Governance conundrum: Corporates disregard the King report

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The retirement of Long4Life chief executive Brian Joffe, only to move to the chairperson’s office, is the latest such transition in South Africa’s business sector that has raised concerns about the blurring of lines to the detriment of corporate-governance integrity.

Issues regarding objectivity and a board not having independent oversight over a company often arises when corporates fail to fully adhere to the King Report on Corporate Governance, which outlines governance structures in the operation of local companies. 

Since the first booklet of the so-called King Reports was released in 1994, there have been three revisions, with the latest edition, King IV,  being published in 2016. 

According to King IV, a retired company chief executive should not become chair of the board until three complete years have passed since the end of their tenure. This cooling-off period is meant to ensure that the former chief executive can act independently as board chair.

There are risks when this cooling-off period is not observed, especially when there is a strong chief executive who could have an influence on the board, according to advocate Annamarie van der Merwe, executive chair of the FluidRock Governance Group and, until recently, a longstanding member of the King Committee on Corporate Governance.

“There is a risk of established relationships that make it very difficult for a new CEO to bring his own flavour into the business. He’ll consult with the chair to drive a certain strategy, which he may want to say ‘actually I don’t agree with the strategy’ but does not have the space to do so,” said Van der Merwe. 

“In other words, the dynamic created between the new CEO and chair is immediately at risk.” 

The chairperson is responsible for marshalling the effective functioning of the board including the collective oversight of management and should ideally be independent, while the chief executive spearheads the business. 

The cooling-off period is tied to when a director who previously served in an executive capacity can be classified as an independent non-executive director, said Professor Nadia Mans-Kemp, of the department of business management at Stellenbosch University.

“If a director directly steps over from being CEO to serving as the board chair, then they cannot be classified as independent based on the King Report,” Mans-Kemp said.

Van der Merwe said one of her big frustrations with the business world is its unwillingness to understand the importance of corporate governance. But the King Report on Corporate Governance is not legislation, so no authority can hold companies who do not follow its guidelines to account. 

“People don’t buy into the value of good governance because they don’t see the benefit of it. No regulator, bureaucrat or institution forcing it is going to have positive outcomes. It has to be, to a large extent, self-regulatory and that is the only way it can have a positive effect,” Van der Merwe said. 

Commenting on the move by Long4Life’s Joffe, she said: “Is this the right decision with Brian? I don’t know and that’s the job of the board. They were comfortable, at the end of the day, with that decision.

“We have always said that it is for the board to weigh up the pros and cons of ignoring a good governance recommendation such as this one.” 

Long4Life’s financial director Mireille Levenstein said the company’s board did consider the King Report when making its decision to elect Joffe as chair.

“We just felt that from a Long4Life perspective and with Brian’s huge wealth of experience, we would want to retain that and it would be much more beneficial for all shareholders to tap into,” she said.

The 74-year-old Joffe is a business heavyweight who founded the Bidvest Group in 1988 and was appointed chief executive in 2004 before stepping down 12 years later. He then founded holding company Long4Life and listed it on the JSE in 2017. Long4Life now has a market value of R3.81-billion. 

“Somebody of his stature with his knowledge, leadership and expertise … all the shareholders would want to support his role as chairman and his continued involvement in the group. So, that is our reasoning for the board wanting him to take the chairmanship role,” said Levenstein. 

She added that the board believed it would be in the interest of shareholders for Joffe to be involved in all strategic decisions: “It’s just more relinquishing his operational day-to-day as CEO but as chairman he would be involved in all major corporate strategic activities.” 

Van der Merwe believes technology group EOH’s move a few years ago to appoint its recently-resigned chief executive as chair of the board was certainly not the right move.

Asher Bohbot was co-founder and chief executive of EOH from 1998 to 2017, before he became chairperson of the board from 2018 until his resignation in 2019, amid a governance overhaul.

“Let’s look back at EOH — was it the right decision from the board? In all probability, no, it wasn’t. Especially if you look today, here you have a company that has instituted civil claims against that particular individual,” said Van der Merwe. 

EOH recently charged Bohbot with a damages claim of R1.7-billion for failing to protect the interests of the business and enabling an environment for corruption. 

According to a News24 article, EOH, in its submission to the court, said Bohbot failed to implement effective anti-bribery and anti-corruption measures including measures to prevent conflict of interest.

EOH wants Bohbot to be declared a delinquent director and barred from acting as a director of any company for seven years from the date of the court order.

This comes after current chief executive Stephen van Coller last year appeared at the Zondo commission of inquiry into state capture to testify about the company’s suspicious dealings with the government.

In his testimony Van Coller said EOH’s governance failure started with its board. The failure of the board was not only in its oversight role but also in how it was constituted.

Whether a chief executive should be prevented from becoming a chairperson should be dependent on the facts of the case, according to Chris Logan, the chief investment officer at Opportune Investments.

“Jeff Bezos just did this earlier this year at Amazon. If a remarkably talented founder like Elon Musk decided he needed to step back a bit it would be a travesty if some rule prevented him from becoming chairman,” Logan said.

He acknowledged that there were instances of some rotten apples moving from chief executive to the chairperson’s office, “but I would say the problem is that they are rotten apples to begin with”.

The King Report needed to be updated to make it more effective, Logan added: “Our listed corporate sector in South Africa has been anything but well run with numerous frauds like Steinhoff and Tongaat, and it is shrinking with six years of delistings on the JSE despite a global IPO boom. King [Report] must share the blame for some of this and it needs to be revised fundamentally.”

An example of a South African chief executive who followed King IV recommendations was Standard Bank’s Jacko Maree, who was at the helm for 13 years and after a four-year cooling-off period returned as non-executive deputy chairperson. 

Anathi Madubela is an Adamela Trust business reporter at the Mail & Guardian