challenges in corporate governance and king iii · market capitalisation • not equal to book...
TRANSCRIPT
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