Who watches the watchers?

The board of a company is the structure that is primarily accountable for the governance and performance of the organisation – a well-known fact. A board is meant to provide strategic direction and oversight to the company, while, for the most part, remaining fairly independent from the operations and day to day running of the company (save for those executive directors of the board). While this can sometimes prove to be a difficult balance to strike, depending on the nature of the company. A not so “well-known fact” is whether anyone can or does hold a board accountable for its own performance.

In recent years, we have seen, the great extent to which boards can have a huge impact and an indirect (sometimes direct) influence on the day-to-day running and overall performance of a company. We have also seen how they can be, and in some instances have been, held ultimately accountable when things go awry – particularly with regard to state-owned entities (“SOEs”).

Take Eskom, SAA and even Transnet for example. After years of sustained allegations of maladministration and impropriety at board level, the boards of these entities were essentially overhauled. Various of these former board members have faced great personal consequences for their alleged lack of care, skill and diligence in executing their duties while sitting on these boards.

A number of the former directors of Eskom are facing litigation in a bid to see them declared delinquent for their role in the downfall of the power utility, while some members of the Transnet board could be facing litigation to recover certain monies lost during their tenure. Last week, we heard testimony from SAA’s former treasurer on how the then board made highly questionable decisions regarding the preferred service provider to fund a R14 billion consolidation process – something that will certainly not go overlooked by the State Capture Commission.

These issues, however, are not unique to SOEs or the public sector. After billions of Rands of shareholder value was obliterated on the JSE following revelations of “accounting irregularities” at Steinhoff, many were left asking – where was the board? A fair question that needs legitimate answers. This question applies to all private companies that have found themselves entangled in allegations of fraud, corruption and even state capture. While the answers in each individual case may be complex and nuanced, there is one likely answer that applies to all of the above mentioned entities: the boards were not doing their jobs effectively. Whether due to naivety (being overly trusting of executive directors and management) or due to outright maleficence on the part of some board members – it is not difficult to conclude that these boards were not working as effectively as they should.

In a normal working environment, employees and independent workers alike are required to meet certain standards or reach certain targets, under pain of dismissal for incompetence incapacity or losing their livelihood. The performance of such persons is pivotal to success of the organisation, but not as pivotal as the performance of the board itself, however boards are rarely held to the same standards and expectations.

This then begs the question – who ensures that the board are performing effectively and in the best interests of the company? Who watches the watchers? The answer is – no one in particular.

The shareholder of an entity has the most to lose should a board fail to perform its function with diligence care and skill. In terms of the Companies Act, they are ordinarily entitled to nominate a director to sit on the board. Such an individual would be in a position to somewhat oversee the performance of the board from an arm’s length (and we are talking about a very long arm here). The Companies Act also affords shareholders a number of rights and actions to use, should they feel that the board is not performing as it ought to – however these avenues usually only kick into gear when things have gone terribly awry. What would serve the shareholder is if the board was monitored in a way that keeps the board in check more closely and regularly.

In this regard, King IV (Principle 9) proposes that the watchers should watch themselves – which is not a terrible idea in circumstances where there are no clear legal or other obligations for reviewing the performance of a board. However, this can be likened to asking students to mark their own homework.

So there are no clear and concrete answers. This is accordingly a gap that companies and state owned entities must grapple with in order to create concrete and innovative solutions. Over and above that, in the age of state capture, where everyone’s hands can be dirtied, this is perhaps a gap where law makers should step in.

Deborah Mutemwa-Tumbo, Chairwoman: Tumbo Scott