Good gov­er­nance is al­pha and omega of suc­cess

The Star Early Edition - - OPINION & ANALYSIS -

Parmi Nate­san and Dr Prieur du Plessis

ONCE of­ten seen as a com­pli­ance bur­den, cor­po­rate gov­er­nance is ma­tur­ing into a crit­i­cal tool for build­ing suc­cess­ful, sus­tain­able or­gan­i­sa­tions and na­tions – some­thing South Africans un­der­stand bet­ter than most.

When the Cad­bury Re­port on cor­po­rate gov­er­nance was re­leased in the UK in 1992, closely fol­lowed by King I in 1994 in South Africa, cor­po­rate gov­er­nance was un­der­stood largely in terms of the sys­tems, pro­cesses, poli­cies and struc­tures needed to di­rect and con­trol com­pa­nies.

While some or­gan­i­sa­tions im­me­di­ately un­der­stood the link be­tween how an or­gan­i­sa­tion was gov­erned and its abil­ity to de­liver, most found it bur­den­some – another set of reg­u­la­tions with which to com­ply. Th­ese com­pa­nies used to throw the darts (so to speak) first and then paint the tar­get where the darts landed, be­cause they had no clear idea of what they were aim­ing for.

Fast-for­ward to King IV that was launched in Novem­ber 2016, where cor­po­rate gov­er­nance is de­fined as the “ex­er­cise of eth­i­cal and ef­fec­tive lead­er­ship by the gov­ern­ing body” to achieve cer­tain out­comes: eth­i­cal cul­ture, good per­for­mance, ef­fec­tive con­trol and le­git­i­macy.

We have thus moved away from a com­pli­ance mind­set to the no­tion of board lead­er­ship to achieve de­sir­able goals, ie know­ing where the tar­get is be­fore throw­ing the darts.

Events in our coun­try have driven home the mes­sage that cor­po­rate gov­er­nance is crit­i­cal. We know that with­out gov­er­nance, lead­er­ship can de­gen­er­ate into tyranny, fraud and per­sonal fief­doms.

Equally, gov­er­nance with­out lead­er­ship risks in­ef­fec­tive­ness, bu­reau­cracy and in­dif­fer­ence, to para­phrase Mark Goy­der, the Bri­tish gov­er­nance ex­pert and au­thor.

There has also been con­sid­er­able re­search link­ing ef­fec­tive cor­po­rate gov­er­nance to sig­nif­i­cant, quan­tifi­able ben­e­fits for or­gan­i­sa­tions and coun­tries.

One of th­ese is for­eign di­rect in­vest­ment. An Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and Devel­op­ment re­search re­port by Maria Ma­her and Thomas An­der­s­son on Cor­po­rate Gov­er­nance: Ef­fects on firm per­for­mance and eco­nomic growth con­cluded that cor­po­rate gov­er­nance af­fects the devel­op­ment and func­tion­ing of cap­i­tal mar­kets, and “ex­erts a strong in­flu­ence on re­source al­lo­ca­tion” in a world char­ac­terised by in­creas­ing cap­i­tal mo­bil­ity.

This is a hard les­son South Africa is busy learn­ing af­ter the coun­try’s re­cent credit down­grades, with the pos­si­bil­ity of more to come. As Arthur Le­vitt, chair­per­son of the US Se­cu­ri­ties and Ex­change Com­mis­sion, said: “If a coun­try does not have a rep­u­ta­tion for strong gov­er­nance, cap­i­tal flows else­where.”

In short, cor­po­rate gov­er­nance im­proves ac­cess to cap­i­tal, and po­ten­tially its cost, for coun­tries and com­pa­nies, es­pe­cially in the de­vel­op­ing world, con­cludes an IFC study en­ti­tled Cor­po­rate gov­er­nance matters to in­vestors in emerg­ing mar­ket com­pa­nies, by Vikra­ma­ditya Khanna and Ro­man Zyla.

Re­search is also start­ing to emerge that links cor­po­rate value to cor­po­rate gov­er­nance. A lo­cal study by Isaih Dzin­gai and Michael Bamidele Fakoya on the Ef­fect of Cor­po­rate Gov­er­nance Struc­ture on the Fi­nan­cial Per­for­mance of JSE-Listed Min­ing Firms con­cludes that if min­ing firms com­ply with cor­po­rate gov­er­nance codes, they will ben­e­fit as will the econ­omy as a whole.

Stud­ies in the US, sum­marised in Jay Eisen­hofer’s ar­ti­cle, Does cor­po­rate gov­er­nance mat­ter to in­vest­ment re­turns, found that “the qual­ity of a par­tic­u­lar com­pany’s gov­er­nance prac­tices and pro­ce­dures pos­i­tively cor­re­lates with both good cor­po­rate fi­nan­cial per­for­mance and share­holder value. Sim­ply put, good cor­po­rate gov­er­nance does in fact pay.”

Seventy-one per­cent of South African di­rec­tors be­lieve cor­po­rate gov­er­nance adds value to the busi­ness, the 2nd edi­tion of the IoDSA Di­rec­tors’ Sen­ti­ment In­dex Re­port re­veals. Of course, cor­po­rate gov­er­nance also low­ers the risk of cor­po­rate scan­dals and rep­u­ta­tional risk.

To con­clude: cor­po­rate gov­er­nance comes about when the board ex­er­cises eth­i­cal and ef­fec­tive lead­er­ship to im­prove the or­gan­i­sa­tion’s sus­tain­abil­ity, which hinges on its abil­ity to make good prof­its while be­ing seen by so­ci­ety as a le­git­i­mate, re­spon­si­ble user of its com­mon re­sources. As the per­for­mance of some of our sta­te­owned en­ter­prises and our govern­ment it­self shows, with­out it the or­gan­i­sa­tion is not prof­itable ei­ther to it­self and its share­hold­ers, or to so­ci­ety as a whole.

Parmi Nate­san and Dr Prieur du Plessis are ex­ec­u­tive director: Cen­tre for Cor­po­rate Gov­er­nance and chair­per­son of the In­sti­tute of Di­rec­tors (IoDSA), re­spec­tively. En­quiries: info@ Bet­ter Di­rec­tors. Bet­ter Boards. Bet­ter Busi­ness.

Parmi Nate­san

Dr Prieur du Plessis

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