South Africa’s bank boards are haemorrhaging experience. And the regulatory limits on independent-director tenure mean several of the biggest banks will face chair succession decisions over the next few years. Should we worry? I think there is reason to be concerned.
Refinitiv’s data on the six biggest South African bank boards over the 18 years since the financial crisis shows that the average tenure of independent nonexecutive directors has fallen from six or seven years to about 4½. Much of that change coincides with the Reserve Bank’s directive 4 of 2018, replaced this year by directive 1 of 2026, under which nonexecutives can no longer be considered independent after nine years. Running up to the April 2020 compliance deadline, long-serving directors retired in droves. Banks could have kept them as nonindependents but generally did not, to keep their independent ratios in line with governance requirements.
The chair must also be an independent director, so the regulatory clock is ticking loudly. Capitec and Investec reach the nine-year point in 2028 and Standard Bank in early 2029. Absa’s René van Wyk, whose service was interrupted by a stint as interim CEO, could face it as early as next year, depending on how the Prudential Authority measures his tenure. Daniel Mminele, who joined Nedbank’s board in 2023, has until 2032. FirstRand’s Johan Burger, who became independent only in 2023 after decades as an executive, may also have until 2032, though it is likely the PA will count some of his earlier tenure as a non-independent director and set the deadline earlier.
An impossible cocktail
Why does this matter? We all want directors who are highly experienced, strongly independent of management and well versed in the bank they oversee. It is next to impossible to get all of that in one person.
The biggest problem that boards face is the information gap. Management knows a lot about the businesses it is running. Boards must rely on reports and other data from management. There is a limit to how much they can interrogate that information, spot mistakes or see what is being left unsaid.
You want people on the board who know where the skeletons are hidden. But if they are too close to management, they can become overtrusting or, worse, sympathetic to failings and willing to defend them. On the other hand, directors who are new to the business don’t know a lot about it and therefore are more inclined to go with whatever management tells them. Former executives can eventually qualify as independent directors: after leaving management, they generally cannot join the board as a nonexecutive for 12 months and cannot be classified as independent until three years have elapsed. But they, too, have only nine years thereafter (though another three-year cooling-off period off the board would restore their independent status).
So how do you balance too-new-to-spot-the-problems against too-close-to-challenge-them? One answer comes from a study of S&P 1500 companies that tested the relationship between board tenure and firm value, on the assumption that more valuable firms have more effective boards. You might quibble with this for banks, where systemic risk management matters as much as value, sometimes requiring conservative, less profitable decisions. But a bank’s value is still a strong indicator of its health.
That analysis found that the value of the firm is maximised when the average length of service of nonexecutive board directors is 10 years. Board tenures a few years shorter or longer than that correlate with a drop in the value of the firm of a few percentage points. The study also found that the value discount is more pronounced if short-tenured boards are operating in complex information environments, measured by testing how dispersed analysts’ earnings forecasts are. While bank earnings forecasts are tightly correlated, I’d still call banks complex information environments, given the vast amount of information that boards must process.
The golden mean
This finding makes intuitive sense. Too short a tenure and you don’t know what’s going on, and you depend on management. Too long a tenure and you are overexposed. And this is an average — within boards there can be quite a range, mixing long and short tenures.
The hunt for new nonexecutive directors is intense. Bank boards must think in advance, building a pipeline of independent directors who could move into the role of chair. I expect the industry’s revolving doors will spin more rapidly, given that a director moving from one bank to another can be seen as independent again, though banks’ policies are required to set cooling-off periods for directors who were executives or chairs of other banks.
The Prudential Authority can extend independent status by up to two years; this year it did so for Trix Kennealy at Standard Bank. I’d like to see that power used deliberately, especially for chairs, to move boards closer to the optimal average tenure. Either way, the search for good independent directors is going to be intense.
Theobald is chair of research-led consulting firm Krutham
