On my return to legal practice from the world of private equity, the first article I wrote was about good corporate governance. You might think it a dry topic for the first round, but it made sense to me at the time because, in my experience, its relevance is so often underappreciated. I also thought that although it may be dry, at least it should resonate somehow with most people. Even if it only results in a brief re-examination of any established biases about governance, it will have achieved something.
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There is a trend for people who are involved in the transactional side of business – generally senior management – to shy away from the subject of governance. Surely that’s what company secretaries and compliance officers are for? But it’s this kind of thinking which undervalues the importance of good governance.
In case you are picking up this article first, although the two may easily be read independently of each other, the following is the link to Part 1. I mentioned then that there is an established connection between good corporate governance on the one hand, and enterprise valuations and the ability to raise debt on the other. A company which has its corporate governance ducks in a row creates an immediate impression of being well run, where executive management knows what is going on and, to mix metaphors, has a firm hand on the tiller. It demonstrates, for example, engagement with a board that functions effectively, that has the information it needs at its fingertips, and that plays a proactive and valuable role in the affairs of the company.
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Private companies looking for equity investors or for finance from any third party could benefit from answering questions with the following flavour:
Board of Directors​
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What does the Board of Directors look like? Are most members of the board independent non-executives? Is it suitably representative of individuals from different backgrounds, and do they collectively bring relevant industry-specific or other expertise?
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Is there a board charter or corporate governance framework in place that explains, at least, the following: what corporate governance means in the context of the company, the expectations the company has of each of the members of the board, and roles and responsibilities of board subcommittees?
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Do each of the board members understand their legal (both statutory and common law) responsibilities, as well as what is expected of them at board level?
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Board Subcommittees
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Have the relevant board subcommittees been constituted and are they functioning properly? Consider the following:
- Is there an Audit Committee, or a combined Audit and Risk Committee? If the mandate of the Audit Committee does not also address the company’s risk environment, is there a separate Risk Committee?
- Is there a Remuneration Committee? While the requirement for such a committee has not been legislated, it is addressed in the proposed new section 30B of the Companies Act (which has not yet been promulgated).
- Is there a Social and Ethics Committee?
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Who are the members of these committees, and are their qualifications and experience relevant to their respective roles? In the case of the Audit Committee, for example, are the members aware of section 94 of the Companies Act (helpfully entitled Audit Committees), and does the committee comply with the requirements of this section? ​
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Are the responsibilities of each committee set out in a clear Terms of Reference or other formal document, and has this been circulated to, and acknowledged by, both the board and all the relevant committee members?
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Meetings, Minutes and Resolutions
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Is there a corporate calendar that sets out, annually in advance, the dates upon which the board and its various subcommittees are to meet?
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Are meetings properly minuted, and are these reviewed and signed off by the relevant committees?
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Is there a comprehensive set of properly prepared and executed resolutions for all decisions taken?
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A bugbear of mine is that although minutes and resolutions are the official record of decisions made by the company, they are frequently either wrong, or sometimes plain misleading. When they are well prepared, they provide a comprehensive history of the company’s affairs, and detailed rationale for and background to decisions taken. When they’re badly done, as all too often appears to be the case, they frequently don’t comply with the applicable law, are often incomplete, and they generally gloss over material facts or issues. These types of records ask more questions than they answer.
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A final thought is that all executive decisions need to be critically examined. It is all very well for busy executives to make important decisions in the corridors, but we all have blind spots – unconscious biases about our own decision-making ability. These biases lead even the smartest people to make stupid decisions sometimes, as they believe emphatically that, because they are equipped with their unique intelligence and their experience, they are right even when they are wrong.
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A board whose members possess relevant experience and expertise can challenge a decision, and can ask for more information where it appears that insufficient information was provided. It provides accountability for decisions, and ensures that the decision-making process is robust. It monitors decisions made, and ensures that any deviations or variations are noted. All this means (and this should be of considerable comfort to the executive team) is that an engaged board is likely to make better decisions.
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To quote an old friend: ‘A decision-making process that provides some guidelines and guardrails provides some safeguards against really stupid decisions.’
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Mason* is a Senior Consultant | Bowmans
* Peter is an ex corporate finance and banking lawyer. After leaving banking,
and a brief sojourn at a large SA law firm, he spent 10 years as a partner of a
private equity fund manager based in Johannesburg.
