Institute of Directors in Southern Africa & The Ethics Institute
Eskom’s decision to pursue disciplinary action against its suspended acting-CEO, Matshela Koko, raises important governance and ethical issues that directors and executives should consider carefully, say Parmi Natesan, Executive: Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA) and Professor Deon Rossouw, CEO of The Ethics Institute (TEI).
“Mr Koko stands accused of influencing the awarding of lucrative contracts to a company in which his stepdaughter is a director. While we should be careful not to prejudge this specific case, conflicts of interest like this represent a major hazard for board members and executives, if they are not managed correctly from the start. All of us should see Mr Koko’s predicament as a wake-up call to make sure our own houses are in order,” says Natesan.
The first point to make is that a senior executive like Mr Koko is both an employee of the company; and a deemed director or prescribed officer in terms of the Companies Act. Such a person is thus bound both by the internal policies of the company and the legal requirements of the Act. As regards the former, it would be necessary to see whether any company policies were breached in the way the contracts were awarded, and whether Mr Koko was himself involved in this process, and whether he disclosed his interest appropriately.
“It needs to be made clear that claiming ignorance is not a good enough defense. As a senior executive, Mr Koko should have investigated actively the interests of any of his related parties, even to the extent of requesting them in writing to inform him if they had any interests in organisations doing business with the company,” she explains. “This would show that he took reasonably diligent steps to be informed. One should never lose sight of the fact that as a senior executive, he has to set an example to the rest of the organisation and protecting its reputation.”
Natesan notes that conflicts of interest are to be expected in business, and do not necessarily constitute evidence of any impropriety: the key issue is how they are handled. King IV thus recommends that members of governing bodies should declare their financial, economic and other interests, and those of their related parties, at least annually. In the same vein, each board or board-committee meeting should be prefaced by a formal declaration of any specific conflicts of interest relating to the agenda.
Professor Rossouw points to the fact that humans are naturally inclined to act in their own interests or in the interests of their immediate family and friends. While the Companies Act and governance codes like the King Reports are examples of legal and voluntary constraints to the pursuit of self-interest, they will ultimately prove ineffectual unless the individuals concerned act ethically.
“I find it significant that the very first principle of the King IV Code on Corporate Governance emphasises that members of governing bodies, both individually and collectively, should act in an ethical manner. In unpacking what is meant by ethical behaviour, the Code starts by focussing on the personal integrity of members of the governing body. They are reminded that as directors, they must act in the best interest of the company, and that they must deal with conflicts of interest appropriately. King IV sees integrity as a characteristic that should be cultivated and exhibited, so that directors develop the inclination to act in the company’s best interests, not their own” he says.
“By sensitising directors not only to actual conflicts of interest but also potential or perceived ones, ethics plays a crucial role in avoiding the reputational damage and financial costs when a conflict of interest is found, or even suspected not to have been handled correctly —as we see in the case of Mr Koko.”
MEDIA CONTACT: Carla Coetzee, 072 112 8347, firstname.lastname@example.org, www.atthatpoint.co.za
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For more information on The Ethics Institute please visit:[DR1]
LinkedIn: The Ethics Institute Company Page
Based on recent research, Association of Certified Fraud Examiners (ACFE) estimates that the typical organisation loses 5 percent of its revenue to fraud each year. In South Africa, this equates to around R160 billion. The three main categories of fraud are asset theft, corruption and misstatement of financial statements.
“Corruption and other sorts of fraud are all different aspects of the same problem—the improper use of an official position for personal gain. The direct costs are very high, as these figures show, but when one takes into account the indirect costs such as reputational damage, investigation costs, loss of business opportunities and lost efficiencies, they are even higher,” says Parmi Natesan, Executive: Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA). “The best defence against fraud of all kinds is corporate governance that really works, and that is the responsibility of the directors.”
Principle 1.1 of King III states that the “board should provide effective leadership based on an ethical foundation” and Principle 2.1 that the “board should act as the focal point for and custodian of corporate governance”.
Speaking at an IoDSA Corporate Governance Network (CGN) event on the board’s role in combatting corruption, Chairman of the CGN and Director at PwC, Anton van Wyk reiterates that corporate governance is critical because it seeks to create a climate that is inhospitable to fraud of all types. “It’s important to acknowledge that these things feed off each other, making a company that acts corruptly more vulnerable to other sorts of fraud. For example, when employees see that the company is willing to act illegally by bribing officials, they can begin to feel it’s OK to steal equipment,” he says. “The ethics of the company have to be consistent and pervade every aspect of its business.”
This is particularly important because many companies argue that they have to participate in corrupt activities in order to do business in certain countries. But the rot cannot be contained, and such companies soon find themselves suffering from other types of fraud and also potentially losing business as their reputations are tarnished.
For that reason, one of the most important contributions that directors can make is setting the right “tone at the top”, showing in the way they conduct board meetings, and the way in which they reward or censure the executive team, that the corporate leaders stand for ethical behaviour. This is the first step in actively managing the organisation’s ethics as required by King III.
This active management means that boards have to ensure that the right structures are in place to combat fraud and corruption, and that they know who the company’s customers and suppliers are—as well as how the industry operates. Such knowledge will help boards not only understand the risks the company faces but also what is average in terms of performance. The board is then in a much better position to spot tell-tale signs of fraud or corruption. Signs might be a higher-than-average propensity to win government tenders, or a lower margin than comparable companies.
“There’s no fixed checklist of things that directors should look out for, but the better informed they are, the more likely they are to understand what the red flags are,” says van Wyk. “But the best defence, in the end, is a clear and widely accepted moral or ethical corporate identity.”
MEDIA CONTACT: Cathlen Fourie, 012 664 2833, email@example.com
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