11 March BOARDS THAT CREATE VALUE: CORPORATE GOVERNANCE FRAMEWORK® March 11, 2019 General By Jene’ Palmer and reviewed by Terrance M. Booysen It has been painful to watch the likes of Lance Armstrong, Mike Tyson and Hansie Cronje sabotage their futures through poor decision-making. Similarly, many organisations and their boards have failed to demonstrate strong and responsible leadership qualities to motivate and drive their organisations to success. Awareness, decisiveness and accountability are some of the business leadership qualities required to achieve remarkable performances. The ‘buck’ stops with the board of directors and it is the board of directors who are ultimately held accountable for the success of the organisation. However, with the business landscape changing at an accelerating rate, risk management and decisive decision-making are becoming more challenging and business failures more prominent. A recent Harvard Business Review reports the failure rate for mergers and acquisitions to be between 70% and 90%. According to the United States Small Business Administration, only 44% of new businesses are still in existence after four years. Against this backdrop, how does a board create a sustainable organisation in what are clearly turbulent times? The board is expected to ensure that there is a common understanding of the governance structures within the organisation and that relevant and appropriate information is available to facilitate risk management and decision-making across the organisation. In order to meet these expectations, the board will need to build and implement a Corporate Governance Framework® which clearly identifies those matters for which the board will be held accountable, and those matters for which management will be held responsible. (It is important to understand that in terms of ethics and governance, accountability means being answerable or liable for your actions, whereas, responsibility means being in charge of or being the owner of a task.) The Corporate Governance Framework® will provide a singular schematic status of the governance of the organisation at any one given point in time, furthermore indicating areas within the organisation’s framework that requires the board’s attention. Through the use of this framework, the board and management will be better positioned to understand the different components of governance which are important to the organisation. “Governance and leadership are the yin and yang of successful organisations. If you have leadership without governance you risk tyranny, fraud and personal fiefdoms. If you have governance without leadership you risk atrophy, bureaucracy and indifference.’’ Mark Goyder (Director of Tomorrow’s Company) The one-size-fits-all approach to governance does not create value and simply adds to bureaucracy within the organisation. The board must establish a process to identify those governance components which are relevant to its own environment and legislative boundaries. Consideration must also be given to the complexity of the organisation as well as its geographic and subsidiary sub-structures before finalising the governance components to be included in the organisation’s own Corporate Governance Framework®. It is worth spending some time on these decisions as the risk of business failure is increased when there is uncertainty as to which areas of the business are important and need to be regularly monitored. Examples can include matters such as strategy, business structure and key organisational policies for which the board is held accountable, which in turn are differentiated from matters such as internal controls, business processes and group wellness and skills for which management is responsible. Once these critical governance components have been identified, they need to be routinely reviewed to confirm their status from a risk management point of view. A simple ‘RAG’ (red, amber and green) methodology will initially suffice and will give the board some comfort as to which areas of the organisation are being well managed and therefore have a low level of risk associated with them. Likewise, these reviews must be designed to highlight those areas of high risk requiring urgent attention. The board will then be in a position to take the necessary action to address these risks timeously and reflect the changes in risk status in the Corporate Governance Framework®. Ideally, these reviews should be independently performed and form part of the organisation’s third line of defence in its combined assurance model. An independent review will provide the board with a greater level of assurance that each governance component has been objectively audited and its status objectively reported. The audited results as reflected in the Corporate Governance Framework® should be included in the organisation’s Integrated Report (specifically intended for public disclosure and consumption) so that that all stakeholders can get a holistic view on just how well the board is actually managing the organisation’s risk. The responsibility for maintaining the integrity of the framework should preferably be delegated to one person, normally the Company Secretary. This person is responsible for collating the information, updating the framework and reporting the outcomes to the board and/or its risk committee. The board may, except to the extent that its Memorandum of Incorporation (MOI) provides otherwise, invite persons who are not directors to the board meeting to provide further explanation on matters pertaining to the Corporate Governance Framework® in order to ensure that the governance components are being appropriately managed. A strong board comprises different personalities with a range of different disciplines and perspectives. The Corporate Governance Framework® enables the Chairman of the board to positively harness and channel the power of such diversity to create value for the organisation by adopting a disciplined approach to performance management (at a strategic and operational level) and proactively attending to critical risk management areas. Indeed, the framework helps to eliminate a ‘’silo mentality” and enables greater cohesion between the board and key management by providing terms of reference, assigning responsibilities and ensuring the flow of information between all parties. Access to up-to-date, independently reviewed governance information such as that included in the Corporate Governance Framework®, is critical for incoming non-executive directors as it provides them with information to make a quick high level assessment of the overall sustainability of the organisation including its level of compliance with relevant legislation. Such information is vital to candidates when deciding whether or not to assume the potential liabilities associated with a non-executive directorship appointment. If too many critical components of the Corporate Governance Framework ® are marked as red (in terms of the ‘RAG’ methodology), the non-executive candidate is more vulnerable to incurring personal liability for a breach of his fiduciary duties. Similarly, the Chairman should also use the framework as an induction tool when appointing and orientating new non-executive directors and Company Secretaries in order to put them in a position to more quickly deliver value to the organisation. Developing a Corporate Governance Framework® requires a thorough understanding of the organisation’s strategic objectives, operations, internal and external environments. It is a continuous process which matures as the business is nurtured – a journey which evolves as lessons are learnt and new paths are travelled. It is a process which empowers the board to create value for all its stakeholders. Related Articles TANGIBLE BENEFITS OF A CORPORATE GOVERNANCE FRAMEWORK® Article by Jene’ Palmer Forward-thinking organisations have realised that corporate governance does not merely fall into the portfolio of the Company Secretary. Indeed, the draft King IV Report on Corporate Governance for South Africa 2016 (‘King IV’), describes corporate governance as “the exercise of ethical and effective leadership by the governing body” of an organisation. Why then is corporate governance still viewed by many organisations as a process which increases bureaucracy and drives a ‘tick box’ exercise? Perhaps the explanation lies in not understanding and appreciating the value which can be unlocked by implementing a purpose-built Corporate Governance Framework® which is tailored to the organisation. Empirical research supports the fact that good corporate governance translates into tangible and sustainable benefits for the organisation. Some of these benefits are set out below. DO YOU REALLY NEED A CORPORATE GOVERNANCE FRAMEWORK®? By Jene’ Palmer and reviewed by Terrance M. Booysen We know that both local and international organisations are continuously having to adapt to operate in uncertain business environments. Locally, the release of the Preferential Procurement Regulations 2017, which places stronger emphasis on ‘radical transformation’, against the backdrop of persisting low economic growth rates are only some of the elements giving rise to further uncertainty. Internationally, the business and regulatory implications of the election of President Donald Trump and the vote in favour of Brexit and how these events will impact on local markets and businesses, is still unfolding. It therefore comes as no surprise that recent governance, risk and compliance (‘GRC’) surveys all indicate an increasing need to improve risk oversight and to balance opportunity management with risk management. The challenge lies in being able to achieve these objectives! SUSTAINABILITY DEPENDS ON A STRONG GOVERNANCE FRAMEWORK Article by Terrance M. Booysen Corporate governance is one of the key elements many investors consider when they reflect upon the organisation’s success, as well as when deciding upon their investment choices. But when the organisation’s governance system shows signs of stress or failure, not only do astute investors understand the unsettling impact it has upon the organsation’s supply chain, they also become wary about its sustainability which may give rise to them re-considering to ‘weather the storm’ or ‘bail out’ so to speak. Over the years so much has been written about failures of corporate governance within organisations, including the financial, social and political consequences which are typically found in its trail. Yet in spite of numerous regulation to improve the overall conduct of organisations, including the various King Codes of Corporate Governance written in South Africa, even more organisations are becoming affected by poor governance. INTERNAL AUDIT REQUIRE GREATER REPRESENTATION ON THE BOARD (2019-08-05) A plethora of corporate governance codes has been written across the world, and in spite of their recommendations which inter alia seek to protect stakeholder interests and shareholder value, many governance failures and organisational collapses continue seemingly unabated. DEMYSTIFYING ISO MANAGEMENT SYSTEM STANDARDS AND RELATED GUIDELINES (2019-10-25) The number of management systems has risen dramatically in recent years, reflecting the increasing governance demands being placed on more and more organisations and their boards, and especially so in the wake of a myriad of governance scandals and corporate collapses locally and abroad. COMBINED ASSURANCE: IS YOUR ORGANISATION ADEQUATELY ASSURED? (2019-10-01) If we have both internal and external auditors, we have combined assurance, right? Wrong! For the board of directors to claim that they have discharged their obligations to implement a Combined Assurance Model requires much more than just the appointment of internal and external auditors. Comments are closed.