Professor Mervyn King, SC
Professor Mervyn King, SC promoting core corporate governance principles through the South African King Reports of 1994, 2002 and 2009; and as Chairman of the International Integrated Reporting Council (IIRC) piloting an exciting Program.
Importance of International Corporate Governance
Good governance is not about a mindless quantitative checklist of compliance with rules. It is about quality founded on intellectual honesty with responsibility, accountability, fairness and transparency.
The exclusive approach to governance with the company being seen as a castle surrounded by a moat of shareholders was the thinking certainly until the last two decades of the 20th century. In short the company was seen as being separate from society instead of being a part of society.
Today the inclusive approach to governance is adopted. The board, on a collective basis, identifies the key stakeholders, depending on the nature of the company’s business and learns, through an ongoing communication with them, their legitimate and reasonable needs, interests and expectations of the company. At the same time the board is aware of the value drivers of the business. In making a decision on behalf of the company while taking account of these expectations, the board is guided by the principle of acting in the best interests of the company for the maximisation of the total value of the company.
In acting responsibly, the board must ensure that the company will be and will be seen to be a responsible corporate citizen. Stakeholders, particularly civil society today, no longer accept that a company can profit at the expense of human rights or with adverse consequences on society and the environment.
A company cannot be accountable if virtually all the stakeholders find that the reporting is in an incomprehensible language. The consequence is that knowledge becomes lost in information. All this has led to integrated thinking and the integrated report. The collective mind of the board is applied to the material financial matters contained in the annual financial statement and the material non-financial matters contained, inter alia, in the sustainability or other reports. The board clearly sets out how the financial has impacted on the non-financial and vice versa and how the sustainability issues pertinent to the business of the company have been incorporated into the long term strategy of the company so that the average user of the report can make an informed assessment that the business of this company will sustain value creation. This is true accountability.
Fairness involves the board as a collective, applying its mind to an issue and balancing the needs, interests and expectations of the various stakeholders which might have the consequence of benefiting some stakeholders more than others but always making the decision in the best interests of the company for the maximisation of the total value of the company. It is not the book or economic value of the company. An analysis of the market capitalisation of companies listed on great stock exchanges has shown that at least since the year 2000 80% of the market cap of companies is not made up of additives which would be in a balance sheet according to financial reporting standards be they set by the IASB or the FASB. Inter alia, this 80% of the value covers the quality of the governance of a company. There are many cases where the company has practised good governance, the board has honestly applied its mind to a business issue, discussed it with some of the major stakeholders and made a business judgment call which turns out to be wrong and causes the company to suffer losses. This leads to the necessity for a rights issue and it has been found that the rights issues are sometimes oversubscribed, because society accepts that the board will not make correct business judgment calls every time. None of us is prescient and directors in taking risk for reward are dealing with uncertain future events. What is expected is that they will apply an informed, intellectually honest and rational judgment to their decisions.
Transparency involves a candid balanced report concerning the business of the company. There is a natural human inclination to highlight the positives and massage the negatives. This leads to an imbalanced report which clearly is not transparent. As the Supreme Court of America has said, sunlight is the best disinfectant but electric light is the best policeman.
Perhaps the most important advance of quality governance today is the traction which integrated thinking and integrated reporting is receiving around the world. Once the who’s who of corporate reporting accepted that corporate reporting as we have known it for over 100 years was no longer fit for purpose the question was what had to take its place. There were attempts at the turn of the 21st century of Value Reporting, Tomorrow’s Reporting, Enhanced Business Reporting, Broad Business Based Reporting, etc. None of these gained traction. Integrated thinking and the integrated report have gained traction, because, inter alia, it is a concept whose time has come and the who’s who of corporate reporting, being the members of the IIRC, have concluded MOU’s with the IIRC and agreed that this is the future of corporate reporting.
Integrated thinking embraces the concept that a company uses resources, (some of which are not even owned by the company), namely financial, manufactured, natural, human, intellectual and social capital which includes the ongoing relationships with the company’s stakeholders. The resources and relationships are interconnected and interdependent, not only in the operations of the company, but in its functions.
The business model is how the company makes its money. The output is its product, but the product itself has outcomes which in turn impact again on society, the environment and the economy. In developing strategy the board needs to apply its collective mind to these inputs, relationships, activities, outputs and outcomes. The best example is The Coca-Cola company which has as its long term strategy to reuse, replenish, reduce and recycle water, but, as recently as 12 May, has advertised that its bottles and cans will have nutritional labelling; it would not advertise to children under 12; it would produce low calorie products; and it would encourage exercise activities for children at its bottling plants around the world. This was because of allegations in the USA that Coca-Cola was one of the reasons for the problem of obesity among American children. The company had to deal with this outcome in its long term strategic thinking. So not only has it embedded the pertinent sustainability issue of water in its long term strategy, but has included the outcome of allegedly causing obesity in its strategy.
Directors are concerned about liability in regard namely to their duty of care. The belief is that their duty has grown and their liability is greater. In fact, a lot of countries have the business judgment rule today in regard to “the powers and functions” of the director and not only in regard to business judgment calls. This is an important governance issue that the safe harbour provisions are brought into line so that directors who act honestly, are informed and make a decision which appears with the wisdom of hindsight to have been on a rational basis, can escape liability. But the purview of the duty of care is wider. A director today knows, or ought to know, that companies have crossed planetary boundaries and directors have to take into account, in developing strategy for the company, both short, medium and long term, the business model’s impact on society and environment and society and environment’s impact on the company.