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Can an honest person be a Director?
Prof Bob Garratt
8/1/2009
An international view of trust, transparency and sustainability in African Boardrooms
 
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This section has been written by Professor Bob Garratt, Chairperson of the Unit for Corporate Governance in Africa at the University of Stellenbosch Business School (USB).

This paper makes two assumptions. First, that there are two heroic expectations underpinning the publication of all corporate governance legislation and regulation worldwide - that all Directors are rational, reasonable and honest; and that they are sufficiently competent to understand and live out their duties of skill, care and diligence. Second, that the international business community's perception of Africa is, sadly, that in corporate governance terms it is neither competent nor honest.

There is a lot of international media comment to reinforce this second point. One only has to recall what was the international media say currently about the shortcomings of, say, Somalia, Cote D'Ivoire, Nigeria or Zimbabwe to sink easily into despair for the whole poor continent. It is true that reading Transparency International's Indexes of Corruption, and bribe paying, do make depressing reading for Africa. But scanning the Mo Ibrahim Foundation's ranking of the best and worst corporate governance in Africa does give more hope. Indeed, there is a sea-change occurring within and without Africa which gives hope for a more rigorous approach to effective corporate governance and so the creation of more stable Civil Societies in the continent. The external view is being changed as the current Western economic crisis shows that the high-tech age is moderating and, ironically, the old primary industries of agriculture and mining are beginning to take on renewed global prominence for global survival and development. Africa is well-positioned geographically to make much of this global demand, if it can get its political stability and transportation logistics organised. As more oil and gas is found it could become also a significant economic power in the twenty-first century.

As its international potential begins to turn positive, in Africa itself the perceptions are also more optimistic and 'beacon' countries are more easily identified, especially South Africa, Botswana and Ghana, as models of how the continent could develop and enrich itself by creating more stable Civil Societies underpinned strongly by effective corporate governance in the private, public and not-for-profit sectors. Indeed I argue that these three countries are already of especial interest to investors as they are both rich in those assets currently demanded globally - minerals, agriculture and energy - and have robust developed corporate governance systems which reduce investment risks significantly. 

The national basis of corporate governance

What do these countries have that puts them ahead of others on the continent? No country in the world is perfect and it should be remembered that many Western advocates of better corporate governance for Africa have large motes in its own eyes. But there are general conditions under which corporate governance can flourish in any country. At the national institutional levels it is noticeable that in most countries Directors and boards are differentiated from executives by rafts of legislation about which managers do not have worry themselves. As most statutory Directors have been long-term executives they often have no induction process, or expectation of such, to bring them to effectiveness in their new directoral world. When these new duties and accountabilities are explained they are often amazed and frightened by their accountabilities and liabilities that they, and ultimately their families, have taken on.

If we go back to legal basics, the vast majority of the modern business world is driven by Common Law or Civil Law and within these two fundamental laws - those of Property and Contract. These are the foundation stones of modern commercial society. Without both we could not trade. The fundamental values and behaviours for Directors of accountability, probity and transparency are central to making effective business deals. These need strong and enforceable legislation and regulation to create the day-to-day framework within which business can be transacted. These are necessary but not sufficient. They need underpinning with an effective and fast Court system which allows legal appeal and redress to damaged parties. I argue that the reason that South Africa, Botswana and Ghana are rated so highly in corporate governance terms internationally is that they have developed and tested these systems and are thus much less risky for both foreign and national investors than other African countries. They create the context and mindset for honest Directors. If to them are added then effective, equitable and enforceable Company Laws and Ordinances and regulations of at the very least companies listed on the national stock exchange, then one has a robust system in which corporate governance can develop. But does it?

The paradox of good governance systems and yet bad practice

Ultimately effective corporate governance comes down to what a group of people, usually men, say and do in private around a boardroom table. They are agents of the owners who have the power to dismiss them. But until that point they have total collegial command of the business, with a growing legal demand to think and vote independently and without conflicts of interest on the issues before them. Their role is to balance and rebalance regularly the classical Director's dilemma - how do we drive our enterprise forward while keeping it under prudent control? To do this well in a dynamic world they need to meet regularly and develop the intellectual capacity to both look strategically beyond their organisation's day-to-day operations and into the future - the capacity for creating the board's 'helicopter view' - while simultaneously understanding the pattern of trends and ratios generated by their internal information systems which lead to prudent control decisions.

To an outsider these roles seem entirely reasonable, even obvious, so why often do they not happen? I argue that there are two main sources of problems found internationally, and that Africa has little historical corporate governance baggage, it can do much to address them as the continent develops itself. The first problem, is that director selection, induction, development, and evaluation is not undertaken rigorously in most organisations - private, public and not-for-profit. In South African corporate governance regulation the phrase that directors have duties of 'skill, care and diligence' is repeated frequently but what does it mean and how are they developed and assessed? Behind this question lurks the whole issue of the regular evaluation of Board Performance. If South Africa can answer these questions it could well become a world leader. It has the legal and regulatory framework but do the boards of Directors have the political will, motivation and incentives to achieve this?

The second problem flows from the need for external assessment and enforcement relating to compliance. It is all very well that a country has good laws and regulations but if these are not enforced, and the enforcement authorities cannot show that they have blood on their sword to encourage the others, then they are worthless and behaviour around the boardroom table will sink inevitably to the lowest common denominator.

Effective Chairmen and Company Secretaries lead to accountable, honest and open board performance
Both sets of problems are difficult to address especially if there has not been a history of effective corporate governance around each boardroom table. But it is not impossible. I argue that if a reasonable corporate governance compliance framework exists, then honest Directors can learn to build on them. Specifically, the Chairman must understand that he/she is the architect of the board and has ultimate responsibility for such competence building around the boardroom table, thus ensuring its competence through those values of accountability, probity and transparency. The Company Secretary's role is then to reinforce the Chairman by ensuring due process around the board's activities and to act as 'the conscience of the board' if it is straying beyond proper process or going outside the legal boundaries of the organisation.

To deliver such board performance, and ensure that it is related directly to business performance, the Chairman needs to develop a culture of both creativity and diligence around the boardroom table. This has proved difficult in many African companies, but it must be said that this is not just an African issue. What can be done? I suggest that the Chairmen focus on five competence-building processes for boards:

Selection

This will open competition based on agreed and published competencies and values for new Directors.

Induction

This will ensure that new Directors understand the legal accountabilities and liabilities. They understand the process of honest dealing around the boardroom table by openness on conflicting interests. They accept that the primary loyalty is now to the organisation as a separate legal entity rather than to those who appointed them. This latter is a particular issue in Africa where Directors are often selected only as representatives of outside interests and so are immediately conflicted.

Annual performance evaluation

It will ensure the rigorous annual evaluation of the board as a whole, each of its committees and each individual director.

Personal development

This includes a Personal Development Plan for each Director, which builds on developing their duties of skill, care and diligence from annual evaluations. 

This can span everything from understanding the business better, to developing strategic thinking, building personal skills in specific disciplinary areas or behavioural improvement.

Refreshing the board

It ensures that there are phased replacements of board members based on regularly evaluated personal performance and sufficient board diversity.

Over a couple of years these five foci can help a Chairman develop a board which is competent, trusting of each other and the executive information systems, open, honest and strategic thinking. They become a learning board and add real value to their businesses. This is a particular challenge for African countries but one which, if accepted given the growing investment interest in Africa, can lead on to greatness.

The South African contribution to corporate governance: Towards the triple bottom line?

The King Reports, I, II and soon III, are of international importance in its own right and should be celebrated as such. They are of particular importance as the context in which they are developed has not been the typical one of improving western-style financial investment performance but rather of nation building and racial integration. Ex-President Nelson Mandela has much to be congratulated in setting this remarkable context and other nations seem to be striving for the leverage of effective corporate governance in private, public and not-for-profit sectors most noticeably in the speeches of President Ellen Johnson Sirleaf in Liberia but also seen in Kenya, Uganda, Angola, Mozambique in the wish for more stable Civil Societies. Effective corporate governance alone will not deliver a Civil Society but it is a great and necessary step towards it.

The drafts of King III suggest that they are tackling trends beyond national remit. Of particular interest to me is the focus on that fashionable and elusive concept of sustainability. This can be a weasel word to suggest progress when not much is happening so let me try to define what I mean. 'Sustainability' is the concept that the world has finite resources so the use of any must be capable of being replaced or substituted with resources without damaging the physical environment. Again, this is a heroic and laudable idea. But can it be made to work in a world seemingly intent on stripping the world of such resources in the name of "development"?

I suggest that it can, and to a great extent, from the boardroom table. This is not to suggest the retraction of business behind national barriers and into primary industries but to a mindset around the boardroom table that assesses notions of sustainability in every business proposition and decision. Such an approach is suggested in the King III drafts. In the UK's Companies Act of 2006 we see a possible legal framework emerging to suit national and growing international demands for more focus on careful resource husbandry. Specifically, the UK asks that the annual report and accounts begin to show two sets of audited accounts. The first is the usual set of financial accounts. But now the notion of accounting for the business's impact on the physical environment is taking hold. And beyond that, although not yet part of the Companies Act, is the concept of reporting annually on the business's impact on the local communities in which they operate. This Triple Bottom Line is seen to lead to combined added value for each business. This triple auditing notion horrifies many Directors at the thought of the added cost and work involved, plus their possible bad exposure if they are compelled to report in this way. However, some companies have been reporting a triple bottom line for any years. Prominent among these has been Shell where the annual report People, Planet and Profits is available on its website and suggests a framework and process, which is nowhere near the worries of many Directors. Indeed Shell argues that it helps decisions on the board deployment of scarce resources to achieve its purpose.

I have no doubt that over the next decade the political will, national and international, will push us all, private, public and not-for-profit organisations, in the direction of Triple Bottom Line reporting. This, in turn will make it easier for Directors and boards to become more honest men and women more openly accountable to our owners, communities and the physical environment in ways that were inconceivable a decade ago. And Africa, especially South Africa because of its political and economic power on the continent, should play a leading role in this.

 

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