Challenges of Governance
in South Africa and Abroad
ISACA and Network Finance
23 July 2008
Presented by:
Prof Mervyn E King SC
Changed world of governance
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1855 limited liability
Wealthy families
Latter half of 20th Century
Shareowner revolutions – politicians
ICT – borderless world
Exclusive/inclusive
Created and destroyed
Scandals
MEK Corporate Consultants
Reaction
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Comply or else – Sarbanes-Oxley
Guidelines
Comply
Explain
The South African Companies Bill?
Hybrid
MEK Corporate Consultants
The company today
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Company larger than governments
Integral to society
Civil economy
Reports – preparers and users
After quality of product
Building trust in company
Agents for change
MEK Corporate Consultants
Governance about process
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Processes to discharge and for directors to be
seen to be discharging their responsibilities
Enterprise – strategic
Risk for reward – failure
Good governance and failure
Acceptable
Bad governance – failure – scandal
Not acceptable
MEK Corporate Consultants
A director’s duties - responsibilities
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Good faith
Care
Skill
Diligence
150 years of jurisprudence
The Companies Bill
MEK Corporate Consultants
Incapacitated person
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Human being
Best interests, care, skill, diligence
Decent citizen thing to do
Company an artificial citizen
Incapacitated
Director, heart, mind and soul
MEK Corporate Consultants
Multi-national companies
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Operating in 150 countries
Function of board?
Court’s realisation
National, lingual, cultural, legal
MEK Corporate Consultants
Internal Audit
Internal audit
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Effective IA function necessary
IA planning informed by strategy
Key contributor to achieving strategy
Objective provider of assurance
MEK Corporate Consultants
Assurance of what?
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Adequate controls
Quality of corporate information
Identify risks that may impede goals
Identify opportunities to realise goals
Timeous and assessed adequately
MEK Corporate Consultants
Strategy
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Board responsible, but developed by
management
IA included in strategy development
process
Better understand risks and opportunities
Assurance that management oversight,
risk management and adequate controls
act in a coordinated manner
MEK Corporate Consultants
Accountable
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Assessment of adequacy of controls
Assessment of the three elements in tandem
Audit Committee to consider
Audit Committee to report to board
Board signs adequacy of controls
Audit Committee to appoint and dismiss CAE
Access to board chairman
MEK Corporate Consultants
Assessment
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Should express clearly :
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Evaluation criteria
Scope
Period
Who has responsibility for what
MEK Corporate Consultants
Internal Audit relationship
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Right arm of the board
Communication skills
Credibility
Boardroom presence
Challenge effectiveness of risk
management
Fulfil regulatory requirements
MEK Corporate Consultants
Attributes
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Chameleon – risk changes means scope of
IA has to change
Leadership skills
Communicator
Strategic mindset
Networker
MEK Corporate Consultants
Corporate world
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Changed in last five years
Sustainability issues are risks
IA/risk management relationships
Included in IA functions
MEK Corporate Consultants
Assurance needs
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Strategy
Controls
Compliance
Treasury
CR & S
Health and safety
MEK Corporate Consultants
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IA has to be intellectual
MEK Corporate Consultants
Alternative Dispute
Resolution
Disputes
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Resolution
ADR in contracts
Cross border
Management tool
MEK Corporate Consultants
Relationships
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In business circle
Build relationships
Dispute/litigation
Destroys relationship
Duty to resolve/preserve
MEK Corporate Consultants
ADR and the company
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Dispute with company
Officers
Investors
Suppliers/customers
Regulators
Communities
MEK Corporate Consultants
Management of relationships
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A business relationship
Company and major customer
CalPERS
Ford and Firestone
MEK Corporate Consultants
Mediation advantages
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Novel
Quicker
Less expensive
Confidential
Preserves relationships
Cost of executive time saved
Dilution of focus when litigate
MEK Corporate Consultants
ADR a mechanism
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A value add
To a commercial relationship
Mechanism to manage
Cost and time
Duties and efficiency
MEK Corporate Consultants
Contracted mediation
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ADR framework in place at beginning
Parties owners of process – attuned
Conflict prevention
Communication
Build trust
Value of immediate knowledge
MEK Corporate Consultants
Questions by a board?
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System of early case assessment
Mechanisms addressing employee dispute
Critical procurement contracts
Agreed cross-border mechanisms
MEK Corporate Consultants
Upfront in the constitution
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Administered ADR
Upfront collaborative solver
Between stakeholders
And the company
IFC
MEK Corporate Consultants
Legal recognition
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Ireland
Germany
Canada
World bodies
The disappearing civil trial
MEK Corporate Consultants
Obstacles
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Constitutional right of access to courts
Rights not absolute
Limitations
Enforce good faith?
Time, languages, place, etc?
Enforcing a process
MEK Corporate Consultants
Corporate governance check
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Have you got ADR with stakeholders?
Decent citizen
World is flat
New constitution of commerce
ADR a dual function
Build business trust – director’s duty
IOD/AFSA clause :
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www.arbitration.co.za
www.iodsa.co.za
MEK Corporate Consultants
Sustainable development as
a business opportunity
Business opportunity
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100 largest economies
Pervasive change is sustainability
Philanthropy
CSI
Added value – business opportunity
Alterantive energy resource boom
MEK Corporate Consultants
Market capitalisation
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Not equal to book value – assessment
Brand and goodwill
Reputation of management and board
Quality of governance and management
Sustainability of the business
Strategic direction
Non-financial aspects, so-called
MEK Corporate Consultants
Measuring company’s economic
value
20 % ?
market value
$ 105,586 mil
30/09/03
67%
Brand value
$ 70,453 mil
(Interbrand)
13%
Book value
$ 13,560 mil
30/09/03
source: SAM
MEK Corporate Consultants
Intangible assets
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Reputation
Brand
Quality of management and board
Sustainability issues
Procter & Gamble
Coca Cola
Anglo American
MEK Corporate Consultants
Stakeholders
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Financial information
Backward looking
Forward looking information
First priority – product
Second priority – trust and confidence
MEK Corporate Consultants
MEK Corporate Consultants
IT governance
Legislation?
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Legislate – Cobit ITIL?
Care and diligence – one size fits all?
Pervasive – CIO or service provider?
Confidential information outside company
MEK Corporate Consultants
IT security
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Napoleon – the wax seal
Unauthorised
Use
Access
Changes
Cryptography – decryption
Legislation
MEK Corporate Consultants
Independence of directors
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Ten year “rule”
ASX abandoned it
Critical bystander – perception
Assess independence annually
MEK Corporate Consultants
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Sarbanes-Oxley
404 difficulties
As5 amelioration by SEC
Legal?
Rigidity and flexibility
Adopt or explain
MEK Corporate Consultants
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Reporting
Preparers and users
“How has the company positively and
negatively affected the economic life of
the community in which it operates?”
“How does the company intend to
enhance the positive aspects and
eradicate or ameliorate the negative
aspects in the year ahead?”
MEK Corporate Consultants
Director’s liability
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D&O insurance
Business judgment rule
No financial interest
Objectively all the facts
Rational business decisions at that time
Hindsight and foresight
MEK Corporate Consultants
A journey
Cadbury,
etc and the Combined Code of the UK
King I, II and III
Every day you may make progress. Every step
may be fruitful. Yet there will stretch out before
you an ever-lengthening, ever-ascending, everimproving path. You know you will never get to
the end of the journey. But this, so far from
discouraging, only adds to the joy and glory of the
climb.”
Sir Winston Churchill
MEK Corporate Consultants
Thank You
Prof Mervyn E King SC