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<p>A week ago – the JSE issued a censure against property company Rebosis and its sponsor Nedbank- for publishing unreviewed results. In the results, the directors had over valued the company’s portfolio by R900 million. Rebosis has since issued a statement- disagreeing with the JSE’S findings. The company says it remains committed to good corporate governance. Joining CNBC Africa for more is the Chairman of the King Committee on Corporate Governance in South Africa, Mervyn King.</p>


Rebosis: Is JSE censure enough?

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<p>The COVID-19 pandemic is changing the way in which the world does business and this means a change in the way that business is governed and functions. According to data from a Refinitiv report on Governance and Sustainability, sustainability has been at the forefront of businesses so far as an increase in corporate accountability to all stakeholders, greater corporate governance and gender equality in the workplace has proved king. But will this all change as COVID-19 disrupts business. Joining CNBC Africa to unpack this report is Elena Philipova, Global Head of ESG Proposition at Refinitiv.</p>


Refinitiv on governance trends & how COVID-19 will change this

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<p>On the Nairobi Securities Exchange, share prices of a number of firms have fallen mainly due to a mix of corporate governance weaknesses, a tough economy and over-indebtedness. Five of the stocks are trading below one shilling and 17 listed firms have fallen below Ksh5 per unit in a stock market bear run. Caleb Mugendi, Assistant Manager at Public Markets Cytonn Investments joins CNBC Africa for more.</p>


Investor losses as 17 firms fall below Sh5 per share in NSE bear run

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<p>Protecting minority shareholders against the misuse of corporate assets by the directors of a company for personal gain is just one of many ways sustainable organisations embrace sound corporate governance practices. Fabian Ajogwu, Senior Advocate of Nigeria and Fellow of the Society for Corporate Governance Nigeria joins CNBC Africa to discuss the importance of corporate governance in building a sustainable businesses.</p>


How can Nigerian businesses achieve sound corporate governance?

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<p>Recent failures of Nakumatt and Uchumi Supermarkets have exposed the weak corporate governance structures in Kenya’s retail industry. Salome Kinyeki, Research Analyst at Euromonitor International joins CNBC Africa to give insight.</p>


Kenya’s retail sector outlook

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<p>South Africa has a reputation, globally, for high corporate governance standards, yet recent news suggests otherwise, as respected names have been implicated in corrupt dealings. What has gone wrong in these companies?</p>


Addressing corporate governance challenges in SA

<p><em><span class="fn author-name">Jyoti Devi |</span> Eastern Institute of Technology and <span class="fn author-name">Teerooven Soobaroyen | </span>University of Essex</em></p>
<p>&nbsp;</p>
<p>Since the turn of the century, developing countries have been adopting corporate governance codes with the promise that they will enhance accountability and growth, while delivering equitable, ethical, and sustainable business practices.</p>
<p>A governance code is a set of guiding principles drawn up by industry to standardise good corporate behaviour. They sensitise company boards and executives to a wide range of interests such as, investors, labour and local communities.</p>
<p>A key governance code – the Cadbury Code – was established in the UK in the early 1990s to improve corporate accountability.</p>
<p>Since then, there have been a plethora of codes across the world. In Africa, governance codes have been designed to help address the legacies of colonialism, extractive post-colonial business behaviour and executive excesses. Several countries like South Africa, Kenya, Ghana and Mauritius have already stepped up to the plate.</p>
<p>Mauritius is interesting case study. The country has sustained its position as the best country in Sub-Saharan Africa to conduct business leads the Mo Ibrahim Index of African Governance.</p>
<p>But it does have some considerable limitations and mainly inefficiencies in public governance.</p>
<p>We set out to study trends in the way companies adopt the corporate governance code in Mauritius. The aim was to provide useful insights to other developing countries, particularly in Africa.</p>
<p>Our study found significant levels of compliance with the code in the three years after implementation. But we also found that Mauritian companies picked and chose elements of the code. They implemented the easier ones perceived to be beneficial, or simply the ones that made them look good.</p>
<p>Our findings are important because developing countries have become important channels of foreign investment, but institutional investors remain concerned about firm- and country-level risks which are difficult to evaluate. The corporate governance arrangements in these are not fully understood.</p>
<h2>Part of a big reform</h2>
<p>Over the last three decades, the Mauritian government worked with international bodies to revamp the country’s regulatory framework for companies. This was part of a drive to encourage local and international investment.</p>
<p>The reforms were wide ranging and included setting up of a stock exchange and adoption of international standards for corporate accounting and reporting. The country also established a number of agencies to regulate financial and professional service sectors. It also embarked on full and partial privatisation of state owned assets as well as the liberalisation of key sectors.</p>
<p>The Mauritian economy emerged from its dual colonial past (it was colonised by both the French and the British) with a number of challenges. One of the main challenges was that it was dominated by a few large conglomerates and state institutions operating in a weak regulatory environment.</p>
<p>The adoption of the codes of good corporate governance in 2004 formed part of this reform movement. It followed a 2002 World Bank/International Monetary Fund report which highlighted governance deficiencies. A code of corporate governance was proposed as a solution.</p>
<p>Inspired by the South African King Code, Mauritius embraced a hybrid corporate governance model. This model mixes the ‘market-centric’ approach (typically practiced in the US and UK) and the ‘relationship-based’ ones (typically Japan, France, and Germany).</p>
<h2>A pick and choose game</h2>
<p>Our study found that companies were picking and choosing sections of the codes to implement as they wished. The more difficult or uncomfortable requirements were ignored.</p>
<p>For example, until now, information on ownership structures and CEO remuneration remain opaque. We concluded that the reason for this was the relatively small business elite, from which most directors and majority shareholders are drawn. They see some sections of the codes as being incompatible with a tradition of keeping things ‘discreet’.</p>
<p>Our investigation also revealed a significant relationship between the implementation of the code and the presence of independent non-executive directors. This confirmed the generally accepted potential of independent non-executive directors as agents of change.</p>
<p>But we also found a limiting factor for the role of independent non-executive directors within Mauritius corporations. Not many of these directors occupy critical posts like board chair and therefore have limited influence.</p>
<p>The recent World Bank/International Monetary Fund report praised Mauritius as an ‘international leader’ on board practices (at par with leading Asian countries, such as India, Thailand, and Malaysia), but also highlighted problems. Directors deemed independent were not sufficiently so in relation to majority shareholders and there is opacity in the appointment of such directors.</p>
<p>The report also noted the pitfalls of a “persistent high concentration of the ownership” in large companies. Almost 60% of the counted companies had one controlling shareholder holding more than 20% of shares. This cannot be good for corporate accountability. It means a form of controller’s roadblock has been allowed to persist.</p>
<h2>Limitations</h2>
<p>Some scholars are critical of the usefulness of these “Western-inspired” codes for developing countries. Criticism ranges from a charge that codes aren’t radical enough, they clash with local social and political factors, to being implemented in a rather superficial way.</p>
<p>The “comply or explain” principle traditionally applied to these codes means that there is flexibility to pick and choose. There’s also little market pressure for a more comprehensive adoption; an issue affecting many countries.</p>
<p>The new version of the Mauritius code which was in 2016 provides for an “apply and explain” principle. In this version companies are expected to explain how they have applied the code and flag any areas where the code has not been applied. But even the new version continues to rely on “market discipline”. It is unclear whether this is feasible in markets characterised by high ownership concentration, low shareholder activism and a weak stakeholder base.</p>
<p>Our study of other developing markets also shows that the market discipline approach is not effective where the capacity of regulators is limited. This is particularly the case where local politics retain an ability to dilute enforcement or where the state itself is a significant shareholder and has little to gain from a change in the status-quo.</p>
<p>&nbsp;</p>
<p><em>This article was first published in The Conversation.</em></p>


Lessons from Mauritius on making companies more accountable

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<p>This year the Independent Regulatory Board for Auditors made it law that companies must rotate their audit firms after a maximum period of 10 years. The law aims to stem corruption and promote corporate governance.</p>


Understanding mandatory audit firm rotation

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<p>Sophisticated and sound corporate governance practices can be helpful in obtaining new and much-welcomed investments in Africa. This is according to a joint study by the Association of Chartered Certified Accountants and KPMG. Jamil Ampomah, Director, Sub-Saharan Africa at ACCA joins <a href="https://www.cnbcafrica.com">CNBC Africa</a> for more insight.</p>


Why good governance matters

<p>South Africa has, in the past, been credited with taking on innovative corporate governance <a href="https://www.ft.com/content/bb4557d2-5b75-11e4-b68a-00144feab7de">standards</a> and integrated reporting. So it’s particularly depressing to see the spectacle around the country’s largest state-owned enterprise, its power utility Eskom.</p>
<p>The <a href="http://www.timeslive.co.za/politics/2017/05/12/Molefe-didnt-resign%E2%80%9A-says-Eskom.-He-retired">drama</a> has revolved around Eskom’s CEO Brian Molefe, who has returned to the job just months after quitting. The contradictory explanations of his return point to huge flaws in the accountability systems of the country’s state owned enterprises. It’s clear that Eskom flouted many basic <a href="https://www.icaew.com/en/technical/corporate-governance/overview/does-corporate-governance-matter">principles</a> of sound corporate governance.</p>
<p>This poses enormous risks as these systems are imperative for ensuring an ethical public service and society.</p>
<p>When Molefe announced his <a href="https://www.businesslive.co.za/bd/national/2017-05-12-brian-molefe-did-not-resign-that-is-why-we-can-reinstate-him-eskoms-board-says/">departure</a> from Eskom, he specifically connected his leaving to “corporate governance”; he was certainly accurate in that. On top of the issue of his claimed connections to the <a href="http://www.bbc.com/news/world-africa-22513410">Gupta family</a>, the <a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">allegations</a> that spurred his exit spoke to breakdowns in information sharing and decision making that were made to benefit only a few.</p>
<p>The National Executive Committee of the ruling party, the ANC, has since ordered that Molefe’s return to Eskom should be reversed, a decision seen to be going against the wishes of its President Jacob Zuma.</p>
<p>There are many flaws that need to be examined in this saga, but let me flag three foundational faults in corporate governance. Firstly, there were serious lapses around Eskom’s senior executive remuneration processes. Secondly, it looks like the basic rules of consultation around critical decision making were flouted. And thirdly, creating a <a href="https://www.ujuh.co.za/lynne-brown-brian-molefes-return-to-eskom-is-better-than-r30m-payout/">false dilemma</a> between handing Molefe a R30 million payout or allowing him to return to his Eskom job points to a simple disregard of the rules.</p>
<h2>Process failures</h2>
<p><strong>The compensation question:</strong> the question of fair and justified compensation for senior executives looms large in the Eskom saga. There’s still no clarity over why Molefe left Eskom in December last year: whether he “retired” or “resigned” remains a contested point. More recently, South Africans were informed that he was, in fact, on <a href="https://mg.co.za/article/2017-05-22-now-eskoms-molefe-was-on-unpaid-leave">unpaid leave</a> in the months between his departure in December and his return in early May.</p>
<p>Whatever the reason for his departure, Eskom’s board chose to award Molefe <a href="http://www.iol.co.za/news/politics/why-did-brian-molefe-get-a-r30m-golden-handshake-8690587">R30 million</a>. This raises the first potential failure in the accountability system: the responsibility of board members to decide fair and justified compensation for senior executives.</p>
<p>This is true regardless of whether they retire or resign or go on unpaid leave. Each is governed by sets of rules to guide a board’s decision-making. Leaving aside the obvious contradiction that anyone would be paid R30 million for being on unpaid leave, none of the normal remuneration rules seem to have been followed. But without a basic understanding of the terms of his departure, a proper analysis is almost impossible. This failure of transparency in the process makes justifying the award on the grounds that it was in the interests of Eskom’s stakeholders even less likely.</p>
<p><strong>Flouting consultation processes:</strong> The second failure in the governance system is a lack of clarity around the <a href="https://www.ujuh.co.za/lynne-brown-brian-molefes-return-to-eskom-is-better-than-r30m-payout/">role</a> of the Public Enterprises Minister, Lynne Brown. Her decision to contradict the board and deny the R30 million pay-out triggered an evaluation of what to do about Molefe’s connection to Eskom. In her statement, Brown highlighted the fact that she hadn’t been consulted and referred to decisions that appeared to have been made without the required approvals.</p>
<p>An effective corporate governance system has clearly delineated processes for both consultation and decision making.</p>
<p>In this case, it seems that steps in that process were skipped over, and key people weren’t consulted, leading to an unsupported outcome.</p>
<p><strong>Creating a false dilemma:</strong> Brown claimed that there were only two options open to her – to pay Molefe R30 million or reinstate him. But by doing so she created a false dilemma that stood to benefit the person who stepped down, rather than the company and its stakeholders. In the process, the board and the minister ignored multiple options that would have likely been better.</p>
<p>For example, if neither the board nor Brown could agree on severance compensation, Molefe could be paid his old salary in the interim, while final negotiations took place (there is a paid leave option in his contract). This type of bridging arrangement would create fairness for him while avoiding disruption to Eskom’s operations.</p>
<h2>A question of ethics</h2>
<p>A fundamental principle of good governance, laid out in <a href="http://www.iodsa.co.za/?page=KingIV">King IV</a> (a set of guidelines for strong corporate governance which companies/directors should comply with and explain their choices), that applies here is that:</p>
<blockquote><p><em>governing bod[ies] should govern the ethics of the organisation in a way that supports the establishment of an ethical culture.</em></p></blockquote>
<p>Regardless of political ideology, it is difficult to see that Molefe’s return to Eskom can be said to be in the best interests of creating an ethical culture.</p>
<p>Strong accountability systems create ethical cultures because everyone knows the rules, and believes the rules are being followed. As a result, people trust that when things don’t go their way, there’s a clear explanation. While they may not agree with choices, they are confident that a decision was made after a known process was followed.</p>
<p>Strong accountability systems can certainly privilege some people over others in different circumstances, but they clarify what gets rewarded and what gets punished. This leads to an ethical culture because there’s a common understanding and, crucially, some levels of shared purpose.</p>
<h2>Not just about following the rules</h2>
<p>Good accountability systems are about more than creating and following rules; while compliance is an aspect of these systems, it is really the bare minimum. They create and support a sense of shared destination, bolstered by agreed processes.</p>
<p>Recently, leaders have too often relied on their legal “right” to do something, ignoring their ethical obligation to the greater good: the good of their company, their portfolio, their electorate, their country.</p>
<p>While the legal grounds for better governance are worth debating and enforcing, South Africans must never neglect the profound ethical impact of failed accountability systems. Eskom’s current situation is about more than fulfilling its legal obligations. It’s a warning that South Africa’s ethical culture might slip through our hands. Let’s hold on tight.</p>


Eskom CEO saga highlights massive systems failure in South Africa

<p>Whilst introducing greater complexity for organisations and the auditing profession, the advent of the King IV Report on Corporate Governance provides an ideal opportunity for creativity and innovation &#8211; not usually synonymous with accountants in particular. The latest iteration of the guidelines on how companies are expected to conduct themselves places a far greater emphasis on asking companies to approach running their businesses from an integrated thinking perspective, rather than ticking off actions to demonstrate compliance.</p>
<p>This therefore holds the potential to blur lines that may have been more clear-cut under the King III principles that had focused quite heavily on demonstrating compliance.</p>
<p>“While public companies would undoubtedly be able to adapt to this new environment, as they have the resources to implement the King IV recommendations, the question of cultural change within organisations is probably the bigger challenge,” says Loshni Naidoo, Director of sustainability and integrated reporting at Grant Thornton. “The changes also pose a challenge to the role of audit firms that have traditionally restricted the scope of their work only to the accuracy of financial statements. What is clear from King IV is that an organisation’s credibility and integrity no longer hinge solely on the financial reports.”</p>
<p>This strengthening in focus is a point that has emerged from a series of global discussions facilitated by Grant Thornton and the Association of Chartered Certified Accountants (ACCA) to explore the future of the auditing profession.</p>
<p>The Future of Audit report, which was compiled from the insights of roundtables hosted by Grant Thornton and ACCA in seven countries, highlights that changes from around the globe place far greater emphasis on contextual information and disclosures, especially on non-financial information, as is the case with King IV.</p>
<p>One of the consequences for the profession, Naidoo says, is that audit teams will need more diverse skillsets to meet this emphasised demand.</p>
<p>“Audits &#8211; both financial and non-financial in nature &#8211; have traditionally always been backward looking, focusing on a relatively limited view of sometimes isolated aspects of the business itself. As a result, they may miss out on seeing the big picture. And with King IV now also requiring audits of non-financial information to be wider in nature,  poses a challenge if this is done without addressing the skills and experience that the audit teams currently possess,” she says.</p>
<p>Grant Thornton and ACCA’s Future of Audit report also emphasises that users of annual reports are looking for forward-looking information and that they require assurance that this information is accurate.  King IV appears to align itself to this view with one of the recommended practices asking that the audit committee consider the assurance requirements of future-orientated non-financial information.</p>
<p>This change in skills applies equally to audit firms’ clients, who will need to adapt to understanding the implications of applying the principles, and not merely focusing on ticking a box to indicate they complied.</p>
<p>“This presents the audit profession with an amazing opportunity to innovate &#8211; working together with the standard-setting bodies to develop the appropriate standards for auditing integrated reports that not just tick the ‘audit box’, but add value to the businesses; and bringing diverse teams together with the ability to support an ‘integrated think’ approach to audits so that teams don’t get lost in the detail and miss the big picture.”</p>
<p>The risk and opportunity committee proposed in King IV is one such example that should find ready acceptance within all organisations. Naidoo says introducing the business opportunities into the governance framework makes this activity more visible for the organisation that could lead to more opportunities for growth.</p>
<p>The Future of Audit report also highlights that an audit can no longer be ‘one size fits all’.  Users are saying although a quality audit is required, it must not place any additional burdens on smaller companies.    King IV understands this dilemma all too well. They have heard that smaller companies and the public sector have many challenges and imperatives and as such has set out guidelines for local government and state-owned entities, non-profit organisations, retirement funds, and small and medium enterprises.  </p>
<p>“This presents an ideal opportunity for the audit profession to take a leaf out of the King IV playbook, to engage with these smaller companies to understand how best to provide real value-adding audit in a cost-effective manner without compromising quality, ” Naidoo says.  </p>
<p>According to the Institute of Directors Southern Africa (IODSA), it is expected that the new King IV Report will only be completed in the second half of 2016. Providing for a two year period in respect of the drafting process and another year grace period to allow organisations to implement, King IV is expected to become effective from approximately the middle of 2017.   ﻿</p>
<p> </p>


corporate governance

Rebosis: Is JSE censure enough?

Refinitiv on governance trends & how COVID-19 will change this

Investor losses as 17 firms fall below Sh5 per share in NSE bear run

How can Nigerian businesses achieve sound corporate governance?

Kenya’s retail sector outlook

Addressing corporate governance challenges in SA

Lessons from Mauritius on making companies more accountable

Understanding mandatory audit firm rotation

Why good governance matters

Eskom CEO saga highlights massive systems failure in South Africa

The yin and yang of King IV

News Tips

Advertise With Us

corporate governance

Rebosis: Is JSE censure enough?

Refinitiv on governance trends & how COVID-19 will change this

Investor losses as 17 firms fall below Sh5 per share in NSE bear run

How can Nigerian businesses achieve sound corporate governance?

Kenya’s retail sector outlook

Addressing corporate governance challenges in SA

Lessons from Mauritius on making companies more accountable

Understanding mandatory audit firm rotation

Why good governance matters

Eskom CEO saga highlights massive systems failure in South Africa

The yin and yang of King IV

News Tips

Advertise With Us

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