Good governance requires not only the application of the law, but also its ethics and principles

In addressing board members on topics such as the fiduciary and statutory duties of directors, trustees and others, as well as the role of a governing body such as a board of directors, I have always tried to illustrate the critical link between the law and governance.  

With more than 30 years’ experience in boardrooms, the number of unfortunate disputes and unnecessary conflict that could have been avoided, had this absolute truth been correctly and consistently applied, fills plenty of space in my personal notebook on boardroom stories.

The recent matter between Sipho Pityana and the Absa board is probably a good case to use for illustration purposes because it is fresh in our minds. I have not made any assumptions or come to any conclusions as to who is right and who is wrong in this unfortunate matter. 

The point to illustrate from this case relates to the essential application of not only the letter of the law, but also the principles and recommendations of good corporate governance. At the same time, it will probably illustrate that you often need a good dose of Solomon’s wisdom in the application of all of this in the best interest of the organisation.

As a starting point, there are the legal rules. These rules, for example, grant authority for the appointment of a director. It also spells out the procedure for removing a director. Not only must due process be followed, but a board wishing to remove a fellow director can only do so on specific and limited grounds. Anyone appointing or removing a director outside these rules introduces the risk of the legality of the action being open to attack. 

In this case, it is not only the Absa board that has to comply with the letter of the law. The Prudential Authority against whom Pityana has taken legal action, and Pityana himself, are subject to the legal rules that govern their respective positions, duties and powers.  The Prudential Authority must act within the boundaries of its regulatory and legal framework. Pityana must comply with his statutory and fiduciary duties to Absa, including the duty to act in good faith, in the interest of Absa and with due care, skill and diligence. 

These are the rules that often form the subject matter of court papers in the event of a dispute between parties and, judging by media reports, this again makes up a substantial part of the court papers filed by Pityana. In due course, a court of law may have an opportunity to express an opinion as to whether all concerned had “stuck to the rules”.

But this should not be the beginning and the end of the story. Ethical and effective leadership is at the heart of the principles of good corporate governance and should, among other, inform the manner in which the legal rules are applied. Principles such as accountability, responsibility, transparency and fairness should form the foundation of the manner in which we all conduct ourselves in the marketplace. This is true for governing bodies, individual members, and regulators alike.

For illustration purposes: when exercising the legal right to appoint a director, applying the principles and recommendations of good corporate governance in an ethical and effective manner, means there is a formalised process that, when correctly and consistently applied, should increase the probability of making the right appointment in the interest of the organisation.

When exercising my legal right as an individual to protect my own interests, applying the principles and recommendations of good corporate governance in an ethical and effective manner means that when I am a director, I will also take due care of the legitimate interests of the organisation that I serve and limit, to the extent reasonably possible, the potential harm my actions may cause the organisation.  

Finally, when exercising functions as a regulator, applying the principles of good corporate governance in an ethical and effective manner means that a fair and transparent process will form the basis of every action and every decision.

Good corporate governance principles and recommendations may not be legally enforceable but should form a central part of how we conduct ourselves as the leadership of organisations, whether in the private or public sector. Due process that complies in all respects with the letter of the law is obviously non-negotiable. 

Only when this is designed and consistently applied on the basis of the principles and appropriate recommendations of good corporate governance can the spirit of the law really prevail.

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Annamarie van der Merwe
Annamarie van der Merwe is the executive chair at FluidRock Governance Group

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