African Decisions: Good corporate governance

The construction firm that uses inferior building materials is just as guilty of unethical behaviour as the business owner who pays bribes to secure a tender, or the large corporation committing accounting fraud to deceive its financiers and shareholders. Good corporate governance is intrinsically linked to an ethical culture.

Any governance failures – even those that stay undetected – can seriously undermine the organisation itself, its employees and the wider economy. Fraud, mismanagement, corruption and corporate scandals erode value and reduce investor confidence in the country. ‘Part of our problem is that perpetrators don’t recognise the impact of their actions. It is easy to think that it’s a victimless crime and therefore justifies their actions,’ says Claudelle von Eck, the outgoing CEO of the Institute of Internal Auditors of South Africa (IIA SA). ‘We need to make people more conscious of the ripple effect of unethical behaviour and how they harm “faceless” people and communities. There is no victimless unethical behaviour.’

Business Leadership South Africa (BLSA) puts it more dramatically: ‘Corruption is the cancer that eats away at this country.’ The independent association, which counts the leaders of some of the most influential companies among its members, condemns any kind of corruption, be it in the public or private sector. BLSA holds its membership base accountable to the ‘integrity pledge’ it has developed in response to recent high-profile corporate failures.

All companies operating in South Africa are expected to comply with the corporate governance regulations for which the country is globally recognised. It is mandatory for JSE-listed entities to ‘apply and explain’ their strategy for accountable leadership, ethical culture and responsible corporate citizenship, among other things, in line with the world-class King IV Report on Corporate Governance.

Many smaller companies and NGOs, which are not obliged to follow King IV, are doing so nevertheless because they understand the value of corporate governance when it comes to future-proofing their business.

‘Good governance practices are aimed at reducing unnecessary risk for an organisation – whether listed, large, SME or small,‘ says Liezl Groenewald, senior manager of organisational ethics at the Ethics Institute and president of the Business Ethics Network of Africa. ‘The sustainability of small companies and SMEs is dependent on their leadership, and good governance is essentially about effective leadership,’ she says. ‘Sustainability and good governance therefore walk hand in hand. With good governance practices, processes, systems and controls in place, as well as ethical behaviour that goes beyond mere compliance with rules and legislation, opportunities for growth, financing and improved performance will arise.’

Good governance practices create trust and reputational value, which increases the long-term sustainability of a company. ‘Financiers want to finance companies that they believe will not waste their money,’ says Groenewald. ‘Employees want to work for an employer who treats them ethically and who will be able to pay their salaries each month; and customers want to buy from companies whose products and services they can trust and who keep their promises.’

Most important, she adds, is leadership that leads ethically and ‘ensures that people are held accountable if they are found wanting in complying with good governance practices’. The leaders also need to support employees to make better ethical decisions; enforce policies, rules and procedures; and they need to role model ethical behaviour. According to the Ethics Institute, senior and executive leaders communicate ‘how we do things around here’ through their behaviour and decisions. Their behaviour should, therefore, be ‘beyond reproach’, as employees imitate their leadership and look to them to legitimise the vision and ethical culture of the organisation.

The latest statistics confirm that there’s a dire need for better governance, particularly at government level. The 2018 Corruption Perception Index ranks South Africa a disappointing 73rd out of 180 countries (with No 1 being the least corrupt and No 180 the most) and ninth in sub-Saharan Africa. Transparency International, which compiles the annual index, reports ‘a largely gloomy picture of Africa’, with one in four people paying bribes to access services. ‘In a society where unethical behaviour is tolerated, it will thrive,’ says Von Eck. ‘In a company, the tone is set by the board, and the managing director/chief executive officer should be the champion who ensures that it permeates throughout the organisation.’

She says the 2018 Corporate Governance Index, published by the IIA SA and now in its sixth year, should serve as a wake-up call to leaders. The index reflects the views of chief audit executives who have reported a widening gap between the ethical tone at the top of an organisation and the reality on the ground.

The 2019 South African Business Ethics Survey findings, meanwhile, released by the Ethics Institute in June 2019, show a disconnect in the perception of ethics within an organisation. ‘Senior management perceived a much higher level of ethical culture maturity than middle-management and non-managerial employees,’ the report notes. ‘In other words, people working in the same organisation can have significantly different perceptions of the very same organisation’s ethical culture, depending on their job level. Leadership in corporate South Africa are evidently not entirely in touch with, and may be under some illusions about, the overall ethical-culture maturity of their organisations.’

More than 2 200 respondents from listed and large private companies across seven industries participated in the survey. In this sample, the more client-facing and higher-trust ‘tertiary’ industries (tourism, hospitality, banking, finance and insurance, for instance) achieved on average much higher ethical-culture and lower ethical-risk scores than the ‘primary’ and ‘secondary industries’ (such as those focused on production, distribution and mining). According to the survey, this could be a result of tertiary industries employing higher-skilled labour, offering better salaries and possibly a more ethical treatment of their staff than primary industries, which tend to employ more unskilled labour in a more demanding, physical work environment.

The findings indicate that listed and large private organisations in South Africa have a ‘moderate’ ethical-culture risk and an overall ‘developing’ but not ‘mature’ ethical culture. This is encouraging, say the authors, as it shows that the building of an ethical culture is prioritised to some extent, but also demonstrates that more can be done to improve the ethical culture of these organisations.

‘More awareness around the true meaning of governance is essential,’ according to Parmi Natesan, CEO of the Institute of Directors in Southern Africa. ‘In King IV we say that corporate governance is essentially about ethical and effective leadership. So there’s no point in implementing a governance code that results in people just ticking boxes; applying practices for the sake of applying them. This needs to result in something.’

She cautions that no law or code can realistically prevent criminal activity, because those wanting to do something wrong will do it, either by disregarding the law or finding a loophole within it. ‘It is for this reason that King IV places so much emphasis on creating an ethical culture and mindset,’ says Natesan. ‘When this mindset is present, individuals and companies will seek to act in the right way – even when nobody is looking – because they understand that to do so makes good business sense and reduces risk.’

Groenewald says that while all of the King reports have been influential, King IV is internationally considered to be ground-breaking because it takes new developments in corporate governance into account.

‘These are matters such as directors’ pay, integrated reporting, responsible investing, mandated audit rotation and tendering, information security and protection, and board diversity. The significance of the inclusion of these matters lies in the fact that they are all underpinned by ethics,’ she says. ‘In other words, something like mandated audit rotation rests on the fact that a long-term client-auditor relationship can result in an unhealthy familiarity between the organisation and an audit company, which in turn can cause ethical dilemmas relating to whose interest should be served on the side of the audit partner. […] Examples abound.’

While some listed companies bemoan ‘onerous’ reporting rules, there are more than enough reasons why these rules are urgently needed in South Africa (as well as in the rest of Africa and the world, too). By instilling an ethical mindset and the mechanisms for good governance in private and public entities – and, importantly, in their leaders – they will be better equipped to avoid illegal or negligent corporate behaviour and steer the economy back on a sustainable trajectory.