Monks and Minow, in their book Corporate Governance, define a corporation as “the relationship among various participants in determining the direction and performance of corporations”.
These participants include shareholders, management and board of directors. They must focus on sustainable development and accept responsibility for their multiple bottom line performance.
This article underlines key issues facing managers, board of directors, investors and shareholders in your company.
What is corporate governance?
Corporate governance in South Africa refers to the broad range of policies and practises stakeholders, executive managers, and boards of directors use to manage themselves and fulfil their responsibilities to investors and other stakeholders.
Corporate governance considers all of these players and must embrace policies, processes, procedures, and principles that govern and balance the way an organisation is directed, administered and controlled.
Corporate governance concerns the means by which a corporation assures investors that it has well-performing management in place and that corporate assets provided by investors are being put to appropriate and profitable use. Thus, a corporation should account for its ethical performance and duly report it to relevant stakeholders. Good corporate governance promotes investor confidence.
What is sustainability?
PricewaterhouseCoopers defines corporate sustainability as aligning an organisation’s products and services with stakeholder expectations, thereby adding economic, environmental and social value.
Corporate sustainability contributes directly to business value, whether through revenue generation, cost control, risk management or long-term creation. Sustainability should therefore be a strategic issue for your organisation.
Corporate sustainability is a business approach that creates long term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social development.
Corporate governance in South Africa
In South Africa the King Reports are used as a governance guideline to ensure corporate governance practices are adhered to by organisations. The King Reports resulted from the recognition that commercial activities in the South African economy were dominated by companies in South Africa not quoted on the local stock market.
King Report I
In 1994 The King Report on Corporate Governance (King I) was published by the King Committee on Corporate Governance. King I, incorporating a Code of Corporate Governance and Conduct, was the first of its kind in the country and was aimed at promoting the highest standards of corporate governance in South Africa.
Going beyond the financial and regulatory aspects of corporate governance in advocating an integrated approach to good governance in the interest of a wide range of stakeholders having regard to the fundamental principles of good financial, social, ethical and environmental practice.
This report successfully formalised the need for companies in South Africa to recognise that they no longer act independently from the societies and the environment in which they operate.
King Report II
King II acknowledges that there is a move away from the single bottom line (that is, profit for shareholders) to a triple bottom line, which embraces the economic, environmental and social aspects of a company’s activities.
The King Committee launched the King II report on corporate governance in South Africa in 2002. King II encourages organisations to go beyond mere corporate compliance to acting as a good corporate citizen.
King II explicitly requires companies to implement the practice of sustainability reporting as a core aspect of corporate governance. Since 2002, sustainability reporting has become widely accepted practice and South Africa as an emerging market leader in the field.
King Reports III
The King II replaces the two previous reports of the King Committee on Governance. The objective of the King III is twofold, to deal with changes in international governance trends since 2002 and to ensure that the committee’s recommendations were in line with the governance provisions contained in the New Companies Act.
King III’s approach to governance is accordingly on an “apply or explain” basis. A board is free to deviate from the recommendations contained in the Code of Corporate Governance but it would be expected to explain why it believed it would be in the best interest of the company concerned.
The King III applies to all entities regardless of their form or manner of incorporation. The premise is that adherence to the principles contained in King III will result in an entity practicing good governance.
One of the main themes running through the King III report is sustainability. Sustainability of a company means conducting operations in a manner that meets existing needs without compromising the ability of future generations to meet their needs.
It means having regard to the impact that your business operations have on the economic life of the community in which you operate. Sustainability includes environmental, social and governance issues.
An integrated report must be prepared annually, which means that all financial statutory information and sustainability information must be reported on in one, integrated report. The integrated report should contain:
- Sufficient information to record how your company has impacted positively and negatively on the economic life of the community.
- Related environmental, social and governance issues.
- How you believe your business can improve positive aspects and eradicate or decrease negative aspects for the following year.
According to King III, directors must discharge these 5 ethical duties:
- Act with conscience
- Be Inclusive
- Develop the necessary competence
- Be diligent
- Show courage
King Report IV
A King IV Report is set to be implemented in early 2016. The revised report will contain the same content as the King III with fewer principles and more succinct, specific practice recommendations. It will be easier to implement thanks to technology. Examples of key issues that will define corporate governance in the future include remuneration and integrated reporting.
The emphasis in King III is placed on a company being a “responsible corporate citizen,” with effective leadership focused on ethics and social responsibility, characterised by the values of responsibility, accountability, fairness and transparency.
Leaders need to rise to the challenges if there is to be any chance of effective responses. Leaders need to define strategy, provide direction and establish the morals and ethics that will influence and guide practices and behaviour with regard to sustainable performance.
Good governance is essentially about effective leadership:
- Leadership for efficiency in order for your business to compete effectively in the economy of South Africa, thereby creating jobs.
- Leadership for morality because investors require confidence and assurance that the management of your company will behave honestly and with integrity in regard to your shareowners and others.
- Leadership with responsibility as companies are increasingly called upon to address legitimate social concerns relating to their activities.
- Leadership that is both transparent ad accountable because otherwise business leaders cannot be trusted and this will lead to the decline of companies and the ultimate demise of the economy of South Africa.
A key challenge for leadership is to make sustainability issues mainstream. Your leadership must integrate strategy, sustainability and control, and establish the morals and ethics that underpin sustainable practices.
Your company’s board should provide effective leadership based on an ethical foundation. Ethical leaders should:
- Direct the strategy an operations to build a sustainable business.
- Consider the short term and long term impacts of the strategy on the economy, society and the environment.
- Do business ethically.
- Do not compromise the natural environment.
- Take account of the company’s impact on internal and external stakeholders.
- Be responsible for the strategic direction of the company and for the control of the company.
- Set the values to which the company will adhere to.
- Ensure that its conduct and those of management aligns to the values and is adhered to in all aspects of its business.
- Promote the stakeholder inclusive approach of governance.
The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to stakeholders in the stewardship.
The board should exercise leadership, enterprise, integrity and judgement in directing the company so as to achieve continuing survival and prosperity of the company.
Corporate governance strategy for your business
Your business needs to establish a strategy to ensure compliance to corporate governance and business ethics. Your strategy should include:
- Adequate corporate compliance standards and procedures.
- Effective compliance oversight. Assign your compliance officer with this task.
- Careful delegation and due care in hiring and screening employees.
- Effective training and education for roles and responsibilities.
- Monitoring, auditing and hotlines.
- Enforcement of violations.
- Corrective action.
Corporate governance is a prerequisite to making fair and responsible corporate decisions that properly reflect the interest of all stakeholders. You need to formulate a strategy that will protect shareholders’ entitlements and increase the transparency of proficiency of your management.
Ensure ethical management of products and processes from the point of view of health, safety and environmental aspects.
Foster a corporate culture that promotes ethical practices, encourages individual integrity, and fulfils social responsibility objectives and imperatives.
Sustaining an ethical corporate culture requires that the board and executive leadership are clear about the company’s ethical values and standards and that they are seen to support these.
It also requires that the company should take active measures to ensure that its ethical standards are adhered to in all aspects of its business.
Strive to internalise a principled system which will enable your board of directors to examine issues pertaining to morality and ethically stemming from the operation of your company and decision-making directives.
Ethics and Social Responsibility
Questions of ethics, or the ‘right way to run a business’, are inherent in all aspects of corporate governance and in every board decision and action. Ethical choices are relevant within the core business strategies that boards pursue and the way that they direct the business as a whole to achieve them.
Business ethics is the art and discipline of applying ethical principles to examine and solve complex moral dilemmas. A business is considered to be ethical only if it tries to reach a trade-off between pursuing economic objectives and social responsibilities.
Your business should always strive to lead by example by consistently meeting high standards. Incorporate ethics within your code of conduct and have the directors understand the code and follow its precepts in the workplace and larger community.
There needs to be consistency between your business policies and actions, a set of principles to guide choices. Ethics should be infused within your business practice, rooted in individual and communal values.
Characteristics of ethical organisations:
- Ethical organisations are based on the principle of fairness.
- All stakeholders are treated equally without any discrimination.
- Benefit of stakeholders is given precedence over own interest.
- There is clear communication within ethical companies.
- What is to be done and how it should be done is clearly stated.
- No Bureaucracy.
- Corporate compliance with applicable laws.
The extent to which business decisions reflect ethical values and principles is a key to long-term success. The business case for business ethics have been well proven by the cost and impacts of the repeated high profile cases of corporate greed and misconduct.
Maintaining successful business relationships and operations requires your business to manage your risks, including integrity risks, and guard your reputations.
Trustworthiness is a valuable asset and guarding an asset is a core remit for those running a company; it is a core remit of good corporate governance.
Corporate governance lies at the heart of the way you run your business. Often defined as ‘the way businesses are directed and controlled’, it concerns the work of the board as the body which bears ultimate responsibility for the business. Your business must continually enhance your management and leadership potential, while consistently adhering to your ethical values.