The past decade’s corporate scandals – spanning Enron’s corporate fraud in the early 2000s, the 2008 banking crisis and Barclays’ interest-rate fixing disgrace this July – have highlighted the dire consequences of unethical leadership and poor corporate governance.
In the wake of these events new regulations, such as Sarbanes-Oxley in the US, the Cadbury Report in the UK and the King Reports in SA, were formulated to protect investors and other stakeholders.
“Corporate governance starts with the board of directors,” says Sandra Burmeister, CEO of Landelahni Business Leaders Amrop SA. “Observing regulatory requirements involves committing to ethical behaviour throughout the organisation. Compliance does not mean simply ticking boxes.
“Bob Garratt’s book, ‘The Fish Rots from the Head’ is as relevant today as when it was first published. The board sets the tone. It is up to the directors to ensure corporate accountability, transparency and probity.
“Increased competitiveness globally, along with economic uncertainty, massive technological advances, and stricter governance regulations pose increased challenges to directors. Best practice boards recognise the value of ethical leadership and the need to take cognisance of a broad stakeholder base.
According to Landelahni director Alan Witherden, the past few years have seen a move from corporate social investment in the form of charitable works to an understanding of corporate citizenship, which includes a deeper engagement with the real concerns of the community. “The King III governance model,” he says, “argues that a company should be a responsible corporate citizen and that it stands in a relationship of ethical responsibility to the society in which it operates.”
Globally, this concept has been entrenched in the principle of integrated or triple bottom-line reporting. This obliges companies to report on the impact of their businesses on all three of the spheres within which they operate: economic, social and environmental. In South Africa, the new Companies Act reinforced this by calling for a board level social and ethics committee that would ensure that listed companies considered their impact on a range of stakeholders.
“Despite this, there are too many examples, in the private and public sector, of boards in a state of disarray,” says Witherden. “Executives removed from their positions owing to non-performance or lapses in ethical conduct frequently receive big pay-outs. Some corporates and state-owned enterprises continue to reflect weak governance practices and deliver less than adequate results.”
“We’ve been grappling with these issues for many years, but best practices are not yet sufficiently widespread,” adds Burmeister. “Appointing a social and ethics committee is a step in right direction. However, in optimally functioning boards, all directors take on this responsibility.
“It’s essential to articulate values from the top, supported by clear policies and procedures. Leaders need to establish the corporate values and then communicate these values all the time, in a variety of ways.”
PricewaterhouseCoopers puts forward some key governance questions directors should be asking:
· Corporate citizenship, sustainability and stakeholder inclusivity requires judgement, balance and compromise. Does the board have the right composition, skills and reliable data to make these types of judgement calls?
· Have we assessed the moral and economic imperatives of corporate citizenship? Have we taken this into account when reviewing our corporate strategy?
· Citizenship and sustainability risks may be obscure or indirect. How do we identify and manage these risks as well as opportunities?
· Do we have policies in place that will guide every level of the business in terms of expected behaviours and practices and with reference to our interaction with all material stakeholders?
· Do we measure the impact or lack thereof, of our corporate citizenship initiatives?
“The corporate culture must include a renewed commitment to embracing ethical values, not simply to avoid scandals, but to regain the public’s trust,” says Burmeister. “That is the only way to ensure that good governance underpins the fabric of our organisations and institutions to ensure long-term sustainability.”