Time to recalibrate moral compasses in local boardrooms
South Africans recently expressed outrage when it came to light that economist Thabi Leoka had allegedly committed CV fraud. At the time Leoka was a member of the Presidential Economic Advisory Council and served as an independent nonexecutive director on multiple boards of JSE-listed companies.
Though she still denies misrepresenting her highest academic qualification —a PhD from the acclaimed London School of Economics
Leoka’s appointment to the Presidential Economic Advisory Council has been terminated, and she has resigned as a director at MTN, Remgro and Anglo American Platinum (Amplats).
The rising tide of fraud in SA warrants discussion from an ethical and corporate governance point of view. The renowned King IV Report provides local organisations with extensive guidance on sound corporate governance policies and practices. For example, principle 7 emphasises the need for diversity in terms of director attributes, knowledge and skills. Having board members with diverse educational backgrounds is also critical as directors are required to steer their companies effectively in an increasingly volatile, uncertain, complex and ambiguous environment.
The vetting of board nominees’ credentials is supposed to be a key aspect of the nomination process. In this respect, King IV states: “Prior to their nomination for election, candidates’ backgrounds should be independently investigated, and their qualifications should be independently verified”. It is apparent from the Leoka saga that the vetting processes followed by organisations in SA are insufficient.
Members of nomination committees should also give attention to the number of positions potential nominees hold at other entities to evaluate potential conflicts of interest and time pressure. Research reveals several advantages and disadvantages of serving on multiple boards concurrently. Directors can gain substantial experience and social networks by serving on several boards. Yet they should caution against becoming too busy to prepare for and participate in meaningful discussions at multiple meetings.
Multi-boardedness might furthermore impair the objectivity of independent nonexecutive directors. Though King IV suggests a nine-year tenure for these directors, no limit is placed on the maximum number of board seats a director may hold simultaneously. The King committee will no doubt provide more guidance on these issues in its next report.
As elsewhere in the world, nomination committees of listed companies in SA have been criticised by activists and scholars for excessive reliance on existing networks to source board candidates. These committees are urged to critically reflect on referrals from current directors and the vetting processes employed. When seeking new board candidates they should cast their nets beyond the powerful individuals, family trusts and existing networks they have always used.
Increased incidences of earnings management and greenwashing also place the spotlight firmly on questionable ethics in local companies. Earnings management occurs when managers use their discretion in the financial reporting process to intentionally misconstrue their companies’ financial performance. Greenwashing similarly creates a false appearance or façade of sustainability.
The exposure of CV fraud, earnings management, greenwashing and other deceptive acts can result in substantial reputational damage for directors and the organisations on whose boards they serve. Reflections on what constitutes ethical conduct are hence of the utmost importance. At the most basic level, ethical conduct refers to the application of values such as honesty, integrity and respect, so as not to harm others.
Regulators often promulgate new legislation in the wake of a scandal. This approach is unlikely to promote ethical conduct. More than 2,000 years ago the Greek philosopher Plato already noted that “good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws”. The same applies to governance codes. The responsibility for cultivating ethical values in the next generation of entrepreneurs, business leaders and investors lies with parents and educators.
Experts suggest current wrongdoing could be addressed through improved checks and balances, alongside enhanced monitoring and punishment of deviant behaviour. New appointees should be aware of repercussions. Whistleblowing and ethics training should furthermore be encouraged.
The time has clearly come for a recalibration of the moral compasses of those who find themselves in the highest decision-making echelons of corporate SA.