Requested Focus: Local government-the corporate sins (ethics and fraud) or
any topic of choice.
Conference Theme: Working towards excellence in local government: From
compliance to delivery: “Footprints in the sand of time are not made sitting
down.”
Paper Title: Corporate governance in local government
Duration: 40 minutes, including question time
Start by acknowledging that this speech on corporate governance was
originally meant to be delivered by Judge Mervyn King, who unfortunately had
to go overseas. Due to our close working relationships with Judge King, he
asked us to present a speech in his place. The responsibility for this speech
rests with PwC, but Mervyn King graciously offered to review it and provide
his input.
Content:
Why corporate governance? :
1. During my interactions with various PWC public sector clients, I’ve been
asked the question why corporate governance applies to public sector
institutions, which are not, after all, corporations. To answer the question
of why there has been increased focus on corporate governance, it is
helpful to take a brief look at how governance has evolved.
2. During the last two decades of the 20th. century, there was a lot of public
questioning around directors’ governing practices and board structures. In
addition, corporate scandals resulted in the formation of various
committees over time and across different continents, which were aimed at
investigating what was wrong, and developing guidance in strengthening
corporate governance. For example, the Cadbury Report which was
released in 1992, and which focussed on the final aspects of corporate
governance is regarded as the document that set the scene for the
revolution that has taken place in corporate governance to date. In South
Africa, the King Commission produced the King Report 2002, which went
beyond the financial bottom line, to integrate social, economic and
environmental impacts of business into corporate governance. It is
important to note that King II applies to PFMA and MFMA entities.
3. Good corporate governance applies as much to the private sector as it
does to public sector institutions. For example, the Protocol on Corporate
Governance in the Public Sector was largely adapted from the King
Reports of 2000 and 2002. Officially, it is said to be aimed specifically at
Schedule 2, 3A and 3D entities, although all public sector entities are
encouraged to adopt its principles. Secondly, there are acts that also
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encourage the principles of corporate governance, for example, the
MFMA. The MFMA was not simply enacted to guide budget and financial
management processes, but also to empower various stakeholders within
the municipality around a framework of good governance. This is
evidenced by the fact that clarifies and separates roles and responsibilities
of local government officials, including the mayor, municipal managers,
executive and non-executive councillors and officials.
4. In the corporate sector, In South Africa, we have the Companies Act of
1973, which is the foremost legal document that legislates the operation of
corporations in South Africa. Currently this act is being amended, and it is
interesting to note that the new act will say a lot more about directors and
governance than the previous version.
What is corporate governance?:
5. Before we go any further, it is important to establish among us what
corporate governance is. I think this is important in particular because after
King II, a lot of private and public sector clients who came to us, asking us
to tell them whether they were practicing good corporate governance on
the basis of some boxes that they wanted to tick. If most boxes were
ticked, they were satisfied that there was good governance within their
organisations. If some were not, they would quickly institute some
procedures that could later be ticked off. On the basis of this tick-box
approach, entities would then be satisfied that there was good
governance.
6. However, what was lacking from this quantitative exercise was information
on how the entities were being governed, or more precisely, an
assessment of the quality of governance. For example, you as a mayor
may have the obligation, according to section 56 of the MFMA, to provide
guidance to a municipal entity. However, while you may tick off you did
indeed fulfil your responsibilities towards the municipal entity, the entity on
the other hand could report that council or mayoral interference was part of
the reason why it did not deliver on its mandate.
7. This was our experience when, two years ago, we were commissioned by
the Department of Housing and the European Union to provide corporate
governance assistance to social housing institutions. We found that only a
few of the housing institutions had actually delivered on their mandates to
provide affordable housing to low income families. Some had been in
existence for several years and yet had not built a single home. Upon
large scale engagement with various stakeholders it became apparent that
the single most important contributor to a lack of delivery was a lack of
effective leadership. Yes, issues relating to institutional and operational
capacity played a big role, and at some point it becomes a vicious cycle.
However, we must keep in mind the words of Bob Garrat that the fish rots
from the head.
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8. It is therefore important to keep in mind that in order to practice what can
be reliably called good governance an entity must take into consideration
the framework in which it operates and the stakeholders who give it its
licence to operate.
9. Going back to the definition of governance, in his book, King gives a more
modern and apt definition of corporate governance as a processes to help
directors discharge and be seen to be discharging their responsibilities
that arise from their duties.
10. We, at PricewaterhouseCoopers take this definition of governance to
mean that there is a need for a new kind of director out there. One who
does not just take governance as a tick-box exercise, but a thinking
director who applies his/ or her mind when performing his or her duties.
This thinking director together with his or her peers form what we call a
Power Board.
11. It is in this context that municipal councils must aim to transform
themselves into power municipalities, that adhere to governance
processes grounded on the principles of:
- Fairness,
- Responsibility,
- Accountability
- Transparency
12. In fact I believe that the purpose of Project Consolidate was meant to
achieve exactly that.
Intellectual honesty
13. The principles that underpin good governance can only be effective within
the context of what Mervyn King describes as intellectual honesty.
Intellectual honesty means that local government leaders must recognise
that mindless compliance with legislation, codes and so on will not improve
governance. Take for example a municipality which submits timely
financial statements. This municipality may be hailed as a shining star in
relation to those that didn’t submit timely reports. Yet, if we were to take a
further look at the operation of that municipality and find that it had no
audit committee or lacked an effective system of internal control, that
municipality would not have met the standards of good governance.
14. The council should then apply its mind as to how its municipality should
be governed. The constitution, MFMA, or the Municipal Systems Act
should be seen a baseline for compliance rather than the complete
framework for governance. An affective governance framework would at
the very least, take into consideration the relationships between the
municipality and the communities which it serves and furthermore, the
national development agenda.
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15. For example, Chapter 4 of the Municipal Systems Act refers to community
participation. It states that municipalities should encourage and create
conditions for the local community to participate in the affairs of the
municipality. Yet how many municipalities represented here today would
say that they have formal and informal processes for engaging their
communities? Even so, how many can proudly say that they continually
assess the effectiveness and the quality of their engagement with their
communities, and build the community’s capacity participate effectively?
16. Personally, I have listened read many newspaper reports and listed to
many more radio call programmes where the members of community
interact with their elected officials. You sometimes wonder whether they
even come from the same place! Of course, I am aware that perception
rather than reality sometimes comes into play in any interaction, however,
it is quite evident that there is still a lot of room for improvement.
I earlier talked about the principles of good corporate governance. I would like
to talk a little bit more about accountability.
Accountability
17. Section 152 (1) of our constitution lists the objects of local government as,
among others, “to provide democratic and accountable government for
local communities”.
18. What our constitution is effectively saying is that municipalities must not
only provide services to local communities, but they should be held
accountable for delivering those services. Accountability can be defined as
giving account or being answerable for your decisions and actions.
Accountability or rather, lack of it has been ascribed as central to most
governance failures in the public and private sectors. Similarly, most of the
governance reforms have been driven by findings as well as wider
stakeholder perceptions and that leaders of entities have simply not been
willing to answer for their actions.
19. Accountability is important in that it tends to make people want to stick to
their defined roles and responsibilities if they know that they would have to
later account for their actions. Therefore it is also one of the effective ways
of managing corruption.
20. Most professionals tend to think of accountability only in relation to legal
requirements. For example following certain prescribed procedures: as
mayors, we must report to the council, and as Accounting Officers we
must report to the mayor and the council, as per MFMA requirements.
21. As I have mentioned before, effective governance is dynamic and takes
into consideration the context in which governance is taking place and the
licence to operate. Most people may think that only corporations need a
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licence to operate, especially because we normally mention communities,
local government, national government, as the providers of the licence to
operate. But we live in a democratic society where votes determine who
governs. So the same principle applies to local government. I’m sure all of
us remember the horrific TV footages of rioting communities in some
municipalities recently, in much the same way that NGOs have been
successful in mobilising support for a boycott or international publicity
against some corporations. I don’t intend here to equate violent protests
with peaceful protests. But the point I’m trying to make is that
municipalities are susceptible to stakeholder demands just the same as
corporations are.
22. There should be effective mechanism in place to ensure that local
councils and the individuals who sit in them, are accountable for the
decisions and actions that they take. What kind of mechanisms? They
consist of, among other,:
- Adhering to the statutory and regulatory requirements
- Ensuring that there is effective leadership
- Ensuring that there is a balance of power, and representation
- Having mechanisms for protecting stakeholder interests
- Endorsing and implementing an effective strategy
- Setting the tone at the top
Ethics:
23. The culture of accountability does not exist in a vacuum. Ethics, or tone at
the top, play an important role in strengthening organisational culture.
24. King describes business as an ethical enterprise, which creates
opportunity, enables men and women enhance their talents plays a
significant role community to improve. Business therefore must be
conducted ethically. The same principle applies to municipal bodies, if we
consider that municipalities are in the business of delivering much needed
services to communities.
25. For an enterprise to be ethical it follows that the people who work in that
enterprise must also be ethical. One of the effective means of creating an
ethical climate is a code of conduct. It is interesting to note that schedule 2
of the Systems Act contains a code of conduct that applies to every staff
member of a municipality. The act goes on to state that the code should be
communicated to local communities. Furthermore, the Draft Summary
Implementation Plan For The Five-year Local Government Strategic
Agenda Furthermore also states that a Code of Conduct will be
implemented for councillors. It is very commendable to see that ethics is
something that is taken seriously by our local governments.
26. The problem arises when the code is simply a document that is hung on
the wall for all to see. In this form it will not support any positive behavior
as was intended. It also will not be effective in curbing unwanted
behaviour. A code is more effective if it is implemented within a holistic
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ethics programme that is based on organisational values, and that is
endorsed by the council.
27. If there are any municipalities that have simply retyped the code contained
in schedule 2 of the Systems Act, I would challenge you to do review
whether the following applies to it:
-
Does it exist within an ethics programme?
Does it support accountability within the organisation
Does it describe practical procedures for reporting and responding
to incidents?
Does it speak to the values of your municipality and the local
community?
Has it been endorsed by council?
Was the local community involved in its development?
Corporate sins:
28. In closing, I want to highlight something that is food for thought. Something
that I would like each individual here to think about. I would like for you to
reflect on what Judge King, in his book refers to as corporate sins.
29. King says that recent corporate failures can be attributed to what he calls
the corporate sins, which are self interest, self concern, conformance,
pride and arrogance:
Self interest - occurs when a leader fails to exercise his duty of
good faith, and instead acts in his own interests.
Self concern- occurs when a leader is fearful to act because they
believe the consequences of their actions will be adverse to them.
Conformance- results from too much focus on process
(administration) rather than focussing on the enterprise side of the
business.
Pride - when a business judgement call has been proved to be
wrong, but the board is slow to correct it.
Arrogance- is a result of a board believing that it has the right
formula for its business and no else does and nothing will go wrong.
Thank you!
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