Getting the balance right: Why directors are quitting and what should be done about it

A cursory glance of the newspapers confirms what we've all been suspecting for some time- that more and more directors are quitting their board positions, creating a worrying vacuum for South Africa's fledgling economy.

And although the real reasons may not be made public, they may be rather cruder than most are willing to admit.

How many directors does it take to screw in a light bulb? Just one will do (according to the latest permutation of this joke), while the others root through the well over 300 pieces of legislation pertaining to directors in order to establish the appropriate process.

In the good/bad old days, pre-Enron, things were somewhat different. Board memberships correlated closely with those of fancy country clubs, and rather more cigar smoking took place than smoking out of potential fraudsters. In short, no great risk was perceived and the rewards and prestige associated with some of these appointments was considered adequate.

Times have changed, but as with so many initiatives that are borne out of troubled times, were currently experiencing the swing of the pendulum towards a highly (perhaps overly) legislated environment, and away from a freer context that allows directors to maintain a stronger focus on creating company wealth.

Conformance vs. Transformance

Adhering to the processes that help ensure the board and management are acting in the best interests of the company is non-negotiable. But as the IoD's King Report on Corporate Governance warned in 2002, "conforming to corporate governance standard may well result in constraints on management. Boards have to balance these constraints with performance for financial success and the sustainability of the company's business."

The kind of strain that already overstretched or inexperienced directors would be loathe to put up with. And as it happens, things aren't likely to get any less arduous or onerous for them just yet. The question of transformance where the board explores better and more efficient ways of doing things and takes a broader view to see whether or not they are still in the right business or on the right track is an area almost totally neglected by most directors.

Three new pieces of legislation are due to come into effect during 2007 the new Companies Act, the Prevention and Combating of Corrupt Activities Act, and the Auditing Profession Act while good in their intention, are not likely to succeed in the government's stated objective (for the Companies Act at least) of making it easier for companies to do business. The Codes of Good Practice on Broad-Based Black Economic Empowerment, while noble in their objectives, are also doing their bit to turn up the heat.

Add to this the pressure of having to make sure that the tone at the top of an organisation is as it should be, as well as the additional challenge of ensuring that the company keeps pace with society's demands and is strategically placed to cope with the needs of a rapidly evolving business - to put it mildly, being a director these days means far more than a little late-night reading on the eve of a big board meeting, followed by what used to be regarded as a relatively easy cheque. Shareholder activism is another pressure point and recent interventions by Public Investment Corporation highlight this. PIC as the custodian of R600 billion, is now enormously powerful in that of restructuring boards where it has money invested.

Given the increasing demands on the average director's time and attention, potentially disastrous risks to reputation, not to mention the small matter of losing your house after all, directors are held liable if the courts uncover any funny business even after they've resigned from the board it's easy to understand why candidates are becoming more circumspect about the directorships they take on. And this is particularly true if the remuneration is not deemed great enough to outweigh the considerable risks.

In addition, South Africa is rapidly losing some of its best directors to overseas companies who're willing to pay top dollar for their sought after skills and experience. And crime is of course another influencing factor that forces them to imagine a less stressful life elsewhere.

The result is that while the demand for skilled directors is steadily increasing in the countrys growing economy, the pool of suitably experienced candidates continues to shrink at a disturbing rate.

Creating an environment for growth

There is clearly no easy solution to this rather complex problem. We, as the IoD, would at this time stress the key importance of training directors to ensure they have the skills to do their jobs properly amidst the present, highly regulated environment. Equipping directors to handle the pressure given whats expected of them is also crucial if they are to make significant contributions towards effective boards.

But this alone is not enough. There is a pressing need for the government to reduce the red tape that threatens to hold back significant economic growth over the next few years.

A director's job is after all to focus on wealth creation through entrepreneurship. But when the laws of the land dont create the right atmosphere for those gifted in business to work their entrepreneurial magic, it becomes understandable that they might seek a less stifling environment.

We're not calling for overly drastic changes here, but we are pointing out the need for balance that IoD vice-president Mervyn King warned of five years ago.

It's time for business to make its presence felt in the interests of a prosperous future economy on which the government of the day does after all depend.

Tony Dixon is Executive Director of the Institute of Directors in Southern Africa (IoD)