When the Cadbury Report on corporate governance was released in the UK in 1992, closely followed by King I in 1994 in South Africa, corporate governance was understood largely in terms of the systems, processes, policies and structures needed to direct and control companies.
While some organisations immediately understood the link between how an organisation was governed and its ability to deliver, most found it burdensome - another set of regulations with which to comply. These companies used to throw the darts (so to speak) first and then paint the target where the darts landed, because they had no clear idea of what they were aiming for.
Fast-forward to King IV that was launched in November 2016, where corporate governance is defined as the “exercise of ethical and effective leadership by the governing body” to achieve certain outcomes: ethical culture, good performance, effective control and legitimacy.
We have thus moved away from a compliance mindset to the notion of board leadership to achieve desirable goals, ie knowing where the target is before throwing the darts.
Events in our country have driven home the message that corporate governance is critical. We know that without governance, leadership can degenerate into tyranny, fraud and personal fiefdoms.
Equally, governance without leadership risks ineffectiveness, bureaucracy and indifference, to paraphrase Mark Goyder, the British governance expert and author.
There has also been considerable research linking effective corporate governance to significant, quantifiable benefits for organisations and countries.
One of these is foreign direct investment. An Organisation for Economic Co-operation and Development research report by Maria Maher and Thomas Andersson on Corporate Governance: Effects on firm performance and economic growth concluded that corporate governance affects the development and functioning of capital markets, and “exerts a strong influence on resource allocation” in a world characterised by increasing capital mobility.
This is a hard lesson South Africa is busy learning after the country’s recent credit downgrades, with the possibility of more to come. As Arthur Levitt, chairperson of the US Securities and Exchange Commission, said: “If a country does not have a reputation for strong governance, capital flows elsewhere.”
In short, corporate governance improves access to capital, and potentially its cost, for countries and companies, especially in the developing world, concludes an IFC study entitled Corporate governance matters to investors in emerging market companies, by Vikramaditya Khanna and Roman Zyla.
Research is also starting to emerge that links corporate value to corporate governance. A local study by Isaih Dzingai and Michael Bamidele Fakoya on the Effect of Corporate Governance Structure on the Financial Performance of JSE-Listed Mining Firms concludes that if mining firms comply with corporate governance codes, they will benefit as will the economy as a whole.
Studies in the US, summarised in Jay Eisenhofer’s article, Does corporate governance matter to investment returns, found that “the quality of a particular company’s governance practices and procedures positively correlates with both good corporate financial performance and shareholder value. Simply put, good corporate governance does in fact pay.”
Seventy-one percent of South African directors believe corporate governance adds value to the business, the 2nd edition of the IoDSA Directors’ Sentiment Index Report reveals. Of course, corporate governance also lowers the risk of corporate scandals and reputational risk.
To conclude: corporate governance comes about when the board exercises ethical and effective leadership to improve the organisation’s sustainability, which hinges on its ability to make good profits while being seen by society as a legitimate, responsible user of its common resources. As the performance of some of our state-owned enterprises and our government itself shows, without it the organisation is not profitable either to itself and its shareholders, or to society as a whole.
Parmi Natesan and Dr Prieur du Plessis are executive director: Centre for Corporate Governance and chairperson of the Institute of Directors (IoDSA), respectively. Enquiries: [email protected] Better Directors. Better Boards. Better Business.