challenges in corporate governance and king iii

Challenges in Corporate

Governance and King III

IRMSA Conference29 July 2008

Prof Mervyn E King SC

MEK Corporate Consultants

Regime

• Comply or explain• Comply or else• Sarbanes-Oxley• Companies Bill - hybrid• King III

International Trends

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International trends (1)

• Risk-based internal audits• Hybrid governance regimes• Market cap does not equal book value• Alternative dispute resolution• IT governance• Independence

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International trends (2)

• Company integral to society• New constitution of commerce• First priority quality of product or

service• Second priority, trust and confidence in

the company by its stakeholders

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International trends (3)

• Intangible assets – iceberg• Growing public attention• Sustainability issues• World is flat – global companies

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International trends (4)

• Financial information alone?• Accounting “broken”?• “How has the company positively and

negatively affected the economic life of the community in which it operates?”

• “How does the company intend to enhance the positive aspects and eradicate or ameliorate the negative aspects in the year ahead?”

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International trends (5)

• Preparer – governance, strategy and sustainability

• User – forward-looking information• Governance, strategy and

sustainability• Inseparable

The corporate legal situation

today

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The corporate governance equation

• Governance about principles and practices

• Enterprise – strategic• Risk for reward – failure• Good governance and failure• Acceptable• Bad governance – failure – scandal• Not acceptable

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The corporate governance equation (cont)

Principles and

practices

Business judgment calls

(strategy)

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A director’s duties - responsibilities

• Good faith• Care• Skill• Diligence

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Board and management

• To direct – guide - steer• Reflective role of board• Board strategically plans• Management implements• Activity role• Board monitors management

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The inclusive approach

• Purpose• Values• Stakeholders• Parcel and document delivery service• The legitimate expectations of

stakeholders• Difference between accountable to and

taking account of

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Decent corporate citizen

• Entity should be and be seen to be a decent citizen

• The non-financial aspects of governance• The triple bottom-line• Social, economic and environmental• Needs of the present• Without compromising the ability of

future generations to meet their own needs

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Existing legal situation

• Duties of directors• Breach of care, skill or diligence• Causation and diminution• Section 424 penal• Company sues• Reliance but not supine• Delegate, but cannot abdicate• Good faith – sui generis• Collective authority• Individual liability

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Legislate good and honest directors?• Cannot legislate against dishonesty• 150 years of Commonwealth

jurisprudence• Sarbanes-Oxley unintended

consequences• Billions of Rands transacted daily• Legislate for one percent?• Fit and proper not take appointments or

resign?

Internal Audit

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Market capitalisation

• Not equal to book value – estimate• Brand and goodwill• Reputation of management and board• Quality of governance• Sustainability• Strategic direction• Non-financial aspects

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market value $ 105,586 mil

30/09/03

13%Book value

$ 13,560 mil 30/09/03

20 % ?

67%Brand value $ 70,453 mil (Interbrand)

source: SAM

Measuring company’s economic value

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Internal audit

• Compliance based approach• Risk based approach• IA needs to know• Short and long term strategies• “Strategies” – the art of the general• Corporate governance, sustainability and

strategy• How else does the IA add value?

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Director’s role

• Reflective• Act on information pack• Quality of pack• IA assurance?• Controls and risks• Needs to know the strategic direction

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Internal controls

• Directors’ statement• Adequate• Functioning• Reliance on expert view• Provided not supine• IA assessment on internal controls?

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Risk

• Operational• Strategic• Financial• Compliance• Non-financial

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Internal audit plan

• Coca Cola• Procter and Gamble• Anglo American

IT Governance

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IT governance

• Legislate• Cobit or ITL• Legal framework needed• Due care• Due diligence• These are the essence of information

security

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Risk in the use of IT (1)

• Confidential info outside company• Different codes of conduct• Different values• Different risks• Accountability issues

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Risk in the use of IT (2)

• Increasing dependence on outsiders• Outside direct control of company• Process outside, e.g. call centre• Financial and reputational risks• Outside access to confidential

information• Information security as part of

governance

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Information security

• Napoleon, The Three Musketeers• The wax seal• Information to enemy• Disastrous for battle or the war

Internet Encyclopedia

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Unauthorised

• Use• Access• Disclosure• Disruption or elimination• Changes• Prudent and reasonable steps or

legislation• Care and diligence

Sustainability

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Intangible assets

• Reputation• Brand• Quality of management and board• Sustainability issues

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Reality of sustainability issues

• Key sustainability issues• Growing public attention• Example: Climate change• WEF – converted CEO’s• “An Inconvenient Truth”

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Why are SI’s reported and managed

• Competitors are doing it• Strategically managing reputation and

brand• Stakeholders want it• Improved risk management• The G3 guidelines – Number One

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Sustainability issues

• ADR• Economic• Ecosystems• Labour, health, security• Human rights

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Alternative Dispute Resolution

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Disputes

• Resolution• ADR in contracts• Cross border• Management tool

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Relationships

• In business circle• Build relationships• Dispute/litigation• Destroys relationship• Duty to resolve/preserve

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ADR and the company

• Dispute with company• Officers• Investors• Suppliers/customers• Regulators• Communities

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Management of relationships

• A business relationship• Company and major customer• CalPERS• Ford and Firestone

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Mediation advantages

• Novel• Quicker• Less expensive• Confidential• Preserves relationships• Cost of executive time saved• Dilution of focus when litigate

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ADR a mechanism

• A value add• To a commercial relationship• Mechanism to manage• Cost and time• Duties and efficiency

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Contracted mediation

• ADR framework in place at beginning• Parties owners of process – attuned• Conflict prevention• Communication• Build trust• Value of immediate knowledge

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Questions by a board?

• System of early case assessment• Mechanisms addressing employee

dispute• Critical procurement contracts• Agreed cross-border mechanisms

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Upfront in the constitution

• Administered ADR• Upfront collaborative solver• Between stakeholders• And the company• IFC

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Legal recognition

• Ireland• Germany• Canada• World bodies• The disappearing civil trial

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Corporate governance check

• Have you got ADR with stakeholders?• Decent citizen• World is flat• New constitution of commerce• ADR a dual function• Build business trust – director’s duty• IOD/AFSA clause :

– www.arbitration.co.za– www.iodsa.co.za

Conclusion

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The relationship

• Governance, strategy and sustainability• Inseparable• Context for strategy determination• What are the social, economic and

environmental impacts?• Management to drive sustainable

development throughout the organisation

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A journey

•Cadbury, etc and the Combined Code of the UK•King I, II and III

Every day you may make progress. Every step may be fruitful. Yet there will stretch out before you an ever-lengthening, ever-ascending, ever- improving path. You know you will never get to the end of the journey. But this, so far from discouraging, only adds to the joy and glory of the climb.”

Sir Winston Churchill

Thank YouProf Mervyn E King SC