Private sector must address challenges of the 21st century

THE Corporate Governance Index 2014, which my centre released last week in partnership with the Institute of Internal Auditors of SA, provides a worrying snapshot of the state of business performance in SA.

The index finds that the leadership skills, accountability and overall conduct of public and private corporations have worsened over the past year.

On a scale between 0 and 4 (in which the top score indicates a level of governance that is in line with regulatory requirements), South African corporations get a meagre 2.9 (down from 3.2 last year).

Put simply, this means that our country’s companies are not living up to the standards set by our legislation and by the benchmarks the sector has given itself.

Like all surveys, this must also be interpreted with a grain of salt to a certain extent, especially insofar as it averages out the performance across a wide range of different cases. Not all surveyed companies are underperforming, of course. A few of them are indeed doing very well. Yet, the worsening trend should be a cause of concern for all those interested in strengthening our economy, and making corporate governance more transparent and accountable.

We all expect good governance from our political leaders, as this is crucial in a democracy. Yet we tend to forget that many ills affecting our institutions are also caused by irresponsible business practices.

As political analyst Steven Friedman has argued on the pages of this newspaper, corruption is a public-private partnership.

Similarly, the World Economic Forum reminds us that where there is a “corruptee” there must also be a “corruptor”. If public officials take bribes to favour a few at the expense of the public good, then it is worth asking: where does the money come from? And the answer usually is: from business.

The simplistic juxtaposition between corrupt government and virtuous business does not pass the reality check.

The corporate sector — in SA like almost anywhere else in the world — traditionally has been assessed in terms of the revenue it generates. Maximisation of shareholder value has always been its ultimate goal, hence the popularity of stock indices and various forms of credit rating, which apply only narrow parameters of profitability to corporate success. The fiscus was happy with that, as it meant more revenue for the government. Good business was business that made money. And society celebrated that as a sign of development.

But things have changed of late. We now expect social responsibility and public accountability from the corporate sector. We expect corporations to have an environmental conscience and to add value to the communities in which they operate.

Innovations in the field of economic accounting are also reinforcing this trend. Triple bottom lines are becoming popular among investors, thus encouraging or forcing businesses to deal with their social and environmental effects more seriously.

New ways of accounting for social and environmental losses are also setting new standards, for instance by requiring labels to disclose the ecological cost of the things we buy every day.

Public statistics, too, are being revised. The gross domestic product (GDP), which is the premier statistic to gauge economic performance in a country, has long provided a skewed perception of value creation in the business sector.

For GDP, which focuses exclusively on monetary transactions, formal business invariably adds to economic growth as long as it generates profits, regardless of whether its effects are good or bad for society.

With this approach to economic growth, polluting industries have been given a facelift, masking the true cost of their extraction and production systems.

The most recent calculations made by the World Bank of the environmental costs of industrial production in a fast-growing economy such as India are quite revealing: $80bn — 5.8% of its entire GDP — will need to be spent every year just to clean up the mess. With these numbers, India’s economic miracle evaporates altogether.

In China, it gets even worse: more than 9% of its entire GDP will need to be set aside to deal with ecological degradation.

It is interesting that these estimates do not even include social and human costs. Ultimately, it seems fair to ask the question: is business activity always a source of value for the economy?

The realisation of the hidden costs of certain forms of production appears to have

Creating jobs will be less significant than creating ‘good’ jobs; excessive salary gaps will be a dangerous anomaly

triggered important reforms in China. President Xi Jinping has declared that GDP will no longer be used as a parameter for the promotion of local officials through the ranks of the Communist Party. More than 70 cities in China have dropped GDP as a measure of economic performance.

Undoubtedly, this will have an effect on the public perception of business performance in such places, given that making money will no longer be sufficient to describe certain companies as “profitable”.

As these issues enter the public debate in SA, more and more businesses will need to look at themselves in the mirror.

How many of them are living up to the expectations of social and environmental responsibility? How many of them add real value to the quality of life in their respective communities? How many of them are ready for the 21st century?

The economy of tomorrow will need to be very different from that of yesterday. Creating jobs will become less significant than creating “good” jobs.

Excessive salary gaps between management and employees will be seen as a dangerous anomaly, possibly to be sanctioned by regulations. Environmental and social responsibility will become paramount. And the elusive concept of economic growth will also change its meaning as we realise the social, human and environmental costs of certain forms of industrialisation.

Against this backdrop, it is crucial to have an open conversation about the type of business we want for the future of SA.

I believe business associations are best positioned to initiate such a dialogue between the corporate sector and society at large.

As social tension spirals out of control and conventional growth targets appear harder to achieve every day, we need to reflect on what type of development trajectory we envision for our nation in the new millennium.

The business sector should not feel defensive about it. There are innovative companies out there that are seriously leading the way towards a new business paradigm. Unfortunately, they tend to be overshadowed and out-competed by the power of conventional conglomerates, which benefit from an institutional system that rewards cronyism and patronage.

We need to foster innovation. But to do so, we need new governance frameworks and innovative legislation. The companies of the future should be supported, while those of the past should be assisted in their transition. Business is crucial to achieve prosperity, but the wrong business can fundamentally undermine development.

Only by rethinking the role of the private sector in the 21st century do we stand a chance of tackling the enormous challenges our country faces.