Cronyism a problem for directors

The difficulty of shareholders ever knowing whether the members of the board are competent was highlighted by the fallout that followed Ketso Gordhan's departure from the PPC board last year. It's an issue that troubles shareholders across the globe.

In its recently released annual report on nonexecutive directors, PwC South Africa refers to the annual corporate directors' survey undertaken by its US counterpart in which 36% of those surveyed suggested someone on their board should be replaced. And it appears directors who have been on the board for a shorter period are more likely to believe someone should be replaced.

"Directors continue to cite diminished performance due to ageing, lack of expertise and not being prepared for meetings as the top reasons for their dissatisfaction with peers' performance," says the South African report.

And it seems that cronyism is at the heart of the problems, with more than 33% of directors in the US survey saying the biggest impediment to replacing an underperforming director is that board leadership is uncomfortable addressing the issue. "Lack of director assessments and ineffective board assessment processes are also considered impediments, with 9% of directors citing a close personal relationship between the underperforming director and the CEO as an impediment."

Gerald Seegers, the PwC director responsible for the local report, believes the US experience is "fairly universal". Seegers says although the evaluation process for executive directors is vigorous, "it is not as robust for nonexecutives . it is an evolving practice".

The forced rotation of one-third of the board at every annual general meeting has not been much help to South African shareholders - mainly because they have no useful information on the director's performance to guide their voting decision.

Charl Kocks, director of Ratings Afrika, believes that one way of assisting shareholders would be for the nomination committee to be required to recommend - or not - each director put forward for election. A recommendation would appear to be implicit in the fact that a director is being put forward for re-election, but Kocks says the re-election process has become mechanical.

"Being required to make a statement might help to focus the nomination committee, and it means the re-election is not automatic."

The PwC report also highlights the far greater reliance on self-regulation in South Africa than in the US or Europe, particularly on the issue of remuneration. The EU has imposed limits on the ratio of variable to guaranteed remuneration. It has also imposed restrictions on golden handshakes and is planning to make the shareholder vote on remuneration policy a binding one.

But it appears that the greatest concern among board members in the US and the EU was sparked by proposals to require companies to disclose details of the gap between the pay of the average executive director and of the average full-time employee. The EU's proposal is that the company's remuneration policy "shall explain how the pay and employment conditions of employees of the company were taken into account when setting the policy or directors' remuneration".