We have become spectators of ongoing sagas in corporate governance having gone wrong. Examples abound, the latest of which involve the very institutional investors who are supposed to promote corporate governance through responsible investing practices who seem to be flouting the requirement of the King code by failing to put remuneration policies to shareholders’ vote.
In that same industry, disciplinary proceedings against an executive have been pursued under circumstances that are anything but transparent.
This is not to mention the failure of a good number of public sector boards to stem the ongoing decay at the entities they serve.
Reflecting on this mayhem, it is probably justifiable to question whether the King Code of Governance Principles is promoting the standard of excellence.
Has it perhaps become one of those establishments that is tolerated and respected for the sheen of respectability that it brings, but which in reality is no more than a ceremonial detail?
Recent headlines such as “The flaw in King’s board formula” and “The King code got it wrong” suggest the King may be scantily clad.
Both articles contend that the presence of independent directors on boards, as recommended in King, adds little or no value, because these directors are too far removed from either the company or the relevant industry to make a meaningful contribution.
The failure of African Bank, compared with the success of Capitec, despite their similar business models, as well as various studies, are cited in support of this view.
However, the problem is not attributable to the code getting it wrong, but rather to the peculiar mindset shown to its application.
To illustrate this, let’s use the example at hand, namely independent directors.
The reason for having independent directors on a board is, first, to provide objective monitoring of management as a protection mechanism for shareholders and other stakeholders against potential managerial excesses.
Second, independent directors should contribute to performance by constructively challenging the business strategy, direction and decisions proposed by management.
The idea is that these directors should provide this additional perspective, which results in a more robust strategy that delivers better results and improved performance.
Considering the above, it seems clear that without the required knowledge of an industry or relevant experience, directors would be unable to oversee, challenge and contribute.
It is more likely that these hapless individuals knowingly or unknowingly defer to executive knowledge.
But objectivity and knowledge are required to be an effective board member.
Sacrificing industry knowledge and experience on the altar of independence is typical of the application of a recommended practice without consideration for its context. As the saying goes, common sense is not so common after all.