Study shows improved in King III compliance

A new study by the Institute of Directors in Southern Africa (IoDSA) shows that boards appraised by the Institute since 2009 are showing a steady, measurable improvement in performance. According to Parmi Natesan, Senior Governance Specialist at the IoDSA, this is encouraging as a high-performing board is a prerequisite for a high-performing company.

“There are many reasons for poor company performance, but one of the root causes islacklustre performance by that company’s board,” says Ms Natesan. “For that reason, as well as pressure from institutional investors, King III placed enormous focus on board performance.”

In an effort to help member organisations improve board (and thus organisational) performance, the IoDSA began performing independent board appraisals in 2008. To date it has completed more than 80 board appraisals, and these have now been aggregated into a set of benchmarking data.

Overall, the results clearly show that board performance has steadily improved from 2.8 on a scale of one to four to 3.2. Perhaps unsurprisingly, the boards of large public companies performed better on all measures than the boards of state-owned entities and non-profits.

The IoDSA’s appraisal methodology covers six main performance areas, and in each of these performance has improved. Better performance in relation to board composition was particularly noteworthy because this area has perhaps the biggest impact on board performance. However, Tony Dixon, an IoDSA facilitator, notes that there are still flaws, especially in the nomination process, where there was still overemphasis on personal connections and not enough on the deep industry knowledge required for maximum board effectiveness.

When it comes to board responsibilities, there are a few areas of persistent underperformance. These include strategy formulation and oversight of its implementation, risk management and IT governance.

“It’s very important that there is a healthy tension between the board and management, with the board holding management to account. In addition, the board must not abdicate its responsibilities to its committees,” Mr Dixon explains.

In general, board committees was the area with the highest performance scores, with audit committees leading.  Since the introduction of King III, a marked improvement in understanding the role of board committees is evident.  .

The lowest performance scores were registered in the area of stakeholder relationships, a focus of King III. According to Mr Dixon, producing an integrated report (while a step in the right direction) is not enough. “We need to talk to all stakeholders—staff, customers, business partners and communities—regularly to find out how we are doing,” he says.

Turning to the consistent underperformance of public-sector entities, Mr Dixon says these boards face inherent challenges that  would take time to overcome. Among these challenges he notes that boards are chosen by one person (the minister) and that boards tend to get replaced when ministers change, which can be frequently. The result is a lack of institutional knowledge, which in turn gives management too much power. Another key challenge is the fact that executives often see themselves as accountable to the minister rather than the board.

“The steady improvement in the performance of the boards in this sample is a clear demonstration of the value that objective, independent board appraisal brings; this improvement is even more marked if one considers only those companies that have had such appraisal performed several times,” Ms Natesan says. “In general, South African boards have a great international reputation, which translates into growing foreign investment in our companies.”

The IoDSA, she concludes, has now built up a cadre of experienced board appraisal facilitators and has a solid, proven methodology. It will now begin marketing the board appraisal service more actively in an effort to help further strengthen South African business and thus the economy as a whole.

Press statement issued by IoDSA

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