Challenges of Governance in South Africa and Abroad

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Challenges of Governance in South Africa and
Abroad

• ISACA and Network Finance
• 23 July 2008
• Presented by
• Prof Mervyn E King SC

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Changed world of governance

• 1855 limited liability
• Wealthy families
• Latter half of 20th Century
• Shareowner revolutions politicians
• ICT borderless world
• Exclusive/inclusive
• Created and destroyed
• Scandals

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Reaction

• Comply or else Sarbanes-Oxley
• Guidelines
• Comply
• Explain
• The South African Companies Bill?
• Hybrid

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The company today

• Company larger than governments
• Integral to society
• Civil economy
• Reports preparers and users
• After quality of product
• Building trust in company
• Agents for change

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Governance about process

• Processes to discharge and for directors to be
  seen to be discharging their responsibilities
• Enterprise strategic
• Risk for reward failure
• Good governance and failure
• Acceptable
• Bad governance failure scandal
• Not acceptable

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A directors duties - responsibilities

• Good faith
• Care
• Skill
• Diligence
• 150 years of jurisprudence
• The Companies Bill

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Incapacitated person

• Human being
• Best interests, care, skill, diligence
• Decent citizen thing to do
• Company an artificial citizen
• Incapacitated
• Director, heart, mind and soul

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Multi-national companies

• Operating in 150 countries
• Function of board?
• Courts realisation
• National, lingual, cultural, legal

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Internal Audit
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Internal audit

• Effective IA function necessary
• IA planning informed by strategy
• Key contributor to achieving strategy
• Objective provider of assurance

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Assurance of what?

• Adequate controls
• Quality of corporate information
• Identify risks that may impede goals
• Identify opportunities to realise goals
• Timeous and assessed adequately

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Strategy

• Board responsible, but developed by management
• IA included in strategy development process
• Better understand risks and opportunities
• Assurance that management oversight, risk
  management and adequate controls act in a
  coordinated manner

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Accountable

• Assessment of adequacy of controls
• Assessment of the three elements in tandem
• Audit Committee to consider
• Audit Committee to report to board
• Board signs adequacy of controls
• Audit Committee to appoint and dismiss CAE
• Access to board chairman

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Assessment

• Should express clearly
• Evaluation criteria
• Scope
• Period
• Who has responsibility for what

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Internal Audit relationship

• Right arm of the board
• Communication skills
• Credibility
• Boardroom presence
• Challenge effectiveness of risk management
• Fulfil regulatory requirements

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Attributes

• Chameleon risk changes means scope of IA has to
  change
• Leadership skills
• Communicator
• Strategic mindset
• Networker

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Corporate world

• Changed in last five years
• Sustainability issues are risks
• IA/risk management relationships
• Included in IA functions

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Assurance needs

• Strategy
• Controls
• Compliance
• Treasury
• CR S
• Health and safety

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• IA has to be intellectual

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Alternative Dispute Resolution
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Disputes

• Resolution
• ADR in contracts
• Cross border
• Management tool

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Relationships

• In business circle
• Build relationships
• Dispute/litigation
• Destroys relationship
• Duty to resolve/preserve

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ADR and the company

• Dispute with company
• Officers
• Investors
• Suppliers/customers
• Regulators
• Communities

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Management of relationships

• A business relationship
• Company and major customer
• CalPERS
• Ford and Firestone

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Mediation advantages

• Novel
• Quicker
• Less expensive
• Confidential
• Preserves relationships
• Cost of executive time saved
• Dilution of focus when litigate

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ADR a mechanism

• A value add
• To a commercial relationship
• Mechanism to manage
• Cost and time
• Duties and efficiency

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Contracted mediation

• ADR framework in place at beginning
• Parties owners of process attuned
• Conflict prevention
• Communication
• Build trust
• Value of immediate knowledge

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Questions by a board?

• System of early case assessment
• Mechanisms addressing employee dispute
• Critical procurement contracts
• Agreed cross-border mechanisms

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Upfront in the constitution

• Administered ADR
• Upfront collaborative solver
• Between stakeholders
• And the company
• IFC

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Legal recognition

• Ireland
• Germany
• Canada
• World bodies
• The disappearing civil trial

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Obstacles

• Constitutional right of access to courts
• Rights not absolute
• Limitations
• Enforce good faith?
• Time, languages, place, etc?
• Enforcing a process

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Corporate governance check

• Have you got ADR with stakeholders?
• Decent citizen
• World is flat
• New constitution of commerce
• ADR a dual function
• Build business trust directors duty
• IOD/AFSA clause
• www.arbitration.co.za
• www.iodsa.co.za

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Sustainable development as a business opportunity
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Business opportunity

• 100 largest economies
• Pervasive change is sustainability
• Philanthropy
• CSI
• Added value business opportunity
• Alterantive energy resource boom

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Market capitalisation

• Not equal to book value assessment
• Brand and goodwill
• Reputation of management and board
• Quality of governance and management
• Sustainability of the business
• Strategic direction
• Non-financial aspects, so-called

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Measuring companys economic value
source SAM
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Intangible assets

• Reputation
• Brand
• Quality of management and board
• Sustainability issues
• Procter Gamble
• Coca Cola
• Anglo American

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Stakeholders

• Financial information
• Backward looking
• Forward looking information
• First priority product
• Second priority trust and confidence

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IT governance
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Legislation?

• Legislate Cobit ITIL?
• Care and diligence one size fits all?
• Pervasive CIO or service provider?
• Confidential information outside company

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IT security

• Napoleon the wax seal
• Unauthorised
• Use
• Access
• Changes
• Cryptography decryption
• Legislation

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Independence of directors

• Ten year rule
• ASX abandoned it
• Critical bystander perception
• Assess independence annually

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• Sarbanes-Oxley
• 404 difficulties
• As5 amelioration by SEC
• Legal?
• Rigidity and flexibility
• Adopt or explain

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• Reporting
• Preparers and users
• How has the company positively and negatively
  affected the economic life of the community in
  which it operates?
• How does the company intend to enhance the
  positive aspects and eradicate or ameliorate the
  negative aspects in the year ahead?

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Directors liability

• DO insurance
• Business judgment rule
• No financial interest
• Objectively all the facts
• Rational business decisions at that time
• Hindsight and foresight

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A journey

• Cadbury, etc and the Combined Code of the UK
• King I, II and III
• Every day you may make progress. Every step may
  be fruitful. Yet there will stretch out before
  you an ever-lengthening, ever-ascending,
  ever-improving path. You know you will never get
  to the end of the journey. But this, so far from
  discouraging, only adds to the joy and glory of
  the climb.
• Sir Winston Churchill

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Thank You

• Prof Mervyn E King SC