Corporate boards must be clear-eyed, credible, competent and conflict-free

On 18 October, ten-and-a-half months after Sasol Limited announced that Andreas Schierenback would join its board on 1 January as a non-executive director, the company announced his resignation.

Sasol explained that, not only were Mr Schierenbeck’s external business responsibilities expanding, “requiring significantly more dedication and time than originally envisaged”, but also that “there is a concern that some green energy sector opportunities that are being pursued by Sasol, and the timing of these decarbonisations (sic) efforts, may potentially place him in a conflict of interests”.

On 13 November, Sasol’s chairperson, Sipho Nkosi, resigned with immediate effect “concerned that some of his business interests may be perceived to place him in conflict with the interests of Sasol.” Nkosi is chairman of investment company Talent10, from which Perth-based gas explorer Kinetiko Energy Ltd was reported to have secured A$6.5 million ($4.1 million) in funding. A discovery by Kinetiko could potentially provide gas to Sasol.

It is not clear when or how either of these potential conflicts emerged. At the time of his appointment and in Sasol’s latest reporting suite, Mr Schierenbeck’s green hydrogen-related “skills, expertise and experience” were specifically highlighted as being advantageous to Sasol’s decarbonisation ambition. Nkosi has chaired Sasol since 2019 and resigned four days prior to its (aborted) 2023 AGM.

Be that as it may, Sasol’s recognition of and action on potential conflicts of interest is commendable. But if these kinds of conflicts are sufficient to warrant resignation, then why is so little attention paid to the potential fossil fuel-related conflicts of interest which are quite common on JSE-listed company boards?

It is certainly not evident from the disclosures of these companies that the potential conflicts of fossil fuel-tied board members are consistently identified and suitably addressed.

What is a conflict of interest and how should it be addressed?

Company directors have a fiduciary duty always to act with independence of mind and in the company’s best interests, and, in all dealings with the company, to show it the utmost good faith. This includes putting the company’s interests ahead of their own and others’ interests.

To exercise objective, unfettered judgement, directors should have no interest, position, association or relationship which is likely to influence them unduly or cause bias in decision-making.

In short, board members should avoid conflicts of interest.

According to the King IV Report, a conflict of interest for a board member, committee member, or related person occurs when there is “a direct or indirect conflict, in fact or in appearance, between the interests of such member and that of the organisation. It applies to financial, economic and other interests in any opportunity from which the organisation may benefit, as well as use of the property of the organisation, including information”.

The JSE Listing Requirements oblige listed companies to ensure that each director “is free of any conflict of interest between the duties he owes to the company and his private interest”.

Section 75 of the Companies Act, 2008 prescribes the steps that board directors, prescribed officers, committee members (and related persons) must take when they have “a direct material interest … of a financial, monetary or economic nature, or to which a monetary value may be attributed”. Since board members are remunerated to sit on company boards, they have a “personal financial interest” in those companies.

If a director – or a related person – has a personal financial interest in a matter to be considered at a board meeting, that director, inter alia:

  • must disclose the interest and its general nature before the matter is considered;
  • must disclose to the meeting any material information she knows about the matter;
  • if requested by the other directors, may disclose any observations or pertinent insights relating to the matter; and
  • if present at the meeting, must leave it immediately after making any such disclosures, and not take part further in the consideration of the matter.

In other words, where board members cannot avoid conflicts of interest, these should be fully disclosed to the board at the earliest opportunity and then proactively managed.

Why does this matter?

Responsible shareholders and other stakeholders must be confident that corporate boards consist of members who are not unduly influenced or biased in their decision-making. Board members need to have the requisite skills and experience to steer their companies through the highly complex transition away from fossil fuels and towards what the Paris Agreement calls “low greenhouse gas emissions and climate-resilient development”.

From a climate perspective, there is a high risk of conflicting interests when individuals sit on boards both of fossil fuel companies and of financial institutions that support and/or invest in these companies.

In Sasol’s case, for example, three members of its board are also directors of major South African banks.

Financial institutions have an integral role to play in determining whether or not the goals of the Paris Agreement are met. Through their lending, investment and underwriting, banks (for example) can either exacerbate the climate emergency, or play a leading and constructive role in urgently reducing greenhouse gas emissions and financing the transition to a low-carbon, inclusive economy.

It is clearly not in the interests of a coal, oil or gas company for a bank to phase out lending to the fossil fuel industry.  However, excluding the provision of finance to new fossil fuels, and swiftly phasing out existing fossil fuel exposure, is precisely what banks must do to play their part in the global effort to limit average temperature rise to 1.5 degrees Celsius.

A bank’s board members with ties to the fossil fuel industry, therefore, may well hamper the board’s ability to interrogate the financial wisdom and social responsibility of continued lending to fossil fuel companies.

As things stand, companies’ reporting suites fail to provide comfort that potentially-conflicted directors do, in fact, act in compliance with the law governing conflicts of interest. What makes this situation worse is that it is also becoming increasingly common for companies to assert – without providing evidence to support these claims – that various of their board members have specific climate-related skills and/or expertise.

To allay reasonable concerns about such conflicts, companies should disclose potential conflicts of interest and indicate how they have addressed these.

In addition, they should not only ensure that the requisite climate-related skills, qualifications and expertise do exist on their boards, but should also disclose how they define and measure what constitutes such expertise, and demonstrate how and why they have determined that a particular board member qualifies as having it.

Difficult decisions must be made to transition to a low-carbon economy. These disclosures will significantly improve the ability of investors and other stakeholders to assess whether the board is clear-eyed, credible, competent and conflict-free, enabling them to guide their companies to make those decisions.

This article was first published in the Daily Maverick on 3 December 2023.

By: Robyn Hugo

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