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South Africa needs a resource to help companies rehabilitate and pay reparation for wrongful conduct by its corporate leaders — Prof Mervyn King

NOMPU SIZIBA: Professor Mervyn King, who is the foremost global expert in corporate governance, hosted a half-day colloquium on effective corporate leadership on November 28. The focus was on whether a company is or isn’t a responsible corporate citizen, especially in what’s increasingly becoming a resource-scarce world. Companies that are deemed to be responsible corporate citizens also tend to win the accolade of being sustainable businesses.

Well, to share his wisdom on corporate governance issues with us, I’m joined on the line by Professor Mervyn King. Thanks very much for joining us, Professor.

MERVYN KING: My pleasure.

NOMPU SIZIBA: You are welcome. What elements does a company need to observe in order to be deemed a good corporate citizen?

MERVYN KING: Well, it’s not a mindless checklist approach to governance. It’s being mindful about the outcomes of how you direct and how you manage. In the King Committee we have identified four outcomes. They are value creation in a sustainable manner in the resource-constrained world, as you point out; adequate and effective controls; effective leadership, which means you are directing a company to the junction of the three critical dimensions for sustainable development — the economy, the society and the environment. And then the trust and confidence which a community has in the entity, which is operating in the community.

So it’s those outcomes. If you achieve those outcomes, an external stakeholder will perceive that you have tracked good governance. So it’s got to be an outcomes-based approach.

NOMPU SIZIBA: So perhaps elaborating on those points that you’ve just raised — what were you focusing on in today’s colloquium?

MERVYN KING: Today the colloquium was on effective leadership, as you pointed out. The essence was that no business model or strategy can be effective in today’s resource-constrained world, where we have natural assets being consumed fast than nature’s regenerating them, which is clearly not sustainable. Hence you’ve got the sustainable development goals.

And no strategy of this model can be expected to be one where the board discharges duty of care to the company if they haven’t taken account of the impact of climate change and species extinction, especially in the supply chain, because the experts who spoke today point out there are four species becoming extinct on a daily basis, and we human beings are at the end of that nature chain.

NOMPU SIZIBA: Presumably size doesn’t matter. When you start a business — I know you said you don’t like the tick-box exercise — but you should look to observe principles around environment, social and governance issues so that, as you do scale up, you are going to be more sustainable.

MERVYN KING: That’s what the providers of capital and of financial services conduct requires. We two months ago issued a guidance notice for financial institutions and trustees of pensions funds, that they have to have regard to how a company is dealing with environmental social and the quality of its governance, before investing a beneficiary’s money in the equity of those companies. And the FSCA [Financial Sector Conduct Authority] and the trustees of pension funds do this, they will legislate with criminal sanctions.

NOMPU SIZIBA: We know that the King principles that have come from the committee you’ve chaired for a number of years are imposed on JSE-listed companies. But to what extent do you think they are adopted by businesses that are not under the same scrutiny, private companies?

MERVYN KING: Well, what is interesting is that market forces are better than legislation. So if you go to the public sector, the Public Finance Management Act presumes financial matters is part of governance, of course, hasn’t adopted irregular expenditure, for example. So the answer is not to compel; the answer is market forces. And what it has been in the capital markets of the world is the providers of capital today do a different due diligence to what they did even 10 or 12 years ago. They don’t just do a financial due diligence. They do a due diligence on how a company’s business model is impacting on those three critical dimensions for sustainable development — the economy, society and the environment.

So you can make a profit because you are having such an adverse impact on the environment holistically, and the company is actually destroying value for society. And that is the test for today, not how much money the company has made, but how has it made its money.

NOMPU SIZIBA: How do you think we are doing in the area of education in South Africa? Do you think there needs to be a serious consideration about governance principles being taught at schools, for example, because not everyone who will end up in leadership positions will necessarily go to university or even specifically choose a governance module.

MERVYN KING: You raise a very interesting point, because I’ve always believed that governance should be taught even at the school level, because if you look at the problems in the world, look at our continent, for example, the biggest problem is governance. And if you instil into children that a company is an artificial, incapacitated person that has no conscience and no mind of its own, the individual corporate leaders are the conscience and mind of the company. And when a company is seen to be, for example, adversely impacting on the environment, society rates the company, but the company actually has done nothing because it’s been led and directed by its individual corporate leaders. So one of the purposed of the Good Governance Academy is to make sure that the students of today, particularly the business science students, are taught that they are the conscience of the company, and they should become conscious corporate leaders of tomorrow.

NOMPU SIZIBA: Professor King, we’ve had one too many governance scandals in both the public and private sectors here in South Africa. What’s the best way for corporates to fix up once they’ve messed up, from your experience and knowledge?

MERVYN KING: Well, again, interesting point. I believe that we need to establish in South Africa a resource which helps companies to rehabilitate and pay proper reparations for any wrongful conduct of its corporate leaders.

People are very quick to put entities into business rescue or to apply for liquidation, but I believe there should be a resource that tries to help a company. So if you take a naming and shaming game, such as Tongaat Hulett’s alleged accounting irregularities now, it would be very helpful to have a resource they can turn to which would advise them on how to rehabilitate that reputation, and pay proper reparations for any wrongful harm done through the accounting irregularities. So I believe there should be such a resource in South Africa.

NOMPU SIZIBA: Super. Thank you so much, Professor, for your time, and all the very best. — Moneyweb.