Mervyn King Excellence In Corporate Governance

Excellence in Excellence in Corporate Corporate

GovernanceGovernanceGBE Pursuing Excellence ConferenceGBE Pursuing Excellence Conference

19 September 200819 September 2008

Presented by:Presented by:Prof Mervyn E King SCProf Mervyn E King SC

MEK Corporate Consultants

Changed world of Changed world of governancegovernance

1855 limited liability1855 limited liability Wealthy familiesWealthy families Latter half of 20Latter half of 20thth Century Century Shareowner revolutions – politiciansShareowner revolutions – politicians ICT – borderless worldICT – borderless world Exclusive/inclusiveExclusive/inclusive Created and destroyedCreated and destroyed ScandalsScandals


ReactionReaction

Comply or else – Sarbanes-OxleyComply or else – Sarbanes-Oxley GuidelinesGuidelines ComplyComply ExplainExplain The South African Companies Bill?The South African Companies Bill? HybridHybrid


The company todayThe company today

Company larger than governmentsCompany larger than governments Integral to societyIntegral to society Civil economyCivil economy Reports – preparers and usersReports – preparers and users After quality of productAfter quality of product Building trust in companyBuilding trust in company Agents for changeAgents for change


Governance about processGovernance about process

Processes to discharge and for directors to Processes to discharge and for directors to be seen to be discharging their be seen to be discharging their responsibilitiesresponsibilities

Enterprise – strategicEnterprise – strategic Risk for reward – failureRisk for reward – failure Good governance and failureGood governance and failure AcceptableAcceptable Bad governance – failure – scandalBad governance – failure – scandal Not acceptableNot acceptable


A director’s duties - A director’s duties - responsibilitiesresponsibilities

Good faithGood faith CareCare SkillSkill DiligenceDiligence 150 years of jurisprudence150 years of jurisprudence The Companies BillThe Companies Bill


Incapacitated personIncapacitated person

Human beingHuman being Best interests, care, skill, diligenceBest interests, care, skill, diligence Decent citizen thing to doDecent citizen thing to do Company an artificial citizenCompany an artificial citizen IncapacitatedIncapacitated Director, heart, mind and soulDirector, heart, mind and soul


Multi-national companiesMulti-national companies

Operating in 150 countriesOperating in 150 countries Function of board?Function of board? Court’s realisationCourt’s realisation National, lingual, cultural, legalNational, lingual, cultural, legal

StrategyStrategy


StrategyStrategy

GubenareGubenare – “to steer” – “to steer” Comes from the Greek word Comes from the Greek word

strategosstrategos Means “general”Means “general” The art of the generalThe art of the general A continuous process when thinking A continuous process when thinking

about the futureabout the future Strategy involves risky decisionsStrategy involves risky decisions


Ordinary and extraordinaryOrdinary and extraordinary

Good strategy – enable ordinary people to Good strategy – enable ordinary people to achieve extraordinary thingsachieve extraordinary things

Bad strategy – extraordinary people will Bad strategy – extraordinary people will only achieve ordinary thingsonly achieve ordinary things

Facing in the same directionFacing in the same direction Define purpose, values and stakeholdersDefine purpose, values and stakeholders Define the legitimate expectations of your Define the legitimate expectations of your

stakeholdersstakeholders Short- and long-termShort- and long-term

Internal AuditInternal Audit


Internal auditInternal audit

Effective IA function necessaryEffective IA function necessary IA planning informed by strategyIA planning informed by strategy Key contributor to achieving strategyKey contributor to achieving strategy Objective provider of assuranceObjective provider of assurance


Assurance of what?Assurance of what?

Adequate controlsAdequate controls Quality of corporate informationQuality of corporate information Identify risks that may impede goalsIdentify risks that may impede goals Identify opportunities to realise goalsIdentify opportunities to realise goals Timeous and assessed adequatelyTimeous and assessed adequately


StrategyStrategy

Board responsible, but developed by Board responsible, but developed by managementmanagement

IA included in strategy development IA included in strategy development processprocess

Better understand risks and Better understand risks and opportunitiesopportunities

Assurance that management Assurance that management oversight, risk management and oversight, risk management and adequate controls act in a coordinated adequate controls act in a coordinated mannermanner


AccountableAccountable

Assessment of adequacy of controlsAssessment of adequacy of controls Assessment of the three elements in Assessment of the three elements in

tandemtandem Audit Committee to considerAudit Committee to consider Audit Committee to report to boardAudit Committee to report to board Board signs adequacy of controlsBoard signs adequacy of controls Audit Committee to appoint and dismiss Audit Committee to appoint and dismiss

CAECAE Access to board chairmanAccess to board chairman


AssessmentAssessment

Should express clearly :Should express clearly : Evaluation criteriaEvaluation criteria ScopeScope PeriodPeriod Who has responsibility for whatWho has responsibility for what


Internal Audit relationshipInternal Audit relationship

Right arm of the boardRight arm of the board Communication skillsCommunication skills CredibilityCredibility Boardroom presenceBoardroom presence Challenge effectiveness of risk Challenge effectiveness of risk

managementmanagement Fulfil regulatory requirementsFulfil regulatory requirements


AttributesAttributes

Chameleon – risk changes means Chameleon – risk changes means scope of IA has to changescope of IA has to change

Leadership skillsLeadership skills CommunicatorCommunicator Strategic mindsetStrategic mindset NetworkerNetworker


Corporate worldCorporate world

Changed in last five yearsChanged in last five years Sustainability issues are risksSustainability issues are risks IA/risk management relationshipsIA/risk management relationships Included in IA functionsIncluded in IA functions


Assurance needsAssurance needs

StrategyStrategy ControlsControls ComplianceCompliance TreasuryTreasury CR & SCR & S Health and safetyHealth and safety


IA has to be intellectualIA has to be intellectual

Alternative Dispute Alternative Dispute ResolutionResolution


DisputesDisputes

ResolutionResolution ADR in contractsADR in contracts Cross borderCross border Management toolManagement tool


RelationshipsRelationships

In business circleIn business circle Build relationshipsBuild relationships Dispute/litigationDispute/litigation Destroys relationshipDestroys relationship Duty to resolve/preserveDuty to resolve/preserve


ADR and the companyADR and the company

Dispute with companyDispute with company OfficersOfficers InvestorsInvestors Suppliers/customersSuppliers/customers RegulatorsRegulators CommunitiesCommunities


Management of Management of relationshipsrelationships

A business relationshipA business relationship Company and major customerCompany and major customer CalPERSCalPERS Ford and FirestoneFord and Firestone


Mediation advantagesMediation advantages

NovelNovel QuickerQuicker Less expensiveLess expensive ConfidentialConfidential Preserves relationshipsPreserves relationships Cost of executive time savedCost of executive time saved Dilution of focus when litigateDilution of focus when litigate


ADR a mechanismADR a mechanism

A value addA value add To a commercial relationshipTo a commercial relationship Mechanism to manageMechanism to manage Cost and timeCost and time Duties and efficiencyDuties and efficiency


Contracted mediationContracted mediation

ADR framework in place at beginningADR framework in place at beginning Parties owners of process – attunedParties owners of process – attuned Conflict preventionConflict prevention CommunicationCommunication Build trustBuild trust Value of immediate knowledgeValue of immediate knowledge


Questions by a board?Questions by a board?

System of early case assessmentSystem of early case assessment Mechanisms addressing employee Mechanisms addressing employee

disputedispute Critical procurement contractsCritical procurement contracts Agreed cross-border mechanismsAgreed cross-border mechanisms


Upfront in the constitutionUpfront in the constitution

Administered ADRAdministered ADR Upfront collaborative solverUpfront collaborative solver Between stakeholdersBetween stakeholders And the companyAnd the company IFCIFC


Legal recognitionLegal recognition

IrelandIreland GermanyGermany CanadaCanada World bodiesWorld bodies The disappearing civil trialThe disappearing civil trial


ObstaclesObstacles

Constitutional right of access to Constitutional right of access to courtscourts

Rights not absoluteRights not absolute LimitationsLimitations Enforce good faith?Enforce good faith? Time, languages, place, etc?Time, languages, place, etc? Enforcing a processEnforcing a process


Corporate governance Corporate governance checkcheck

Have you got ADR with stakeholders?Have you got ADR with stakeholders? Decent citizenDecent citizen World is flatWorld is flat New constitution of commerceNew constitution of commerce ADR a dual functionADR a dual function Build business trust – director’s dutyBuild business trust – director’s duty IOD/AFSA clause :IOD/AFSA clause :

www.arbitration.co.zawww.arbitration.co.za www.iodsa.co.zawww.iodsa.co.za

Sustainable Sustainable development as a development as a

business opportunitybusiness opportunity


Business opportunityBusiness opportunity

100 largest economies100 largest economies Pervasive change is sustainabilityPervasive change is sustainability PhilanthropyPhilanthropy CSICSI Added value – business opportunityAdded value – business opportunity Alterantive energy resource boomAlterantive energy resource boom


Market capitalisationMarket capitalisation

Not equal to book value – assessmentNot equal to book value – assessment Brand and goodwillBrand and goodwill Reputation of management and boardReputation of management and board Quality of governance and Quality of governance and

managementmanagement Sustainability of the businessSustainability of the business Strategic directionStrategic direction Non-financial aspects, so-calledNon-financial aspects, so-called


market value $ 105,586 mil

30/09/03

13%Book value $ 13,560 mil

30/09/03

20 % ?

67%Brand value $

70,453 mil (Interbrand)

source: SAM

MMeasuring easuring company’s company’s economic economic valuevalue


Intangible assetsIntangible assets

ReputationReputation BrandBrand Quality of management and boardQuality of management and board Sustainability issuesSustainability issues Procter & GambleProcter & Gamble Coca ColaCoca Cola Anglo AmericanAnglo American


StakeholdersStakeholders

Financial informationFinancial information Backward lookingBackward looking Forward looking informationForward looking information First priority – productFirst priority – product Second priority – trust and Second priority – trust and

confidenceconfidence


IT governanceIT governance


Legislation?Legislation?

Legislate – Cobit ITIL?Legislate – Cobit ITIL? Care and diligence – one size fits all?Care and diligence – one size fits all? Pervasive – CIO or service provider?Pervasive – CIO or service provider? Confidential information outside Confidential information outside

companycompany


IT securityIT security

Napoleon – the wax sealNapoleon – the wax seal UnauthorisedUnauthorised UseUse AccessAccess ChangesChanges Cryptography – decryptionCryptography – decryption LegislationLegislation

DirectorsDirectors


Independence of directorsIndependence of directors

Ten year “rule”Ten year “rule” ASX abandoned itASX abandoned it Critical bystander – perceptionCritical bystander – perception Assess independence annuallyAssess independence annually


Sarbanes-OxleySarbanes-Oxley 404 difficulties404 difficulties As5 amelioration by SECAs5 amelioration by SEC Legal?Legal? Rigidity and flexibilityRigidity and flexibility Adopt or explainAdopt or explain


Director’s liabilityDirector’s liability

D&O insuranceD&O insurance Business judgment ruleBusiness judgment rule No financial interestNo financial interest Objectively all the factsObjectively all the facts Rational business decisions at that Rational business decisions at that

timetime Hindsight and foresightHindsight and foresight

CommunicationCommunication


Essential questionsEssential questions

ReportingReporting Preparers and usersPreparers and users ““How has the company positively and How has the company positively and

negatively affected the economic life negatively affected the economic life of the community in which it of the community in which it operates?”operates?”

““How does the company intend to How does the company intend to enhance the positive aspects and enhance the positive aspects and eradicate or ameliorate the negative eradicate or ameliorate the negative aspects in the year ahead?”aspects in the year ahead?”


ExcellenceExcellence

Good faithGood faith IncapacityIncapacity TransienceTransience ImmortalityImmortality Short-term gainsShort-term gains


A journeyA journeyCadbury, etc and the Combined Code of the Cadbury, etc and the Combined Code of the UKUKKing I, II and IIIKing I, II and III

Every day you may make progress. Every Every day you may make progress. Every step may be fruitful. Yet there will stretch step may be fruitful. Yet there will stretch out before you an ever-lengthening, ever-out before you an ever-lengthening, ever-ascending, ever-improving path. You know ascending, ever-improving path. You know you will never get to the end of the journey. you will never get to the end of the journey. But this, so far from discouraging, only adds But this, so far from discouraging, only adds to the joy and glory of the climb.”to the joy and glory of the climb.”

Sir Winston ChurchillSir Winston Churchill

Thank YouThank YouProf Mervyn E King SCProf Mervyn E King SC