Globally fund managers are becoming more critical and extremely thorough when conducting their due diligence around the board composition and requiring regular governing body member and governing body performance reviews.
Governing body effectiveness refers to the quality of performance of the Governing body and members, not only in their meetings, but in their consistent attention to and execution of duties and responsibilities throughout their term of office. This section provides some techniques and guidelines that will enable Governing body members to enhance their team-working, decision-making skills and personal effectiveness.
Governing body effectiveness begins with the selection and appointment of people who have a strong motivation to truly serve the aims and objects of the Company to which they have been nominated. Spurious motives such as prestige, visibility or networking opportunity will not be sufficient to maintain a high level of motivation and attention to the often mundane and thankless duties that they are expected to perform
Given that Governing body members serving on Governing body’s of non-profit organisations usually do not receive any remuneration for the legal and fiduciary responsibility they bear, or for their drive and investment of time, skills and knowledge into the success of the company, the inducement to persistently maintain a high level of diligence must be based on a dedication to its aims. Dedication cannot be fabricated or faked, and when the initial enthusiasm for the call wears off, it draws deeply from the reservoirs of commitment, character and values of those from whom this is expected.
To ensure that those appointed to Governing body’s remain in office for their full term and that they are productive and add significant value through their efforts and contributions, the selection of Governing body members should be planned, agreed on and well managed by the Governing body. The King report recommends that, “There should be no element of tokenism or cronyism in appointments.” This is of even greater importance to the appointment of non-executive Governing body members, serving without any form of material incentive.
Once Governing body members are formally appointed and have received all such documentation that will give them as comprehensive an appreciation as possible of their duties, responsibilities, roles and functions, the following guidelines can assist towards their effectiveness:
Governing bodies should conduct regular, objective and honest, self- appraisals of the quality of ideas, solutions, reports and plans that are produced through their collective efforts. Such appraisals should not be limited to their own evaluation, but be extended to an assessment of the Governing body by the Members of the Company. Areas for assessment should include, but not be limited to:
Summary of key competences and attributes applicable to the selection, assessment and appointment of governing body members for public business entities without share capital. The draft Peer2Peer Governing body performance revue model is available as an additional service offering.
The King Report on Governance for South has a number of principles, practices and governance outcomes pertaining to governing organisation, governing body members and sub-committees. King IV is a voluntary code with an ethos of “comply and explain.”
For purposes of this study manual the application and relevance of King IV to non-profit organisation has been taken into account. There is a NPO supplement which has been developed by the Institute of Directors in Southern Africa which is most helpful.
Below are some of the relevant principles and recommended practices contained in King IV:
Performance evaluations, King IV™ recommends that a formal evaluation process be conducted at least every two years (King IV Code™ Part 5.3 Recommended practice 73). The governing body should schedule in its yearly work plan an opportunity for consideration, reflection and discussion of its performance and that of its committees, its chair and its members as a whole, in every alternate year (King IV Code™ Part 5.3 Recommended practice 74).
Principle 8, the governing body should ensure that its arrangements for delegation within its own structures promote independent judgement, and assist with balance of power and the effective discharge of its duties.
Principle 9 The governing body should ensure that the evaluation of its own performance and that of its committees, its chair and its individual members, support continued improvement in its performance and effectiveness.
Principle 10 The governing body should ensure that the appointment of, and delegation to, management, contribute to role clarity and the effective exercise of authority and responsibilities.
Structure of the governing body The King IV recommends a unitary governing body consisting of executive and non-executive members. When determining the requisite number of members of the governing body, the following factors should be considered. The appropriate mix of executive, non-executive and independent non-executive members, [Part 5.3 Recommended practice 7]
The governing body should assume responsibility for its composition by setting the direction and approving the processes for it to attain the appropriate balance of knowledge, skills, experience, diversity and independence to objectively and effectively discharge its governance role and responsibilities. [Part 5.3 Recommended practice 6]
The governing body should comprise a majority of non-executive members, most of whom should be independent. [Part 5.3 Recommended practice 8]
The Governing body is required to appoint managers to operate the business on a day-to-day basis and to set up special committees as may become necessary in terms of the Public Finance Management Act, and to improve its own effectiveness.
When Managers are appointed, they should be conferred with sufficient authority to enable them to perform the duties and responsibilities assigned to them. The Governing body must ensure that service contracts are drawn up and formalised, and that such contracts accurately and adequately set out the functions and responsibilities of Managers.
The Governing body members should endeavour to provide Managers with sufficient support in respect of direction, motivation, specialist advice and encouragement and instill them with confidence that the issues, dynamics and complexities of their operating environment are understood by the Governing body.
In carrying on the business of the enterprise, Managers shall:
Depending on the size and level of business activity of the Company, the Governing body shall ensure that at least the following Standing Committees are appointed:
In terms of Section 51 of the Public Finance Management Act, any Governing body of Governing body members defined as the Accounting Authority for a public entity and government business enterprise, must ensure that the public entity has and maintains a system of internal audit under the control and direction of an audit committee, complying with and operating in accordance with regulations and instructions as prescribed.
An internal audit committee is a fundamental component of good corporate governance and Deloitte and Touche state that the following additional benefits will be gained:
In principle an audit committee should be advisory in nature and not an executive committee and should not perform any management functions or assume any management responsibilities, as this could prejudice the objectivity of the committee.
The King Report recommends that the audit committee consist of a majority of non-executive Governing body members, one of which should act as the chair. The frequency of meetings will depend very much on circumstances and requirements but it should meet at least twice a year and address the following matters:
Prior to the commencement of the annual external audit
After completion of the external audit
To review the annual financial statements and other disclosures in the annual report before recommending them for approval by the Governing body.
All meetings of the internal audit committee should additionally be attended by the financial director of the Company and a representative of the external auditors, and where necessary, other Governing body members, managers or members of staff.
A formal agenda should be sent to all those required to attend at least a week before each meeting or earlier if possible. Minutes of the meetings must be taken recording all material matters, and copies should be distributed to all Governing body members.
The King report recommends that the internal audit committee be given a standing in the Company that commands respect and they must be seen as colleagues who aid the Governing body and executives to control their business. The chair of the audit committee must enjoy direct access to the Chair of the Governing body.
As said before, the effectiveness of Governing body members can be increased if the Governing body assigns various committees to handle specific matters. Many of these committees may only need to be of an ad hoc nature to attend to short term projects such as to investigate and recommend policies, complete feasibility studies and conduct studies on proposals that are presented at Governing body meetings. These types of committees often disband when their task is accomplished. The internal audit committee, however, should be a standing committee with only its membership changing as their circumstances change. However, the King III report recommends a number of sub-committees, including; risk and nomination committees.
The remuneration committee is another standing committee recommended by the King Report. A Company is not bound to pay its Governing body members for their services as governing body members. They must be paid only if the Articles of Association provide authorisation or if the remuneration has been approved by the members at a general meeting. The purpose of a remuneration committee is to ensure that Governing body members and senior executives are fairly rewarded for their individual contributions to the Company’s performance.
The composition and terms of reference of the committee must be decided by the Governing body, and like the internal audit committee, its role is to make informed recommendations and not to make management decisions.
The main benefit of such a committee is to demonstrate to Stakeholders that remuneration, especially of senior people, is set objectively and fairly by a committee of non-executive Governing body members who have no personal interest in the outcome of their decisions.
It is the responsibility of the Governing body of Governing body members to ensure that the Company complies with all the Statutory Regulations concerning the recruitment, selection, appointment and conditions of employment of people. The following suite of labour legislation would generally apply to organisations with employees:
In addition, Chapter Two of The Constitution of South Africa guarantees basic human rights commonly known as the “Bill of Rights.” Fundamental rights are not absolute and can sometimes be limited. This is because these rights operate in a society with values and norms which can limit certain basic rights. For example, while freedom of expression is a fundamental right, to recklessly shout “Fire! Fire!” in a crowded theater causing a hysterical stampede that leads to the death of some people, will undoubtedly result in prosecution and imprisonment. In society, a person’s rights end where the rights of others begin.
Individuals cannot sign away their fundamental rights and any employment contract that denies an employee a basic right cannot be enforced. Some of these basic human rights are:
Employees do accept certain obligations and conditions related to their duties when they become employed by organisations, and provided such conditions comply with the five Acts mentioned and they are therefore deemed to be “Fair,” employers have a right to insist that employees perform and behave as agreed.
Managers must ensure that all employees have formal contracts of employment, whether they are fixed-term contract workers or full time employees, and the duties and standards of work required from employees must be clearly set out in their job descriptions.
In addition to the execution of their direct duties, the King Report states that the organisation can reasonably expect the following from their employees:
Such conduct and expected values cannot be unreasonably demanded and remain largely a factor of the degree of mutual respect for human dignity and organisational objectives that exists within the Company.