Good corporate governance : can it be ensured through structures only : a critical evaluation of the role of the board and in particular the independent director

Scholtz, Louise (2004-03)

Thesis (MBA)--Stellenbosch University, 2004.

Thesis

ENGLISH ABSTRACT: The main problem area this dissertation studied is whether there the appointment of independent directors to the board, is firstly an adequate way to ensure good corporate governance, and secondly, if it is not the case, what must companies do to amend the situation. As result of various factors, amongst them the spectacular corporate failures worldwide that demonstrated the flaws in the shareholder democratic model, shareholder activism and global competitiveness corporate governance has taken centre stage. Pivotal to good corporate governance is the board of the company, as postulated not only by the majority of corporate governance models, but also by all the corporate governance codes. Furthermore, the perception of shareholders that independent directors are the most effective way to ensure that shareholder interests are protected has also been entrenched in the directives of corporate governance codes, with the inclusion of the South African King Code. As a result of the foregoing the role of independent directors has come under the spotlight, especially their failure to act in some of the instances of governance abuse by management. In this regard strong responses and possible prosecution has now alerted non-executive directors to the fact that there is no difference in liability between them and the executive brothers. Non-executive directors or independent directors have primarily two functions, they must monitor the performance of management and provide strategic input. As a result of the aforesaid corporate collapses non-executive directors are of the opinion that their monitoring role is being emphasis at the cost of their strategic role, which might be to the detriment of the company. Independent directors as the solution to all governance problems are however not flawless. Independence interpreted restricts access to possible suitable candidates. Furthermore, ineffective selection processes curtail the optimal functioning of boards, manipulation of information by management, lack of director training, and the increasing cost attendant to ensure adequate independent representation on the board. There are also "soft issues" that are even mere pervasive and destructive, the boardroom atmosphere that precludes open and honest discussion, the powerful chief executive and the failure of some directors to distinguish between managing and directing. In view of the problems highlighted above, this study project proposes that there has, firstly been an over-emphasis of the role that the independent director can play in ensuring good corporate governance at the cost of other measures that can be implemented. A more optimal situation can be created through a combination of a strong independent presence coupled with ongoing training and evaluation of boards and directors. There are two prerequisites for such training and evaluation to be successful. Firstly, the process must be actively driven by the chairman of the board and, secondly, directors must be made aware of the fact that shareholders have become more demanding and critical of their performance. Unless they are perceived to add value to the company they may find that they are without a job. In today's demanding environment companies and boards that do not actively encourage a learning culture will not survive.

AFRIKAANSE OPSOMMING: Die kern-probleemgebied wat in die verhandeling bestudeer is is tweeledig, eerstens, of die aanstelling van onafhanklike direkteure op die direksie voldoende is om goeie korporatiewe bestuur te verseker, en tweedens, indien dit nie die geval is nie, wat maatskappye te doen staan om die situasie reg te stel. As gevolg van verskeie faklore, onder andere die skouspelagtige korporatiewe mislukkings wereldwyd, wat die gebreke in die aandeelhouer demokratiese model aan die kaak gestel het, aandeelhouer aktivisme en globale mededinging, het korporatiewe bestuur 'n sentrale rol aangeneem. Die kern tot goeie korporatiewe bestuur is die direksie van die maatskappy, soos daargestel deur beide die meerderheid van koperatiewe bestuursmodelle en al die kodes ten opsigte van korporatiewe bestuur. Voorts, word die aanname van aandeelhouers dat onafhanklike direkteure die mees doeltreffendste wyse is om hulle belange te beskerm, verder ingeburger in die voorskrifte van korporatiewe bestuurskodes, wat die Suid-Afrikaanse King Kode 2 insluit. As gevolg van voormelde het die rol van onafhanklike direkteure in die spervuur beland, veral as gevolg van hulle versuim om op te tree in sommige gevalle van korporatiewe vergrepe deur die bestuur van die maatskappy. In die verband, het die sterk reaksie en die sprake van vervolging, 'n waarskuwing aan nie-uitvoerende direkteure gerig dat hulle net so aanspreeklik gehou kan word as hulle uitvoerende broers. Nie-uitvoerende direkteure or onafhanklike direkteure het primer twee funksies, hulle moet die prestasie van die bestuur monitor and hulle moet strategiese insette lewer. As gevolg van gesegde korporatiewe mislukkings is nie-uitvoerende direkteure nou van mening dat hulle moniteringsrol beklemtoon word ten koste van hulle strategiese rol, wat tot die nadeel van die maatskappy mag strek. Onafhanklike direkteure as die oplossing tot alle bestuursprobleme is egter nie volmaak nie. 'n Streng interpretasie van onafhanklikheid beperk die keuse van moontlike geskikte kandidate. Voorts word die optimale funktionering van direksies ingeperk deur ondoeltreffende keuringsprosesse, die manipulering van inligting deur die bestuur, gebrek aan direkteursopleiding and die stygende koste verbonde aan 'n voldoende onafhanklike teenwoordigheid op die direksie. Daar is ook "sagte" aspekte wat selfs meer vernietigend inwerk, naamlik die atmosfeer wat heers in die direksiesaal, die magtige hoof uitvoerende direkteur en die gebrek aan insig by direkteure rakende die verskil tussen die pligte van 'n direkteur en 'n bestuurder. Gegewe die voorafgaande probleme, is die verhandeling van mening dat die rol wat die onafhanklike direkteur kan speel om goeie korporatiewe bestuur te verseker oorbeklemtoon word. Hierdie klem is ten koste van ander maatreels, wat ingestel kan word. 'n Meer optimale klimaat kan geskep word deur 'n kombinasie van 'n sterk onafhanklike teenwoordigheid op die direksie, gekoppel aan deurlopende opleiding en evaluering van direksies en direkteure. Ten einde te verseker dat sodanige opleiding en evaluasie suksesvol is, is daar twee voorvereistes. Eerstens, moet die proses aktief deur die voorsitter bestuur word, en tweedens, moet 'n bewustheid by direkteure gekweek word aangaande die verwagtinge van aandeelhouers, wat meer veeleisend en krities staan teenoor hulle prestasie. Tensy hulle geag word waarde toe te voeg, mag direkteure hulle sonder 'n werk bevind. In vandag se veeleisende omgewing kan maatskappye en direksies, wat nie 'n leerkultuur aanmoedig nie, nie verwag om te oorleef nie.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/49978
This item appears in the following collections: