Corporate governance is about collaboration, not annual reports
Too many SA companies see disclosure as the crux
of corporate governance. But it is only a by-product of the kind of collaborative decision-making increasingly being seen as
the key to business success, writes CIARAN RYAN
Directors feared South Africa would follow the British model where directors' remuneration is disclosed to all and sundry, providing a warehouse of ammunition for trade unions at the annual slug-fest over wage increases.
While many believe South Africa should go this route, the King committee on corporate governance baulked at this fence. But it may, in time, become a requirement.
Corporate governance is a subject fraught with misconception. It goes way beyond issues of disclosure in an attempt to improve decision-making within companies and make directors accountable for their decisions.
"The misconception (about corporate governance) is the tendency to see corporate governance mainly as a requirement for annual report purposes, a tendency to treat corporate disclosure as an end in itself," says Roy Shough, head of Deloitte & Touche's corporate governance services division.
"We believe this is putting the cart before the horse and, taken to extremes, could result in organisations seemingly complying with good corporate governance, but in truth deriving very little benefit from it."
Shough says the objectives of good corporate governance are good business management, improved relations with shareholders and trading partners, consideration for staff, good environmental practices and compliance with laws and regulations.
"These objectives are all consistent with enhancing organisational performance for the benefit of shareholders and other stakeholders, to enhance information and decision-support processes, particularly at the director level, and to provide a framework for directors to perform their duties better and meet the responsibilities for which they are accountable," he says.
"Most importantly, it limits the risk of serious fraud which is endemic within the business environment," says Peter Wilmot, non-executive chairman of Deloitte & Touche.
It is also a safeguard against business failure. Companies like Crusader Life, AA Mutual, Cape Investment Bank and Alpha Bank failed because of bad management decisions. The failures could have been prevented had the companies adopted the kind of corporate governance structures which are becoming increasingly commonplace around the world.
In the US, the timely intervention of good corporate governance prevented a number of potentially calamitous business decisions.
John Pound, chairman of New Foundations, a multidisciplinary, Harvard-based research project on corporate governance, says Piccadilly Cafeterias built its customer base on home-style cooking, but in 1986 the CEO, brushing aside the financial director's objections, decided to save costs by substituting mass-produced products in recipes.
By 1992, with profits and market share declining, the company fired the CEO and rehired the financial director who had resigned in 1986 in protest. The company turned around.
There is a growing body of evidence which suggests collaborative decision-making vastly reduces the potential for business failure.
Pound coined the term "governed corporation" to describe this new system of collaborative decision-making, distinguishing it from the old "managed corporation", which stemmed from the dispersion of corporate ownership among many shareholders and the emergence of a new class of professional managers who were neither large shareholders or founders of companies.
These senior managers shaped corporate policy in the era of absentee owners and, in fact, resented the opinions of shareholders. In a hierarchical system, junior managers are usually loathe to challenge seniors and the corporation is exposed to potentially fatal risks.
But tougher management audits and external surveillance are no substitute for better decision-making.
"Mervyn King and his committee did not invent corporate governance nor did Lord Cadbury in the UK and others like him around the world," says Shough. "What these committees did, though, was to codify best practices and other measures aimed at ensuring the effectiveness of the board of directors. They drew these best practices and measures from the combined experience of their members and other business leaders with whom they consulted."
Done properly, improved disclosure is an automatic by-product of good corporate governance.
Last month Deloitte & Touche presented its annual corporate governance award to NBS. Accepting the award, group financial director of NBS Mark Farrer said it did not signal the end of the road in terms of improved corporate governance, but the beginning of an evolutionary process.
King says his committee's purpose has been achieved - raising awareness: "The corporate governance revolution which has swept the world has arrived in South Africa."
What is also evident is that corporate governance is increasingly regarded as a management tool rather than a burden.
Writing in the Harvard Business Review, Pound notes that corporate governance has long been preoccupied with the balance of power between managers, boards of directors and shareholders.
It is often assumed that a corporation which introduces more formal audits of management performance, separates the positions of chairman and chief executive, appoints outside directors and makes board members more accountable to shareholders has discharged its responsibilities.
"But reforms that shift power from one party to another will not by themselves create more smoothly run, profitable organisations," says Pound. "They do not address the fundamental problems in corporate governance, which stem not from power imbalances but from failures in the corporate decision-making process."
Companies that are serious about delivering better returns to shareholders, staff, customers and the public had better embrace the revolution, as King calls it, or face the fate of Marie-Antoinette and the thousands of others who resisted the tide of change.