corporate governance-200712
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An Introduction to
Corporate GovernanceBelow Board Level
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Refers to the way in which something is governed …………. meaning “Directed and Controlled”
Example – a country - powers shared are between
� the legislative assembly
� the executive government
� the judiciary
to meet objectives such as protecting it’s people, and acting in the country’s best interests
Weak governance in a country will result in a struggle to attract foreign investment
WHAT IS GOVERNANCE ?
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Definition :
“Good corporate governance is essentially about effective leadership characterised by the ethical values of responsibility, accountability, fairness
and transparency”
CORPORATE GOVERNANCE …
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THE MAIN DECISION …………..
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Corporate Governance is :
� NOT the day-to-day management of the business
operations
� NOT concerned with formulating business strategy,
although the board is expected to take strategic decisions
Management = running the company
Governance = seeing that it is run properly
WHAT IS CORPORATE
GOVERNANCE NOT ?
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Effective corporate governance makes good business sense !
1. Investment
2. Sustainable growth
3. Business risk
4. Human talent
WHY IS CORPORATE GOVERNANCE IMPORTANT ?
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� Shareholders
� Board of Directors ***
� Management
� Employees
� Financial lenders and creditors
� Customers
� General public
WHO ARE THE ROLE PLAYERS AND STAKEHOLDERS ?
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To find a way to govern the company in which
the interests of the
� Shareholders
� Directors
� Other stakeholders
are all be sufficiently satisfied.
This can be achieved by ensuring a balance of power
CHALLENGE OF GOOD CORPORATE GOVERNANCE
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Board of Directors consists of :
� Chairman
� Executive directors
� Non-executive directors
� Independent non-executive directors
� Chief Executive Officer
WHO ARE THE BOARD OF DIRECTORS ?
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Must have :
� Strategic focus
� Financial savvy
� Understanding of the fiduciary role and responsibilities
� Effective communication skills
They must all deserve one of these !!
� Judgement and leadership ability
� General management experience
� Knowledge of the company and industry
� Basic understanding of the macro-economic, legal and regulatory environment
� Team orientation
CHOOSING THE RIGHT DIRECTORS
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**** Individual, company and institutional investors
WHO ARE THE SHAREHOLDERS ?
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� Regulation of the exercise of power
� Development of practices which make and keep the company accountable to it’s stakeholders
� Creation and monitoring of appropriate checks and balances
� Identification of risks which are then either managed, mitigated or eliminated
� Compliance with law and regulations
CORPORATE GOVERNANCE ENSURES :
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Conflicts of Interest …….. (or potential ones)
Can arise between Shareholders and Board of Directors (or individual directors)
� Shareholder interests – lie in the long-term
� Directors interests – lie in short-term
“Principal – Agent” problem
AT HEART OF DEBATE ABOUT CORPORATE GOVERNANCE
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These concepts apply to corporate governance in all countries where international investors invest their money :
1. Openness, honesty and transparency
2. Independence
3. Accountability
4. Responsibility
5. Reputation and reputational risk
6. Social responsibility
CONCEPTS IN CORPORATE GOVERNANCE
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BHOPAL – UNION CARBIDE
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3
1. Sloth
2. Greed
3. Fear
THE 3 CORPORATE SINS
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1. Financial reporting and auditing
2. Directors’ Remuneration
3. Company – Stakeholder relations
4. Risk-taking
5. Effective communication
(between directors & shareholders)
AREAS WHERE CONFLICTS OF INTEREST MIGHT BECOME
APPARENT
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FINANCIAL REPORTING AND AUDITING
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DIRECTORS’ REMUNERATION
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COMPANY – STAKEHOLDER RELATIONS
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RISK-TAKING
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EFFECTIVE COMMUNICATION
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Corporate governance is to be considered against the background of a country's
broader legal context
� Legislation
� Regulations
� Listings requirements
� Codes of best practice
CONTEXT IN WHICH COMPANIES ARE GOVERNED
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Various laws within SA govern the way that companies deal with it’s stakeholders.
Common Law
Legal precedent
Existing laws
APPLICABLE LEGISLATION IN SA
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HISTORY AND DEVELOPMENT :South Africa
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MASTERBOND
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HISTORY AND DEVELOPMENT : International
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Judge Mervyn King
(Chairman of the King Committee)
Voluntary ……… King III 2009 (RSA)
“Apply or explain”
Statutory …… Sarbanes-Oxley Act 2002 (USA)
“Comply or else !!”
VOLUNTARY OR STATUTORY COMPLIANCE ?
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King III had broadened scope of corporate governance in South Africa.
“The philosophy of the Report revolves
around leadership, sustainability and
corporate citizenship” Mervyn King
King III is principles-based with no
“one-size-fits-all” approach
FORMAT OF KING III
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Described as one of the most
underestimated of all governance
roles.
Secretary comes from Latin word
“secretarius” meaning a person to
whom a secret is entrusted.
Must zealously guard their independence, and advise the board on any action proposed if it
is unlawful or contrary to the Memorandum Of Incorporation
THE COMPANY SECRETARY
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The Report and the Code are collectively known as “King III”
� 9 Chapters
� 75 Governance Principles
� 298 recommended practices
� 579 points in form of detailed advice
CONTENT OF KING III
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ETHICAL LEADERSHIP AND CORPORATE CITIZENSHIP
“Responsible corporate citizenship implies an ethical relationship between the
company and the society in
which it operates.”
CHAPTER 1
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BOARDS & DIRECTORS
“Companies should be headed by a board that should direct, govern and be in effective control of
the company”.
CHAPTER 2
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AUDIT COMMITTEES
“An independent audit committee fulfils a vital role in corporate governance.
The audit committee is vital to, among other things, ensuring the integrity of integrated
reporting and internal financial controls and identify and manage financial risks.”
CHAPTER 3
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THE GOVERNANCE OF RISK
“The board should exercise leadership to prevent risk management from becoming a series of
activities that are detached from the realities of the company’s business.”
CHAPTER 4
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The Board is responsible for the total process of risk …
Management is responsible to the Board for risk management processes in respect of
� Designing
� Implementing
� Monitoring
RISK MANAGEMENT
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CHAPTER 5
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THE GOVERNANCE OF INFORMATION TECHNOLOGY
“IT cuts across all aspects, components and processes in business and is therefore not only an
operational enabler for a company,but an important strategic asset which can be leveraged to create opportunities and to gain
competitive advantage.”
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COMPLIANCE WITH LAWS, RULES, CODES AND STANDARDS
“The board is responsible for the company’s compliance with applicable laws and with
those non-binding rules, codes and standards with which the company has
elected to comply.”
CHAPTER 6
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INTERNAL AUDIT
“The King III risk-based approach directs internal audit to address strategic, operational, financial and sustainability issues in its quest to deliver
value to the organisation.”
CHAPTER 7
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GOVERNING STAKEHOLDER RELATIONSHIPS
“Stakeholder relationships provide a platform for the board to take into account the concerns and objectives of the company’s stakeholders in its decision making, which is fundamental to the
process of integrated reporting”
CHAPTER 8
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INTEGRATED REPORTING AND DISCLOSURE
“Reporting should be integrated across all areas
of performance, reflecting the choices made in the strategic decisions adopted by the board, and should include reporting in the triple context of economic, social and environmental issues.”
CHAPTER 9
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Design and maintain a Code of Ethics based on
� Fairness
� Transparency
� Honesty
� Non-discrimination
� Accountability and responsibility
� Respect for human dignity, human rights and
social justice
CORE ETHICAL PRINCIPLES
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� Acceptable/unacceptable practice
� Guide policy
� Encourage ethical behaviour
� Guide difficult decision-making
� Identify ethical infringements
� Promote awareness
� Resolve conflicts
� Specify company’s social responsibility
� Relations with stakeholders
� Enhance ethical reputation of company
APPLICATION OF CODE OF ETHICS
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3
� Ensure the right people are in charge
� Have a long term development plan
� Aim to implement simple and robust solutions
� Appreciate that issues of governance are fundamentally linked to issues of
o strategy development
o risk management
o ethics
o corporate citizenship and sustainability
PRACTICAL IMPLEMENTATION
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3
� Do not reinvent the wheel – draw on experience of other companies
� Apply the 80/20 Rule
� Ensure that governance programmes have the active backing of the board and top management
� Market the corporate governance and sustainability concepts
� Be flexible
� Take bold steps – learn to live with the frustrations !
PRACTICAL IMPLEMENTATION … continued
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MANAGERS & EMPLOYEES
Role within the organisation :
• Be equipped with the knowledge values and skills to interpret the importance of sound Corporate Governance
• Contribute to the business through an increased awareness of it’s importance and link to corporate citizenship
• Develop responsible business practices that lead to environmental, economical and social sustainability
• Lead by example !
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MANAGERS & EMPLOYEES
Contribution :
• Find out what the leaders of the company are thinking
• Ask for what you need - CG Policy, Code of Ethics
• Understand what the rules are and implement them within your teams - then monitor and report
• Collaborate with others
• Ask for feedback from the Board
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…… is when an employee provides information about his/her company which he/she reasonably provides evidence of :
�A violation of a law or regulation
�A miscarriage of justice
�Financial mismanagement
�A danger to public health and safety
Whistle-blowers are protected by the SA Protected Disclosures Act 2000
WHISTLEBLOWING
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� Corporate Governance in Southern Africa (Course material for the CIS International Qualifying Board Exam)
� Corporate Governance – An Essential Guide for South African Companies (2nd edition)
By Ramani Naidoo
� Executive Guide to King III
(PWC)
� www.cartoonstock.com
BIBLIOGRAPHY
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QUESTIONS ……
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Thank you !
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