The submission of the South African Institute of Chartered Accountants (SAICA), prepared in response to the Nel Commission Report, inquiring into the affairs of the Masterbond Group, included a section dealing with corporate governance. This section highlighted the role of corporate governance in preventing corporate failures. The most salient points are summarised below.

Introduction

When corporations fail the blame is often laid at the door of the auditors when, in fact, the real problems rest with management. Directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors. In addition, shareholders can satisfy themselves that an appropriate governance structure is in place by asking the appropriate questions at annual general meetings.

The responsibilities of the board of directors include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The actions of the board are subject to laws and regulations and are reviewed by shareholders at the annual general meeting. Whilst the board is accountable to the shareholders, shareholder participation is necessary to make that accountability effective.

The concept of corporate governance has grown in prominence in recent times as a result of the increasing involvement and interest of stakeholders other than shareholders. Although statutes compel the stewardship of directors toward the shareholders, the other stakeholders cannot be overlooked and influence corporate governance in a variety of ways.

The auditors

The effectiveness of the audit function is to a large extent influenced by the governance structure that exists within a corporation. Historically, governance structures in many corporations have been weak, leaving much of the power in the hands of executive directors - but with little accountability. In such circumstances, it is very difficult for the auditors to fulfil their proper function. The problem is exacerbated as organisational structures and transactions become more complex.

Crucial roles in the governance structure are played by executive directors, non-executive directors, audit committees and internal auditors. If irregularities occur in corporations, they should be detected by one or more of the screening processes of the governance structure before the auditors become aware of them.

SAICA’s point of view

Although the King Committee’s recommendations are directed at affected corporations, as defined in the King Report, SAICA is of the opinion that many of the recommendations are of importance to all business enterprises, particularly to those business enterprises that have public involvement.

Looking to the future, SAICA believes that some of the recommendations should be incorporated in legislation. Not all of the recommendations are relevant to all corporations, but this could be catered for in the legislation. Recommendations referred to include:

• Appointment of non-executive directors
• Limiting executive directors’ contracts to five years
• Audit committees
• Internal audit
• Improved stakeholder communication
• Code of ethics

Non-executive directors bring their special expertise and knowledge to bear on the strategy, enterprise, innovative ideas and business planning of the corporation. They objectively monitor and review the performance of executive management and play an important role in resolving situations where there is conflict of interest. Overall, non-executive directors act as a check and balance against the executive directors.

Audit committees have the potential to improve the quality of financial reporting, create a climate of discipline and control which will reduce the opportunity for fraud, strengthen the position of the auditors and increase public confidence in the credibility and objectivity of financial statements.

Referring to stakeholder communication, it should be noted that, as annual reports become more complex, stakeholders need to have the key issues highlighted for them. This is of even greater importance in South Africa with its diverse cultures and emerging investors. Stakeholder communication should be simple enough to be understood by an average investor, but this should be achieved without sacrificing the quality of the information published.

The essence of corporate governance is based on enterprise and integrity. The fiduciary duty of directors is paramount. SAICA supports the King Committee’s view that the duty to act in good faith in the interests of the company does not stop with the board. All stakeholders should deal with the company in good faith. The company is the link between the stakeholders. The relationships between the stakeholders require honesty, openness and fairness.

Furthermore, as noted in the King Report, boards in South Africa have to create a culture in the South African business world where any stakeholder can, without fear of retribution, expose any immoral or unethical conduct by any other stakeholder. An immoral act by one stakeholder impacts on all stakeholders.

In conclusion