee the appointment of senior management and appoint only individuals of suitable calibre
• ensure compliance with relevant legislation and regulations and implement an effective reporting system to monitor such compliance
• conduct visits to company premises on a regular basis
• have a good working knowledge of the contents of important company documents such as the memorandum and articles of association, policy manuals, strategic plans, key contracts, the board charter and the terms of reference of board committees

Board charter

King II recommends that companies consider introducing a charter to govern the performance and operations of the board. A board charter might incorporate details of:

• board composition, proportion of independent directors to other directors, directorship terms and retirement age, and limits on the number of directorships held by each director
• the board’s major responsibilities, distinguishing these from management responsibilities
• director selection criteria including skill sets, diversity and experience, recruitment process, and the orientation and induction process to be followed with new directors
• board leadership issues including the selection of the chairman, the separation of roles of the CEO and chairman or the appointment of a lead independent director
• director compensation
• board meeting procedures
• board performance monitoring and board audits including the assessment of the board and committees' effectiveness and assessment of individual director performance
• guidance on conflicts of interest
• the constitution of Board Committees

A Charter and Terms of Reference for a company's board and board committees are considered essential for the proper governance of the company. Whilst the King II Report provides generic examples of such documents, companies are cautioned against simply adopting such generic standards without, in the first instance, interrogating the particular company's corporate governance needs and ensuring that the board and committee structures in place are appropriate in the specific context.

Should you require assistance with developing a Board Charter or Committee Terms of Reference, please contact Ramani Naidoo at Edward Nathan on (011) 269-7633.

Board audits

Modern companies are highly complex and evolving entities. A director’s attention is so often focused on the day-to-day activities of the company that the performance of the board itself may not be questioned until some major event occurs which forces the board to evaluate its effectiveness. The board has a responsibility to ensure that its own performance meets the high standards that it sets for the rest of the company. An analysis of the answers to questions such as those below should be turned into recommendations for incorporation into a strategic plan.

Some suggested areas for board and individual director evaluation follow:

Board performance

• are the key responsibilities noted in the Board charter being carried out?
• is adequate and timely information received?
• are meeting agendas appropriate and is adequate meeting time allotted?
• how well do directors work together, is communication and discussion appropriate and is a sufficient degree of consensus achieved on key issues?
• are there any “holy cows” in the boardroom environment which prevent open and frank discussion?
• is the board composition effective (i.e. is the mix of skills and diversity appropriate; how well do the personalities of directors interact in the boardroom?)
• is the board's overall level of effectiveness adequate?
• is the board the right size?
• are individual roles and responsibilities clearly defined?
• what criteria are used to select directors?
• do non-executive directors annually review succession plans for senior management?
• are the activities of the executive committee (if any) sufficiently contained to prevent the emergence of a "two-tier" board?

Board processes

• how critically are decisions debated?
• is sufficient time allowed in meetings for thoughtful discussion in addition to management presentations?
• can non-executive directors alter the meeting agenda?
• do non-executive directors meet separately from executives from time to time?
• is there an environment of openness and trust amongst directors?
• how effective is the chairman?

Internal information

• what internal information do directors receive?
• how are directors kept up to date on company performance?
• does the company help directors to prepare for meetings by sending relevant information and analyses ahead of time?
• do directors routinely speak to senior managers who are not represented on the board?

Non-executive directors

• is the board constituted such that important stakeholders consider it responsive, representative and legitimate?
• does the board include a significant percentage of independent, critical, outside directors who add value to the deliberation process?
• is there an appropriate balance of non-executive and executive directors?
• is there a nomination committee to search for and screen suitable candidates?
• are non-executive directors periodically rotated?

Strategic planning

• is the organisation bottom-line driven and/or short-term focused?
• does the board focus on strategic issues, or does it tend to debate operational matters at meetings?
• is the board actively involved in formulating long-range corporate strategy from the start of the planning cycle?
• does the board have regular retreats for strategic planning, or is strategy at least a standing agenda item?
• are business risks and key assumptions about the company and its operating environment clearly identified and regularly challenged?

Compensation and performance appraisal

• how critically is corporate performance appraised?
• is good board performance visibly rewarded?
• is indifferent or poor board performance addressed?
• does the remuneration committee base director compensation on long-term results?
• is the performance of each director regularly reviewed?
• do non-executive directors formally evaluate the chief executive's performance, objectives and personal plans every year?
• is at least a portion of directors' pay linked to corporate performance?
• are directors who are no longer making an adequate contribution discouraged from standing for re-election?

Individual director performance

• does the director attend board meetings regularly?
• is the director adequately prepared for meetings?
• does the director participate actively during meetings?
• is the director able to communicate and express ideas clearly?
• is the director willing to listen and acknowledge other viewpoints?
• does the director understand the business of the company and industry in which it operates?
• is the director able to work effectively with other directors and management in the best interests of the company?
• what does the director do well?
• what should the director do differently? and
• what is the overall level of contribution of the director?

Key questions

• What are the areas in which I can improve?