PARMI NATESAN

Less is more: board members should not take on too many directorships

Arecent editorial in Business Day raised a perennial governance hot potato: on just how many boards should a single individual be able to serve? The tenor of the article was that the chair of Capitec should focus on that role, and risked being distracted by chairing two other boards as well.

It’s an important issue. While a seat on the board was once a coveted job - the crown of a successful business career - the development of governance over the years means that business acumen and experience alone are no longer enough. Specific technical skills in governance are now essential, as are the personal or social skills that support critical thinking and collaborative exchanges.

At the same time, board members can be held personally liable for decisions that were poorly thought through, or that were taken without sufficient information — whenever their duties were breached, in fact. For example, boards can no longer rely simply on board packs; they need to develop their own sources of information to correct the information imbalance that always exists between board members and management.

In the South African context, this kind of detective work is particularly important when an organisation is captured in whole or in part.

I could go on discussing the ways in which the scope of the director’s job has widened as the role has grown in importance, but you get the drift. The point here is that the time a director needs to commit to do the job properly has expanded. This is even more so when it comes to the chair’s role.

Estimates vary, but the National Association of Corporate Directors in the US says that board directors are averaging around 250 hours per year per company, up 18% from the average before the 2008 financial crisis. A board member who has a day job could realistically only take on one or two board positions at most, one would imagine, while a professional director could perhaps manage four.

It’s interesting to note that the PWC 2022 “Non-executive directors: Practices and fees trends” report shows that the vast majority of non-executive directors sit on only one board (1,148 in 2021), with only 211 sitting on two boards and 79 on three. The totals drop dramatically, with only one director sitting on six boards.

Those figures would seem to indicate that South African directors have already realised that less is more when it comes to the number of boards they sit on.

Perhaps most convincing of all, research indicates that “over-boarded” directors negatively affect the financial performance of a company.

That said, we should also recognise that it’s very difficult to come to a firm figure of how many boards one can serve on. One factor is that large, complex companies that have a significant role in the economy will require significant time from their directors, whereas a small nonprofit might require much less.

The fact that the chair of Eskom chose to resign as chair of a large bank to devote himself to the troubled power utility was probably a wise move given the challenges the organisation faces.

The time a director needs to commit to do the job properly has expanded. This is even more so when it comes to the chair’s role

Henley Business School research suggests that directors should serve on no more than four boards, but the Institute of Directors in South Africa believes that each organisation needs to determine how much time each board member’s role requires. Organisations must also put the right process in place to ensure that current or prospective board members can commit to that.

The individual director’s ability, experience and capacity would also be factors to consider, as already noted. Another important consideration would be the director’s flexibility — would he or she be able to ramp up the time devoted to work during periods of crisis? Individuals who are fully committed will presumably not have that flexibility.

In view of the growing realisation that governance plays a crucial role in ensuring corporate sustainability, investors are starting to take note of how many boards non-executive directors serve on. In the UK and the US, institutional investors (often via proxy services) now oppose the appointment of directors with more than five board seats. In India, by contrast, the legal limit of directorships is 20.

South Africa’s Companies Act gives no prescription on the subject. King IV addresses the challenge by, among others, recommending transparency, advising independent non-executive directors to detail their other board commitments and to provide a written undertaking that they have enough time to discharge their board responsibilities.

The director’s role has become steadily more important, and this trend will continue — the Zondo commission reports have demonstrated all too vividly the consequences of poor governance.

It might make sense for boards to formalise the minimum amount of time that each role requires. The overriding principle is that the issue needs to be thoroughly ventilated and minuted to ensure there is consensus about what the role demands, and whether each director can give the time needed.

The nominations committee also plays a key role in monitoring the attendance and involvement of board members and should act swiftly where there are capacity concerns.