A little like a subliminal conscience, corporate governance has always been with us. We all instinctively know the difference between right and wrong. It was only during the past quarter century that the principles of corporate governance began to be codified. One of the earliest attempts was the Cadbury Commission in the United Kingdom. South Africa was also one of the earlier participants, with the King Report (now already King 3).
Simply stated, corporate governance involves the processes, customs, policies, laws and institutions (governments, regulators and the like) that affect how a company does business and is administered. It includes the relationships among a company's stakeholders, of which the principal ones are its shareholders, management and board of directors. Other stakeholders include employees, customers, suppliers, the environment, regulators and the community at large.
Corporate governance is a multi-faceted subject that has the important theme of accountability. A second important theme is the welfare of stakeholders and shareholders. The sustainability of the environment is another related issue, and there are many more that could be listed.
Cynics question what all the fuss about corporate governance has achieved. It is clear that a great deal has been achieved, not least the propulsion of the topic into the public domain and the healthy debates this has stimulated. Practical steps have been taken, such as tightening the listing requirements on stock exchanges, enhancing the regulatory frameworks in many countries, raising the standards of accounting, encouraging responsible shareholder activism and improving the way that companies do business.
Despite this, there is no denying that at the very time that corporate governance was being developed and thrust into prominence, some of the most spectacular examples of shocking corporate governance came to light. The dramatic failure of United States energy company Enron was a case in point.
The Enron Corporation was a darling of the New York Stock Exchange. When it went bankrupt in late 2001, Enron employed about 22 000 staff and was one of the leading electricity, natural gas, pulp and paper, and communications companies in the world. It reported revenues of nearly US$101 billion in 2000.
Fortune magazine named Enron America's most innovative company for six consecutive years. At the end of 2001, it was revealed that its reported financial condition was sustained to a substantial degree by institutionalised, systematic and creatively planned accounting fraud. Enron has since become a popular symbol of wilful corporate fraud and corruption.
The failure of Enron did catapult the US government into taking action, but that has not stopped the rot. There is a growing concern that corporate governance failure was partly responsible for the subprime-induced bankruptcies, the ensuing financial crisis and, ultimately, the global recession.
A second high-profile collapse was that of Lehman Brothers. On the fateful day of September 15, 2008, the centenarian American financial services company filed for bankruptcy, even though it was reported to have had assets of US$600 billion. The full extent of the sorry affair began to unfold earlier in the year as unprecedented losses started to mount due to the subprime mortgage crisis. A second financial quarter loss of U$2.8 billion signalled that the end was nigh and the share lost 73 percent of its value. The collapse of Lehman Brothers is pointed to as another corporate governance disaster.
We have also witnessed many corporate governance failures in South Africa. The Competition Commission has found that there was price collusion in the bread, cement and steel industries. We see a failure of corporate governance in poor service delivery and widespread corruption at all levels of government. We have witnessed it in parastatals, with musical chairs at board level and shocking financial performance. This is clearly cause for great concern.
But despite the poor scorecard of corporate governance locally and abroad, there is no doubt it has a vitally important role to play. It is only by adopting sound corporate governance and encouraging its growth that we can hope to turn the tide of endemic greed, corruption, poor administration and frankly bad business practices.
As we look forward to the World Cup and the economic recovery this year, we need to redouble our efforts to convince people to embrace good and sustainable corporate governance.
- David Sylvester is the chairman of the Shareholders' Association, telephone 021 686 7567.
This article was first published in Personal Finance magazine, 1st Quarter 2010.