INTERNATIONAL FEDERATION OF ACCOUNTANTS AFRICA REGIONAL LEARNING WORKSHOP Mohamed Adam 29 September

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INTERNATIONAL FEDERATION OF ACCOUNTANTSAFRICA
REGIONAL LEARNING WORKSHOPMohamed Adam29
September 2006
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Content

• What is corporate governance?
• Why corporate governance matters
• Challenges for corporate governance in Africa
• Addressing the challenges for sustainability
• Conclusion

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• WHAT IS CORPORATE GOVERNANCE?

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Corporate Governance

• Definition
• The system by which organisations are directed
  and controlled Cadbury Report 1992
• Varied over time to reflect different emphasis
• ..good corporate governance requires that the
  board must govern the corporation with integrity
  and enterprise in a manner which entrenches and
  enhances the licence it has to operate The
  Commonwealth Association for Corporate Governance
  1999

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Corporate Governance

• Definition (contd.)
• King report 2002 refers to the characteristics of
  good corporate governance
• Discipline universally accepted behaviour
• Transparency candid, accurate, timely
  information
• Independence no board/committee conflicts (of
  interest)
• Accountability by law/statute to company
• Responsibility to relevant stakeholders
• Fairness current future interests/minorities
  
• Social responsibility not discriminatory or
  exploitive environmentally
• and personally

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Corporate Governance

• Evolving trend
• Corporate entity led to a split in control and
  ownership
• Limited liability for shareholders led to
  protection for third parties
• Company Law
• Governance requirements
• Evolved from autocratic institutions to more
  participative
• Importance of stakeholders recognised
• Latest thinking encapsulated in notion of
  sustainability or the triple bottom line
• Economic, social and environmental performance
• Integrated sustainability reporting

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Corporate Governance

• Sustainability
• The achievement of balanced integrated economic,
  social and environmental performance
• At its broadest, the term is used to capture
  the whole set of values, issues and processes
  that companies must address in order to minimise
  any harm resulting from their activities and to
  create economic, social and environmental value.
  This involves being clear about the companys
  purpose and taking into consideration the needs
  of all the companys stakeholders shareowners,
  customers, employees, business partners,
  governments, local communities and the public.
• King Committee on Corporate Governance 200297

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Corporate Governance

• Stakeholders
• Who is a stakeholder?
• those whose relations to the enterprise cannot
  be completely contracted for, but upon whose
  co-operation and creativity it depends for its
  survival and prosperity. King Report 2002 -
  quoting Slinger and Deacon
• those groups who affect and / or are affected
  by the organisation and its activities AA 1000
  
• King Report classifies stakeholders as follows
• Shareowners
• Parties with a contractual nexus
• Parties with a non-contractual nexus
• The State

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Corporate Governance

• Pillars of good corporate governance
• Transparency
• Accountability
• Responsibility
• Fairness

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Corporate Governance

• Standards and guidance
• Financial reporting and auditing
• GAAP
• IFRS
• International Accounting Standards
• OECD Principles
• CACG Guidelines
• King Report 2002
• Global Compact
• Sullivan Principles
• ISO 14001
• OHSAS 18001
• GRI Guidelines

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• Corporate governance is essentially about
  leadership

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• WHY CORPORATE GOVERNANCE MATTERS

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Why Good Corporate Governance Matters

• Business is not just about making sound
  investment decisions, taking management risks,
  and dealing with economic uncertainties. Today,
  it is about social responsibility, putting all
  our actions under public scrutiny, and responding
  to the concerns of those among whom we conduct
  our business in an open and accountable way. It
  is important for us all to remember that good
  governance, like personal integrity, is no longer
  the luxury of the virtuous it has become a
  global business necessity Aziz 2002

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Why Good corporate Governance Matters?

• If we Asians are to profit from the lessons of
  the devastation that effectively wiped many of
  our countries off the global economic radar
  screen, we must embrace the fact that the
  unbridled excesses that underpinned our bubble
  economies were really no substitute for high
  ethical business standards and good corporate
  governance Aziz 2002

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Why Good Corporate Governance Matters?

• The world investor community has understandably
  asked that as Africans we must establish the
  conditions to enable them to take rational
  business decisions to make long-term investments
  in Africa Mbeki 1998

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CHALLENGES FOR CORPORATE GOVERNANCE IN AFRICA
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Challenges

• Institutional framework
• Leadership
• Role clarity
• Transparency
• State-owned enterprises
• Independent boards
• Role clarity of government as shareholder

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ADDRESSING THE CHALLENGES
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Institutional Framework

• The OECD Principles for Corporate Governance
  point out that to
• ensure an effective corporate governance
  framework , it is necessary that an appropriate
  and effective legal, regulatory and institutional
  foundation is established upon which all market
  participants can rely in establishing their
  private contractual relations. This corporate
  governance framework typically comprises elements
  of legislation, regulation, self-regulatory
  arrangements, voluntary commitments and business
  practices that are the result of a countrys
  specific circumstances, history and tradition.
  The desirable mix between legislation,
  regulation, self-regulation, voluntary standards,
  etc. in this area will vary from country to
  country. As new experiences accrue and business
  circumstances change, the content and structure
  of this framework might need to be adjusted.
• OECD 200429

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Institutional Framework

• As a minimum
• A legal framework capable of enforcing certain
  miminum standards
• Government policy framework
• Pressure and incentives to adopt best practices
• The right mix of
• Legislation
• Regulation
• Guidelines

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LEADERSHIP
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Leadership

• Essentially a function of
• Clear purpose and direction
• Role clarity
• Empowerment / inspiration
• African leadership
• Participative
• Empowering
• Mutual respect
• Establishing values

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Leadership

• .leadership must be measured against the
  purpose, integrity and values of the vision or
  objective that is set by the leader. Furthermore
  it should be sustainable. This means that the
  vision should be in the interests of the
  organisation or community, ethical in intention
  and implementation, and developed in a
  consultative and transparent manner.
• Source (James M. Burns 2003) Transforming
  Leadership The pursuit of happiness.

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Leadership
Role of the board
PERFORMANCE
LEADERSHIP
PERFORMANCE
GOVERNANCE FRAMEWORK
LEGAL FRAMEWORK
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Leadership

• Role of the board
• The board has a collective responsibility to
  provide effective corporate governance that
  involves a set of relationships between the
  management of the company, its board, its
  shareowners and other relevant stakeholders, in a
  manner whereby the board should
• determine the companys purpose and values
• determine the strategy to achieve its purpose
  and to implement its values
• exercise leadership, enterprise, integrity and
  judgement in directing the company
• ensure that procedures and practices are in place
  that protect the companys assets and reputation

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Leadership

• Role of the board
• monitor and evaluate the implementation of
  strategies, policies, management performance
  criteria and business plans
• ensure that the company complies with all
  relevant laws, regulations and codes of best
  business practice
• ensure that technology and systems used in the
  company are adequate
• identify key risk areas and key performance
  indicators
• regularly assess its performance and
  effectiveness and
• ensure that the company has developed a
  succession plan for its executive directors and
  senior management
• Source King Committee on Corporate Governance
  for South Africa 200297

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Leadership

• Role of the board
• Values, vision, strategic direction
• Directoral dashboard

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Leadership

• Role of the shareholder
• Government is a unique shareholder
• Overarching purpose
• Priorities
• Shareholder compact as a tool

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Leadership

• Appointment of the board
• Need a competent board
• Transparent appointment process
• Diversity of skills, gender, race, executive and
  non-executive
• Clear mandate

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Leadership

• Balance performance and conformance

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Leadership

• Role of management
• Develop proposals
• Evaluate and implement strategy
• Determine the how

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Leadership

• Role of stakeholders
• Influence direction and activities
• Broader participation and credibility
• Constructive dialogue

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Leadership

• Empowerment
• Within agreed parameters and framework role
  clarity
• Allows for monitoring and reporting
• Can never avoid accountability

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Leadership

• State-owned enterprises
• Role of government as shareholder
• Role regarding strategic decisions
• Mandate and KPIs
• Empowering the Board
• Shareholder Performance Agreement

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TRANSPARENCY
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Transparency

• Information age
• Global village
• More information is available
• Greater access - and vulnerability

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Transparency

• What is transparency?
• concerns the duty to account to those with a
  legitimate interest - the stakeholders in the
  organisation(1) - AA1000
• is the ease with which an outsider is able to
  make meaningful analysis of a companys
  actions,its economic fundamentals and the
  non-financial aspects pertinent to that business.
  This is a measure of how good management is at
  making necessary information available in a
  candid,accurate and timely manner... - King
  Report 2002

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Transparency

• . Effective corporate governance depends on
  access to relevant, high quality information that
  enables performance tracking and invites new
  forms of stakeholder engagement Global
  Reporting Initiative (GRI) Sustainability
  Reporting Guidelines (GRI Guidelines) (2002)

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Transparency

• Main reasons for lack of effective disclosure
• Confidentiality, trade secrets and IP
• Exposure to litigation (prejudicial)
• Nike v Kasky
• To conceal shortcomings/weaknesses/contraventions
  
• Lack of Resources
• Failure to appreciate the benefit
• Attitude and culture

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CORRUPTION
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Corruption

• ..the issue of corruption . is about two
  distinct matters, one being the matter of the law
  and the other being a matter of social morality.
  Between these two, clearly what must come first
  is the matter of social morality
• Mbeki 1999)
• Organisation must show a commitment to
  organisational integrity
• Processes to ensure compliance

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Corruption

• Organisational Integrity King Recommendations
• Engage stakeholders in determining standards of
  ethical behaviour, and demonstrate commitment to
  organisational integrity
• Each company should demonstrate its commitment to
  its code of ethics
• Disclosure should be made of adherence to the
  companys codes of ethics
• Companies should strongly consider their
  dealings with others

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Corruption

• Organisational Integrity
• Ethics v Organisational Integrity
• Requires more than a code of ethics
• Codes of ethics recommended
• Must be supported by
• Monitoring mechanisms
• Enforcement
• Consequences for non-adherence

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Corruption

• Legal framework
• Fiduciary duties
• Prevention of and Combating of Corrupt Activities
  Act

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Corruption

• Legal framework Prevention of and Combating of
  Corrupt Activities Act
• Provides for extraterritorial jurisdiction
  regarding acts by South Africans in other
  countries
• Definition of corruption broadened (not confined
  to public officials)
• Provides for a register of tender defaulters to
  be established by the Minister of Finance
• The failure by a person in authority to report an
  offence in terms of the Act or theft, fraud,
  extortion, forgery or uttering involving an
  amount of R100 000 or more to a police official
  is an offence

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Corruption

• Protected Disclosures Act (No 26 of 2000)
• Whistle blowers protected
• Channels for whistle blowers

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INTEGRATED RISK MANAGEMENT
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Integrated Risk Management

• Board is responsible for total process of risk
  management
• Organisations must identify and manage risks

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AUDIT
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Audit

• Need internal and external audit function
• Reassures stakeholders
• Independence of audit process

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Audit and Accounting

• Appropriate reporting standards
• Giving legal effect to accounting standards

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Conclusion

• Countries are at different levels of development
• Initiatives must be adapted to country specific
  situation
• Need a solid foundation for sustainable corporate
  governance practice