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Steinhoff, SOEs show SA boards must take corporate governance seriously

May 10 2018 06:01
Professor Mark Graham
It's become impossible to ignore the importance of corporate governance at South African companies, yet we are still not using all the tools at our disposal to get it right. The integrated report should be the starting point for a discussion on what boards are doing, and how they are doing it, says Professor Mark Graham.
 
AT LAST year's Naspers annual general meeting, the company's chairperson Koos Bekker derided the importance of corporate governance:
 

“It sounds wonderful,” he was quoted as saying. “If you want to be the best soccer team in the world it is important to wash your hands after using the bathroom.

"But will you win? Not unless you train the hardest, recruit the best and are merciless in your ambition. 

“Once you have won, then you can look at things. If you lose, the best governance in the world can’t help you.”
 
It's hard to imagine that Bekker was unaware of what was happening at South Africa's state-owned enterprises at the time. It is equally unlikely that he missed the collapse of African Bank in 2014, which was almost entirely due to a failure in corporate governance.
 
There is certainly no chance that he overlooked what happened at Steinhoff just a few months after he made these comments. That was a breakdown in corporate governance so spectacular that it rocked the entire JSE and damaged the pockets of millions of pension holders.
 

Yet as the chairperson and former CEO of South Africa's largest company, he still felt comfortable saying that corporate governance is no more important to a business than washing your hands is to a football team.

That Bekker would make such comments can only indicate that there is a culture in South African business that goes way beyond just him, that supports this view. Corporate governance, as far as many management teams and boards are concerned, is something that you worry about after you've done everything else. 

As events continue to remind us, however, this can't be a sustainable approach. Even with the Steinhoff matter still hanging over the country, we've been faced with questions around Resilient, VBS Mutual Bank and KPMG.
 
Yet still the majority of companies do not appear to take corporate governance seriously enough. Year after year, when judging the EY Excellence in Integrated Reporting Awards that cover the top 100 companies on the JSE, we find that corporate governance matters are generally relegated to the end of the report, and dealt with in a tick-box manner.
 
Governance should, however, come first. It is possibly the most important thing for stakeholders to know – who is running this business and how.
 

Simply stating the mandates of board committees and when they met tells us very little. What stakeholders should want to know is what the main deliberations were.

What has been top of mind? What are the important decisions that were made? What was the thought process? What are the risks that had to be confronted? 

This would provide an idea of how these organisations are really being run. Nedbank is one of very few local companies that does provide information on board deliberations, and its integrated report stands out for this reason.
 
The reality is that we know how to analyse financial numbers, and we know how to analyse strategy. Yet we have not started to analyse governance properly. The levels of disclosure simply don't allow us to interrogate what the board is doing.
 
It starts even before that though, because stakeholders should be told how the board is constructed in the first place. How was it decided who should be invited to the board? How much emphasis was placed on ensuring diversity in terms of age, race, gender and experience?
 
What is the culture of the board and how it operates? Are members given the chance to ask questions and to be confrontational, or is an emphasis placed on achieving consensus?
 
General Electric in the US does this very well. The governance section of the company's integrated report opens with the lead director explaining some of the key issues that the board is dealing with and what its approach has been in discussing them. That allows stakeholders to have a sense of how the board is thinking, and what it is thinking about.
 
The significance of putting this into an integrated report goes far beyond just telling an organisation's stakeholders what it has been up to, however. It forces the company to clarify its approach for itself.
 

Documenting these things must make those involved reflect on what they are doing and how they are doing it. Can they be proud of the approach they have taken, and are they comfortable being transparent about the decisions that have been made?

If not, that should make them reconsider why and how those decisions were reached.

Ten or 15 years ago, boards would meet four times a year and most offered little more than a rubber-stamping exercise. However, now in terms of company's act and the King IV Principles stakeholders require far more from them.
 

The integrated report is the one thing that, if done properly, can create a vehicle for people to start asking the right questions in this regard. How is this board creating value, and perhaps even more importantly, how is it preventing value from being destroyed?

Learning to ask these questions at the right time could perhaps stave off the next Steinhoff or the next African Bank. A crucial starting point is for board members and company directors to take steps to familiarise themselves with how to prepare and how to use this critical tool more effectively. 

Mark Graham is a professor at the University of Cape Town and convenes the Understanding Integrated Reports Executive Short course at the UCT Graduate School of Business. This course runs on June 4 in Cape Town.

Follow Fin24 on Twitter, Facebook, Google+ and Pinterest. 24.com encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

gsb  |  mark graham  |  board  |  opinion
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