INDIVIDUALS seeking annuity income from their fees for sitting on multiple boards should now think twice before going directly to prison without passing go, or being sued for more than what they earn from being serial nonexecutive directors.
This warning is not just directed at directors serving multiple companies, but also at companies and shareholders who appoint any Tom, Dick or Harriet to their boards for patronage and other ulterior motives, rather than the skills and contributions a director could make to the board.
This is a lesson companies should pick up from the strong decision taken by black economic empowerment (BEE) shareholders of African Bank Investments Limited (Abil) to sue the failed bank’s directors and auditor.
If you missed that story or have forgotten, here is a brief account. The BEE shareholders, Hlumisa and Eyomhlaba, are suing Abil’s directors for a total of R2bn, for allegedly acting recklessly in directing the affairs of the company, thereby costing Abil’s shareholders some big money.
It is a matter of fact that Abil had few directors with experience in the banking sector. Of course, with hindsight now that things have fallen apart, one wonders how some people on that board managed to get the blessings of the regulator and shareholders to continue serving as directors.
Having said that, before the BEE shareholders think they have any moral monopoly in this matter, the court may want to find out whether they (the BEE shareholders) participated in the re-election of these directors, and if so, why they did not stage a revolt and oust them rather than crying foul after things fell apart.
One has heard stories of nonexecutive directors opening their board packs in the parking lot, 10 minutes before the start of a board meeting. These people’s packs look brand-new, as if they have just come from the printers. I am told that the lack of dog-ears and other markings on the pages of some board packs could fool you into thinking some of these directors were taught well at school to be neat and never to write on books.
It gets even worse — there are some directors who you struggle not to find on South African boards. Some individuals at some point have held directorships in 10 or more big listed companies. One wonders how they find time to read all the documentation, let alone attend meetings and contribute meaningfully, especially when the companies concerned have similar reporting periods and financial year-ends. And these are the people who are supposed to hold executives and managers to account?
There is a myth that is being peddled that the bulk of the multiserving and overstretched directors are those who come as BEE partners in a listed company. Of course, that factor does exist. But if you look deeper, you will find a number of white directors serving on multiple companies. This is not a new phenomenon. It predates BEE. There have been many patronage appointments in companies and boards and some are now exposed on social networks.
Of course, BEE will pose a challenge in the introduction of directors who may not have all the skills necessary to serve and have a positive effect on boards immediately.
Some black people are appointed because they are successful entrepreneurs, although they may have had little experience in the governance of listed entities.
To avoid exposing these directors to civil action, time and money has to be spent training them. Inexperienced black directors must also understand that a failure to learn exposes them to risk and embarrassment. With such behaviour prevalent, the Abil BEE shareholders’ civil claim is important, as it can go a long way towards improving governance and holding company management teams to account.
Although the Abil civil matter has spooked many directors, it is also an opportunity for companies to rid themselves of ineffective directors who do not deserve to be on boards, and those who are overstretched.
Reserving board appointments for a chosen few with connections also undermines the potential of younger people with skills and potential rather than experience, who could contribute in other ways.
The opportunity highlighted by the Abil lawsuit is for all affected stakeholders to see the sense in investing more time and energy in producing a new set of competent and effective directors. A failure to do this opens a company to collapse and potentially costly criminal and civil action.
• Ndzamela is a finance writer