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TO DIRECT OR TO GOVERN? THAT IS THE QUESTION

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The recently published King Report on Governance for South Africa 2009 (King III) is very good at telling us what we knew all along but failed to do anything about. It is also very appropriately timed – coming in the midst of the biggest economic crisis in many years. After all, the crisis was allegedly caused by the very topic the report addresses: corporate governance failure and, more specifically, uncontrolled greed in the boardroom. But will the emphasis on control in King III have unintended consequences? I think it will.

King III embodies 75 principles of good corporate governance. Few, if any, of them can be argued against – all are sound and valid. The report provides a very useful checklist for people not knowing (or remembering) what should be done to ensure good corporate governance. It is also a very effective tool (surpassed only by enforced legislation) to put pressure on those that avoid doing what is right.

Some of the principles King III advocates are that:

  • the board should ensure that the company is and is seen to be a responsible corporate citizen;
  • the board should ensure that the company’s ethics are managed effectively;
  • the board should act as the focal point for and custodian of corporate governance;
  • the board should ensure that the company has an effective and independent audit committee;
  • the board should be responsible for the governance of risk;
  • the board should be responsible for information technology (IT) governance;
  • the board should ensure that the company complies with applicable laws and consider adherence to non-binding rules, codes and standards; and
  • the board should ensure that there is an effective risk-based internal audit.

However, in my opinion, there is a fundamental problem in that the composition of the 75 principles focuses unduly on control.

The role of directors is twofold, namely to direct and to control. Please note the sequence: direct and control; not control and direct! Approximately 67 of the 75 King III principles are control principles, and only three are clearly directing principles. The remaining handful can be argued both ways. Whatever your count, King III is predominantly a document driving control, with a few remarks about directing thrown in.

More likely than not, when reference is made under the above principles to being a “responsible corporate citizen”, people will think about “not polluting the environment” rather than about “not creating job opportunities”. When reference is made to “risk”, few companies will list the risk of being “too risk-averse” in their entrepreneurial thinking.

South Africa needs economic growth, and such growth comes through focus on opportunity, flexibility and visionary leadership (also called “directing”). Such directing should come from directors that take the “control thing” in their stride and focus on the job of directing. Remember that King III applies to “all entities, regardless of the manner and form of incorporation”, and thus also applies to close corporations and proprietary companies.

I have two recommendations. First, to all CAs(SA) and other directors: Study King III until you have internalised the principles to such an extent that you can forget them and do the controlling subconsciously. Then spend your time and energy on directing the companies with which you are involved. Second, to the nomination committee members: Find candidates who are directors and not controllers – our prosperity depends on you!

Dr. Mike van Wyk CA(SA), MBA, D Com (Corporate Governance), holds the position of Functional Excellence at Sasol Petroleum International Group.

 

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