While some companies see corporate governance as a burden, a sort of grudge purchase that cannot be avoided, and some ignore it entirely, others welcome and embrace it. With several scandals breaking in the news over the past year, the importance of compliance and governance has come under the spotlight, and companies are sitting up and taking notice.
‘Corporate governance is a set of principles and guidelines; a system that enables effective leadership and disclosure within a corporate environment,’ says Deloitte director Johan Erasmus. Asked what he believes are the main tenets of good governance, Erasmus lists transparency and accountability. Christina Pretorius, director at Norton Rose Fulbright, adds ethical leadership. ‘It’s about moving towards sustainable, responsible leadership and not being focused only on the bottom line,’ she says, adding that it’s about how you do business rather than what business you do, and about decision-making. ‘The purpose behind corporate governance is to make good decisions. It’s a framework for acting sensibly.’
When it comes to the practical implementation of corporate governance and how this should guide a company’s business practices, Erasmus says it should be seen as a vehicle to drive performance. ‘Governance in itself is not the aim. The point of all these codes, principles and rules is how you use these to ensure delivery on your strategic objectives. This includes the financial, social and environmental aspects of the business and relates directly to the system of internal controls, the ethical culture, and the legitimacy of the types of decisions taken by the board and executives. And, of course, it is about the performance of the business. You need to ask, how can we use what they suggest to impact how we run the business in a positive way?’
Gasant Orrie and Justine Krige, directors in the corporate and commercial practice at Cliffe Dekker Hofmeyr, assert that corporate governance should work with the management of a business to support it, rather than stifle it. ‘Corporate governance aims to establish practical processes and policies to ensure the success of organisations, for all stake-holders – shareholders, employees and the environment in which they operate,’ they say.
Jo Iwasaki, head of corporate governance at the Association of Chartered Certified Accountants (ACCA), says it is important that leaders think and articulate how the world might look in future, and how the company’s vision and business model would fit into that context. ‘Corporate governance should be the way to help companies head to that long-term future and be part of it successfully,’ she says.
ACCA, in association with KPMG, last year published a comparative study of corporate governance frameworks in Africa, reviewing the corporate governance requirements of 15 countries on the continent against corporate governance principles. South Africa ranked first. Here, the King Code is the dominant document guiding corporate governance. It was first issued in 1994 by the King Committee on Corporate Governance and is currently in its fourth revision (King IV). For companies wishing to establish a strong governance framework, Erasmus suggests they start here. ‘King is a really good document and a great starting point for any type of business,’ he says. Everything in the code can be scaled down to suit a business, he believes, even a very small one. ‘If I [owned] a small company, I would read the principles and ask myself, in our context, what is it that we already do, and where can we do better?
‘It’s about focusing on something and how that will contribute to your business and make [it] a better organisation. And that’s not only about money,’ he adds. ‘As you mature in governance, you can then roll it out and refine it, and add more to the system.’
Asked where companies generally go wrong with regards to corporate governance, the sentiment seems to be that, too often, this is seen as little more than a tick-box exercise. ‘I wish boards would take a step back and say, looking at the guiding principles and what they mean, this is what we should be doing,’ says Pretorius. ‘I don’t think King III did anybody any favours, as it was quite tick-boxy. King IV has taken all the principles of the previous version and distilled them; made them more generic, which has made it easier for companies – more doable.’
Erasmus believes the system fails when there is not enough diversity in the mix and where a person or group of people have unchecked power. ‘A really good governance system includes a mix of people in the room, all acting as sounding boards to the CEO, or playing devil’s advocate and challenging decisions.’ He adds that transparency is also critical, and something often overlooked. ‘Can we explain to people why we took certain decisions? Real transparency allows stakeholders to keep you honest. But if you don’t provide them with information, they can’t do this,’ he says.
Erasmus says that, generally speaking, unless a company is a listed entity, in which case adhering to governance principles is strictly enforced, governance and codes of good practice do not take top priority.
‘Regulation is often seen as a hindrance more than anything else; a compliance burden. People do things reluctantly, if at all,’ he says. ‘At a listed level, where governance is a non-negotiable requirement, companies generally have the resources to ensure they comply. At a private company level, it’s scant to say the least. The focus is on running the business and not on regulatory compliance.’
Pretorius both agrees and disagrees. ‘Generally speaking, South African companies are good at adhering to regulation. But that’s almost the problem when it comes to corporate governance, because regulation is a tick-box exercise, whereas corporate governance is not. Rather, this should be about applying your mind and implementing certain principles to reach a desired outcome.’ She adds that there has, however, been a very distinctive change in the past year, regarding an awareness within companies of the importance of corporate governance.
So, with such strong frameworks and guidelines in place, is there room for improvement? Absolutely, says Erasmus. ‘Even though the King Code is excellent, the way that this is used should change. We have a compliance hat on when we read the code and we want to tick all the boxes, but we never ask why we do it or what benefits we derive, or how well we tick each box. The attitude to governance is completely misplaced.’
Pretorius agrees that there’s always room for improvement. ‘King IV is easy to follow and understand, compared to King III. It’s in the implementation that there’s room for improvement,’ she says, noting that people need to think how to create a culture of compliance and ethical behaviour. ‘We are seeing progress here. You only need to look at current events and the news to see the conversations people are having. Civil society as a whole is turning away from the concept of unethical conduct, which will automatically spill over into corporate conduct. I’m not suggesting that companies didn’t implement good corporate governance before, I think there’s now a much greater awareness of good governance principles than, say, a year ago.’
For Orrie and Krige, the lack of under-standing that corporate governance principles need to be customised to suit each organisation is a contributing factor to why implementation is lower than it should be. ‘There is no one-size-fits-all approach. King IV is based on the principle of proportionality, which provides that the principles therein must be applied to organisations in accordance with their size, resources, and extent and complexity of activities… Organisations will need to assess the extent to which the various principles are appropriate for their specific needs and can be practically implemented.’
Ultimately, companies have much to gain if they do things right, as good governance is a distinct competitive advantage – even more so in the current climate. ‘At the macro level, high standard corporate governance frameworks being in place is fundamental,’ says Iwasaki. ‘These facilitate market confidence and business integrity but also signal government’s commitment to creating credible arrangements for investors, taking their rights into consideration and safeguarding their investment. At the individual level, it helps companies deliver long-term success.’
