King IV defines corporate governance as the exercise of ethical and effective leadership by the governing body towards the achievement of the following governance outcomes:
■■ Ethical culture
■■ Good performance
■■ Effective control
■■ Legitimacy
What does that mean?
At the heart of it, corporate governance deals with leadership. How does the governing body of the company or organisation lead, guide and set the direction to achieve the strategic objectives and outcomes the company wishes to achieve? King IV identifies four key outcomes, as set out above. It will not be enough to just achieve one or two outcomes, but it is imperative to achieve all four. In fact, these outcomes are so intricately connected and interlinked, that the one cannot be achieved without the other*. These outcomes are part of the ecosystem of the company.
How to interpret corporate governance?
Corporate governance can be considered from many angles and perspectives. One such perspective is the dichotomous nature of corporate governance. It comprises both tangible and intangible elements and characteristics.
Tangible Elements
The tangible portion deals with the more visible, structural aspects and primarily drive and enable the outcomes of good performance and effective control. These would include the governance hierarchy, roles, responsibilities, processes, structures, standards, methodologies that companies use to organise themselves towards achieving their strategic objectives.
Examples include how the company’s decision-making forums and organs are structured to enable effective and efficient decision-making. Who is accountable and responsible for what? How is the divide between accountability and responsibility structured? How easy or difficult is it to communicate in the company? How effective or ineffective is information flow? What are the mechanisms in place to ensure decisions taken are implemented, and how effective is the review and monitoring of the implementation process?
This is an area where corporate governance can become your best friend, or your worst enemy. The golden rule is to find the sweet spot in the middle where there is enough governance without it becoming stifling and counter to what the company set out to do in the first place. Governance should be an enabler and driver of purpose and strategic objectives, not a bureaucratic nightmare that restricts innovation and progress.
Examples of best practice processes and systems include ISO standards, becoming a signatory to the United Nations Global Compact (UNGC), becoming a member of industry or sector associations and commit to implement their best practice guidelines.
External integrated reporting, linked to the company’s internal reporting assists with identifying and explaining the key issues important to the company that will enable the company to achieve its strategic objectives.
There are numerous integrated and sustainability reporting frameworks to consider, which can assist the company in integrating Environmental, Social and Governance (ESG) aspects into its strategy and business plan.
Intangible Elements
The intangible relates to the culture and ethics of the company – “how we do things around here” or “the vibe” and generally reflects the DNA of the company. An ethical culture is essential to create and maintain a company’s legitimacy, or its recognised standing in society. It ensures its social licence to operate and is closely related to its good name and reputation. What is the level of trust that the stakeholders have in the company? What are the types of relationships the company has and fosters? Are mutually respectful relationships important to the company? How does the company trade off the needs, wants and expectations of its various stakeholders, especially under times of pressure and stress? The Covid-19 pandemic starkly brought to the fore the underlying ethics and morals of companies in the way they treated their stakeholders.
It is common cause that the culture and ethics of a company are driven from the top and that the leadership sets the tone. What kind of behaviour does the governing body actively encourage? What behaviour does it condone, or turn a blind eye to? Examples of toxic practices and cultures come to mind. The recent release of the review report highlighting gender discrimination and abuse by Rio Tinto shook the corporate world. The review was conducted by former Australian Sex Discrimination Commissioner Elizabeth Broderick, and identified instances of bullying, sexual harassment, racism and other forms of discrimination throughout Rio Tinto.
Of interest was the leadership’s response to the report. It chose to make the review report publicly available, accepted all 26 recommendations and committed to implement all of them. The company will focus on three specific aspects:
· The company’s leadership committed to create a safe, respectful and inclusive working environment to prevent harmful behaviours and better support the more vulnerable in the company. This includes focus on greater diversity.
· Working on the safety and inclusivity of the company’s camp and village facilities.
· Enabling the ability for all people to point out unacceptable behaviours, raising the flag when such instances occur and to receive support.
The CEO, Jakob Stausholm chose to take accountability and responsibility for the toxic culture of Rio Tinto and is actively addressing the findings. He also apologised unreservedly to all those employees who had been affected by the culture and thanked the employees for the willingness to come forward and share their stories and experiences. The eight-month study resulted in shared experiences by more than 10 000 people, more than 100 group listening sessions, 85 confidential individual listening sessions and nearly 140 individual written submissions.
Knowledge is your friend
Part of good corporate governance is knowing what information and knowledge are required to get the job done. Make sure your employees are empowered with information and actionable knowledge. They need to know where and how to get the relevant information to use their skills and expertise to take good decisions in the best interest of the company and its stakeholders. If you have identified an information or knowledge gap, address the issue through internal and external sources of information.
If such information or knowledge is not present in the company, forge partnerships or collaborations to fill the gap. Alternatively join an industry or sector association. In the case of specialised information and knowledge, a company could partner with a university or relevant tertiary institution.
Efficient and effective information flow within the company, and externally with its stakeholders, are crucial to the proper functioning of the company. Create information and knowledge hubs within the company and foster a culture of peer learning and sharing. Establishing self-organising Communities of Practice (CoP) is an excellent way of empowering employees to improve their innovative problem solving skills. At the end of the day leadership wants employees who are willing and able to take proactive action and addressing problems in a more inclusive and collaborative way, which generally may result in quicker and more sustainable solutions.
Know what the conversation should be
Good leadership knows what the salient aspects of the company are, whether internally within the company (on a micro level), or externally on a meso or macro level outside the company. The governing body should know and understand the material issues affecting the company, its risks, opportunities, and drivers. These issues are not the same but may in many instances overlap. It is not always obvious what these issues may be, especially when they are more long term and further removed from the direct operations of the company.
To start the conversation, or join an existing one, the governing body should have the required level of information and understanding of the specific issue. It is the responsibility of management, and in particular the company secretary or governance officer to ensure that correct, complete, timeous and decision-useful information is provided to the governing body. However, the governing body is also responsible to keep up to date with issues that may affect the company, its business operations and stakeholders, whether directly or indirectly.
Examples of such conversations would include serious global risks, including the Covid-19 pandemic and its systemic socio-economic impacts, the recent unprovoked Russian invasion of the Ukraine, climate change, social in cohesion, inequality and poverty, especially in a country such as South Africa. Other issues include more regional, industry-specific and company-specific issues. The governing body should ensure that these issues are incorporated into the strategy and operations of the company as may be appropriate, and reported to its stakeholders, where required.
Corporate governance is not rocket science – it is mostly common sense. However, for good corporate governance to work in practice, it takes discipline, dedication, commitment, a lot of courage and tenacity and the will to follow through, especially when faced with a difficult situation when the right decision will require some sacrifice.
*For more information on King 4 please see page 16