Corporate Governance and Ethical Behaviour

CORPORATE GOVERNANCE AND ETHICAL BEHAVIOUR

The significance of Corporate Governance is well recognised both nationally and internationally. Of late however, there appears to have been a lapse particularly in the area of ethical behaviour.

The Cadbury Report (Committee on the Financial Aspects of Corporate Governance) was published in December 1992 with a further Financial Reporting Council study in June 1995.

The former reported on the "propriety" of corporate governance particularly public quoted companies. It argued for “clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no individual has unfettered powers of decision”.

This reflects UKpractice where historically the Chief Executive’s and Chairman's position are held by two people. The Chairman chairs the Board and oversees external communications: with large investors and government, presenting the corporation's public face etc. The CEO attends to executive and operational aspects - coordinating the work of other executive directors and running the company internally.

Recent significant corporate failures in the United Stateshave had repercussions around the world. The Enron scandal resulted in the passing of the “Sarbanes-Oxley Act” of July 2002. This was an indication of the USGovernments attempts to prevent similar situations occurring in the future.

The focus has once again been placed on the functions, duties and responsibilities of directors to ensure the effective governance of their companies.

Internationally we have seen the introduction and updating of various pieces of legislation to ensure compliance. The “Combined Code” in the United Kingdom, The “Bouton Report” in France and the “Cromme Report” in Germany are all evidence to this fact. In South Africa we saw the release of the “King 2 Report” in 2002 and will have the “King 3 Report” available shortly.

The various Reports and Acts include four principles or basic essentials common to all. They are fairness, accountability, responsibility and transparency.

All companies are bound by and must comply with the provisions of the companies act and with the release of the new act imminent this will have a major impact and personal consequences for directors. Good corporate governance goes much further than this. Good governance ensures there is adequate control over the strategy, direction and operations of an organisation to enable it to achieve its overall objectives. The long-term result of any organisation depends on its commitment to and interaction with its stakeholders.

King 2 report of 2002

In 1993 the institute of directors in South Africa appointed a committee under the chairmanship of former Supreme Court Judge, Mervyn King, to review and make the necessary recommendations relating to corporate governance and ethical standards for companies in South Africa. The first report published in 1994 addressed fundamental principles of good financial, social, ethical and environmental practices.

The report went beyond the financial and regulatory aspects of corporate governance. It proposed an integrated approach to good governance in the interest of all stakeholders.

Developments since 1994 led to a need to revise this report. Due to this revision the King 2 report was published in 2002, replacing the report of 1994. The report went beyond the requirements of the companies act, and incorporated recommendations on a Code of Corporate Practice and Conduct for companies. This code included a set of guidelines and principles for good governance in South Africa and recommended that all companies give consideration to the application of these principles.

The King Code of 2002 is specifically applicable to all companies listed on the Johannesburg stock exchange. It is also applicable to all insurance, banking and financial institutions.

Of particular note is the fact that it also applies to all public sector enterprises that fall under the Public Finance Management Act and the Local Government Municipal Finance Management Bill.

Accountability and Responsibility

A distinction is made between accountability and responsibility. You render an account when you are held accountable, but you can be called to account when you are responsible. A director is therefore accountable at common law and by statute to the company and at the same time responsible to all stakeholders including the shareholders.

Directors must now consider regulatory aspects, industry and market standards, industry reputation, investigative media, attitudes of customers, suppliers and consumers, employees, investors and communities. These can be identified as the relevant stakeholders that the directors are responsible for.

The purpose of a company must be defined and the values it stands for and by which it operates must be communicated to all stakeholders. The relationship between the company and its stakeholders should be mutually beneficial.

Corporate governance and values

Good corporate governance pays on condition there are good practices in place that are adhered to. It reflects the value system of the society in which it operates.

It is important for companies in South Africa to recognise the diversity of cultures that result in a wide diversity of value systems based on culture, religion and ethnicity. There is an inherent trust and belief in the fairness of all human beings. Co-existence with other people is highly valued. This is the essence of “ubuntu”

Good corporate governance adds shareholder value.The measurement for trust and confidence in a company can be linked to the quality of corporate governance that exists. Corporate governance is recognised as an effective mechanism for combating corruption and fraud.

Corporate governance is about leadership

Leaders need to demonstrate and put into practice efficiency, honesty, integrity, responsibility, transparency, and accountability.

Corporate governance requires an inclusive approach.Boards must apply the tests of fairness, accountability, responsibility and transparency and must be accountable to the company. There must be a balance between performance and conformance in an entrepreneurial market economy.

The Future of Corporate Governance

Corporate governance failure is a real threat to the future of every company. As a business ethics issue, corporate governance is so powerful it can destroy a business in a short space of time. To make matters worse, standards of corporate governance are changing rapidly in response to random events that capture public imagination.

So what is going to happen next in corporate governance? How can companies and relevant public sector organisations use corporate governance to restore confidence and protect themselves against tomorrow’s headlines? How much further than legal minimum requirements for corporate governance should they go to ensure sustainable success?

TRUST TAKES YEARS TO WIN AND HOURS TO LOSE

Systems of corporate governance must win TRUSTof the local and international community

Transparent – totally open, going beyond current requirements or expectations
Responsible – clearly acting in the broader and longer term interests of all
Uncompromising – total commitment to highest moral standards
Successful – great results combining excellence in all areas with strong values
Temperate – taking care to avoid major risks, wild decisions and extravagance

BUILDING A BETTER WORLD

This should be a core value and universal slogan. Companies will be expected to “build a better future” not only for their shareholders but also for their customers, workers, business partners, community, nation and the wider world. Those with effective corporate governance based on this core value will have an added competitive advantage. They will attract and retain business associations and will generate positive reactions in the marketplace.

© Des Squire (Managing Member)

AMSI and ASSOCIATES cc

Cell 0828009057