Something rotten in corporate SA …
With all eyes on state flaws, private-sector standards plummet
● Private-sector corruption could be “quite a bit worse than we think”, says Claudelle von Eck, CEO of the Institute of Internal Auditors South Africa (IIA SA).
Rampant corruption in the public sector has “lulled us into thinking that things are going very well in the private sector”.
According to the 2018 Corporate Governance Index released by the IIA SA, corporate governance in SA has hit record lows. Mostly this reflects the calamitous state of corporate governance in the public sector, which Von Eck says has diverted attention from problems in the private sector.
The focus on public-sector debacles has let private-sector companies off the hook, she says.
Steinhoff and the VBS Mutual Bank scandal have been massive wake-up calls.
“I think the focus in SA has been too much on the public sector. Part of that is because where the public sector is concerned it’s our money, it’s much more personal, and therefore we react a lot stronger than we would with private-sector companies.”
Given the amount of pension money invested in companies like Steinhoff, there should have been more focus on corporate governance in the private sector.
Part of the problem is that people often have no idea where their money is invested.
“We need to do a lot more to help them understand how corporate failures affect them. A lot of people affected by Steinhoff have not comprehended to what degree they have been affected.”
The index highlights the need for more shareholder activism, she says.
“Shareholders have to do some selfreflection.” They have themselves to blame as well for disasters like Steinhoff. They need to play a stronger role in holding organisations accountable, says Von Eck.
They must answer the same questions that are being asked of the Steinhoff board: “Did you apply your mind to what your responsibilities are?”
Too many institutional shareholders “are not clearly seeing the role they are supposed to play”. By not asking the right questions, they have enabled corruption and corporate governance failures, she says.
“If they’re not asking the right questions, and having the right conversations at a deep enough level, then corporate failures like this is what you’re going to see.”
The index also raises questions about the role and effectiveness of internal auditors.
They report to audit committees and management, which either bully and intimidate them into sweeping inconvenient findings under the carpet — “we see quite a lot of that” — or ignore their findings and fail to pass them on to the board.
In part, this reflects a decline in the quality of university graduates.
“Generally speaking, we are concerned about the competence of internal auditors.
“Often we find that organisations employ people in internal audit positions without ensuring that they have gone through what we consider a necessary test of competence so that you can expect at least a certain minimum, and then ensuring that they adhere to continual professional development.”
Too many organisations are not ensuring they recruit and appoint people who are adequately skilled. This is either because they don’t understand the value of an internal audit, or because it suits their purpose.
Less-qualified, less-experienced and more junior auditors are easier to intimidate and ignore.
“We sometimes hear that there is a very deliberate intention to ensure the internal auditor is not at a senior-enough level and is not strong enough.”
This is mainly a problem in the public sector, but also happens in the private sector.
Organisations frequently employ external auditors to fill the internal auditor role, which they’re not trained or qualified for.
Internal audit is a risk-based discipline that reaches across the entire organisation. External auditors look at financial statements, which is a recording of history.
“They’re not trained to spot symptoms of things going wrong somewhere else in the organisation, which is where an internal audit focus should be.”
That is why these symptoms are being missed, leading to corporate failures and wealth destruction.
The fact that corporate governance has declined so markedly in the era of the King codes of corporate governance is not an indictment of these codes, she says.
The fact is boards lack experience and are not educated enough about governance.
“A lot of directors don’t understand all aspects of governance.”
Von Eck does not agree that by limiting board terms for directors the King codes have contributed to this problem.
“You can have years of experience and still not apply governance principles,” she says, quoting Steinhoff as an example. “I don’t think the individuals on that board can argue that they didn’t have enough experience.”
An “undue trust of management” seems to have been their problem. They didn’t ask the kind of probing questions they should have.
“Professional scepticism goes out the window because we’ve become too close to the CEO or executive team.”
Von Eck says Steinhoff and other recently publicised corporate failures have been a timely wake-up call.
“As these things come to the surface, people are a lot more conscious of their own actions. You can hear that happening in your firms and corporates.
“It has created a heightened awareness and more self-reflection, and questions being asked around: are we doing the right things, are we making sure that we are not the next news?
“That should lead to a more conscious application of minds around governance principles.”
Does learning how to stay out of the news suddenly make them more ethical, though?
Only 48% of chief audit executives polled for the survey said ethics formed an integral part of their organisations.
“A lot more people are becoming aware of what is unethical,” Von Eck says.
She subscribes to the “few bad apples” school. “The vast majority of business leaders are good,” she says.
This doesn’t seem to be what insurance companies think. They’re raising their premiums to cover themselves against claims resulting from unethical behaviour from South African executives.
That’s an overreaction, Von Eck says. They’ve been “spooked” by the headlines.
Generally speaking, we are concerned about the competence of internal auditors Claudelle von Eck
CEO of the Institute of Internal Auditors South Africa
Claudelle von Eck, CEO of the Institute of Internal Auditors South Africa, says in some cases internal auditing is deliberately weakened to allow malfeasance.