/ 5 August 2019

If rot starts at the top, so too must hope begin with leadership

To be fair
To be fair, South Africa still performs relatively well in an African context. (Oupa Nkosi/Paul Botes/Delwyn Verasamy/M&G)




South Africa is a country of contrasts, haunted by its history and divided by inequality. The country has a Gini coefficient of 0.63, which makes it the most unequal country in the world by some distance. According to the World Bank, in 2015 the richest 10% of the population held about 71% of net wealth, compared with only 7% held by the bottom 60%.

South Africans who live side by side experience very different realities. For example, last year Cape Town was voted “best city” for the sixth consecutive year in the Telegraph Travel Awards survey and received the Best Destination in Africa at the World Tourism Awards for the seventh time but, in the same year it was also voted the 11th most violent city in the world, with a staggering murder rate of 66 per 100 000. By way of comparison, the murder rate for Tokyo is 0,3 per 100 000.

One is reminded of the opening paragraph of Charles Dickens’s A Tale of Two Cities: “It was the best of times, it was the worst of times … it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us …”. But we are not talking about two cities; all these contradictions are in one city. South Africa is really a tale of two countries, with similar discrepancies in different areas.

In the World Economic Forum’s 2018 Global Competitiveness Report, South Africa is ranked 18th out of 140 countries in terms of its financial system, but 114th in terms of human capital development (106th in terms of the specific indicator of skills of future workforce). This has been the trend for many years. In the 2008 report, South Africa was placed 5th in the world in terms of regulation of securities exchanges and 12th in terms of financial market sophistication, but 110th in terms of the quality of the education system and a 132nd in terms of the quality of maths and science education.

The quality of corporate governance in South Africa has been consistently high for many years. In 1994, the birth year of our democracy, the first King Report on Corporate Governance was published. The King Reports contain non-legislated codes developed by the King Committee on Corporate Governance.

The King I (1994), King II (2004) King III (2009) and King IV (2016) reports have received international recognition for being forward-thinking and innovative, especially in terms of recognising ethics, sustainability, corporate citizenship and integrated reporting as key requirements for good corporate governance.

The first few clauses of King IV include the following directives to boards:

  • The board should lead ethically and effectively;
  • The board should govern the ethics of the organisation in a way that supports the establishment of an ethical culture;
  • The board should ensure that the organisation is and is seen to be a responsible corporate citizen; and
  • The board should ensure that reports issued by the organisation enable stakeholders to make informed assessments of the organisation’s performance, and its short, medium and long-term prospects.
  • Integrated reporting was introduced as a key corporate governance requirement in 2009. The following extracts from King III illustrate the initial thoughts about the concept:

  • Integrated reporting means a holistic and integrated representation of the company’s performance in terms of both its finances and its sustainability;
  • The integrated report should be prepared every year and should convey adequate information about the operations of the company, the sustainability issues pertinent to its business, the financial results, and the results of its operations and cash flows; and
  • The integrated report should describe how the company has made its money; hence the need to contextualise financial results by reporting on the positive and negative effect the company’s operations had on its stakeholders.
  • Even though the recommendations were vague (King III was published a few years before the establishment of the International Integrated Reporting Council and the publication of the Framework in 2013) it gave South African companies a head start and time to experiment.

    But South Africa’s international reputation in terms of corruption has deteriorated rapidly over the last two decades. Transparency International’s Corruption Perception Index placed South Africa 33rd out of 85 countries in 1998 (score 5.2), 54th out of 180 countries in 2008 (score 4.9) and 73rd out of 180 in 2018 (score 4.3).

    To be fair, South Africa still performs relatively well in an African context. The Ibrahim Index of African Governance measures four elements: safety and rule of law; participation and human rights; sustainable economic opportunity; and human development. In the 2018 Index South Africa is placed 7th out of 54 African countries.

    There seems to be a discrepancy between corporate governance and public sector governance — that is, between governance and government. South Africa’s reputation has suffered as a result of state capture.

    There are links and similarities between democracy and corporate governance. At the most basic level, a well-functioning democracy will create an enabling environment, among others through legislation and regulation, for corporate governance to thrive. One would therefore expect to see a positive correlation between vibrant democracies and good corporate governance.

    Second, the parallels between “one person, one vote”, and “one share, one vote”, as well as the principles of transparency, accountability, separation of powers and protection of minorities indicate that the two concepts can be mutually reinforcing. The one obvious difference is that in a corporate environment an individual or entity can have more than one share, and therefore more than one vote.

    Third, good governance in the private sector might require corporations to intervene in political processes to support or defend democracy.

    South Africa is no stranger to the blurring of political and economic boundaries. During the dark days of apartheid, economic sanctions helped bring about change in the country.

    There are different views about whether corporate South Africa did enough more recently to stem the tide of corruption and state capture. Although some companies were speaking up (quite often behind closed doors) others did the opposite and serious damage was done to brands such as KPMG and McKinsey.

    The biggest corporate accounting scandal in South Africa’s history reminds us that corruption does not always originate in the public sector. In 2017, Steinhoff — a South African company registered in the Netherlands and listed in Germany — was stunned by the sudden resignation of its chief executive, Markus Jooste, and lost 90% of its value in a few days.

    There is a silver lining though. We have a new president who, although somewhat hamstrung by factions in the ruling party, appears to be serious about turning the tide of corruption and poor service delivery. As a result, the Ibrahim Index of African Governance has classified South Africa as being in “bouncing back” mode.

    The country’s business community has a big role to play to ensure long-term success. Apart from the governance framework provided by the King Code, there is also a national development plan as well as global goals (the United Nations sustainable development goals) that give guidance. There are both moral and business imperatives for South African companies to get involved — their own success and the future of the country.

    I would like to extend this call for responsible, sustainable and transparent business to all companies in the world. A Tale of Two Cities referred to London and Paris in the time of social upheaval caused by the French Revolution. The world is, yet again, unsettled, with many countries struggling with the uncertainty associated with growing inequality, migration, xenophobia, and risks and opportunities associated with the fourth industrial revolution. It is not clear whether a spring of hope or a winter of despair awaits. We all would do well to heed the warning of Oliver Goldsmith in his 1770 poem, The Deserted Village: “Ill fares the land, to hastening ills a prey, where wealth accumulates, and men decay.”

    Daniel Malan is an associate professor in ethics and governance and director of the Centre for Corporate Governance in Africa at the University of Stellenbosch Business School. This is an edited version of a paper he presented at the annual meeting of the International Corporate Governance Network held in Tokyo last month