Corporate Governance

the decision makers dilemma

Presented by Raj Mahabeer

INTRODUCTION

• In business, decision makers are faced with moral and

ethical decisions daily. Not only are they faced with

questions between deciding what is right or wrong, but

there is an increasing challenge where they have to

choose between what is - right , fair and ethical

• This challenge creates dilemmas for decision makers

BASIS OF CORPORATE GOVERNANCE

South Africa : Apply or Explain basis

USA : Comply or Else basis

“Apply or explain basis”

The King III Report is based on an “apply or explain” basis. It gives an opportunity for companies to apply the recommendations and also to explain themselves should

they not apply.

“Comply or else basis”

In the USA, the Sarbanes-Oxley Act was on a “comply or else” principle. This forced all

companies to comply and made no provision for extraordinary circumstances.

PRINCIPLES OF CORPORATE GOVERNANCE

Ensure that leadership is based on ethical foundation

Ensure that the company is and is seen to be a

responsible corporate citizen

Ensure that the company’s ethics are managed effectively

Act as the focal point for and custodian of corporate

governance

Ensure that the company complies with applicable laws

and consider adherence to non-binding rules, codes and

standards

Ensure the integrity of the company’s integrated report

Act in the best interest of the company

Impact on Economy,

Society and Environment

Doing Business Ethically

Cognisance of the Natural

Environment e.g. global warming

Impact on Stakeholders

Sustainability

ETHICAL VALUES

Ethical values

AccountabilityBe able to justify their

decisions and actions to shareholders and other

stakeholders

FairnessEnsure fair consideration to the legitimate interests

and expectations of all stakeholders of the

company

ResponsibilityDecision makers should

take responsibility for their actions and be willing to take corrective actions

where required

TransparencyBeing transparent in the

decisions being made including full disclosure of information and ensuring acceptable performance,

and sustainability

DECISION MAKERS

• Companies Act: Section 66(1) : the business and affairs of a company must

be managed by or under its board, which has the authority to exercise all of

the powers and perform any functions of the company.

– Company directors are responsible and accountable for their actions and

decisions and for the successful performance of their company

– Directors are entrusted by shareholders to ensure that companies are

successful, therefore directors have a fiduciary duty to run the company

– Director would assumes the following two roles:

An agent – Directors have the powers to act on behalf of the company

A trustee – Directors have been given powers to control company assets

and manage the company as shareholders investment.

THE ROLE OF THE DECISION MAKER

Companies Act

Exercise independent judgment without undue influence

Independent judgment

Avoid Financial and self interest Ensure fairness and transparency

Act in the best interest of the company

They should not use information acquired in their

capacity for personal gain

Act in good faith towards the

company and its stakeholders

Best interest… avoid conflicts

between personal and company interests

should not prefer their own interests over that

of the company

THE ROLE OF DECISION MAKERS

- KING III AND COMPANIES ACT

KING III COMPANIES ACT

•King III provides guidance for decision makers which includes the following;

Act in the best interest of the company

That minority shareholders are protected

Should do business ethically rather than being satisfied with legal or regulatory compliance

Act with intellectual honesty and independence of mind

Provide effective leadership based on ethical foundation

Broad focus on interest of stakeholders as opposed to shareholders

Oversight role of institutional investors

•Companies Act provides principles and rules when decisions are taken

Most of the decisions are taken based on resolutions

•Decision makers should Act in good faith and for a proper purpose

Act in the best interest of the company

Act with a degree of care, skill and diligence

•Directors may be liable should they fail to comply with the provisions of the Act (sec.77)

CHALLENGES FACING THE DECISION MAKER

Shareholders

Profits

Incentives

Price fixing

Fronting

Challenges

SARS & Auditors

CHALLENGES FACING THE DECISION MAKER

Challenges

SHAREHOLDERS•Growth

•Asset value•Mergers and acquisitions

•Investments

FINANCIAL PERFORMANCE•Share price

•Profits•Revenue

•Stock markets•Earnings

AUDITORS•Clean audit reports

SARS •Pay less VAT, Normal tax and

other taxes

BANKS•Bank overdrafts

•Loans

INCENTIVES•Bonuses•Salaries

•Share Based Payments•Promotions

TENDERS•BBBEEE scores

•Fronting

•Bribery – government departments

COMPETITION•Industry competition

•Price fixing•Industrial espionage•Acquisition of small

business

THE IMPACT OF ORGANISATIONAL CULTULRE ON

ETHICAL CONDUCT

Organisational Culture

Definition • Drennan (1992:3) “way things are done around here”

• Robbins (1997) “common understanding”

• Schein (2004) “to deal with change requires a change in culture”

Impact on ethical conduct

• Creates moral awareness on companies

• Ensures fairness and transparency

• Results in balanced decisions being taken

Positively influence organisational culture to promote ethical conduct

• In organizations ethical decisions are influenced by organizational culture

• Organisational culture influence decision-making processes

Benefits• Enables decision makers to make the right decisions

• Enables decision makers to resist pressure in behaving unethically

• Creates a decision making environment that has strong moral values

ATTRIBUTES OF AN ETHICAL LEADER

Ethical leader

They build relationships that are characterized by

trust, respect and support

They tie ethics to the long-term success of the business by providing examples from

their own experiences

They take into account the ethical impact of

their decisions

They are taught to be honest and trustworthy

Responsible for transmitting ethical culture in their organizations, and

ethical dimensions of organizational culture

They make decisions based on ethical values

CONVERGING GLOBALISATION AND ETHICS

GLOBALISATON

Globalization has transformed the

way we do business

The challenge is to devise ethical and

economically sound policies that

will guide companies doing business in the global village

Markets should function based on ethical principles

The internalization of ethical values within the

consciousness of the individual and the

community could be the only hope for humanity

Culture should be guided by morally universal values

ETHICAL QUESTIONS

– How are moral judgments even possible?

– Why be moral at all?

– Do moral values exist objectively or only subjectively?

– Are moral values relative to something, like culture or individuals?

– Can morality exist independently of culture?

– Do people have a free will which would make moral judgments

possible?

Some case studies

• Ford Pinto’s Exploding Gas Tanks – unethical conduct

… the court suggested that Ford’s top decision makers were aware that the Pinto

was unsafe and concluded it would be cheaper to incur the loses from lawsuits

than to recall and fix all the affected cars…..

• BeechNut and Its Bogus Apple Juice - unethical conduct

….BeechNut executives tried to suppress conflict. When this failed they eliminated

the most apparent source of conflict: LiCari. This sent a message : Do not speak

out or raise ethical questions. They ignored the risks of hiding the tainted

concentrate from the Food and Drug Administration(FDA) and of selling a tainted

product to developing countries in violation of federal law.

• The 2006 bread collusion – unethical conduct

… Tiger Brands was fined approximately R100 million for colluding with certain

other major bread producers. In addition, Tiger Brands and Premier Foods agreed

to assist and provide information to the Competition Commission of other players

in the industry who were involved in collusive activities, particularly price fixing……

Some case studies ( continued )

• On the duty to investigate tender fronting and fraud – unethical conduct

…..In Viking Pony Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty)

Ltd and Another in a unanimous Constitutional Court ruling- in a judgment written

by Justice Mogoeng Mogoeng – made it clear that there was a heavy onus on

organs of state (municipalities, parastatals, provincial and national departments)

to investigate allegations of tender fraud when they are made aware of it……

• Record price-fixing penalty for Pioneer – unethical conduct

…..South Africa's Pioneer Foods had to reduce the sale price of bread and flour

products by a total R160-million, as part of a R1.05-billion settlement reached in

its price-fixing cases…

• SA investigates World Cup airline price-fixing – unethical conduct

In 2006, SAA was fined 55m rand ($7m; £4.5m at current prices) after being found

guilty of price-fixing with German carrier Lufthansa. The airline was also fined on

two-charges of anti-competitive behaviour

Recommendations

• Decision makers should ensure ;

– fairness and transparency in decisions

– Compliance with code of ethics, laws and statutory

duties

– Comply with organizations policies and procedures

especially on ethics

– Conflict of interest is properly addressed

– Decisions taken are for the benefit of the company rather

than self benefit

– Decision makers should have the right composition,

skills and reliable information

– Consider the moral and economic imperatives of

corporate citizenship

– Determine the nature and dimensions of the dilemmas