Corporate Governance
Presentation by
Susan Mutangadura
IAC Conference 2011
7-9 September
Troutbeck Nyanga
©Susan Mutangadura
A case for Corporate Governance
• “If a country does not have a reputation for strong
corporate governance practices, capital will flow
elsewhere. If investors are not confident with the level
of disclosure, capital will flow elsewhere. If a country
opts for lax accounting and reporting standards, capital
will flow elsewhere. All enterprises in that country – …
suffer the consequences. … Markets exist by the grace
of investors. And it is today’s more empowered
investors that will determine which companies and
which markets will stand the test of time and endure
the weight of greater competition. It serves us well to
remember that no market has a divine right to
investors’ capital”. (Arthur Levitt, the former Chairperson of the US Securities and
Exchange Commission)
©Susan Mutangadura
Defining Corporate Governance
Why Corporate Governance is so important
The evolvement of Corporate Governance
Topics
Corporate Governance in Africa
Some case studies
Conclusion
Defining Corporate Governance
“Corporate governance is a complex multi faceted
subject matter involving not only legislation and
regulation but also what is usually known as best
practice, which is very much a matter of
corporate culture, mind-set and education”
(Phillip Baldwin CEO Hong Kong Inst of Chartered Secretaries.)
©Susan Mutangadura
Defining Corporate Governance
The institutional investor and activist, Hermes, observes:
“Traditionally…, the concept refers to corporate decision
making and control, particularly the structure of the
board and its working procedures. However, the term
corporate governance is sometimes used very widely
embracing a company’s relations with a wide range of
stakeholders or very narrowly referring to a
company’s compliance with the provisions of best
practice codes.”
(Corporate Governance and Performance, 2005)
©Susan Mutangadura
Defining Corporate Governance
Corporate governance is the system by which companies
are directed and controlled. Boards of directors are
responsible for the governance of their companies. The
shareholders’ role in governance is to appoint the
directors and the auditors and to satisfy themselves
that an appropriate governance structure is in place.
The responsibilities of the board include setting the
company’s strategic aims, providing the leadership to
put them into effect, supervising the management of
the business and reporting to shareholders on their
stewardship. The board’s actions are subject to laws,
regulations and the shareholders in general meeting.
(UK Code on CG 1992.)
©Susan Mutangadura
OECD Definition
• “The procedures and processes according to
which an organisation is directed and
controlled. The corporate governance
structure specifies the distribution of rights
and responsibilities among the different
participants in the organisation, such as
board, managers, shareholders and other
stakeholders – and lays down the rules and
procedures for decision making.”
©Susan Mutangadura
Subjects of analysis and variables relating
to corporate governance (Turnbull 1997)
©Susan Mutangadura
Essentially …..
• Corporate governance involves a set of
relationships between a company’s
management, its board, its shareholders and
its stakeholders.
©Susan Mutangadura
Corporate Governance is a dimension of a much larger picture of
the ways in which a company engages in social responsibility to
its stakeholders and to society at large. CG is part of a larger
picture of a company’s CSR
Labour
Rights
Ethical
Business
Practices
Human
Rights
Company
Corporate
Governance
Environmental
Concern
Philanthrophy
©Susan Mutangadura
Why Corporate Governance?
“At the end of the day, good governance is more
about people than it is about procedures. So
professional bodies need to ensure that there are
enough people with the professional knowledge
and skills to ensure that commonsense
governance, and not governance by mass
regulation, prevails.”
Phillip Baldwin CEO Hong Kong Inst of Chartered Secretaries.
©Susan Mutangadura
Why Corporate Governance?
The International Finance Corporation (IFC), a
lending arm of the World Bank Group, is the
largest source of financing for private sector
projects in Emerging Markets.
IFC argues:
Good corporate governance won’t just keep your
companies out of trouble. Well-governed
companies often draw huge investment
premiums, get access to cheaper debt, and
outperform their peers.
©Susan Mutangadura
Why CG Matters
• The purpose of corporate governance is to
facilitate effective, entrepreneurial and
prudent management that can deliver the
long-term success of the company. (The UK
Corporate Governance Code 2010)
©Susan Mutangadura
Why CG Matters
There is increasing recognition that business is
no longer just about financial performance.
Good corporate governance has become one
of the cornerstones of business excellence and
underpins market confidence, integrity and
efficiency, and hence promotes economic
growth and financial stability (Khoza and
Adam 2005).
©Susan Mutangadura
Why CG matters
• Good corporate governance principles focus
on establishing mechanisms of ensuring that
corporations are managed effectively and that
those in positions of control and influence
are held accountable for the assets of the
firm.
©Susan Mutangadura
Corporate governance and investor interest
• McKinsey’s Global Investor Opinion Survey (2002) is
the most widely quoted research on the link between
good corporate governance and investor interest.
McKinsey found that 80% of institutional investors
would pay a premium for a well governed company.
• (The premium varied from approx 40% for companies
in countries where corporate governance standards
were dubious eg Egypt & Russia, to approx 12% for
companies in countries where corporate governance
standards were regarded as high eg Canada, the UK,
South Africa?)
©Susan Mutangadura
The evolvement of Corporate
Governance
©Susan Mutangadura
The Development of Corporate Governance Consciousness
 Three developments occurred in corporate governance
thinking in the 1970s:
#1: In the US, the importance of independent external
directors was recognised
#2: In Europe, the European Commission promoted the
establishment of two-tier boards
#3: A debate began about the duties of companies towards
stakeholders and not simply shareholders.
©Susan Mutangadura
Developments in the 1980s and 1990s
 Research which probed the concept of corporate
governance was published during the 1980s, and the
phrase ‘corporate governance’ emerged as the concept
began to be developed.
 The American Law Institute published a report in 1984,
Principles of Corporate Governance.
 Robert Tricker, sometimes called the father of corporate
governance thinking in Britain, published a book, also in
1984, Corporate Governance: Practices, Procedures and
Powers in British Companies and their Boards of Directors
©Susan Mutangadura
The evolvement of Corporate Governance
Developments in CG thinking and practice have been
responses to company collapses, corporate corruption
or the domination of companies by an individual.
 UK Cadbury report followed unacceptable excesses
in the Guinness and Maxwell Companies
 US Sarbanes-Oxley Act was in response to the
collapses of Enron & WorldCom
 The failure of the Carrian Group led to the first CG
code Hong Kong.
©Susan Mutangadura
Institutional investors began to become active
 Important institutional investors, e.g. pension
funds began to become very active in
corporate governance issues from the early
1990s onwards.
©Susan Mutangadura
It really began with Cadbury
 Cadbury (1992)
The Cadbury Committee was established by the
London Stock Exchange, the Financial Reporting
Council and the accountancy profession as a
result of a number of financial scandals and the
consequence lack of confidence in financial
reporting in the UK.
©Susan Mutangadura
The Cadbury Report
The Cadbury Report has almost certainly been the most
influential report on corporate governance ever written.
Its most essential recommendations were probably these:
 the wider use of independent non-executive directors
 the introduction of an audit committee to be composed of
only non-executive directors, with a majority of them
independent.
 the separation of the roles of CEO and chairman of the board
©Susan Mutangadura
Comply or Explain
It is no exaggeration to say that the British approach
to corporate governance – anchored the ‘comply
or explain’ principle – has had exceptional
influence worldwide, especially with regard to
countries in the British Commonwealth. Virtually
all of the 54 countries, with a combined
population of 2 billion, that have a code have
adopted the British approach.
©Susan Mutangadura
The OECD Principles
During the 1990s, the Organisation of Economic
Cooperation and Development (OCED) worked on a
set of principles of corporate governance that would
help Governments in their efforts to improve their
corporate governance regimes.
The first set of principles were published in 1999.
The current set of principles were published in 2004.
©Susan Mutangadura
Corporate Governance in Africa
• Coinciding with the dawning of a new
democracy and the readmission of South
Africa into the world economy in 1994, The
King Committee on Corporate Governance,
headed by former Supreme Court judge,
Mervyn King S.C., published The King Report
on Corporate Governance (the “King Report
1994”).
©Susan Mutangadura
The King Code 1994
Apart from the financial and regulatory aspects
of corporate governance the report advocated
for an integrated approach to good
governance in the interests of a wide range of
stakeholders having regard to the
fundamental principles of good financial,
social, ethical and environmental practice.
©Susan Mutangadura
King II 2002
Backed by the IOD and the JSE, a revised
corporate governance code was issued in
2002. The report promotes an ‘inclusive’
approach to corporate governance, taking
into account Africa’s preference for the
community over individualism and consensus
over competition.
©Susan Mutangadura
King II 2002
• The Report 2002 identifies the seven primary
characteristics of good governance as discipline,
transparency, independence, accountability,
responsibility, fairness and social responsibility
• King 2002 introduced into mainstream corporate
governance the concept of the triple bottom line,
which embraces the economic, environmental
and social aspects of a company’s activities.
©Susan Mutangadura
King III 2010
• The King III Report is based on an “apply or
explain” basis.
• This enables companies to operate for the
purposes for which they were intended,
without being bound to follow standards
which are, by nature, inflexible.
©Susan Mutangadura
KEY PRINCIPLES OF THE KING III REPORT
The Report places great emphasis on:
• Leadership;
• Sustainability; and
• Corporate Citizenship.
The importance of the concepts of integrated
sustainability and social transformation is
highlighted. This leads to a lasting concentration
on the effects of business on society and the
environment.
©Susan Mutangadura
EMERGING GOVERNANCE TRENDS
INCORPORATED IN THE KING III REPORT
Emphasis is placed on the following:
• Alternative dispute resolution
It is suggested that alternative dispute resolution will enable business to
preserve business relationships, by speedily solving problems.
• Risk based internal audit
This will enable companies to place more reliance upon internal controls,
which internal audit will verify/assure.
• IT Governance
IT governance is important as it is a major operational risk.
• Shareholders and Remuneration
There is a need for the policy of the remuneration of non-executive directors
of the Board, to be authorised by shareholders, before implementation.
• Evaluation
The Board of directors, the Board Committees and individual directors should
be evaluated, annually.
©Susan Mutangadura
Corporate Governance in SA – The test
Perhaps the most significant debate on governance in SA in
recent times has been influenced by the events leading to
the removal from office of the then Deputy President of
South Africa Jacob Zuma, by President Thabo Mbeki.
Delivering judgment in the trial of prominent SA
businessman Shaik, the judge found the deputy president
to have conducted himself improperly in the corrupt events
that led to a fifteen-year jail term for the accused. The onus
fell squarely on President Thabo Mbeki to demonstrate
whether his country’s repeated commitments to good
governance were sincere or mere rhetoric.
©Susan Mutangadura
Codes vs Legislation?
Havard research (2009) found strong consensus among
directors that:
 the key to improving boards’ performance was not
government action, but action by each board.
 boards & companies differ.
 each board needs to develop structures, processes, &
practices that fit the company & its business needs.
 no one size fits all.
©Susan Mutangadura
Some case studies
©Susan Mutangadura
#1 Enron
• American energy company
• Named by Fortune Magazine “America’s most
Innovative Company” 6 years in a row
• In its review of CG in 2000, Chief Executive
Magazine named Enron one of the 5 best
boards in the US
• Enron collapsed in 2001 due to lack of CG
controls!
©Susan Mutangadura
Consequences of Enron’s collapse
Loss of jobs (20000)
Loss of pensions ($2+ billion)
Loss of retirement plans ($1.2billion)
Arthur Anderson, Enrons accountants went
out of business with a loss of 85000 jobs
Loss of investment
©Susan Mutangadura
The Consequences
• Jeff Skilling, Enron’s COO & later CEO was
sentenced to 25years for securities fraud.
©Susan Mutangadura
#2 WorldCom
 Before its collapse in 2002, in the largest
bankruptcy in U.S. history at that time,
WorldCom was:
the 2nd largest long-distance telecommunications
provider in the United States.
the largest carrier of international traffic in the United
States
the largest carrier of Internet traffic in the world
©Susan Mutangadura
What went wrong?
 In their treatment of the WorldCom collapse, Hamilton &
Micklethwait argue that the problem were these:
‘poor strategic decisions’
‘an all-consuming drive for growth’
‘an incompetent and dominant CEO’
‘a supine board which rubber-stamped Ebbers’ decisions’
‘a complete lack of other normal checks and balances’
 Mr. Sullivan had directed his subordinates to inflate
revenues and hide expenses at WorldCom, once the USA’s
second-largest phone carrier.
©Susan Mutangadura
The consequences
 In March 2005, Bernard J. Ebbers, WorldCom's founder
and chief executive, was found guilty of securities
fraud, conspiracy and seven counts of filing false
reports with regulators. In July 2005, he received a
prison sentence of 25 years.
 Mr. Sullivan, the former chief financial officer who
acknowledged his leading role in WorldCom’s $11
billion accounting fraud was sentenced to five years in
prison after the court took cognizance of his cooperation with the investigation.
©Susan Mutangadura
#3 Lehman Brothers

Lehman Brothers was a leading U.S. financial services firm
which before its bankruptcy employed 26,000 people in 20
different countries.

When it filed for bankruptcy in September 2008, its filing
represented the largest bankruptcy in American history. The
bank reported debts of $768 billion but assets of only $639
billion.
©Susan Mutangadura
What had happened?
• Lehman Brothers encountered very substantial losses due to the
subprime mortgage crisis and also due to its real estate
investments.
• In the first half of 2008 alone, Lehman’s stock lost 73% of its value.
• Lehman tried to find a buyer for the bank, negotiating especially
with the Korean Development Bank. When news that those talks
had fallen through became public, Lehman’s stock fell 45% in a
single day, on 9 September.
• More losses followed. Lehman filed for bankruptcy on 15
September 2008.
©Susan Mutangadura
What were the corporate governance issues?
Where was the board of directors leading up to the financial crisis?
 Many analysts since Lehman’s collapse have argued that Lehman’s
board of directors were unfit to serve on the board and could not
really understand the contemporary financial world.
• 9 members of the 10-member board were retired
• 4 members were over 75 years of age (2 members were in their 80s)
• only 2 members of the board had direct experience of the financial services
industry – and in both cases their experience was more than a quarter of a
century (before the age of securitisation, credit default swaps, derivatives
trading, and so on)
©Susan Mutangadura
The Board
Is it fair to say that these people should not have been board
members of a sophisticated financial services company??
• A 2006 member of the board, just retired, was an 83 year-old
actress.
• Another member of the board was a 75 year-old theatre producer.
• The risk committee, headed by an 80 year-old board member (with
experience of banking some quarter of a century before) met only 2
times in 2006 and 2007 as Lehman’s risks were building up.
©Susan Mutangadura
Impact of the Global Financial Crisis?
• Organisation for Economic Co-operation &
Development (OECD) : the real need is to improve
the practice of existing principles
• Areas needing attention:




Board practices
Risk management
Top level remuneration
Shareholder rights
©Susan Mutangadura
Impact of the Global Financial Crisis
A Harvard paper identified 6 areas for improvement:
 Clarifying the boards role
 Acquiring better information & a deeper understanding
of the company
 Mantaining a sound relationship with management
 Providing oversight of compant strategy
 Assuring Management development & succession
 Improving risk management
(Perspectives from the Boardroom 2009 – Prof J Lorsch & colleagues)
©Susan Mutangadura
Impact of the Global Financial Crisis
UK CG Code proposed changes:
 To enhance accountability to shareholders
 Ensure boards are well balanced & challenging
 Improve a board’s performance & deepen
awareness of its strengths & weaknesses
 Strengthen risk management
 Link performance related pay to the company’s
long term interests and risk policy
©Susan Mutangadura
Conclusion
Abraham Lincoln:
“You can fool all of the people some of the time,
and some of the people all the time, but you
cant fool all the people all the time.”
©Susan Mutangadura
THANK YOU…
©Susan Mutangadura
PRESENTATION……..
©Susan Mutangadura