Governance is in crisis in South Africa, with evidence of weak leadership across many state-owned enterprises (SEOs), universities and private companies.

Mismanagement at Transnet, for example, caused a rail and ports crisis that put exports in jeopardy; while poor governance at the University of Cape Town has resulted in the exit of many senior staff, leaving a leadership vacuum.

These developments have alarmed investors and undermined faith in many institutions – but all is not lost, says Professor Parmi Natesan, CEO of the Institute of Directors South Africa. “The status of governance in South Africa varies, but there is a growing recognition of its importance,” she says. “South Africa has made significant strides in corporate governance codes over several years.”

But while South Africa has a robust regulatory landscape, with institutions governed by the fourth edition of the King Report on Corporate Governance (King IV) and the Companies Act, the country faces an uphill battle in terms of how governance is understood, implemented and disclosed by companies.

Ironically, many companies that have experienced governance failures were attempting to adhere to governance principles. This suggests that further education is needed, along with a change of mindset.

The need for good governance is vital. For example, the vast majority of South Africa's 6 000-plus retirement funds are small funds, managed by unqualified company employees who may be out of their depth. This poses a risk to retirement outcomes, but good governance can counteract this.

The 2023 Mercer CFA Institute Global Pension Index ranked South Africa 38th out of 47 surveyed countries, indicating that the country's pension fund system is producing inferior outcomes. However, that ranking was downweighed by factors like sustainability. The integrity of the national pension fund system remains highly rated.

Old Mutual’s SuperFund board

The Old Mutual SuperFund is South Africa’s largest commercial umbrella pension fund, with its management board overseeing the retirement savings of nearly half a million fund members.  “One of Old Mutual’s values is to ‘champion the customer’ – and this informs all aspects of what we do, especially at SuperFund,” said SuperFund Chairman Nhlanhla Nene at the most recent SuperFund Summit.

“The trustees of management boards are called to serve and protect,” he notes, adding that retirement funds can lead by investing wisely, paying claims promptly and designing benefits that make sense for employers and members. Above all, educating and empowering members will lead to better retirement outcomes.

SuperFund is exempt from Section 7A (1) of the Pension Funds Act, which states that members of a fund must elect no fewer than 50% of the members of its board. In fact, 75% of board members are independent and not employed by Old Mutual. This speaks to King IV’s recommendation to have a balanced board with a majority of non-executive members, most of them independent.

The relationship between SuperFund and Old Mutual is governed by a detailed governance agreement, which sets out to ensure efficient, effective and accountable management of the fund, delivering member benefits transparently. This agreement is reviewed and updated regularly.
The challenge for boards

Employees’ retirement outcomes are impacted by the state of their employers’ corporate governance – and here, says Natesan, boards play a crucial role.

“They provide oversight and strategic guidance, and they ensure accountability,” she says. A “According to King IV, the board is responsible for setting the ethical tone, defining the company’s purpose, and ensuring that it delivers value over the short, medium and long term.”

However, company boards do not always function as intended – not only due to corruption and maladministration, but also because board members may lack experience or the necessary skills to perform the tasks at hand.

Natesan says such risks can be mitigated by appointing a skilled, diverse board that brings a mix of expertise, backgrounds and perspectives to the table. King IV recommends that at least half the directors on a board, including the chair, are independent to prevent a conflict of interest and foster greater objectivity.

Independence doesn’t guarantee effectiveness, but it does help a board make more impartial decisions. “Regular board evaluations can help identify areas for improvement, and ongoing director education is essential to keep the board abreast of emerging governance trends and challenges,” Natesan says.

Trust, honesty and a commitment to ethics should set the tone. “Improving board culture involves fostering open communication, promoting ethical behaviour and creating an environment that encourages constructive dissent,” she notes. “Signs of good governance include an ethical culture, good performance, effective control and legitimacy.”

Finally, it’s important to establish clear expectations for directors, implement effective succession planning and cultivate a culture of continuous improvement. These are key strategies for enhancing board effectiveness and governance practices.

The risks of poor governance

Natesan points out that there are many risks around poor governance, all of which could have severe consequences for companies. “These risks include legal and regulatory non-compliance, financial mismanagement, reputational damage, loss of trust and decreased employee morale,” she says.

“Poor governance may also lead to a lack of strategic direction, which hinders a company’s ability to adapt to changing market conditions and navigate uncertainties effectively.”

Poor governance is often characterised by weak oversight, lack of transparency, conflicts of interest, inadequate risk management and a disregard for stakeholder interests.

“Signs of poor governance can manifest in financial scandals, ethical lapses and reputational damage,” Natesan warns.