Historically, the chair of the board of directors filled a procedural and ceremonial role. This was a low bar focusing on the chair’s role in meetings.
But in recent years their role in companies has evolved to become much more complex and demanding. Some reasons for this may be the global increasing governance burden on companies, more focus on strategy issues, and greater awareness of risk.
Today the chair is seen as vital for effective corporate governance. They are required to lead the board in fulfilling its governance duties and responsibilities. In fact, the chair was considered by a Global Board Culture Survey to be the “single biggest differentiator” between the most and least effective boards.
An effective board demonstrates sound business judgment, has an independent perspective, is able to challenge management when appropriate, asks the right questions and has the courage to do the right thing.
It is crucial for chairs to fulfil their roles effectively. A failure to do so may result in an ineffective board and a poorly performing company.
Countries have, to varying degrees, laws and corporate governance codes in place to guide the regulation of the job. But not all do this adequately. South Africa is a case in point. Its laws on the issue are not adequate or clear.
In my research as a professor of company law, I found that there are several shortcomings in the regulation of the office. I outline some of them below, and suggest ways they can be addressed.
Shortcomings
Inconsistency. The South African Companies Act doesn’t address the appointment process of the chair. So there is inconsistency among companies.
South Africa’s corporate governance code, the King IV Report, recommends that the chair should be an independent non-executive director. Independence means that the director does not have an interest, position, association or relationship which is likely to influence unduly or cause bias in making decisions.
But appointing an independent non-executive director as the chair isn’t mandatory for companies that aren’t listed on the Johannesburg Stock Exchange. That means that the chair of unlisted companies does not need to be a director. This goes against the King IV Report’s recommendation.
Qualifications: No professional qualifications are required for the role even though it’s demanding and requires a complex set of skills.
Chairs must know the general procedures and principles of board and shareholders’ meetings. They must also understand general company law and corporate governance principles. Some skills that chairs should have are the ability to think strategically, communicate clearly, be a good listener and have emotional intelligence. Examples of professional qualifications that would help chairs are qualifications in corporate governance, company law, business administration and accounting.
Term limits: There are no limits on how long a chair can serve. Some hold the position for a long time.
For instance, the chair of the South African airline Comair Limited (which is now liquidated) served for 46 years until shareholder activists publicly raised concerns about his independence at an annual general meeting. Following pressure from shareholders, the chair resigned, and Comair Limited was forced to replace him with an independent chair.
Independence: An independent chair is important to foster a culture of openness, which gives the board scope to consider diverse views. An independent chair is one who can exercise objective, unfettered judgment. A chair who dominates the board can stifle dissenting opinions.
That is one of the reasons the King IV Report advises against the same person holding the positions of both chief executive officer and chair. In listed companies these roles must be separated to enable companies to guard against concentrating too much power in the hands of one person.
King IV also recommends a three-year cooling-off period before a retired CEO can assume the role of chair. This ensures that the former CEO can act independently as the board chair.
But not all companies follow this recommendation. For instance, the CEO of the investment holding company Long4Life Ltd, Brian Joffe, retired and moved to the office of the chair immediately, bypassing the recommended cooling-off period.
Unclear responsibilities. There is very little guidance on the functions and powers of the chair. South African courts have not provided much guidance either.
This makes it difficult for chairs to understand their responsibilities. If they fail to fulfil their role correctly it can lead to wrong decisions. This can affect the company’s operations.
Unclear liabilities: South African law lacks clarity on whether the chair (who is a director) bears a heavier fiduciary duty than ordinary directors. Directors are fiduciaries to their company. This means they must act in good faith, with honesty and loyalty, and in the company’s best interests. They must not put themselves in a position where their personal interests conflict with their duties to the company. It is also unclear whether the chair holds a higher duty of care, skill and diligence than other directors. The lack of clarity can lead to problems for the chair.
The way forward
The Companies Act and the King IV Report must provide updated guidance tailored to the modern role of company chairs.
Firstly, a standard appointment process will avoid ambiguity about the appointment of the chair. It will ensure that there is consistency and transparency in the process, and clarify that the chair should be a director of the company.
Secondly, it would be advisable for companies to require chairs to meet certain minimum qualifications before being eligible.
Thirdly, limits must be placed on how long chairs may stay in the job. Based on my research, I am of the view that capping the chair’s term at nine years is ideal.
Fourthly, in my view the chair would probably be held to a higher standard than ordinary directors. But since South Africa’s courts have not ruled on this it’s not clear. This uncertainty leaves chairs unsure about their duties. They face the risk of personal liability if they breach their duties.
