Aspects of corporate governance are shaking up boardrooms by making directors more proactive in influencing decisions taken by their companies. Corporate governance is also becoming an important tool in minimising the risk of litigation for failing investors.
The updated version of the King II report on corporate governance was released this week. Coincidentally, Unifer, the micro-lending arm of Absa, this week picked up the pieces after its recent collapse. The company required a R3,5-billion rescue operation after the collapse, which was largely attributed to dysfunctional corporate governance.
The King II report was released in March and its recommendations guide companies whose financial years began in the month it was released.
“The phrase ‘business ethics’ need not be an oxymoron,” Phillip Armstrong, editor of the report, told the second yearly AIG seminar on corporate governance in Johannesburg this week.
Armstrong defines corporate governance as “guidelines that seek to align the interests of directors with those of shareholders and other relevant stakeholders”. The code of governance requires company directors to exercise due care and skill in executing their duties as custodians of employees’ and investors’ assets and livelihoods.
Armstrong said though the code is a set of guidelines and is neither prescriptive nor legislation, it is already being used by courts and commissions of inquiry to guide their decisions. South Africa’s code is also being consulted around the world by bodies such as the United States Congress, which is probing a range of corporate scandals from the collapse of the energy giant Enron to the creative accounting at the telecoms colossus WorldCom.
“The code will also begin to inform the letter and spirit of the law,” Armstrong says.
In its latest yearly report, the South African Reserve Bank’s bank supervision department says changes are being contemplated to the Bank Act to incorporate good corporate governance.
One of the themes of corporate governance has been integrated sustain- ability reporting, or what has become known as the triple bottom-line approach, where companies report not only on their profits but on what they do for the environment and the communities in which they do business.
“Financial performance will always be key,” says Armstrong “but satisfactory performance can be achieved with integrity.”
The code has far-reaching powers, governing South African companies’ operations even beyond South African borders. It governs companies listed on the JSE Securities Exchange, public-sector institutions, parastatals and banks and financial institutions — any institution that is headed by a board of directors.
“The board forms the focal point of governance,” says Richard Wilkins, executive director of the Institute of Directors of Southern Africa and a member of the King committee, headed by the former judge and businessman Mervyn King.
One of the main achievements of the corporate governance code is the recommendation that companies disclose their directors’ remuneration, now a requirement for all listed companies. Wilkinson notes that directors’ remuneration should be looked at in the context of corporate performance and not in the sensationalised manner in which the media often reports.
The code seeks to do away with the old boys’ club of directorships. Anyone on this circuit may hold numerous posts, often trudging from one meeting to another, missing most, only to pitch up to collect his fee and at the general meeting to seek re-election. The code calls for establishment of a board charter, setting out minimum acceptable levels of attendance and delegation of powers, as well as issues like retirement age, if the board wishes. The code also demands a full disclosure of directors’ attendance and a rigorous appraisal of the board, its chairperson, the CEO and company secretary — with outside help where necessary.
The code recommends that boards should include executive and non-executive directors, as in the past, but should also have independent non-executive directors. The independent directors should have no direct or indirect financial interest in the business, no association with the company’s main suppliers or customers and should not have been employed by the company in the previous three years.
“Directors do not take conflict of interest seriously enough,” says Wilkins. “Where there is a potential conflict of interest, it is better to disclose before it arises” to allow the board to decide if the director has to be recused merely from discussing and voting on a particular issue, or to resign from the board, depending on the scale of conflict.
This week Unifer was reconstituted as a wholly owned subsidiary of Absa after a forensic audit of corporate governance was undertaken by Delloite & Touche. The audit also looked at R1,8-billion of loans granted in five months. Meanwhile, criminal, civil and disciplinary actions are under way and Unifer’s board is being reconstituted.
“We are seeing a lot more regulatory investigations and there might be more companies that go bust,” says Damien Coates, vice-president of the financial lines division of AIG Europe.
He told the seminar that 487 class-action cases were brought against failed companies in the US last year, up from an average of 200 a year over the previous eight years.
Coates believes that South African companies with complex accounting structures will be the most pressed to adapt to the new environment. He says that companies must also have a strong insider-trading control policy and clear and transparent reporting and communications policies.
“If you have bad news,” he concludes, “it is better to report it. Trying to hide [bad news] causes problems.”