CORPORATE GOVERNANCE: ItÂ’s Simple- Practice Good Corporate Governance
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South AfricaÂ’s companies can expect increasing focus to be placed on the role of the board and its effective governance in executing its responsibilities in the wake of the recent economic uncertainty, warns Professional Services Firm PwC.
Regulators, industry watchdog groups and interested shareholders will make corporate governance a priority on the boardÂ’s agenda in years to come, says PwC Corporate Governance Centre Leader Anton van Wyk. Â“Therefore the board will need to take more responsibility for scrutinising managementÂ’s actions, closely reviewing executive remuneration and supporting managementÂ’s actions in a number of operational issues,Â” he says.
Van Wyk was speaking at PwCÂ’s 4th Corporate Audit Forum, held in Johannesburg recently. The aim of the Forum is to provide a platform for heads of internal audit, the c-suite (CEOs, CFOs, and so forth), audit committee members and company directors to share leading-edge governance practices and develop insightful debate on contemporary issues.
Â“Recent changes in regulation and legislation and increased demands from shareholders have become extremely challenging for boards, particularly in how they handle their key responsibilities effectivelyÂ”, says Van Wyk. Shareholders are concerned about the performance of corporate governance - this has placed more emphasis on the boardÂ’s role.
Directors Should Focus on the Scope of Key Responsibilities of Governance
Given this scrutiny and that they face an ever-changing landscape, directors should focus on understanding the scope of their key responsibilities and engage in a considered process to discharge these responsibilities more effectively, he says. Directors need to think critically about whether the board is getting the right information for each responsibility and devote the right amount of time on the agenda it needs to discuss key issues of governance. Â“This should help fill possible gaps and improve board performance.Â”
He says that shareholders are also paying more attention to companiesÂ’ risk management practices, having seen organisations struggle with unexpected catastrophic events, such as the tsunami in Japan, which have had an effect on their supply chains. More focus has also been placed on the role of risk management, largely due to the King III Report on Corporate Governance. The King III Report takes a process-driven approach to risk management that emphasises the overall responsibility of a companyÂ’s board, which should have a risk management policy and plan in place.
Van Wyk says that every company needs to consider risk and identify risks early and their consequences. Â“The board must be focused, responsive and sensitive to effectively see the company through distressed times.Â”
He says that companies also need to adhere to good governance principles and compliance with legislation particularly, having regard to more stringent rules and regulations. New legislation, such as the Companies Act, the Consumer Protection Act and the pending Protection of Privacy Information Bill, are expected to have a far-reaching effect on directors and their duties. Â“These new laws and regulations are unlikely to ease in the near future and should be seen in the context of the GovernmentÂ’s attempt to create a more transparent and ethical environment in which business can function and compete in the local and international arena.Â”
Improved Governance Allows for a Demystified and Ethical Business Environment
Worldwide legislators and regulators are also increasing their focus on companiesÂ’ governance of ethical conduct. For instance, in the US the Dodd-Frank Act of 2010 focuses on certain minerals that are commonly mined in the Democratic Republic of Congo or neighbouring countries, from the view that such minerals help finance extreme violence in the region. If companiesÂ’ products contain any of these conflict materials, such as gold or tin, a due diligence report will be carried out on their entire international supply chains.
Law enforcement agencies worldwide are also taking vigorous steps to combat the unethical conduct of directors. For instance, in 2010, companies paid $1.8 billion in penalties under the US Foreign Corrupt Practices Act, up from $641 million in 2009 and a huge leap from the $87 million in fines in 2007.
Fines are expected to increase even further, suggests a 2012 PwC report on Â‘Board EffectivenessÂ’. In 2011, the US Securities and Exchange Commission adopted new rules of governance to compensate whistleblowers (by sharing a portion of fines levied on a company) for reporting securities law violations. This may increase the number of allegations reported.
As the compliance requirements become more onerous on companies, so will the costs of doing business in South Africa, says Van Wyk. He says some companies may opt for an easier alternative by simply Â‘ticking the boxÂ’ instead of instilling good corporate governance practice. Â“Regulatory compliance is critical and itÂ’s vital for companies to act ethically. Directors need to understand how executives set the right tone at the top and then make sure it is carried throughout the company.Â”
Unethical conduct can damage a companyÂ’s reputation, in addition to bottom lines, as companies lose customers and employees and see their brands tarnished. A companyÂ’s reputation can also suffer from technology-related problems. Van Wyk says that savvy directors understand that crisis management has changed with the advent of globalisation and technological developments.
IT Governance is Vital for Risk Management
He says that directors will need to ensure that information technology (IT) governance becomes part of their agenda in order to monitor internal control frameworks. Â“This is a new expanded area for corporate governance in South Africa. More resources and time will be required to address this issue. IT governance will have an effect on the risk management, assurance and reporting frameworks of a company.Â”
Although social media and other emerging technologies do have benefits for organisations, they also have major risks. Companies will need to consider implementing a strategic programme on IT governance to capitalise on such emerging technologies.
Van Wyk says it is also important for boards to give reliable financial information to shareholders. The recent economic uncertainty has placed more focus on the leadership, integrity, governance and the responsibility of boards. To the extent that the companyÂ’s stakeholders are tracking the organisationÂ’s performance on environment, employee, product, or other issues, the board should be aware of the key messages governance delivers and how management assures that information is reliable.
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