In a move that is likely to be challenged by institutional investors, the Institute of Directors (IoD) has recommended that executive directors should not be subjected to re-election by rotation.
The issue of whether the status of executive directors should be put to a shareholder vote on a rotational basis has been highlighted because of the May deadline for companies to secure shareholder support for their new memorandums of incorporation (MoIs).
The MoI, which is essentially the constitution of a company, replaces the articles of association and memorandum of association required by the old Companies Act.
At present, listed companies put forward a third of their directors for re-election each year. As a result of increasing activism by institutional shareholders, many companies require that each executive director as well as non-executive director is put forward for re-election every three years.
However, yesterday the IoD issued a statement, on behalf of the King committee, noting that the inclusion of executive directors is not a reflection of South African legal or regulatory requirements, nor of the King 3 code on corporate governance.
Ansie Ramahlo, the executive director of the IoD, told Business Report yesterday that a number of institutional shareholders had indicated that they would not vote for adoption of a company’s MoI if it did not allow for a rotation of all directors. “Institutional investors are becoming more active, but we are saying that this is not a good practice and can lead to all sorts of unintended consequences.”
The IoD’s view is that once the appointment of an executive director has been approved by the shareholders, his position as an executive director is left in the hands of the board and out of the hands of the shareholders. “As a matter of sound governance, executive rotation is a matter for the board. The board is in the best position to judge the performance of executive directors, both as members of management and in how they fulfil their role as directors,” the IoD said in its statement.
It recommended that if shareholders had concerns about the performance of an executive director, a constructive approach would be for the shareholders to engage with the board on the performance measures set for the executive and how these were monitored and enforced.
David Couldridge, an analyst with Element Investment Managers, said that he believed executive directors should be put forward for re-election and that “unintended consequences” should be managed by appropriate contracts and succession planning. “We would prefer if all directors were accountable to the shareholders,” Couldridge said.
In a related move, the IoD issued a practice note in conjunction with the JSE yesterday, which attempts to provide guidance to listed companies on how to disclose their adherence to the King 3 code.
Andre Visser of the JSE’s listings department said that some of the 75 principles of the King 3 code were mandatory for listed companies. “With respect to the remaining principles, companies must either explain how they have applied the principles or, if not applied, they must explain why not.”
Visser said companies had been struggling with how and where to make the necessary disclosure.
“The practice note allows two possible approaches for the non-mandatory principles: a company can maintain a register on its website dealing with all the principles and simply cross-refer to it in the annual report or it can provide the disclosure for all the principles in the annual report,” Visser said.
He noted that once it was compiled the register would reduce the volume of information that had to be in the annual report and could be easily reviewed on an annual basis.