chapter 2 non-financial corporate governance principles …

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CHAPTER 2

NON-FINANCIAL CORPORATE GOVERNANCE PRINCIPLES��

�

2.1 Introduction

In this chapter the particular corporate governance principles or characteristics of

accountability, integrity and disclosure will be discussed as well as their specific

relevance for good corporate governance.

King II identified the seven characteristics as discipline, transparency, independence,

accountability, responsibility, fairness and social responsibility. In essence, they

demonstrate the same kind of behaviour that forms part of good corporate governance

as the above characteristics of accountability, integrity and disclosure. Management’s

view of the most important aspect in business is that of the bottom line of the balance

sheet in other words the profit that the company generates. The view of this study and in

support of that of Rossouw D & Van Vuuren L (2004) is that business cannot only be

bottom line driven. In order for any business to be successful and to make a profit,

interactions with other businesses and individuals have to take place. The public and

company employees are constantly interacting on different levels of society and within

various disciplines to fulfil the demand for certain needs. It is at this point where

businesses and individuals are confronted with issues such as good and bad or wrong

and right. Accountability, integrity and disclosure can become prerequisites for any

business or organisation alike to maintain their business reputation and to sustain

financial performance. Organisations and companies should pursue these concepts, to

avoid being blamed by communities and shareholders for being short sighted and driven

by the need for profit at all cost.

According to Du Toit (2002:8) the seven primary principles or characteristics of

corporate governance as indicated by the King II Report (2002), could be stated

differently by using terms such as accountability, integrity and disclosure. Integrity

comprises a value-based system in order to manage ethical behaviour within an

organisation. Integrity should play an important part in the day-to-day operations within

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the organisation. Management should go as far as defining integrity behaviour and

cultures that are relevant to the organisation and make them part of the key

performance indicators of individuals. They should then be appraised in terms of their

compliance or non-compliance to these outcomes.

Disclosure of information can either be internally or externally. This chapter will

investigate disclosure of organisational information to internal sources. Disclosure is

defined by the COLLINS English dictionary as “to make information known”, “to allow to

be seen” or to “agree to disclose the contents of the box”. Companies and organisations

should be very concerned with what information is divulged to the public and the timing.

Disclosure of organisational information can either be to your advantage or

disadvantage. Major corporations have in the past obtained a competitive advantage

over their rivals with the information known to them. The question of what information

should be disclosed is particularly concerned with categorizing information as being

sensitive, confidential or for general public consumption. The value of disclosing internal

corporate information lies in whether the information reaches the target group for which

it was intended.

There is ever increasing pressure on companies to become more balanced, and the

more comprehensive the disclosure, the more positive the impact will be on the

reputation of the company. On a corporate level sustainable disclosure according to the

King II Report (2002:203) should include social, transformational, ethical, occupational

health and safety, and environmental policies and practices. The King II report goes

further to mention that three levels of reporting exist which can be phased in over a

period of time, namely:

��Acceptance and adoption of business principles that can be verified

��The implementation of practices with adequate evidence to support disclosure

��Performance against related adopted principles.

When considering the sustainability of disclosure within an organisation, the disclosure

should include principles such as:

��Reliability

��Clarity

��Relevance

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��Comparability

��Verifiability

��Consistency, and

��Materiality

This chapter will specifically focus on two organisational disclosure aspects, which will

include employment equity and training. Although other aspects of disclosure exist,

these two aspects form the basis of the character of the organisation as well as the

future stability and success of the organisation. Aspects such as environmental matters,

social issues, procurement and black economic empowerment could be seen as

external matters. This is a direct result of the fact that these aspects do not benefit the

organisation internally but rather the community or the consumer.

The extent to which public organisations comply to corporate governance principles e.g.

(accountability, integrity and disclosure) are some of the major questions, which are

constantly asked by the public. The reason for this being, that the general public strive to

minimize service levy costs and maximize service delivery levels. Operational,

budgetary and management problems occur from time to time, which gives the

impression to the general public that the organisation is not at all in control of matters

and therefore mistrust and negativity towards the organisation and employees are

created. Performance management evaluations are known to only measure the

performance of an individual or an organisation against pre-determined organizational

goals and objectives with specific targets or benchmarks. Performance measurement

however does not measure the fundamental characteristics of non-financial corporate

governance namely, accountability, integrity and disclosure as referred to by Du Toit

(2001:7).

The basic principles of financial corporate governance are annually measured by the

Finance Department of the CTMM. These principles of corporate governance include,

risk management, social responsibility, financial procurement processes and financial

sustainability of the organisation in terms of the income streams and levels of

expenditure. The non-financial corporate governance principles are however not part of

the financial audit and it therefore seems that non-financial corporate governance is

neglected throughout the whole organisation. This study will focus on the non-financial

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corporate governance principles as defined in the King II report (2002:3) and earlier

discussed in the chapter. The principles of accountability, integrity and disclosure are

specifically chosen for their importance regarding the efficient and effective

management of the CTMM. They will be discussed in detail in sections to follow. The

focus will be to define the various concepts and to utilize these concepts to derive

specific questions in order to compile the questionnaire. These and other related

concepts will be discussed in more detail in the paragraphs to follow.

2.2 Accountability

Accountability means “that the subordinate’s manager has the right to expect the

subordinate to perform the job, and the right to take corrective action in the event the

subordinate fails to do so” Bateman & Snell, (1999:284). King II (2002) distinguishes

between accountability and responsibility in the manner where “ one is liable to render

an account when one is accountable, and be called to account when one is

responsible”. KPMG (2002:71) mention in the toolkit for the company directors that it is

very important to note that accountability to the board remains with management and

should be the responsibility of every employee in the organisation. For a company or

individual to discharge its accountability, an organisation/individual should account for

his/her acts, omissions, risks and dependencies according to the Toolkit for the

company director, KPMG (2002:71). The concept of accountability is directly related to

other concepts of responsibility, delegation and code of conduct. People are held

accountable for that which has been entrusted to them by their job descriptions and their

subsequent fiduciary duties. This entrustment in organisations happens through

delegation and authority for which they are responsible. Typically, a code of conduct is

to ensure appropriate measures are applied, in order to ensure that behaviour is

desirable for which people can be held accountable.

In order to understand the level at which the managers and deputy managers are

accountable for their decisions and actions, figure 2.1 is included to indicate the

hierarchy of accountability within the CTMM structure. However, all employees of a local

government organisation are accountable for their actions towards the local community.

All levels of management within the CTMM are ultimately accountable for their actions to

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the Executive Mayor. The Executive Mayor Committee performs the same duties and

has similar responsibilities as the Board of Directors of a company. The Municipal

Figure 2.1: Hierarchy of Accountability within the CTMM

•

Mayor of the CTMM

CTMM Community

(Executive) Mayoral Committee Consisting of 9 (MMC’s) -Members

of the Mayoral Committee with specific portfolios

Municipal Manager On equal base with Chief Executive Officer of a Company

On equal base with Board of Directors of a Company

Chief Operating Officer

Local Economic Development

Division • Strategic

Executive Officer (1/2)

• General Manager (1)

• Managers (4) • Deputy

Managers (10) • General Staff

Transport Division • Strategic

Executive Officer (1/2)




Roads & Stormwater

Division • Strategic

Executive Officer (1)




On equal base with Shareholders

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Manager on the other hand has duties and responsibilities similar to that of a Chief

Executive Officer of a company.

The Institute of Social and Ethical Accountability (ISEA) of South Africa developed an

Accountability Framework (AccountAbility 1000 – AA1000), which was compiled in

collaboration with international partners concerned about the international standards and

guidelines of corporate accountability. This guideline document aims at improving

common understanding of what matters about accountability and quality management of

an organisation by responding to the needs and aspirations of its stakeholders, and also

through external stakeholder engagement to establish a climate of increased trust and to

create partnerships to open value-based relations.

The AA1000 defines accountability, as “to explain or justify the acts, omissions, risks

and dependencies for which one is responsible to people with legitimate interest”.

Accountability by individuals and organisations can be improved once the organisation

or individuals decide to ensure that organisational strategies are meaningful to

stakeholders and understood by them.

The credibility gap that was created by corrupt managers and mismanaged corporations

led to the establishment of proper guidelines on accountability such as the AA1000 and

the drafting of the King II (2002) report on corporate governance. Rossouw & Van

Vuuren (2004:192) confirms that the state is accountable to its citizens in the public

administration of its powers. They state that as a result of growth of modern corporations

they exert enormous social influence, but without having to account to the public for their

actions. This in particular led to the establishment of special interest groups i.e.(home

owners organisations, civic associations, youth and women’s leagues, social-economic

and environmental organisations, etc) to monitor the actions of organisations.

Ratepayer’s organisations and other interest groups play a similar role in holding local

government institutions and their officials accountable. In terms of the Local

Government: Municipal Finance Management Act, Act 56 of 2003, officials and

municipal entities are directly accountable for their financial conduct.

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The accountability concept is also linked to the concept of responsibility. In order to be

held accountable for one’s actions certain responsibility should have been entrusted

upon the individual. Delegation of responsibilities often takes place by management, but

accountability ultimately remains the responsibility of management. Performance

measurement regarding the responsibilities which one is accountable for is guided by

the code of conduct of an organisation. In the event of non-compliance, it implies that

corrective or punitive measures should be applied. The concept of responsibility will be

elaborated on in the following section.

2.2.1 Responsibility

Responsibility, according to Bateman & Snell (1999:284), means that a person is

assigned a task that he or she is supposed to carry out. Responsibility can be grouped

into two different sections namely, (1) social responsibility where the organisation is

ultimately responsible to its clients/community for the services that they deliver, or (2)

the work/job responsibility which an individual, in this case the managers, has towards

senior management and their direct subordinates. Classicists according to Robbins

(1993:491) argue that delegation goes with commensurate responsibility. Responsibility

might encompass reporting responsibility, supervisory responsibility or financial

responsibility as defined by the King II (2002) report.

To allocate authority without responsibility creates opportunity for abuse and no one

should be held responsible for what he/she has no authority over. Classicists’ further

state that responsibility cannot be delegated. They support this contention by noting that

in many situations, actions or arbitration cases the delegator was held responsible for

his or her delegates’ actions. According to Robbins (1999:493) two forms of

responsibilities exist namely, operating responsibility and ultimate responsibility.

Operating responsibility is the responsibility that managers encounter every day of their

lives where they delegate operating responsibility equal to the delegated authority.

Ultimate responsibility, however, can never be delegated.

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In this study the focus will only be on the internal responsibility, in other words the

responsibilities that a manager has to fulfil his/her job and the departmental purpose. All

appointed managers in the CTMM should be in possession of a copy of his/her job

description, which defines the specific role, and responsibilities, which he or she should

perform in the organisation. The job description also performs an important role when a

manager or his delegate did not perform their responsibilities, as they should have or as

a result of improper behaviour. The job description then becomes the guiding document

for any corrective measures or possible punitive measures. A manager can only assume

responsibility for actions, incidents or activities, which was delegated to him or her.

Responsibility as measured in the CTMM context, will mainly focus on management’s

responsibility role, which they play in the organisation, and whether they are held

responsible for decisions that they take as a result of their delegated authority.

2.2.2 Delegation

Delegation also forms part of the principle of accountability. Managers cannot perform all

the business activities themselves and often have to rely on other individuals or

subordinates with the necessary skills to perform it on their behalf. By delegating

activities managers get the job done by others but retain accountability for the tasks,

which others perform. Authority means that a person has the power and the right to

make decisions, give orders and draw upon resources and do whatever else is

necessary to fulfil his/her responsibilities as defined by Bateman & Snell (1999:284).

The common problem with responsibility is that people and managers have more

responsibility than then have authority to perform their duties. Bateman & Snell

(1999:283) states that delegation is perhaps the most fundamental feature that

managers use to get things done by someone else. Delegation further requires that

some sort of feedback take place after the task/s have been completed.

In the CTMM authority is delegated to managers according to their job descriptions and

their departmental purpose portfolios and any further responsibilities are delegated by

means of special power resolutions approved by the decision-making authority of the

CTMM. There is for this reason, currently specific delegated powers given to the

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Municipal Manager regarding the procurement process, budget reallocations, signing

and approval of agreements, financial arrangement powers, etc. On the other hand the

Municipal Manager officially delegated his financial powers to the Chief Financial Officer

(CFO) who is ultimately responsible for the financial control of the CTMM finances in

terms of the MFMA.

Whether management of the CTMM delegates to subordinates, and if so whether it is

done formally or informally, will be elaborated on in the analysis of the findings of the

questionnaire.

2.2.3 Code of Conduct

The individual in the company can be held responsible and accountable for his or her

actions when interacting with customers or the public takes place. In order to address

their possible non-compliance a code of conduct is utilised to rectify the problem. A code

of conduct is merely a set of ethical rules. The value of the code of conduct according to

Crawthorne (1993:94) lies in the fact that the code of conduct draws attention to pitfalls

that can be avoided and suggests how all employees should conduct themselves in the

interest of good governance. Rossouw & Van Vuuren (2004:182) further supports the

notion that a code of conduct should specify the standards of behaviour that all

members of the organisation adhere to. They go further to say that it is important for

management to develop the code in such a manner that it enjoys credibility and

acceptance in the organisation. Craythorne (1993:94) states that a Code of Conduct is a

document of an advisory nature and does not have any legal force, unless it is included

into the employee’s contract of service. The employee subsequently have to sign

acknowledgement and receipt of a copy of the Code of Conduct in order to prevent

future allegation that it was not received. Any Code of Conduct should be properly

drafted and should include any possible discrepancies or so-called “grey areas” where

employees can escape prosecution from misconduct. The main objectives of any Code

of Conduct should be to prevent any dishonesty, corruption, unethical behaviour, abuse

of information, conflict of interest, being bias etc and to hold people accountable in terms

of the code of conduct for these actions.

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Apart from the organizational code of conduct, which an individual should comply with,

almost every professional career has its own code of conduct, which its professionals

have to comply with. These professional codes of conduct are developed, implemented,

and monitored by organisations such as the Medical and Dental Council of South Africa,

Engineering Council of South Africa, Association of Chartered Accountants, Law

Society, etc to name but a few.

The CTMM approved its Code of Conduct on 1 November 2001 under section 69 of the

Municipal Systems Act. By approving the Code of Conduct the CTMM set standards for

social and ethical behaviour by all employees of the organisation to comply with. The

CTMM Code of Conduct addresses specific issues, which defines the organisations

external image and creates a safe, enjoyable and trustworthy organisation on the inside.

Specific issues addressed by the CTMM code of conduct to name but a few, are:

• general conduct –external and internal

• servicing the publics interest

• personal gain

• disclosure of benefits (through business association)

• unauthorised disclosure of information

• undue influences

• rewards, gifts and favours

• council property

• sexual harassment

• reporting duty of staff members and,

• breaches of contract.

The general conditions of conduct of the CTMM’s code of conduct stipulate that a staff

member of a municipality should at all times:

• loyally execute the lawful policies of the municipal council

• perform the functions of office in good faith, diligently, honestly and in a

transparent manner

• act in such a way that the spirit, purport and objects of section 50 are promoted

• act in the best interest of the municipality and in such a way that the credibility

and the integrity of the municipality are not compromised

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• act impartially and treat all people, including other staff members, equally without

favour or prejudice.

The CTMM thus has a code of conduct, which defines in detail the required actions from

its members towards society and fellow workers. The availability of the code of conduct,

the consciousness and familiarity of the contents of the code of conduct as well as the

continuous use thereof will form part of this study, and is measured by means of a

questionnaire.

2.3 Integrity

The definition of integrity according to the Collins Concise Dictionary is defined as

adherence to moral principles, honesty, and the quality of being unimpaired, soundness,

unity and wholeness. According to Rossouw & Van Vuuren (2004:6), integrity is a

concept that is closely aligned to ethics. Integrity is however a much more restricted

concept than ethics. The concept of integrity can be analysed in terms of the following

aspects:

• Fairness as a way of treating fellow workers and fairness in the treatment of

workers by the organisation or the company, fosters the belief in people that they

are being treated with integrity

• The interaction with fellow colleagues in the work environment normally indicates

whether a person has respect for others, which directly shows whether someone

is a person of integrity, or not.

• By showing empathy to another individual when he/she has gone through a

difficult time, indicates whether a person is compassionate and whether a person

possesses integrity.

• Being an honest person in the actions towards other also indicates whether a

person is a person of integrity and can be trusted. This also applies to the entire

organisation, as the consumer perceives it.

Integrity is thus often associated with concepts such as fairness, honesty and empathy.

According to Rossouw & Van Vuuren (2004:151) companies can take various steps to

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improve integrity in the company and to make sure that it becomes a company that acts

with integrity. These measures include to:

• Recruitment and selection procedures to assist the company to hire individuals of

integrity

• Identification of ethical values and standards that all staff members should adhere

to

• Include a reward system for adherence or a disciplinary action against those who

deviate from it.

Figure 2.2:Relationship between Integrity and Ethics

Source: Rossouw & Van Vuuren. (2004:6). Business Ethics. Cape Town.

Oxford University Press.

To become a person of integrity you have to go back to the fundamentals. This implies

that you would have to commit yourself to complete and utter honesty and

confidentiality. On your daily journey in life consider the following aspects to become a

person of integrity as stated by Maxwell & Dornan (1997:33):

• commit yourself to developing strong character

• do the little things that matter in life

• do what you should do before you do what you want to do (duty before pleasure).

Integrity is crucial for business and personal success. An important rule to remember

according to Maxwell & Dornan (1997:22) is to not do “what you would not feel

comfortable reading about it in the newspaper the next day”. Tests are these days used

Ethical Behavior

INTEGRITY

Unethical Behavior

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to assess a job candidate’s integrity. These test are commonly known as polygraphs and

paper-and-pencil honesty tests. According to Bateman & Snell (1999:342 typical

questions asked in a paper-and-pencil test would be whether a person has ever thought

about stealing and whether he or she believes other people steal. These types of test

according to Bateman & Snell deliver great results firstly in choosing employees with

integrity and secondly to reduce theft by employees.

Any organisation should have an integrity strategy that focuses on the continuous

communication, training and induction of new employees in the integrity strategy of the

organisation. The elements of an integrity strategy according to Bateman & Snell

(1999:162) should include:

• the guiding values are shared and clearly understood by everyone

• company leaders are personally committed to the values and willing to take action

on them

• the values are considered in decision making and reflected in all important

activities

• information systems, reporting relationships, and performance appraisals support

and reinforce the values

• people at all levels have the skills and knowledge to make ethically sound

decisions on a daily basis.

An integrity strategy should commence with a deep diagnosis of the corporate ethical

culture and the current state of ethical behaviour. Stakeholders should be consulted to

give their moral expectations of the organisation. Rossouw and Van Vuuren (2004:53)

are of the opinion that an integrity approach relies heavily on the example set through

adherence of the leaders to the core ethical values and standards of the organisation.

2.3.1 Fairness

In paragraph 2.3 it was found that fairness is a way of treating people in an acceptable

manner and people are made to believe by their parents, teachers, bosses and other

people that play an important role in their lives, that they are people with integrity. Fair

treatment according to Bendix (1996:374) can only be considered when the conclusion

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was reached that an action or behaviour could be considered fair if there was balance

between the parties, if both parties received equitable treatment, if there was conformity

with universally accepted standards and if consistency was exhibited. Fairness

therefore could be considered as the quality of being just, equitable and impartial. Ideas

of fairness are sometimes shaped by vested interest. Perceived fair treatment by fellow

colleagues and business associates is an important concept to build trust, honesty and

improve future business relations. Ferrell, Fraedrich & Ferrell (2002:65) state that

fairness is the disposition based on a desire to deal with the perceived injustices of

others. They go further to state that fairness often relates to doing the right thing with

respect to small matters to cultivate a long-term business relationship.

Fairness within the organisation could mean that emphasis is placed on aspects such as

procedural transparency and fairness in processes such as promotions, bonuses and

disciplinary actions, which make it easier for managers to communicate with their

subordinates. Procedural fairness in the case of disciplinary hearings refers to the

procedures, which should be prompt and procedurally correct. Substantive fairness in

the instance of disciplinary hearings makes reference to the punishment, that it must be

commensurate with the misconduct of the employee in other words it must be

proportionate to the offence.

In the CTMM context the focus is rather based on the principles of substantive and

procedural fairness to ensure that fair investigations, hearings, verdicts and penalties

are implemented. The intention with this study is to determine whether the CTMM

promote fairness, in particular as mentioned above and whether the CTMM not only

preaches but also applies their fair treatment for all policy.

2.3.2 Respect for others

Interaction with other individuals in a respective manner shows good character and such

an individual can be classified as an individual with integrity. The Collins Concise

Dictionary defines respect as “attitude of deference, admiration, or esteem, regard”.

Heller & Hindle (1998:231) state that to show respect to others you have to treat

everyone with the same respect that you expect yourself (“do unto others as you would

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be done by”), because your staff are allies in the job of management. A simple example

of showing respect to others is by entrusting part of a manager’s work to another

because of a belief in their capability. Heller & Hindle (1998:231) further emphasize the

importance to build mutual respect by asking subordinates for their opinions on how the

work should be done, and demonstrating to them a willingness to listen to their

suggestions.

In the CTMM context the focus regarding respect for others is based on your immediate

actions in the direct work environment. Actions that might negatively impact on another

person’s work environment should not be communicated, not attacking someone’s

personality, respecting their privacy and listening to whenever they have a contribution

to make no matter the relevance thereof, demonstrates respect. The intention with this

study is to determine whether the CTMM shows respect to its employees through its

actions and further to determine whether respect is applied by the superiors of

managers and deputy managers when considering their respective views, decisions and

actions.

2.3.3 Compassion

A compassionate individual is a person with empathy towards other individuals and can

show that they possess adequate empathy that they do not communicate the issues to

others, show character of integrity. Being able to show compassion and empathy is

important people skills in the business environment. The Concise Dictionary defines

compassion as “a feeling of distress and pity for the suffering of, or misfortune of

another”. On the other hand empathy is defined by the Concise Dictionary as “the power

of understanding and imaginatively entering into another person’s feelings”. Frederick

(1999:314) mentions that sympathy, compassion, fidelity, and friendship are traits most

commonly focused upon by feminist philosophy. To show compassion one should be

able to show empathy.

Compassion or empathy in the case of the CTMM is constantly shown towards non-

ratepayers. The arrears in service levies run into hundreds of millions of rands, which

would probably never be retrieved. On the other hand the question should be whether

- 27 -

the CTMM and its managers show adequate compassion or sympathy towards their

fellow workers and the public in general. How far is the CTMM willing to let rate non-

payments escalate? One can simply not show endless compassion specifically when

the compassion impacts on other ratepayers that has to foot the bill. This study therefore

focuses on the question of, when is enough, enough. This question and others will be

put to the target audience to get their views of the CTMM’s level of compassion.

2.3.4 Honesty

An honest person attracts trust, and in instances encourages honesty in others or the

organisation. An honest person definitely is a person of integrity, which can be trusted.

Honesty in this study refers to truthfulness, integrity and trustworthiness according to

Ferrell, Fraedrich & Ferrell (2002:31). Honesty is defined by the Concise Dictionary as,

acting in an honest manner, trustworthy, not false or misleading, genuine, just and fair.

Virtues that expand on honesty are trust and truthfulness. Ferrell, Fraedrich & Ferrell

(2002:65) define truth as the “predisposition to place confidence in the behaviour of

others while taking the risk that the expected behaviour will not be performed”.

Truthfulness on the other hand is defined as the disposition to provide the facts or

correct information as known to the individual. Telling the truth involves avoiding

deception and contributes to trust in the business relationship. According to Fredericks

(1999:144) possible honesty “risks” could include aspects where the employee has

conflict of interest, security of employee records, inappropriate gifts, unauthorized

payments to foreign officials and advertising content.

Polygraph tests have extensively been used in the USA & the UK where new job

applicants were put through a polygraph test. There have been some mixed feelings and

results regarding this test and according to Shaw & Barry (1989:286) on balance the

violation of the privacy of a job applicant weighs strongly on the effectiveness of these

tests. This however constitutes a serious reason to oppose the use of the polygraph test

in the evaluation of honesty levels of new applicants.

The honesty test should be conducted as a pre-employment test according to Shaw

(1991:247) whereby the honesty test should include questions such as:

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• How strong is your conscience?

• How often do you feel guilty?

• Do you always tell the truth?

• Do you occasionally have thoughts you wouldn’t want to make public?

• Does everyone steal a little?

• Do you enjoy stories of successful crimes?

• Have you ever been so intrigued by the cleverness of a thief that you hoped the

person escaped detection?

The answers to these questions provide the organisation the answers they need in order

to develop an honesty profile of the individual with a “risk” classification between high,

moderate or low.

In this study the focus will be on whether the CTMM as an organisation expects honest

behaviour from their employees but also whether the organisation promotes and applies

honesty on a daily basis. In terms of the CTMM code of conduct, any employee that

receives gifts, financial rewards or any favours by someone that stands to gain more

from such a relationship should immediately bring it to the attention of the council. Any

failure to do so could result in corrective steps being taken against the perpetrator and

the employee, which could result in either the suspension or dismissal of the employee,

depending on the seriousness of the offence.

2.4 Disclosure

Organisations and individuals often have to disclose fraudulent and unethical conduct to

ensure that the company retains its future existence, stability and status in the

community.

All business organisations depend on communication, being internal or external

communication. This study will only focus on the internal component of communication

or the disclosure of information. According to Grobler, Wärnich, Carrell, Elbert & Hatfield

(2002:14) communication is the glue that binds various activities together, that allows

people to work together and produce the required results. Two basic communication

- 29 -

channels are present in any organisation: the communication that flows from the top

downward, and the communication that flows from the bottom upwards.

The Promotion of Access to Information Act states that the right of access to any

information held by a public or private body may be limited to the extent that the

limitations are reasonable and justifiable in an open and democratic society based on

human dignity, equality and freedom as contemplated in section 36 of the Constitution.

The Promotion of Access to Information Act further has the following to say under the

preamble of the act in order to:

• foster a culture of transparency and accountability in public and private bodies

• by giving effect to the right of access to information

• actively promote a society in which the people of South Africa have effective

access to information to enable them to more fully exercise and protect all of their

rights.

The Promotion of Administrative Justice Act expresses in its preamble that the contents

of the act should be implemented in order to:

• promote an efficient administration and good governance

• create a culture of accountability, openness and transparency in the public

administration or in the exercise of a public power or the performance of a

public function, by giving effect to the right to just administrative action.

The question arises as to, when should information not be disclosed? According to Uren

(2003:38) the following apply in this instance, namely:

• a reasonable person would not expect the information to be disclosed

• the information is confidential and there is satisfaction that confidentiality has

been maintained

• one or more of the following applies:

o it would be a breach of a law to disclose the information

o the information concerns an incomplete proposal or negotiation

o the information comprises matters of supposition or is insufficiently

defined to warrant disclosure

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o the information is generated for internal management purposes of the

entity

o the information is a trade secret.

The CTMM has written into its Code of Conduct that the disclosure of benefits by a staff

member of a municipality who, or whose spouse, partner, business associate or close

family member, acquired or stands to acquire any direct benefit from a contract

concluded with the municipality, must disclose in writing full particulars of the benefit to

the council.

• This item does not apply to a benefit which a staff member, or a spouse, partner,

business associate or close family member has or acquires in common with all

other residents of the municipality.

The code of conduct of the CTMM is very clear on specifically unauthorised disclosure of

information. The CTMM code of conduct has the following rules:

• A staff member of a municipality may not without permission discloses any

privileged or confidential information obtain as a staff member of the municipality

to an unauthorised person.

• For the purpose of this item "privileged or confidential information" includes any

information-

• Determined by the municipal councillor any structure or functionary of the

municipality to be privileged or confidential;

• Discussed in closed session by the councillor a committee of the council;

• Disclosure of which would violate a person's right to privacy; or

• Declared to be privileged, confidential or secret in terms of any law.

The inclusion of these items does however not derogate from a person's right of access

to information in terms of national legislation.

2.4.1 Status of Information

An important aspect of disclosure is the status of information that needs to be disclosed.

The status of information, which corporate entities should disclose, is determined by

whom the information is intended for and what the possible benefits for disclosure could

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be. In the 21st century information is power. Information that falls into the hands of the

opposition might ensure competitive advantage to them. It is therefore crucial to know

the status of the information before it is made available for public consumption. Sensitive

information should be accompanied by a confidentiality or highly confidential status.

Accessibility to sensitive information or privacy of personal information should have

restricted access and only be accessible to individuals that have the necessary

authoritative permission. There is however a specific information session, which need to

take place, which are called public participation sessions where a specific message is

conveyed to the community. These sessions are very well structured and only a speaker

conveys the correct information.

The code of conduct of the CTMM clearly defines the circumstances under which

information can be disclosed and what information can be disclosed. The code of

conduct of the CTMM under the heading of disclosure of benefits has the following to

say:

• A staff member of a municipality who, or whose spouse, partner, business

associate or close family member, acquire any direct benefit from a contract

concluded with the municipality, must disclose in writing full particulars of the

benefit to the council

On the sensitive topic of unauthorized disclosure of information the code of conduct

states that:

• A staff member of a municipality may not without permission disclose any

privileged or confidential information obtained as a staff member of the

municipality to an unauthorized person

• Privileged or confidential information is any information determined by the

municipal council or any structure or functionary of the municipality to be

privileged or confidential

• Discussed in closed session by the council or any structure or functionary of the

municipality to be privileged or confidential

• Disclosure of which would violate a person’s right of privacy

• Declared to be privileged, confidential or secret in terms of any law

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These items however does not derogate from a person’s right to access to information in

terms of the national legislation.

2.4.2 Whistle Blowing

Various ways of disclosure of information exist. Whistle blowing is one such method of

disclosure of corporate wrong doing by management or a colleague. Rossouw & Van

Vuuren (2004:183) defines whistle blowing as “the unauthorized disclosure of

organizational wrongdoing”. In the words of Shaw (1991:272) “A whistle blower is an

employee or an officer of any institution, profit or non-profit, private or public, who

believes either that he or she has been ordered to perform some act or he/she has

obtained knowledge that the institution is engaged in activities that:

• are believed to cause unnecessary harm to third parties

• are in violation of human rights

• run counter to the defined purpose of the institution and who informs the public

of this fact.

Whistle blowing primarily has to do with the disclosure of all malpractices and

organizational wrongdoings. Organisational wrongdoings therefore consist of all illegal

and/or unethical behaviour within the workplace. Typical aspects, which could be

considered as unethical, or malpractices within the workplace and therefore qualifies for

whistle blowing, are:

• any form of maladministration

• abuse of power

• improper or unauthorized use of public funds

• miscarriage of justice

• endangering the health or safety of any individual, etc.

Why should someone blow the whistle on his or her colleague? According to Rossouw &

Van Vuuren (2004:178) the first reason could be as a result of the whistle blowers high

moral standards, the so-called “choiceless choice”. Whistle blowers might secondly use

it as a tactical move to distance themselves from immoral activity. In the third place the

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whistle blower might want to expose the inequitable distribution of rewards and finally

whistle blowing might be related to vengeance. The effectiveness of whistle blowing

within an organisation is only as effective as the system that is in place. Whistle blowers

therefore expect the organisation to address wrongdoings as soon as possible. The

whistle blower often becomes the target and is isolated in the organisation. Colleagues

become progressively less friendly and are blamed for being a troublemaker. Managers

can go so far as to try and fire the whistle blower and protect the wrongdoer. Tactics

used by management to discredit the whistle blower are, according to Rossouw & Van

Vuuren (2004:180), as follows:

• destroying the whistle blowers career

• blacklisting

• dismissal

• transfer

• personal harassment.

Should management ultimately use one of the above methods to discredit a whistle

blower, he or she might voluntarily leave the company from fear of being victimized.

In the instance of the CTMM this study aims to establish whether the CTMM has an

effective and efficient whistle blowing policy so that whistle blowers can feel protected.

The study will go further to determine whether the CTMM promote whistle blowing and if

they do, whether the whistle blower will be protected from possible victimization by the

organisation, peers and fellow colleagues.

2.4.3 Openness

Openness defines the way by which the corporate entity discloses for instance aspects

such as fraud, unethical behaviour or mismanagement. Openness is further linked to

how soon the information is disclosed, in what manner, to whom and by whom?

Openness according to Rossouw & Van Vuuren (2004:149) refers to how freely

managers make information available to their subordinates. Rossouw & Van Vuuren

distinguishes further between two kinds of information, namely:

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• Functional information that is required by employees to perform their jobs well.

Should this vital information be withheld from employees within the CTMM, it

would undermine the trust, which employees should have in management.

• Personal information about the managers themselves. Managers who are

willing to expose something of themselves to their workers are general seen as

more trustworthy, by their workers.

To withhold functional information from workers and junior management could be

perceived by workers and junior management, as they are not being trusted. Rossouw &

Van Vuuren (2003:148) states that workers might perceive it as counterproductive and

even immoral. The individual openness of managers and workers alike is directly linked

to his or her personality. So for instance would an extrovert personality manager, be

more open to sharing personal information with his or her colleagues. An introvert

personality manager on the other hand would be inclined to withhold any personal

information and in some instances even important work related information. Companies

encourage managers to get to know their own personality in order to compensate for

possible shortcomings in this regard. Personalities and openness towards functional

information severely influences the individual’s management style and impacts

negatively on the image of the organisation.

Openness and being transparent goes hand in hand. Transparency is about openness.

In terms of democratic governance systems, it is about being able to see what decisions

are being made, how they are made and if it is important for anyone to agree to. Without

information citizens are unable to monitor the affairs of their elected representatives,

which could lead them to think that politicians and managers use decision-making and

information transfer to hide their own interests and personal agendas. Transparency

strengthens:

• Public and media involvement

• The right to knowledge of protected government actions

• Performance measurement by the public

• Reduction in overspending and therefore reduction in financial budgets, etc.

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In the instance of the CTMM, openness and transparency is important to gain trust from

its communities in order to get more effective and less hesitant buy-in from the

community when budget decisions, capital investments and service delivery is

concerned. Increased information sharing by the CTMM would also reduce negative

media coverage, which is imperative to improve the already negative public image of

local government organisations.

2.4.4 Fraud

Typical information, which corporate entities should disclose to shareholders, is fraud.

Disclosure of fraud makes management aware of possible loopholes in the system or

point out to management that proper checks and balances are not in place to prevent

fraud from occurring. Fraud is riving in corporate business but most probably more

prominent in local government. The Collins Concise Dictionary defines fraud as a

“deliberate deception, trickery, cheating intended to gain an advantage, or an act or

instance of deception”. Theft on the other hand is defined as “the dishonest taking of

property belonging to another person with the intention of depriving the owner

permanently of its possession”. Fraud can jeopardize a company and organization’s

viability in a number of ways:

• It can drain the company’s/organisation’s resources to a point where it is no

longer profitable

• Investors will receive lower returns on investment and it will ultimately reduce real

investment in that company or organisation

Fraud increases the cost of running the CTMM and eventually someone has to foot the

bill and in the case of the CTMM, this is the community. Rossouw & Van Vuuren

(2004:156) are of the opinion that there are always three dimensions to a case of fraud,

namely:

• a motive for committing fraud

• an opportunity for doing so, and

• a rationalization by the person who committed the fraud.

Rossouw & Van Vuuren (2004:156) further state that a set of circumstances should be

in place in order for fraud to take place, which includes that:

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• a person must be in the position of trust or must have access to people in

positions of trust

• a person must understand the control systems of the organisation as this gives

one the ability to beat these

• a person should have access to the assets of the company.

There are ways and means to fight fraud, of which Rossouw & Van Vuuren (2004:157)

mention three avenues that can be taken to prevent fraud, namely:

• restricting the opportunities for fraud

• undermining the motivation for fraud, and

• undermining the rationalization for fraud.

Organisations should introduce essential mechanisms to detect fraud in the early stages

by utilizing actions such as:

• internal audits

• risk management procedures for dealing with company assets, and

• implement strict disciplinary action against fraud offenders.

Rossouw & Van Vuuren (2004:161) states that fraud prevention should be a shared

responsibility in any organisation. Managers have a moral obligation to inform staff

about fraud related matters. Regular communication of fraud related matters would show

that the organisation is committed to reducing fraud and that there is a high level of

awareness in the company. Secondly managers should create the opportunity for all

staff members to report suspicious behaviour, which could lead to fraud. Managers

should however promote confidentiality of any suspicious or alleged fraud case until it

can be proven and punitive actions have been taken against the individual/s.

This study aims to determine whether the CTMM acts immediately when fraud has come

into the open, and further to determine whether the CTMM take the necessary corrective

steps against such individual/s or whether the fraudulent actions are covered-up, never

to hear of them again. The CTMM is responsible for the efficient and effective

management of services and has an obligation towards the community to address any

fraudulent actions as soon as possible and to try and recover whatever amount is

possible.

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2.5 Conclusion

The theoretical detail on the various principles or characteristics namely, accountability,

integrity and disclosure will provide the necessary insight into the underlying concepts of

the three principles. The underlying concepts will guide this study in order to formulate

the questionnaire from which valuable information will be obtained to test the various

hypotheses and to reach the various research objectives. These principles will be

expanded upon to include at least three to four measures per principle, which will not

only define the principles clearly but also allow the researcher the opportunity to

measure the appropriateness of the principles and to test the level of understanding by

CTMM management.

The findings of the above three sections will form part of the summary in chapter five,

from which the researcher will draw various conclusions. In light of the aforementioned,

chapter five will also include a section consisting of recommendations based on this

chapter and chapters to follow.

chapter 2 non-financial corporate governance principles …

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