Will the real responsible corporate citizen please stand up?

The King IV™ Report on Corporate Governance for South Africa, 2016 (King IV ™), as did most of its predecessors, highlighted the need for responsible corporate citizens. In King IV™, responsible corporate citizenship forms part of the exercise of ethical and effective leadership that results in the outcome of an ethical culture in an organisation. In addition to being ethical and effective leaders, the members of the governing body of the organisation are expected to direct and monitor organisational ethics as well as ensuring that the organisation is and is seen to be a responsible corporate citizen.

The term ‘responsible corporate citizen’ has often been misunderstood and or equated to the CSI (corporate social investment) programme of an organisation. Although corporate social investment does form part of being a responsible corporate citizen, it is so much more! A quick glance at the relevant recommendations of King IV™ will reveal that being a responsible corporate citizen actually starts in your own backyard, in the workplace. Looking after the dignity, development, equity opportunities, health and safety of your employees; having  responsible remuneration philosophy and practice, etc.

The circle then widens to include the economy and society. As far as the economy is concerned, what is being done by your organisation to assist with economic transformation in our country and to prevent and detect fraud and corruption that hasbeen a soul-destroying and devastating virus all by itself? Is your organisation a responsible tax payer? Forget for a minute the arguments around how wisely our tax is being used, this is a separate debate. The fact remains that as part of having an ethical culture and being a responsible corporate citizen, an organisation has to be a responsible tax payer.

Society also has legitimate expectations of organisations, both in public and private sectors. Again, CSI projects is but a part of fulfilling our responsibilities to society as organisations. There is public health and safety that warrants our utmost attention, consumer protection and protection of human rights, to name but a few. The development of communities in which we operate and doing our part to assist the most vulnerable in society should form an important part of our initiatives as being a responsible corporate citizen.

The fourth area that King IV™ highlights as part of being a responsible corporate citizen is the environment – responsibilities in respect of pollution and waste disposal, protection of biodiversity. Do we really appreciate that there is no ‘Planet B’? That we owe it to our children and their children to look after the resources we are borrowing from them today and that they will need in future to ensure their own livelihood?

Thus, being a responsible corporate citizen is about much more than writing out cheques to support soup kitchens or sponsor
a sporting event for a nearby school. It is about our people, our economy, our society and our environment. In my many years as a corporate governance advisor and operating in various boardrooms in this country, I have often been dismayed at not only the windowdressing but also the limited understanding when it comes to being a responsible corporate citizen.

Let me hasten to say that there are also those organisations and leadership that do in fact understand the art of ‘ethical capitalism’ to borrow a bit of the title of the book by Julian Richer (The Ethical Capitalist: How to make Business work better for Society, 2018). For these, I am eternally grateful! We have recently learned of a handful of individuals and organisations who have donated substantial amounts of money to various initiatives to address the impact of the coronavirus. In my personal experience, however, and forgive my cynicism forged over many years of walking the corporate corridors, there are an equal number, if not more, for whom ‘responsible corporate citizenship’ is nothing more than yet another corporate governance ‘hurdle’ potentially standing in the way of putting money in the pockets of shareholders.

We are now faced with a crisis of enormous proportions, the extent of which we have absolutely no idea of at this point in time. It is crunch time for the world, for South Africa and for every citizen, individual and corporate. It is now, in my respectful opinion, that we will see the true responsible corporate citizens and their leaders arise. When competitors start working together
for the greater good of society, when corporates do everything humanly possible to avoid job losses, when employers reach out a hand to employees where salaries are lost or reduced to soften the impact in whatever practical way possible. There is a myriad of ways in which an organisation can practically live out its commitment to being a responsible corporate citizen and it does not necessarily always mean a negative impact on financial resources. With the right attitude and mindset, creative ways can be found to fulfil one’s responsibilities to your workforce, the economy, society and the environment. Who knows what opportunities this can bring for the business! It is just a matter of perspective!

The million-dollar question therefore – is being a responsible corporate citizen just part of your public relations image to the outside world or will you “put your money where your mouth is”? It is time for the true leaders to stand up and show up!

ANNAMARIE VAN DER MERWE
Executive Chair
FluidRock Governance Group

*Kindly note that The King IV™ Report on Corporate Governance for South Africa 2016, Copyright and trademarks are owned by the Institute of Directors in Southern Africa” and the IoDSA website link is: http://www.iodsa.co.za/?page=AboutKingIV


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The building of high-performance boards

Having the right board in place is one of the cornerstones of steering an entity successfully through the sometimes stormy, if not muddy, waters of the corporate world. At the same time, getting board composition right is a challenge no matter the company size or ownership structure. A look at responses from a survey undertaken in 2016 by the KPMG Board Leadership Centre amongst 2 300 directors and executives suggests that board building is an even greater challenge for private companies – both investor-owned and family-owned.1 Only one third of private company directors said that they were satisfied that their boards had the right combination of skills, backgrounds, experiences and perspectives to probe management’s strategic assumptions and help the company navigate the increasingly volatile marketplace.

When asked to rank the most effective mechanisms to achieve the right mix of skills, backgrounds and experiences on the board, some 80 per cent of private company directors cited both robust board evaluations (including individual director evaluations) and formal board succession plans as their top two.

It is fairly obvious from the aforegoing that boards are not completely ignorant to some of the value- adding disciplines and processes, such as performance evaluations and succession plans, required to strengthen and enhance their ability to be effective. However, the scoreboard shows that these disciplines are getting very little, if any, airtime in the boardroom. The reality is that many directors of private companies find their way into the boardroom as representatives of material stakeholders such as shareholders, funders, suppliers, labour and others. Very little interest is taken in appropriately developing these individuals, in effectively evaluating their performance or having an adequate succession plan in place.

In principle, having stakeholder representatives in the boardroom is not in itself to be frowned upon. There are many reasons why this can be of real benefit, not only to the board, but also to the organisation. Personal experience in boardrooms over three decades has however left me fairly despondent and cynical in this particular area. The mindlessness with which directors are often introduced to and welcomed onto a board is but one of the features regularly witnessed in many boardrooms – both in the private and public sector.

In a Forbes article,2 Bryan Stolle writes:

A great board is the result of having great board members. Bad board meetings are the result of ineffective or unqualified board members.   So what does make a great board member?

He then lists a number of critical attributes of a great board member such as great judgement, wisdom, understanding the relevant context, motivation and interest, good people skills, courage, and being an effective coach, mentor and sounding board. The King IV™ Report on Corporate Governance for South Africa, 2016 (King IV™) also highlights a number of important characteristics to ensure effective and ethical leadership in our organisations. These include integrity, competence, responsibility, accountability, fairness and transparency. Considering all of this it goes without saying that a healthy dose of emotional intelligence is non-negotiable for an effective and value-adding board member.

It is however not only about character and personality; it is also about bringing the right skills into the board to enable the board to be in effective control, to ask the right questions from management, to timeously identify potential risks, negative trends and the like. Ana Dutra3 argues that ‘to add such strategic value, high-performing boards must be “talent-centric.” At its most basic level, this manifests itself in a board’s composition and diversity level. An enterprise must attract directors who can provide valuable, strategic input, while building a board that can draw on the diversity of its members’ expertise and backgrounds
— across geographies, gender, race, and experience
— to create a whole that’s literally greater than the sum of its parts.’

The reality is that many directors of private companies find their way into the boardroom as representatives of material stakeholders such as shareholders, funders, suppliers, labour and others.

Is having the ‘right people’ then enough to guarantee a highly effective board? Sadly not. It is one of the critical building blocks but not sufficient on its own. If the individuals in the boardroom do not understand their roles as well as the relevant rules of engagement that govern the functioning of the board and if they do not have proper governance processes in place, things can still go terribly wrong. The level of ignorance often displayed in boardrooms as to the fiduciary (and in some instances even statutory) duties of board members to act in the best interest of the organisation, to the exclusion of the interests of their principals, can be mind-blowing at times. Considering that the board acts as the controlling mind of the organisation and that the organisation is completely dependent on the board to not only enhance but also protect its interest, it is not difficult to understand why we witness some of the corporate disasters out there. In a boardroom filled with individuals, a number of whom have their own agenda and interest as first priority, it is only a matter of time before disaster strikes.

It is often found that board members do not have an appropriate understanding of what is expected from them in law but also in being appropriate governors and custodians of the interest of the organisation. Not only this, they lack a basic understanding of the applicable rules and regulations that govern their functioning and as stipulated in relevant laws and regulations as well as the constitutional documents of the organisation. This level of ignorance, sometimes fuelled also by arrogance, can result in even the most qualified, skilled and mature individual finding themselves in the midst of a board that is failing dismally in its stewardship and leadership role.

Once we have the ‘right people’ in the boardroom who all fully understand, appreciate and execute their role vis-à-vis the organisation in an effective and ethical manner, we need proper process management to support them. Facilitating an adequate flow of information to enable informed decisions to be made, both within and outside of formal meetings, is a critical element of a high-performing board.

This requires a substantial number of elements and sub-processes that have to come together in a holistic manner to form a strong foundation from which a board can effectively function. These processes speak not only to the actual functioning of the board but also to those processes alluded to earlier that assist with identifying and addressing weak areas on the composition of the board, such as appropriate performance evaluations and succession plans. Also, these include processes around induction and ongoing development to further strengthen the talent around the boardroom table.

The King IV™ Report on Corporate Governance for South Africa, 2016 (King IV™) also highlights a number of important characteristics to ensure effective and ethical leadership in our organisations.

What is the point? The point is that an effective board is not an informal process. It starts with those having the authority to appoint individuals to boards in the private and public sector understanding the need to have the ‘right people’ in the room. These are individuals with the skills, background, experience and attributes that are appropriate and relevant to
the specific organisation. Thereafter, ensuring that these individuals fully understand the meaning and implications of acting in the best interest of the organisation requires proper induction, performance evaluation and ongoing engagement. Not only that, an appropriate understanding of the rules that govern the functioning of the board is essential in ensuring that actions and decisions taken on behalf of the organisation can withstand any challenge from those who, driven by own agendas and interest, may want to sabotage the work being done.

A lot has recently been said about the spectacular failures of boards of state-owned entities. Lots can also be said of the daily failures of boards in the private sector. The dynamics working against the establishment of high-performing boards are prevalent in both these sectors. It is time for those appointing the members of these boards and the boards themselves to realise that, as a start, it is about having the right people, doing the right things and doing things right!

Annamarie van der Merwe

First published in The Corporate Report, Juta, 2018

About the author:

Annamarie van der Merwe has been a corporate lawyer and company secretary for more than 27 years, acting in both the private and public sectors. She has a B.luris degree, a Bachelor of Laws degree and a Master of Laws degree. She has served as a board member in different institutions over many years. She is a member of the King Committee and was actively involved in writing a number of the King Reports on Corporate Governance. She is also a well- known presenter and facilitator of workshops for directors and company secretaries. She is the Executive Chairman of FluidRock Governance Group (Pty) Ltd.

*Kindly note that The King IVTM Report on Corporate Governance for South Africa 2016, Copyright and trademarks are owned by the Institute of Directors in Southern Africa” and the IoDSA website link is: http://www.iodsa.co.za/?page=AboutKingIV


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It is time to take a stand…

In one of my many roles as facilitator for the Institute of Directors, I spend many hours with corporate leadership in both public and private sectors. While addressing the overall topic of the roles and duties of governing bodies and its members, both from a legal as well as a governance perspective, I motivate the need for ethical and effective leaders in our boardrooms. Pointing out that no corporate governance code on its own, no matter how well written or intended, will prevent the corporate failures we have been witnessing in the public and private sectors of our beautiful country. Human intervention is critical for its success and not just any kind of human intervention. Without intellectual honesty (a concept widely advocated by Prof Mervyn King, chairman of the King Committee on Corporate Governance) the so-called application of the principles of good governance will be a mindless tick-box exercise potentially causing more harm than good. Competent people and leaders with integrity are required, those that behave in a fair, responsible and transparent manner in all their dealings and who accept accountability for their decisions and actions or lack thereof.

In my teaching role, I explain the legal notion of the separate existence of any organisation, its utter dependence on the governing body as its controlling mind acting in its best interest and not in the furtherance of own interests. I elaborate in detail on the importance of an organisation being a responsible corporate citizen that considers the impact of its existence and activities on all its stakeholders, as opposed to focusing all its efforts on creating value for one group of stakeholders at the expense of others. All of these important notions I illustrate with real life stories, the good and the bad, from my journey of nearly 30 years through many a boardroom in this country while wearing very different hats – that of corporate lawyer, company secretary, governance advisor, director and many others.

Most of the times my audience responds with nodding heads, silently but seemingly in agreement with my plea for a fundamental change in the way we lead and manage our organisations and even our society. Only for a short while and then the “yes but” starts to raise its well-known negative voice. “Yes, but you don’t understand the pressure we are under from shareholders or from politicians.” “Yes, but you don’t understand how deeply engrained the corruption is in our organisation or our society.” “Yes, but we are too small to make a difference.” “Yes, but we will not secure tenders without paying bribes and facilitation fees.” “Yes but, yes but, yes but……!” Fingers are pointed at others – others must take action, take responsibility, be blamed for governance failures, be accountable. It is never me who needs to take action and responsibility and accountability. Then there is the convenient excuse that the level of corruption in our public
and private sectors is of such magnitude that change is impossible. And so, I listen to all the excuses.

The fact of the matter however is that if each one of us just start in our homes, our communities, our boardrooms, our spheres of influence to raise our voice for honesty and truth and compassion against injustice and lying and greed……it can change this country for the better, for us and for the next generation. It is time to take a stand…

First published in The Corporate Report, Juta, 2019
It is time to take a stand …

“Power corrupts the few while weakness corrupts the many.” – Eric Hoffner

ANNAMARIE VAN DER MERWE
Executive Chairman, FluidRock Governance Group


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Director’s Disclosure

Directors have a fiduciary duty to act in the best interest of the Company which includes the duty to prevent conflict of interest and to maintain unfettered discretion. From time to time situations will arise which could pose a conflict of interest and Section 75 deals with the obligations in relation to the disclosure of personal financial interest and the consequences of a failure to disclose appropriately.

Who does it apply to?

  • Registered directors and alternate directors;
  • Prescribed officers;
  • Members of board committees

 

It is important to note that not bearing the title or official appointment as “director” does not exempt a person from Section 75 and the duty thus extends to positions such as managing director and chief executive officer.

What needs to be disclosed?

The application of section 75 is broad and requires that personal financial interest must be disclosed and there has to be a disclosure if the director knows that a related party has a personal financial interest in any matter to be considered by the board.

The Act defines “know”, “knowingly” or “knows” as follows:

‘‘knowing’’, ‘‘knowingly’’ or ‘‘knows’’, when used with respect to a person, and in relation to a particular matter, means that the person either—

  • (a) had actual knowledge of that matter;
  • (b) was in a position in which the person reasonably ought to have—
  • (i) had actual knowledge;
  • (ii) investigated the matter to an extent that would have provided the person with actual knowledge; or
  • (iii) taken other measures which, if taken, would reasonably be expected to have
    provided the person with actual knowledge of the matter.

 

A simplified example demonstrates the effect of the requirements in section 75 – If Company A is negotiating a contract with Company B and Director X’s spouse is a director at Company B, section 75 is triggered

What is personal financial interest?

The Act defines “personal financial interest” and it will include any direct material interest of a financial, monetary or economic nature or a direct material interest to which a monetary value may be attributed.

How do declare in terms of Section 75?

  • Disclose the personal financial interest in writing or verbally before the matter is considered by the Board;
  • The conflicted director may provide insight or material information to the Board but must then be recused from the meeting and may not participate in any decision making in relation to the matter;
  • The conflicted director may not vote on the matter. Voting includes signing a written resolution related to the matter.

 

In simple terms – Disclose and leave the meeting.

What are the consequences of non-compliance?

Non-compliance with section 75 has far-reaching consequences and to remedy the transgression is not a quick exercise. Any board resolution taken without complying with section 75 is invalid.

Proper consideration of personal financial interest and spending sufficient time at every board meeting on disclosure is worth the effort.

How to ratify a decision taken without proper disclosure?

The solution to non-compliance will take more effort than an apology and a few red faces. There are only two avenues of recourse:

  • The decision/board resolution has to be ratified by an ordinary resolution of the shareholders following disclosure of that interest; or
  • The decision/board resolution has been declared to be valid by a court.

 

Recommendations

  • As a director, it is your duty to be aware of your obligations and duties in terms of the Act. Give your Company Secretary a time slot at your next meeting to give refresher training;
  • Add “declaration of personal financial interest” as a standing agenda item on every board and committee meeting agenda;
  • When you deal with declaration of personal financial interest – spend adequate time on the item;
  • Review your own personal financial interests and make sure that you have disclosed all that is required;
  • Consider who your “related parties” would be and identify any areas of potential conflict or personal financial interest;
  • Ensure that the board submit, at least annually, all directorships, direct and indirect shareholding. The disclosure should be readily available to peruse by all directors. Update the Company Secretary if there are any changes;
  • If in doubt – disclose to the board and engage;
  • Lastly, remember if a personal financial interest has been disclosed – leave the meeting.

 

“Trust happens when leaders are transparent” – Jack Welch


[1] Section 75 in the Companies Act 71 of 2008 as amended from time to time

[2] Section 2(1) of the Companies Act 71 of 2008 as amended from time to time

[3] Companies Act 71 of 2008 as amended from time to time

[4] Section 1 of the Companies Act 71 of 2008 as amended from time to time

[5] Section 75(7)(b)(i) and Section 75(8) of the Companies Act 71 of 2008 as amended from time to time

By: Yolandi van Zweel

Governance Professional

www.fluidrock.co.za


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