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BOARDROOM
R15.00 (Incl VAT)
Number 1 2010
Magazine for Chartered Secretaries - Southern Africa
Corporate Secretaries International
Association Launched
Over R290million allocated to 58 development projects to date with over 11 000 beneficiaries,
all of whom are in line with the NSDS targets of 85% black, 54% women and 4% people with disabilities.
BLACKMOON 05458
086 101 0001
fassetcallcentre@fasset.org.za
www.fasset.org.za
Fasset is the Sector Education and Training Authority for Finance, Accounting,
Management Consulting and Other Financial Services. F A S S E T
BOARDROOM
Number 1– 2010
Magazine for Chartered Secretaries - Southern Africa
BOARDROOM is published by The Eagle Publishing Contents
Company for The Southern African Institute of Chartered
Secretaries and Administrators, 14th Floor, Sable Centre, Chief executive’s message 2
41 De Korte Street, Braamfontein, Johannesburg, 2001.
PO Box 331, Wits 2050. Telephone: (011) 403-2900 Corporate Secretaries International Association –
Fax: (011) 403-1522 Website: http://www.icsa.co.za
EDITORIAL COMMITTEE: Rob Furney; Stephen Sadie.
Stephen Sadie
CONTRIBUTIONS: The Editor welcomes news items, press
CSIA question & answer 4
releases and technical articles related to business – Please
contact Rob Furney at (011) 326 0303 or post your articles to: CSIA-All the answers
P O Box 41928, Craighall 2024, RSA, or via E-mail to:
rob@eaglepub.co.za. corporate law 8
ADVERTISING & SALES:
Avenue Advertising – Barbara Spence Conduct and liability of directors in terms
E-mail: barbara@avenue.co.za – P O Box 71308, Bryanston, 2021
of the new Companies Act – Willie Coetzee
Tel: 011 463-7940 Fax: 086 518 9936 Mobile: 082 881 3454
The right of reproduction in any form of the whole or any part governance 10
of any article or other matter published in BOARDROOM is
vested in the Institute. All expressions of opinion in this journal Taming the beast of board papers – Mary Morel
are published on the basis that they are not to be regarded as
expressing the official opinion of the Institute unless expressly remuneration 14
so stated. The Institute, authors and all persons involved in the
preparation and distribution of this journal are not thereby giving Aligning your interests: How are executives remunerated?
legal, accounting or other professional advice and hence do not
accept any responsibility for the accuracy of any of the opinions
How should they be remunerated? – Henriëtte Scholtz
or information contained in the journal. Readers should not act or
& Riaan Rudman
refrain from acting on the basis of opinions or information without
first taking appropriate professional advice in respect of their own property 16
particular circumstances. The institute does not accept any liability
to advertisers for the publication of advertisements which may be Immovable property and the Budget
held to be contrary to law.
Taxation 19
Office Bearers for Botswana: Brian Mphoto
2009/2010
Tel: 00 267 390 5463 Companies cautioned not to unwittingly ‘de-group’ –
President: Jill Parratt
Senior Vice President:
Address: PO Box 3949 as unwelcome CGT liability could arise 19
Bert Kok Gaborone
Vice President: Nicky
Fasset 20
Botswana
Edmunds
E-mail: brianm@cashb.bw
Fasset celebrates a decade of delivery 20
Past President: Andy Sello
Head Office Cape Town: Rob Tiffin SAS 21
Chief Executive: Stephen
Sadie
Cell: 084 509 0367
2010: A year of action – Maphum Nxumalo
Tel: 021 514 3100
14th Floor, Sable Centre,
Planning 22
41 De Korte Street, Fax: 021 788 2025
Braamfontein, Johannesburg,
e-mail: rob@scentpac.co.za
Scenario planning: Preparing for the challenges of tomorrow
2001. PO Box 331, Wits 2050.
Telephone: 011 403-2900
Namibia: Eugene Shepherd Vouchers 23
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Branch Chairmen Institute News 24
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BoardRoom 1/2010 1
C h ief e x ecutive ’ s message
Corporate Secretaries
International
Association Stephen Sadie
By Stephen Sadie
I
recently returned from Paris where I represented the Southern register in Switzerland and is governed by a Council of which any
African Division at the launch of the Corporate Secretaries National organisation is eligible to become a full member. The
International Association (CSIA). Council then elects an Executive Committee to manage the day-
CSIA is an international federation of professional bodies to-day affairs of the federation.
established to promote corporate secretaryship and good governance. CSIA represents a group of people that have a unique skill-
Member organisations include national representative organisations set; a combination of legal, governance, ethics, business finance,
from Hong Kong/China, the United States, India, United Kingdom, accounting, secretarial, strategic and administration skills. The
Southern Africa, Malaysia, Singapore, New Zealand, Australia, Canada, practitioners within our member organisations are charged with the
Zimbabwe and many other jurisdictions. All share a common interest in responsibility of implementing good governance practices within their
the promotion of good governance and the professionals that underpin organisations. Accordingly, what we do is practical in orientation and
its practice. Working together, CSIA represents approximately 70,000 applied in nature.
governance professionals in more than 70 countries. There are a number of areas of work which the Association will
CSIA recognises that governance professionals occupy a wide undertake in 2010, probably the most important being the publication
variety of roles within the private, public and not-for-profit sectors and of 20 Practical Steps to Better Governance, which is an opinion paper
from country to country have differing degrees of recognition. CSIA was that draws on published material and the experience of a large group
formed to help all member organisations better serve their members of governance practitioners and academics. The paper attempts to
and their community. identify good and bad examples of corporate governance culminating
The Mission of CSIA is to develop and grow the study and practice in a number of practical steps that an organisation anywhere in the
of secretaryship to improve professional standards, the quality of world can take to help it on the path to better governance.
governance practice and to improve organisational performance. CSIA will also working with the World Trade Organisation to introduce
The purpose of CSIA: a separate Head in the Services Sectoral Classification List of the WTO.
CSIA has been established in order to assist member organisations CSIA does not in any way replace our affiliation to ICSA
to: International. CSIA does however allow us to link up with corporate
l Promote the professional status of suitably qualified chartered secretaries who are not part of the ICSA family such as the United
secretaries, corporate secretaries, company secretaries, board States and India and many other countries in the future which are
secretaries and other governance professionals not part of ICSA International. Philip Armstrong of Global Corporate
l Establish and maintain good relations and exchanges between Governance Forum and Grant Kirkpatrick spoke at the launch in Paris.
organisations dedicated to the promotion and practice of One of the major tasks to be undertaken is lobbying at a national
secretaryship and/or the promotion of good governance and international level to improve global governance standards and
l Develop and improve their services and professionalism of their establish universally acceptable principles of good governance.
members. Further on in this issue of BoardRoom you will find a Question
l Assist in the creation of such organisations in countries or regions and Answer article that explores the exciting development and
in which they do not currently exist. establishment of CSIA in more depth. To quote Phillip Baldwin, the
l Promote the growth, development, study and practice of Chief Executive of HKICS, “Corporate governance is undergoing
secretaryship and assist their members develop and improve their much questioning given the serious governance failings that
services and professional standards contributed to and sustained the financial crisis. In response, we
l Advocate for good governance through carrying out research, are creating a global professional organization – one building on
developing standards and raising awareness the strengths of national associations that represent corporate
l Promote the recognition and influence in respect of secretaryship secretaries, who are on the front line in helping companies
and its professional practitioners to national governments and implement best practice corporate governance. Governance is as
their supplementary/sponsored organisations, international much about people, as it is about procedures. Corporate secretaries
organisations and the global business community. are part of the solution to improve corporate governance practices
The CSIA is an association entered into the commercial worldwide.”
2 BoardRoom 1/2010
The frontline of governance
Canada
United Kingdom
United States of America Switzerland
China
India
Malaysia
Singapore
Zimbabwe
Australia
New Zealand
Southern Africa
CSIA Founding Members
The international leaders in corporate governance
across the world – united in one association
The official launch of CSIA was held on 22 March 2010 from 12:00 – 14:00 (CET)
at the World Bank Headquarters, 66 Avenue D’Lena, Paris, France
“Also launching 20 Practical Steps to Better Governance”
www.csiaorg.com l info@csiaorg.com l Tel: +852 2881 6177 l Fax: +852 2881 5050
Supporting organisations Founding sponsor
CSIA QUESTION & ANSWER
CSIA-All the answers
Q Why form CSIA now? and manages the Group’s insurance contract. Furthermore,
A Corporate governance is undergoing much questioning as it ensures the development of Société Générale Group’s
the consensus grows that there were failings in corporate Sustainable Development and Innovation approach.
governance that contributed to the financial crisis. We are The Corporate Secretary unit is formed of the Legal function,
creating a global professional organization – one building the Tax Department, the Insurance Department, the Compliance
on the strengths of national associations that represent the Department, the Innovation Sustainable Development
practitioners, the corporate secretaries who are on the front Department and the General Inspection.” (Source: http://careers.
line in helping companies implement best practice corporate socgen.com/groupe/en/knowing/our-industries/corporate-
governance. Governance is as much about people, as it is about secretary.html. )
procedures. Corporate secretaries are part of the solution. CSIA Q. Do you have a profile of the practitioner: Age, gender,
represents more than 70,000 governance professionals who can training, years of experience?
now express a global voice in shaping corporate governance A They differ greatly, depending on the country. In Asia, they tend
best practices based on their experiences, expertise, and to be younger and the likelihood of a corporate secretary being a
insights. To make governance work, you need input from woman is higher than in the US, UK, and Australia. For example,
those who design and put it into action corporate governance in Hong Kong, 63% of the members and students of HKICS are
standards and programs. female compared with 30% of the members in the UK; that said,
This is particularly important at times of economic downturn in the UK, 50% of the students are female.
when most companies tend to focus on the short-term financial Q The global financial crisis puts into question the role of
gains and performance instead of the long-term sustainability of corporate governance and those who were responsible
the business. for its effectiveness. What role did corporate secretaries
The corporate secretary can be broadly split into four roles: play?
Compliance, advice, support, and administration. A The financial crisis and the weaknesses that the crisis
i. Compliance: Listing rules, regulations (e.g. Securities exposed in corporate governance were major reasons behind
and Exchange Commission in the US, Financial Services the formation of CSIA. We are at the front line. We are part of
Authority in the UK, Securities and Futures Commission in the solution. We believe that governance best practices must
HK, China Securities Regulatory Commission in China), and be at the core of all sound, ethical business decisions. We’re
other legal, environmental, Corporate Social Responsibility, the governance professionals. Through CSIA, corporate
financial, contractual matters. secretaries and governance professionals will have a global
ii. Advice: Servicing and advising the chairman, board, and voice.
its committees (e.g. audit, governance, and remuneration, As you note, Dr. Shann Turnbull states that the real
etc.), corporate governance, stock exchange requirements, reason for the sub-prime crisis, the trigger for the global
communications channel for non-executive and independent financial meltdown, was a failure in corporate governance.
non-executive directors and shareholders, organisation of Before and during the financial crisis, corporate secretaries
the annual general meeting, and overall responsibility for the were providing advice to their boards and senior management.
annual report. They were and are leading efforts to review a company’s
iii. Support: Legal structures of the company, group/company corporate governance practices and adherence to both the letter
transactions (e.g. acquisitions – connected and otherwise). and the spirit of best practices.
iv. Administration: Share options, insurance, pension The UK combined code, for example, stipulates that
arrangements, risk management. every director must have access to the advice and services
Different companies and different cultures emphasize of the company secretary – advice we would encourage all
different aspects of the corporate secretary’s responsibilities. In companies everywhere to adhere to.
some companies the advisory role may be dominant, while at That said we shouldn’t run away with the idea that there
others the compliance responsibility may be the most important. has been a massive failure of governance across the whole
Ultimately, as the accounting firm Deloitte notes, “an effective corporate community. That isn’t so. While there are isolated
corporate secretary leads to further growth of confidence from cases of non-bank and financial institutions getting into
potential investors.” serious difficulty (in some cases through fraud, as opposed
In France, for example, at the financial institution Société to incompetence), by and large the corporate failings in 2008
Générale, “the mission of the Corporate Secretary unit is to and 2009 occurred primarily in the banking and financial
ensure the legal and tax security of the Group’s activities. It is services sector – and the reasons are now fairly clear; boards
responsible for the Group’s compliance function. It oversees failing to understand the risks their companies were taking or
CSIA QUESTION & ANSWER
the complex financial products in which they were investing; governance best practice. This gives them a unique vantage
inappropriate remuneration structures which encouraged a point when assessing risk, advising the chairman/board on
climate of recklessness; overly dominant CEO’s who were not matters of governance and compliance. The CFO tends to
sufficiently challenged by non-executive directors; and failure focus on finances, legal counsel on legal matters, whereas the
of regulatory oversight. No doubt there were other reasons too. corporate secretary takes these plus the opinions/likely reaction
The important point, however, is that the mechanisms supporting of shareholder and other stakeholders as well as NEDS and
good governance, including corporate secretaries, by and INEDS, listing and securities regulations, structural impact and
large worked well and we shouldn’t imply that the failings in the a host of other factors that other officers and management
banking sector affecting the whole corporate community. If there simply don’t have information about. That makes corporate
is one area in which most companies could be found wanting, secretaries unique. For example, chartered secretaries, many
it was, perhaps, that they did not anticipate the liquidity crisis of whom are company secretaries in large listed companies, are
that unfolded in the light of the banking failures, which thus qualified in law, finance, accounting, business ethics, regulatory
impaired their access to capital. The consequence has been management, corporate secretaryship and governance.
some corporate collapse (particularly in small and medium sized We’re part of the answer in helping the global economy
enterprises). recover from the financial crisis. As a profession, we see the
It should be remembered that corporate governance is a need for our greater involvement in ensuring that corporate
journey, not a destination. Our profession has been taking a governance best practices are adhered to worldwide. That is
dedicated role to enhance corporate governance and we will why we are joining together as a worldwide organization, pooling
continue to do so. our expertise and experience and providing that to the global
Q How can CSIA make a difference? standards setters for corporate governance. The objective is
A CSIA represents corporate governance practitioners, those at to ensure that these organizations, such as the OECD, have
the front line of governance/the gatekeepers of governance. the best information and insights available to inform their
We bring a different perspective to the boardroom. Corporate recommendations.
secretaries have a far broader brief and access to a tremendous The research report released at the official launch of CSIA, 20
amount of information about the company and corporate practical steps to better corporate governance – is one example of
CSIA QUESTION & ANSWER
how we are doing that. CSIA will work with the (Global Corporate integrity is independence. A good corporate secretary should
Governance) Forum to produce a Corporate Secretaries Toolkit, be the ‘wise counsel’ of the chairman and non-executive
which will help establish the role and profession of corporate/ directors, and a source of advice and support to the whole
company/board secretaries in targeted countries. board in discharging the company’s objective of producing
We will also lobby governments who are the major sustainable performance in the interests of shareholders and
players in the WTO trade talks and work with the WTO the wider stakeholder community
to introduce a separate Head in the Services Sectorial Q How will CSIA address diversity issues? In particular,
Classification list for governance, that of compliance, women in boardrooms is a big issue in Europe.
secretarial advisory professionals (GCSAP). This is a multi- A In France, they represent only 9% of board members and a
billion dollar business sector yet it isn’t officially recognised law was passed in January to increase that proportion.
by governments. As a consequence, bi-lateral and multi- Q Do you think women can play a role in good governance?
lateral trade agreements such as the NAFTA, CEPA, etc. Are you in favour of quotas to ensure diversity in the
don’t include this sector. This stifles trade which, in turn, boardroom?
slows the global economic recovery. For example, the A Quotas aren’t the answer; education and skills are the
Closer Economic Partnership Agreement (CEPA) between important factors. The appointment of women to board should
Hong Kong and China follows the WTO classifications, thus be encouraged, but the primary criterion for appointment to
excluding GCSAP. There is a massive demand for these the board should be that the proposed appointee possesses
types of services in the mainland as its economy opens the relevant skills to perform the role.
up and mainland companies list both on the mainland and Q How can CSIA present a united front when countries
in Hong Kong. Firms providing such services find it very have such different regulations on corporate secretaries/
difficult to establish a presence there other than under the corporate governance?
ambiguous banner of consultants. Inclusion of GCSAP A There is a common thread than binds us all: the desire for
in CEPA would create a surge in new investment and job better governance. There are the OECD principles, which
opportunities for professionals. These trade barriers also are widely accepted. The drive for better governance is what
slow the spread of governance standards and practices, is driving the formation of CSIA, the reason why governance
which leaves the business world more vulnerable to another professionals throughout the world have come together.
economic downturn. This is why another of CSIA’s aims is to Q Which countries have laws that promote good corporate
promote general principles of governance while deepening governance? Which types of companies have set
the recognition of the role corporate secretaries play in examples?
helping companies to adopt corporate governance best A Many countries – from emerging markets, developing
practices. countries, to developed countries - have in place, or
We understand that different cultures and countries have are preparing, policies and practices to achieve better
their own approaches and laws and regulations on corporate governance. What is missing is the professionals – the
governance. But that said, there are general principles people - to put things into practice. Part of CSIA’s mission is
behind good corporate governance practices, those espoused to develop and grow the study and practice of secretaryship to
by the OECD are good example. CSIA’s approach will be improve professional standards and the quality of governance
from the practitioner’s perspective which we hope will provide practice. We will also assist in the creation of professional
a practical element to governance, the importance of which governance-type bodies in countries where they don’t exist.
companies sometimes fail to grasp when faced with general Professional bodies are a key element in lifting governance
governance principles issued by regulators and government standards. They train, qualify and maintain members’
related bodies. standards. Without professionals you can’t implement good
Q How does CSIA define governance? governance practices. It always comes back to people.
A Governance consists of the principles and structures put in Q The financial crisis has created a huge “trust issue”
place to support companies in their drive to create sustained regarding the corporate world, for shareholders,
value. It’s more than a series of regulations and codes. employees, trade unions and the general public. How
It’s a company’s culture. It’s a system by which a company can corporate secretaries help to increase the level of
is directed and managed; how the company’s objectives trust? Will members of CSIA sign on to an ethics code?
are established and achieved; how risk is monitored and If standards are set, how will you make sure they are
assessed; and, how performance is optimised in sustainable enforced? Will there be some type of certification system
ways - ways that take into consideration stakeholders’ for professionals?
interests. A CSIA is an international body whose membership consists of
At the core of governance are people. Professionally national bodies, professional bodies. We have no plans to be
trained people who put integrity and ethics, not short term a standards-setting organisation. We work through and with
gain, at the centre of business. One of the core elements of local bodies.
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corporate law
Conduct and liability
of directors in terms of
the new Companies Act
Willie Coetzee Partner - Shepstone & Wylie Attorneys - Commercial Law Department
T
he new Companies Act 71 of 2008 is scheduled to come into information obtained to gain advantage for themselves or third parties or to
operation by July this year, and although this appears to be harm the company.
increasingly unlikely, company directors including alternates, Directors must communicate to the company at the earliest practical
prescribed officers and members of board committees should ensure that opportunity any material information obtained, unless they believe that
they know the Act’s contents and their liability. information is immaterial, in the public domain or that they are precluded
Of particular importance is part F of chapter two which deals with the legally or ethically from disclosure.
governance of companies and sections 75 to 78 which contain far-reaching Directors must act in good faith, and for a proper purpose in the best
provisions in terms of which the legislature has attempted to codify interests of the company and with the degree of care, skill and diligence,
directors’ conduct and liabilities. that can reasonably be expected of them.
If a directors has taken reasonably diligent steps to be informed, has
disclosed any financial interests and there was a rational basis for believing
that a decision was in the best interest of the company, then the director will
Section 75 obliges directors to disclose personal or related party financial be regarded as having acted in the best interests of the company and with
interests in respect of matters to be considered by the board. They must the necessary degree of skill.
leave the board meeting thereafter and may not be regarded as present for Directors are entitled to rely on employees and professional
the purposes of adopting a resolution on the matter; appointees, who they reasonably believe to be reliable and competent,
Directors must also promptly disclose personal or related party as well as board committees unless that committee’s actions do not merit
financial interests in any matter in which the company has a material confidence.
interest.
Liability of Directors
Standards of Conduct
Section 77 of the Act spells out the circumstances in which a director can
Section 76 requires that directors do not use their position or any be held liable for loss, damages or costs of the company. It does not deal
8 BoardRoom 1/2010corporate law
with liabilities to third parties or other In essence, a company may
stakeholders such as shareholders and indemnify a director in all circumstances,
employees. except where the liability arises as a
However, Section 20(6) enables result of the director’s failure to act in
shareholders to claim damages against good faith and for a proper purpose, or
any person who acts fraudulently or in the best interests of the company, or
grossly negligently. Furthermore, Section with the degree of care, skill and diligence
218(2) makes a person who contravenes required.
any provision of the Act liable to any other There is also no indemnity where
person for any loss or damage suffered the liability arises from wilful misconduct
by reason of the contravention. These or wilful breach of trust or in respect of
provisions could open the door to a new any fine imposed in terms of any national
form of shareholder activism by enabling legislation.
shareholders to sue directors.
Directors may also be held liable in Delinquency and Probation
terms of common law for losses, damages
or costs sustained by the company as It should be noted that Section 162 of the
a result of breaches of their fiduciary Act sets out circumstances under which
duties or failure to act with the necessary a director can be declared delinquent
care, skill and diligence or in accordance or under probation. The company,
with either the Act or the company’s a shareholder, another director, the
Memorandum of Incorporation. company secretary or prescribed officer,
They are also liable for any a registered trade union or another
losses, damages or costs sustained representative of the employees of a
by the company as a direct or indirect company, has the right to apply to have
consequence of acting without authority, a director declared delinquent or under
acquiescing in reckless trading, being probation.
a party to a fraudulent act or omission, An application must be made to
signing, consenting to or authorising court and Section 162 lists a number
financials or prospectuses which are of circumstances under which a court
false or misleading and failing to vote must make an order declaring a person
against various unauthorised acts, to be delinquent. For example, if a
despite knowing that such acts are director grossly abused his position,
unauthorised. took personal advantage of information,
The liability of directors for the losses intentionally or by gross negligence
is joint and several and a three year inflicted harm upon the company, or
prescription period applies from the date acted in a manner that amounted to
of the act or omission which gave rise to gross negligence, wilful misconduct
the liability. or breach of trust. If a director is
Except in the case of wilful declared delinquent, in most cases, the
misconduct or wilful breach of trust, a delinquency remains for seven years,
court in proceedings against a director whereas an order for probation is for not
may relieve a director of liability wholly or more than five years.
partly, if it appears that the director acted Being a company director under
honestly and reasonably or it would be fair the new legislation is extremely onerous
under the circumstances. and those who fail to comply with their
obligations run a serious risk of both
Indemnification and Directors’ criminal and civil liability. In the case
Insurance of criminal liability, provision is made
for a fine and/or imprisonment for up
Section 78 of the Act sets out the to 10 years. In the case of civil liability,
circumstances under which a company the losses sustained by the company,
may indemnify directors and purchase a shareholder or third parties can be
protective insurance. substantial.
BoardRoom 1/2010 9governance
Taming the beast
of board papers
By Mary Morel, Director, The M Factor, Australia
l Most organisations have templates and guidelines for users to prepare is, information), ‘decision’, or
board papers but the challenge is to ensure they are followed ‘discussion’.
l Essential to plan writing and get to the point at the beginning of board Noting papers provide
papers to make the implications clear updates and monitor progress
l Well-written and thought-out papers anticipate questions likely to be against the organisation’s
posed by the reader performance drivers. They
Directors face a thick pile of papers to read for each board meeting. cover the full range of
Reading these papers can be interesting, and even pleasurable, but quickly operational activities, such
turns into a chore if the papers are dense and difficult to read.1 as infrastructure, people and development, key client groups and major
A typical set of board papers will consist of: projects. These papers may also highlight successes and identify risk
l an agenda factors.
l the minutes of the previous meeting Many papers that fall into the noting category will be regular
l major correspondence updates, but on occasion, papers will look at an out-of-the-ordinary risk
l the CEO’s report the board needs to be aware of. These issues could include customer
l financial reports dissatisfaction, a technology problem or a project falling behind
l operational updates schedule.
l documents supporting submissions that need decisions and Decision-making papers seek ‘approval’, ‘endorsement’ or
l an action list. ‘ratification’ depending where the final authority rests. Many papers
come straight to the board for approval, but some may go to a
Types of board papers subcommittee first and then seek board ratification. In some
instances, senior management may have the authority to approve a
Board papers can be broadly categorised as financial or non-financial. The paper, but may ask the board to endorse the decision to gain board
emphasis in this article is on non-financial papers, which cover topics such awareness and support. An example could be a politically sensitive
as human resources, marketing, operations, production, strategic planning issue, such as a price increase for government services.
and risks. Discussion papers are not as common as noting or decision-
Many organisations view non-financial papers in terms of key making papers and not all boards use them. But they can be
performance indicators or performance drivers. Deloitte Touche Tohmatsu useful. Senior management and boards can use discussion
and the Economist Intelligence Unit conducted an international survey in papers to stimulate debate about a topic that may become a
2004 (In the Dark) and identified nine non-financial performance drivers, concern in the future, such as impacts of diabetes and obesity
five external and four internal. (See Table 1.) on the workforce. Or they could be used to discuss a complex
issue that needs to be thoroughly discussed before any decision
Table 1: External and internal performance drivers is made, such as the pros and cons of investing in China.
External drivers External drivers Occasionally, they are used to discuss a problem that has been
1 Customer satisfaction Quality of governance going round and round in circles for some time without resolution,
2 Product or service quality Innovation such as the turnaround time for processing customer complaints
3 Brand strength Operational performance or responding to website inquiries.
4 Relationships with outside Employee commitment
stakeholders
Templates and styles
5 Impact on society & the environment
Most organisations have templates for board papers because they
provide uniformity and consistency. Many organisations also have
Noting, decision-making and discussion papers guidelines on how to use the template, but in my experience, writers
seldom read these; partly because they don’t realise they exist or
Non-financial papers can be further categorised as ‘for noting’ (that because the guidelines are lengthy. One organisation I worked with
10 BoardRoom 1/2010governance
encouraged writers to read the guidelines by attaching them as Executive summary or overview (optional)
coloured bubbles in each section of the template. The writers had to
delete the bubbles before they could use the template. Of course, they Most board papers are short so do not need an executive summary,
could delete them without reading the guidelines, but many writers but quality is a more important criterion than length, and occasionally a
would at least skim read them. paper benefits from an executive summary that highlights the ‘must know’
All templates have major headings that writers should work information.
within and not change. Some organisations have separate templates A few templates I have seen use an executive summary instead of
for different types of papers, but most organisations I’ve worked an issue statement. In these instances, the executive summary gives an
with have a one size fits all template for noting, decision-making overview of what the issue is, what caused it and what action is needed.
and discussion papers. This type of template usually works best
for decision-making papers and may need modifying for noting or Issue
discussion papers. For example, some organisations allow writers to
delete the recommendation section for a noting paper. Writers can Some templates do not have an issue statement based on the premise that
occasionally delete a heading, but they shouldn’t alter the remaining the purpose or recommendation statements identify the subject matter and
template headings. the issue can be discussed in the background and comments sections.
Although templates vary from organisation to organisation, many I think an issue statement aids clarity in decision-making papers
include the following headings: where the issue is often a problem or concern that needs a solution.
l Purpose (sometimes replaced with a recommendation statement) On occasion, the issue may be an opportunity the organisation needs
l Executive summary or overview (optional) to consider, rather than a problem.
l Issue When writers discuss the issue in the background section, many
l Background tend to structure their writing poorly and directors have to wade
l Discussion or comment through clutter before deciphering what the problem or opportunity is.
l Recommendation (sometimes at the beginning replacing the The role of the issue statements in noting paper is not as clear
purpose statement) cut. Many noting papers are regular updates with no particular issues,
l Appendices (optional). but this section could be used to highlight any out-of-the-ordinary
Other headings I have seen in templates include: assumptions, activity or risk. In a discussion paper, the issue statement is the topic
community opinion, compliance, consultation, current position, and why it needs discussing.
environmental issues, financial implications, other options considered, Whatever the subject matter of the issue statement, the content
risks, strategic plan implications, time frame and conclusion. should be clear and concise so directors can understand the problem,
Some organisations also have a cover sheet, stating whether concern or opportunity immediately. An issue statement is similar in
the paper is for noting, decision-making or discussion, who wrote the this respect to an executive summary. For example:
paper and which senior manager signed it off. Sometimes the purpose The X equipment at the plant in Y has prematurely failed and will
of the paper is included in this cover letter and at other times, the cost $1.4 million to replace. This expenditure is essential, but was not
purpose statement is in the template. budgeted for this financial year. We cannot seek compensation from
the manufacturer because the company is no longer in business.
Purpose or recommendation statement
Background
Some organisations put the recommendation first, based on the
principle that directors want to know why they are reading a paper The background section provides an overview of what has happened
before they start reading. If the recommendation is at the end, the in the past to cause the current situation. As most directors do not
purpose statement should achieve the same function, that is, to give keep copies of previous board papers, this section should summarise
the directors an indication of what the paper is about and why they any previous board considerations and decisions made. If the
need to read it. organisation has previous board papers on a board intranet, the writer
In the purpose section, writers state what they are asking the should refer to relevant papers so directors can reread them.
board to do, which will usually be to inform them about something or This section may also put the issue in a broader context so
seek approval, endorsement or ratification for a decision. directors can view the situation from a strategic and risk perspective.
I have seen some templates that do not have a purpose statement For example, if discussing a particular tax issue, the writer may need
and writers are expected to put the purpose in the ‘Issue’ section. I to provide some information about the relevant legislation.
think this causes confusion as some writers use the ‘Issue’ heading for The challenge for writers in this section is to be clear and concise.
the purpose and others to state the issue. Many writers tend to make assumptions about directors’ knowledge
There is no one ‘right’ way to write a purpose statement, but it of the topic so either take shortcuts in their explanations or deluge
must relate to the recommendation and be as specific as possible. For directors with too much detail. A common complaint I hear from
example: directors about the background section is the overuse of unexplained
To seek approval to spend $X to upgrade the computer system. acronyms and technical terms.
BoardRoom 1/2010 11governance
Discussion or comment There are no hard and fast rules about what to include in
appendices. They could, for instance, include legal opinions, financial
Not all templates have a discussion or comment section, but the value data and survey results.
of an open-ended section is that writers can use this section to link the
issue to the organisation’s strategic direction, elaborate on the risks, Planning and structuring writing
provide options if relevant, and express their own expert opinion.
Many directors I have interviewed commented that they like Many writers believe that having a template solves all their planning
knowing the writer’s opinion for two reasons: issues. If only that were true! Writers can still manage to structure a
l they value the writer’s opinion as they are the subject-matter expert small section within a template poorly, largely because many write for
l knowing what the writer thinks helps identify any biases directors themselves; not their audience.
need to take into account in their decision-making. Many writers start writing off the top of their heads without working
Some writers find it difficult to distinguish between background out what they want to say first. As result, their writing tends to be
and discussion information and muddle these sections so their writing narrative or expository. With narrative writing, writers tell the reader
feels waffly and repetitive. everything they have done, step-by-step, often in minute unnecessary
detail. With expository writing, the reader builds their point of view and
Recommendations finally gets to the conclusion at the end. This style works in university
writing, but not board papers.
As stated earlier, recommendations are either at the beginning or end When writing a board paper, writers need to structure their writing
of a board paper. If the paper is for noting only, some templates skip with directors in mind so they get to the point at the beginning and
this heading, but many still have a statement such as: We recommend state what the issue means for the organisation. Once they have
that the information is noted/It is recommended that the information is stated the issue, they can support their line of thought, often referred
noted. to as an ‘argument’, with specific, relevant information. This discussion
Recommendations in decision-making papers should outline may include a summary of actions that have occurred in the past, not
clearly and concisely what approval is sought and what action a step-by-step account.
is required. It sounds basic to ask for what you want, but many In The Craft of Argument, US authors Joseph M Williams and
recommendations are too vague. As one director I interviewed said: Gregory G Colomb suggest developing an argument based on a
In the end I didn’t know what the recommendation was — was it to claim, reason and evidence.
buy a copper mine or invest in a copper mine? I believe X because Y based on Z.
Most recommendations should be sufficiently detailed to stand They also suggest that writers should evaluate their warrants
alone, that is, to make sense without accompanying text. They can (assumptions or underlying beliefs) because these can influence their
then be copied and pasted into the minutes and adjusted slightly to logic and may affect their judgment and readers’ response to their
become resolutions. Many organisations draft minutes before the argument.
actual meeting, basing the draft resolutions on the recommendations. Williams and Colomb suggest writers develop logical arguments
In some instances, it is not practical to have a specific stand-alone by asking themselves five types of questions.
recommendation. For example, if the recommendation is to approve a 1 What’s your point?
new suite of tariffs that are outlined in tabular form in the body of the 2 Why should the reader agree? (reasons)
paper, there is no need to repeat the table in the recommendation. 3 What evidence do you have?
There are several different styles of writing recommendations. 4 What’s your logic? (what assumptions have you made?)
l It is recommended that the board approve the revised occupational 5 But have you considered ... ?
health and safety policy.
l We recommend that the board approve the revised occupational Subheadings aid clarity
health and safety policy.
l That the board approve the board approve the revised occupational Although writers should work within their template headings rather
health and safety policy. than changing them, most organisations allow writers to use
If there are several recommendations, they may also be bulleted. subheadings within the template headings.
Subheadings help writers structure their writing, encouraging them
Appendices to group material into logical sections. The most effective subheadings
are informative phrases that succinctly summarise the following
Appendices support information provided in a board paper and, as section.
such, should not introduce new ideas. Appendices are the ‘heavy duty’
detail that you need for ‘the record’ and for technical readers who Qualities of effective board papers
want that extra information and evidence. While all directors should
read them, technical readers will probably be the only ones who delve A well-written board paper, structured appropriately within major
deeply into the detail. template headings, reads like a written conversation, that is, it
12 BoardRoom 1/2010governance
anticipates and answers directors’ questions. These may be questions
that directors already have about the subject or questions that could
arise as they are reading the paper.
Reading many reports and papers over the last few years, I have
found my initial reaction has often been to ask questions that aren’t
addressed satisfactorily in the document. When I talk to the writers,
they can usually answer my questions, but they didn’t anticipate
them when they were writing. On many occasions, there is a big gulf
between what the writer tells me and what they have actually written.
For example, I mentored a training officer who worked in a
Learning and Development division of a government department. She
wanted the executive team to approve the Learning and Development
division’s request to implement a training software package. The more
I read about the package, the more concerns I had. For example,
the report stated that the company providing the software was not
willing to provide support in three years’ time and that the product
had several disadvantages, none of which were specified. When I
questioned the writer further, it transpired that this training software
package was the only one available as the department had the licence Design and style
for it. Nowhere had she stated this.
The ‘look’ of a paper matters more than most writers realise as well-
Aligned to risk and strategy presented material is easier to read. Several directors I interviewed
complained about papers being in small font that was hard to read
A good decision-making paper addresses how the recommendation late at night and they wondered if this was to make the papers appear
aligns with the organisation’s strategy, business plan and budget in shorter. As one director said:
terms of performance drivers, costs and time frames. A paper needs to be comfortable reading; not squashy. It must be
Risks are more of a concern these days and the scope of risks well-spaced and flow well.
has widened from the traditional operational and financial concerns to Writers should adhere to their organisation’s style guide for all
include issues such as environmental and health. For example, if the elements of style from font type and size through to how to write
writer was making projections about the future workforce, they may numbers and financial terms. It’s distracting to have different styles
need to factor in the impact of obesity and diabetes and how they may within the same paper, for example, dollar amounts referred to as
affect workers’ health and productivity. AUD, A$, $A and AU$. More to the point, it damages the writer’s
KPMG’s Company Director’s Toolkit (2008) identifies risks that credibility with readers of the document.
writers need to consider. See Table 2.
Australian standard for board reporting
Table 2: Some categories of risk for consideration
Strategic risk What is the risk that the strategy will be Standards Australia has developed a standard for board reporting,
poorly executed or inappropriate? HB 403—2004 Best Practice Board Reporting. The standard outlines
What are the risks inherent in key strategies, board and senior management reporting responsibilities and provides
and how might the organisation best identify, guidelines on how to present information in board papers.
and manage these risks? This standard is available at www.infostore.saiglobal.com.
Emerging risks Are emerging risks anticipated? (These Mary Morel is the author of Write to Govern: How to write senior
might include risks from new competitors or management reports and board papers. She can be contacted on
emerging business models, recession risks, (02) 9365 7711 or by email at mary@themfactor.com.au.
relationship risks, outsourcing risks, political www.writetogovern.com.au
or criminal risks, financial risk disasters and
other disasters). Note
Operational risk To what extent have operational risks been
identified, analysed and integrated into 1 See also Morel M, 2006, ‘Bored with board papers?’, Keeping good
risk monitoring, reporting and assurance companies, Vol 58 No 7, pp 400–403, for more detail on common
systems? problems with board papers
Regulatory risk Has a risk assessment process been 2 This article was first published in the February 2010 issue of
undertaken of regulatory risks? Keeping Good Companies, the journal of Chartered Secretaries
Australia. Reprinted with permission of the publisher.
BoardRoom 1/2010 13remuneration
Aligning your interests:
How are executives
remunerated? How
should they be
remunerated?
Henriëtte Scholtz & Riaan Rudman are both Senior lecturers at Stellenbosch University
A
large number of companies grant share options to or the underlying share. International researchers found that executives
executive directors to motivate them to improve company holding share options were more likely to engage in the following acts:
performance and to align the interests of the shareholders l Pursuing short-term strategies: Investment managers often based
and the agents (mostly executive directors) who act on behalf of the share selection on short-term earnings, rather than for example
shareholders. But how effective is this? discounted cash flows; consequently share prices often reflected
The wave of corporate scandals including Lehman Brothers and and were driven by short-term earnings and performance. This then
American International Group (AIG) refocused attention on executive impacted on the value of share options and in a pursuit to increase
remuneration and raised questions about the design thereof and the the value of share options, management might pursue short-term
extent to which share options truly align the interests of executive strategies to enrich themselves, rather creating long-term value to
management and shareholders. Many of the American banks hardest shareholders.
hit by the banking scandal, and in some cases bailed out by the l Financial misrepresentation and earnings management: Two
Federal government, are now paying executives large performance forms of misrepresentation were found to take place. Intentional
bonuses; while others are granting share options. This raised debate misapplication of accounting rules and misreporting of financial
in the American and International media about whether executive results by for example misusing accruals or estimates to report
remuneration, rather than solving agency problems, are actually temporary earnings, impacting on the companies’ financial ratios and
causing new conflicts of interest, and thereby increasing the risks of consequently, valuation. The more serious misrepresentation occurred
granting share options. South African media has also focused attention where fictitious transactions were recorded or transactions are omitted.
on the remuneration of parastatel executives and whether their l Insider trading: Executives were able to use privileged information
remuneration is appropriate in aligning stakeholder interests. (i.e. information not available to the public) to realise gains. In
The purpose of this article is to provide a best-practice framework numerous international research studies, executives found guilty of
combining local and international corporate governance principles, fraud for misrepresenting accounting results, also exercised their share
legislation and disclosure developments to help to align the interests of options.
all stakeholders and mitigate this risk. This framework was developed l Share option backdating: This is the process of granting share
from research conducted by Scholtz (2009). The importance of such a options dated prior to the actual date on which the company granted
framework is highlighted by the recent publication of the draft King III report. the share option. In this way, the exercise price of the granted option
could be set at a lower price than that of the company’s share price at
Divergence of interests the granting date. The purpose was to allow the option holder to realise
a larger gain without the company needing to show it in the financial
Performance-based remuneration was endorsed by researchers statement.
throughout the world as a way to align the interests of shareholders and
the agents who act on behalf of the shareholders. In the recent past, Safeguards
remuneration levels increased, but many argued that it failed to provide the
necessary incentives to directors to perform better. In fact, research found In order to help prevent the inappropriate managerial behaviour from
that it created an incentive for managers to act contrary to the best interests occurring (as referred to above), changes should be implemented at
of the shareholders in order to manipulate the value of the share option an internal governance level, as well as in the manner which directors
14 BoardRoom 1/2010remuneration
are remunerated and how this remuneration is disclosed. The secret Conclusion
is to implement safeguards to ensure that executive management has
enough of its own financial future at risk to act like a shareholder. The The important question is not how much executives should be
following broad safeguards could be implemented to mitigate this risk: remunerated, but rather how to structure the remuneration (including
l Directors: The requirements and appointment process of share options) to align the interests. The answer lies in balancing
directors should be clearly defined, including independent non- the creation of a corporate structure, appropriate disclosure and
executive directors; the roles and structure of the various directors shareholder participation.
forming the management team and related committees should
also be clearly defined. Amending and extending the indemnity References
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prospects of success’ test to ensure more responsibility on the Greenbury, R. 1995. ‘Directors’ remuneration report of a study group’,
side of the directors. UK Government, 17 July. [Online] Available at: http://www.ecgi .org.
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evaluated regularly. directors’, Department of business enterprise regulatory reform,
l Audit committee: The requirements of the members of the [Online] Available at: www.dti.gov.uk. Accessed: 3 June 2008.
committee should be clearly defined. Processes should be IoD (Institute of Directors Southern Africa). 2002. ‘King report on
implemented to allow members to gain full access to all the corporate governance for South Africa’, Institute of Directors in
resources required. The audit committee should take full Southern Africa, Parktown.
responsibility for the external auditors. The audit committee should IoD (Institute of Directors Southern Africa). 2009. ‘Draft King report on
ensure greater accountability on the part of management as well corporate governance for South Africa’, Institute of Directors in
as the internal and external audits. Southern Africa, Parktown.
l Remuneration committee: The requirements and skills required ICAEW (Institute of Chartered Accountants in England and Wales).
of the members should be clearly defined before forming a 2008. ‘Accountability and transparency key to disclosure of director’s
committee. The committee should be responsible for all aspects remuneration’, Institute of Chartered Accountants in England &
of the remuneration programme and integrate all components of Wales, [Online] Available at: www.icaew.co.uk. Accessed: 19 June
remuneration. The members should have a sound knowledge of 2008.
the company and its process and key business drivers, taking into IASB (International Accounting Standards Board). 2007. Share based
account all stakeholders interests. payment, IFRS 2, [Online] Available at: http://www.iasb.org.
l Institutional ownership: Institutional investors should be more Accessed: 31 July 2008.
involved to ensure corporate monitoring and good governance. ICGN (International Corporate Governance Network). 2006. ‘ICGN
l Salaries: Remuneration should include both short-term and long- Remuneration guidelines’, International corporate governance
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l Approval of compensation plans: Shareholders should approve 2008.
the compensation plans and in doing so, the shareholders should Scholtz, HE. 2009. ‘Share options as part of executive remuneration:
be fully informed of the compensation plan. aligning the interests of stakeholders’. SA Business Review. 13(2).
l Transparency and disclosure: There should be full disclosure Security and Exchange Commission (SEC). 2006. ‘SEC votes to
per director, including a non-technical explanation of the rationale adopt changes to disclosure requirements concerning executive
for the remuneration plan. The disclosure per type of remuneration compensation and related matters’, USA Security and Exchange
should be extended to include the full terms and current status of Commission, [Online] Available at: http://sec.gov. Accessed: 4 June
the financial instruments (if applicable). Where changes occur in 2007.
the information related to the financial instrument as previously South Africa. 1973. Companies Act no. 61 of 1973, Pretoria: Government
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