Better Companies,
Better Societies
Global Corporate Governance Forum
Lessons Learned from South Africa
Eurasia CG Codes Workshop
Baku
January 2009
South African Context
 Well developed mining, industrial and banking sector
↳ But, with large portion of population outside mainstream
 Long tradition of law, enforcement and codification
 Significant transition to fully fledged democracy
↳ New Constitution embracing transparency, civil liberties
 Private sector under pressure
↳ Political demands to demonstrate social conscience
↳ Questions of international competitiveness, integrity
 Commitment to open, liberalized economy
 Coincided with rapid advance of globalization
 Heavy expectations among previously disenfranchised
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Rationale for 2nd Report
 1st Report outdated
↳ …… against transformed socio-political and economic environment
 Significant international advances in Codification
↳ e.g. OECD CG Principles, Commonwealth Guidelines (1999)
↳ e.g. Various UK Codes post Cadbury, Malaysia, etc.
 Considerable regulatory reform
↳ Generating need for boardroom guidance and practices
 Concerns regarding corporate integrity
↳ Attracting foreign investment a key policy criteria
 Issues of compliance and enforcement
 Reconcile local practices with international standards
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Framework for Code Formulation
 Global/Regional standards setting the benchmark
↳ OECD [part of World Bank/IMF 12 Core Standards]
↳ European Commission Directives
 Country standards
↳ e.g. United Kingdom, The Netherlands, Bulgaria, etc.
 Industry initiatives
↳ e.g. Mining (EITI), Forestry, Banking (Basel)
 Investor-specific standards
↳ e.g. ICGN, CalPERS, Aberdeen, Morley/Aviva, ABI, etc.
 Regulatory standards
↳ e.g. NYSE, Johannesburg, Sydney, etc.
 Corporate-specific standards
↳ e.g. Rio Tinto, BP, Lockheed Martin, Westpac, etc.
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A Debate Not Yet Resolved…….!
“A key lesson from the recent scandals is that the checks on the system
simply have not worked. The honor code among CEO’s didn’t work.
Board oversight didn’t work. Self-regulation was a complete failure. But
one thing has worked: law enforcement.”
Eliot Spitzer
Former New York State Attorney
“You can’t prosecute your way to a healthy corporate culture.”
Deputy U.S. Attorney General James Corney
Chair of the President’s Corporate Fraud Task Force
“The areas in which law will be necessary are two: disclosure and the
ability of shareholders to exercise their ownership rights. Without
sufficient disclosure, the investor is unable to make sensible and
informed judgments about the issues.”
(Late) Alastair Ross Goobey
Former Chairman, International Corporate Governance Network
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Reasons for a CG Code
 Be clear on rationale for formulating a Code
↳ Not just because the country next door has one!
 For e.g., is it to …..
↳ …..enhance established law and set higher business practices?
↳ …..address particular standards for a specific sector?
↳ …..reconcile domestic practices with international requirements?
 Code should NOT be a substitute for legal deficiencies
 Understand distinction, and implications, between…..
↳ …..a voluntary initiative, e.g. UK, South Africa, India, etc.
↳ …..an officially commissioned process, e.g. Germany, Malaysia, etc.
 Understand market framework and policy priorities
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Setting the Frame of Reference
 Identify the institution to co-ordinate (lead?) process
 Determine composition of review body
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↳
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Preferably members should have institutional reference
Ensure Chairman has appropriate credentials and authority
Identify project manager to co-ordinate, guide entire process
Establish scope and timetable
 Some important points to consider
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↳
↳
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“Names” on the main committee, “Doers” on the task forces
Fully brief everyone involved on expectations, commitment
Meet with key regulators expected to enforce Code at the outset
Don’t reinvent the wheel, contact other similar initiatives
 Media can be a valuable tool for dissemination
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Factors for Success
 “Perceived” neutrality and credibility of Code Committee
 Inclusive participation of key stakeholder interests
↳ Therefore capturing wide group of opinions (and interests!)
↳ Role of government, policy makers must be navigated
 Encourage open, transparent public consultation
↳ Sensitizes market to key areas of focus
↳ Highlights corporate governance as a matter of public interest
 Code should NOT be a reflection of status quo
↳ Must contain inspirational elements = raise the bar!
 Isolate issues that can only be resolved by legislation
↳ This may be key to process that follows promulgation of Code
 Don’t be over ambitious
↳ Success rests on ability to implement and relevance
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And, the Challenges!
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“Comply or Explain” assumes strong functioning institutions
Inability of legislature to respond to recommended reforms
Diffused regulatory structures, inconsistent application
Domestic investors insufficiently engaged
Focused on narrow band of companies, market relevance
Conflicts and vested interests among key players
Lack of follow through and guidance
Lack of appreciation of “market incentives”
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Some Lessons from South Africa
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Local ownership of the process is essential
Include all key stakeholders, private sector role critical
Must be broad national commitment
Actively engaged, informed media played critical role
International consultation brings credibility, recognition
Relying on volunteers has serious potential limitations
Understand market incentives, what drives compliance
Is the King Report a good model to follow…….
↳ …….I think so, BUT with conditions
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Board Governance Framework
Shareholders
Board of Directors
Company
Secretary
Board Operations
Board
Meetings
Strategy
Corporate Policies & Procedures
Board Governance Instruments
Monitoring and Supervision
Key areas of
responsibility
• Achievement of strategic objectives and value creation
• Fulfil responsibilities and duties in law and prescribed functions
Chairman
Governance
system and
controls
Reporting &
Disclosure
Board Committees
Audit
Committee
Internal Audit
Compensation
CEO & Management
Other
Committees
Executive
Committee
Combined Assurance Model
Other Assurance
External Audit
Providers
Internal Controls
& Assurance
Management
Source: KPMG, 2004
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THANK YOU
Philip Armstrong
Global Corporate Governance Forum
Telephone +1 202 458 9114
parmstrong@ifc.org
www.gcgf.org
“…the substance of good corporate governance is
more important than its form; adoption of a set of
rules or principles or of any particular practice or
policy is not a substitute for, and does not itself
assure, good corporate governance.”
The Business Roundtable, USA
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