CORPORATE GOVERNANCE IN DEVELOPING COUNTRIES: THE SOUTH AFRICAN EXPERIENCE by DLR van der Waldt
IJ SISEM Sci Co for 2009 ICIEOM
Production engineering and sustainable development
6-9 October 2009, Hotel Pestana in Salvador, Brazil
(Van der Waldt, DLR. 2009. Corporate governance in developing countries: the South African experience. IJ SISEM Sci Co for 2009 ICIEOM. Production engineering and sustainable development to be held during 6-9 October 2009, Hotel Pestana in Salvador, Brazil).
CORPORATE GOVERNANCE IN DEVELOPING COUNTRIES: THE SOUTH AFRICAN EXPERIENCE
By
DLR van der Waldt
Department of Marketing and Communication Management
Faculty of Management and Economic Sciences
University of Pretoria
Republic of South Africa
Tel: +27 12 420 3415
Fax: +27 866381544
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Paper to be delivered at the
IJ SISEM Sci Co for 2009 ICIEOM Conference
“Production engineering and sustainable development”
6-9 October 2009, Hotel Pestana in Salvador, Brazil.
ABSTRACT
CORPORATE GOVERNANCE IN DEVELOPING COUNTRIES: THE SOUTH AFRICAN EXPERIENCE
Current corporate governance thinking supports the principle of a symbiotic relationship between business and society by emphasising economic, environmental and social sustainability (the triple bottom line). The key factor in the South African context is the King Report on Corporate Governance (I & II, Number III is due mid October 2009). It goes beyond financial and regulatory matters to focus on social, ethical and environmental issues in seeking an appropriate balance between the interests of shareowners and other stakeholders. It includes sections on risk management, internal audits, integrated sustainability reporting, accounting and auditing and compliance and enforcement. Most of these variables are also entwined into the so-called “temple of corporate reputation” of Fombrun & Gardberg (2000).
Some organisations neglected the aspects of corporate governance in managing processes. The King Reports on Corporate Governance provides a description of what corporate citizenship entails and that companies need to contribute significantly to sustainableeconomic development. The purpose of this paper is to describe the developing context of South Africa in which organizations conduct its corporate governance. The paper further explores the King Reports on corporate governance as well as the role that corporate communication can play in the enhancement of corporate reputations.
South African case studies were selected to illustrate how their corporate communication, codes of conduct and stakeholder relationships contributed to the reputations against the background of corporate governance.
Key words: corporate governance (triple bottom line – people, planet & profit), corporate citizenship, sustainability, King Reports I, II & III, corporate communication, corporate reputation.
CORPORATE GOVERNANCE IN DEVELOPING COUNTRIES: THE SOUTH AFRICAN EXPERIENCE
- INTRODUCTION
“A good name is more to be desired than great wealth and to be respected is better than silver and gold” (Proverbs 22:1).
According to Watson & Kitchen(IN: Melewar, 2008:123) reputation does not occur by chance:”It relates to leadership, management, and organizational operations, the quality of products and services, and – crucially – relationships with stakeholders”.
Each organization operates within a unique context. Within this context or environment organizations need to have sound relationships with their stakeholders due to the importance of their vested interests in the organizations’ performance. Post, Preston & Sachs (2002:7-9) emphasize that the long term survival and success of the organization is determined by its ability to establish and maintain relationships within its entire network of stakeholders. They also stress that it is relationships, rather than transactions that are the ultimate sources of organizational wealth: “The key to solving the core strategic problem is to understand the firm’s entire set of stakeholder relationships. These relationships are the essential assets that managers must manage, and they are the ultimate sources of organizational wealth”. The critical challenge for contemporary management is the recognition of the mutual interests between the organization and its stakeholders, which will ultimately lead to the development of consistent and supportive policies for dealing with them. Goodijk (2003:227) emphasizes that organizations can no longer ignore the feelings and the perceptions of and pressures from stakeholders.
Mahon (2002: 430) and Steyn & Puth (2000:187) insist that it has become crucial to understand the values and the expectations of each stakeholder group, their key issues and their willingness to expand resources in helping or hindering the organization strive towards its vision. These explanations increasingly emphasize ethical business conduct, environmental sustainability and human capital. Evidence hereof is the magnifying interest recently on sustainability and the triple bottom line (TBL) that necessitates a renewed interest on stakeholder relationships. Blair (IN: Clarke, 2004:174) accentuates that according to the view that the goal of corporate governance mechanisms and the responsibilities of corporate directors are to see that the firm maximizes wealth creation. However, a fast growing tradition of a wider spectrum of wealth creation emerged in recent years.
Simmons (2004:602) is of the opinion that new rules of corporate governance require the organization’s constituencies to be managed in a socially responsible way with decision makers gaining legitimacy by recognizing an ethical dimension to the actions they take. He refers to this type of management as “moral management” which gives due consideration to employee and wider stakeholder interests. This perspective is related to issues in organization-stakeholder relationships. Corporate governance seems to function on the relationship between business and society by emphasising economic, environmental and social sustainability (the triple bottom line). Grayson, Rodriguez, Lemon, Jin, Slaughter & Tay (2008:2) explain this intricate balance in their proposed approach to corporate sustainability. The traditional management strategies solely driven by shareholder value objectives and shareholder returns is primarily unsustainable.
Sustainability in Africa has been questioned from numerous platforms. However, South Africa has often been held as an example where sustainability is applied (See Marais, et al., 2001). According to the African Growth and Opportunity Act (AGOA, 2009) South Africa is a middle-income, developing country with an abundant supply of resources, well-developed financial, legal, communications, energy, and transport sectors, a stock exchange that ranks among the 10 largest in the world, and a modern infrastructure supporting an efficient distribution of goods to major urban centers throughout the region. South Africa has been burdened with high unemployment, and economic problems of which some remain from the apartheid era, such as problems of poverty and lack of economic empowerment among the disadvantaged groups. Other problems are violent crime, corruption, and HIV/AIDS. The South African Government constantly addresses these challenges. The country has been fortunate to have enjoyed sustained growth backed by stable interest, inflation and exchange rates (AGOA: 2009). Unfortunately one of the most challenging burdens to date is corruption and unethical management of organizations.
“South Africa is one of the United States' leading trading partners in Africa, and accounts for the most diverse trade flows. Total trade between the two countries has been increasing steadily in recent years, with South Africa holding an increasing trade surplus since 1999. This amounted to $ 3,3 billion in 2006. U.S. exports to South Africa far exceed US exports to any other country from Sub-Saharan Africa (SSA), emphasizing the importance of the latter’s access to the South African market. In terms of SSA exports to the United States, South Africa's exports rank second after those of Nigeria, with Gabon’s exports being in third position. However, the latter two countries' AGOA exports consist mainly of energy-related products (mostly oil), whereas South Africa's AGOA exports were highly diversified. Exports qualifying under AGOA amounted to $ 1,8 billion in 2006 (2005: $ 1,5 billion), although this figure includes exports under the GSP program, of which AGOA is essentially an extension (see link to Country Trade Profile below). Exports of products that were added under AGOA amounted to $ 717 million in 2006 (2005: $ 455 million). Of South Africa’s exports of textiles and apparel to the US in 2006 ($ 47 million), $ 42 million were AGOA-eligible items. South Africa does not benefit from the 3rd country provisions, and is required to source local or regional fabric made from African or US yarn” (AGOA: 2009).
Loubser (1997: no page) confirms that during 1997 the Johannesburg Stock Exchange (JSE) accounts for 94% of the market capitalization of Africa, with 615 listed companies and more than 10 000 daily trades. Today these figures more than tripled.
With regard to the above context the following research questions are put forward: Why the renewed interest incorporate governance and corporate citizenship in strategic management as illustrated by emphasis on the King III Report on Corporate Governance? What do the King Reports entail and why is there such an emphasis on it in Southern Africa? How can corporate reputations be influenced through corporate governance? What is the role of corporate communication in corporate governance and relationship building with stakeholders?
- PROBLEM STATEMENT AND RESEARCH AIM
With regard to the above research questions above the following research problem is formulated:
Few academic studies in a developing context like Southern Africa integrate corporate governance, the King Reports on Corporate Governance and corporate reputation. On face value these concepts function independently, however the intricate relation between these variables are linked by corporate communication and sound stakeholder relations. The communication of governance aspects and stakeholder relations impact directly upon the reputation of organizations – positive or negative. The research aim of this paper is to describe the interdependency of these variables within a developing context in order to explainthe impact of corporate governance on the reputation of selected cases as well as the role of corporate communication in facilitating this impact.
It is imperative that corporate governance is prioritized as an important strategic asset that contributes favourably to the corporate reputation of organizations and therefore needs to be integrated into the communication strategy of corporate institutions. This paper proposes to review current academic literature on Corporate Governance and corporate reputation management in a developing context, while the broad guidelines regarding the King Reports are described. The King III Report on Corporate Governance will only be released in October of 2009, however, the Institute of Directors in Southern Africa, published the draft concept (See: on which the comments of this paper is based).
This paper further aims to provide a conceptual approach linking corporate governance, corporate citizenship, the King Reports on Corporate Governance, the role of corporate communication and stakeholder relations in corporate reputation management. In order to illustrate this interdependence, reference will be made to case studies within the Southern African context. The specific research objectives are:
RO 1: To contextualize why corporate governance became a more prominent focus in strategic management in South Africa.
RO 2: To indicate how corporate reputations are enhanced or diminished through corporate governance plans in organization.
RO 3: To describe the role of corporate communication in relationship building with stakeholders.
- RESEARCH METHOD
A qualitative research approach is used to answer questions about phenomena that were identified in the research questions and research objectives. The research often focuses on describing and understanding the phenomenon from the point of view of the participants (Creswell,1998:15 and Leedy & Ormrod, 2005:94). A study on the relation between corporate governance, corporate reputation and corporate communication is exploratory in nature within the South African context. The paper intends to explore and describe the variables as indicated and it intends to integrate the findings into a feasible framework to apply these abstract concepts. Five cases are included to illustrate the interrelationships between these variables. This paper is not a case study research methodper se, nor a case study analysis.
ThreeSouth African cases that were selected reflect scenarios where seemingly positive corporate reputations of the organizations were negatively influenced by theirbusiness actions. Eventually these perceptions were altered more positively through consistent and sustainable stakeholder engagements: AngloGold Ashanti’s decision to re-enter the Ituri district in the DRC for mining, the squatter camps of Impala Platinum mine near Rustenburg and Sasol petroleum and human rights in Mozambique are examples of this nature. The
Two other South African cases were selected for their excellent stakeholder relations: the Mama Afrika – Ukwakha Isizwe project of Clover for community involvement and the Gautrain project that unites the country due to its magnitude and engineering ingenuity. The Gautrain project is the first rapid rail system for Africa and one of the biggest infrastructure projects in South Africa. It has become a symbol of pride, prosperity and progress for the continent. These two are examples of organizations that researched and applied sound stakeholder relations prior to the inception of their respective programs.
4.LITERATURE REVIEW
4.1CORPORATE GOVERNANCE IN SOUTH AFRICA AS A PROMINENT FOCUS IN STRATEGIC MANAGEMENT
“Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals…the aim is to align as nearly as possible the interests of individuals, corporations and society” (Cadbury,
Corporate governance is regarded as the system by which organizations; particularly business corporations are directed and controlled by their owners (Carpenter & Sanders, 2009:466). Most organizations have some form of governance in place. However, corporate governance addresses the distribution of rights and responsibilities among different participants in the organization according to the above authors. This includes the board, managers, shareholders and other stakeholders. It spells out the rules and procedures in decision making on corporate affairs. As such it provides a structure by which the organization’s objectives are set and the means of attaining those objectives and monitoring the performance.
The term corporate governance has only recently emerged, but since the earliest of days it has been a subject of controversy according to Clarke (2004:1). He further contends that governance has proven an issue since people began to organize them for a common purpose.
4.1.1Corporate citizenship
Waddock (2006: 4) quotes the then UN Secretary-General Kofi Annan in an address to The World Economic Forum on January 31, 1999: “Business is integrally connected to both the social context in which it operates and the natural environment on which we all depend” launched the United Nations Global Compact (also known as Compact or UNGC), is a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. The Global Compact is a principle based framework for businesses, stating ten principles in the areas of human rights, labor, the environment and anti-corruption. [ (Accessed: 25 August 2009)].
Corporate citizenship involves more than meeting the discretionary responsibilities associated with philanthropy, volunteerism, and community relations and doing social good. Waddock (2006:5) stresses that this goes beyond the above and includes the responsibilities that were traditionally assigned to governments that are now part of the organization’s role:labor and human rights, environmental sustainability, anticorruption measures that are met in all the organizational strategies and operating practices as well as the outcomes and implications of corporate activities.
Lawrence, Weber & Post (2005:294) and Steiner & Steiner (2006:597) maintain that corporate governance is the overall control of activities in a corporation. It is concerned with the formulation of long term objectives, strategies and plans and the proper management structure (organization, people and system) to achieve them. It is referred to as the legal checks and balances that define the rights and limit powers of the shareholders, boards of directors and managers. Carpenter & Sanders (2009:467) emphasize that by sound managing of corporate governance it provides the structure through which the company’s objectives are set, the means of attaining those objectives and monitoring performances. A broader stakeholder view of governance is that the firm, as a function of its governance has the responsibility to benefit other stakeholders beyond shareholders. It is therefore also called the “triple bottom line” that includes people (social objectives), planet (environmental objectives) and profit (financial performance).
4.1.2The triple bottom line
The phrase was coined in 1989 by John Elkington, co-founder of a consultancy focused on sustainability. The Triple Bottom is an ongoing process that helps a company keep on track towards running a greener business and demonstrates to the community at large they are working not just towards riches, but the greater common good. Without people and planet - there simply is no profit to be made. The explanation below is an adopted summary of the triple bottom line according to Green Living Tips[ com/articles/264/1/Triple-bottom-line.html: (Assessed 19 August 2009)]:
(a)People (social objectives)
This is also known as Human Capital. It implies that organizations should treat its employees as well as the community where the organization operates fairly and humanely. As a result: “business not only ensures a fair day's work for a fair day's pay; but also plows back some of its gains into the surrounding community through sponsorships, donation or projects that go towards the common good” [ com/articles/264/1/Triple-bottom-line.html: (Assessed 19 August 2009)].
(b)Planet (environmental objectives)
This is referred to as Natural Capital. A business will strive to minimize its ecological impact in all areas - from sourcing raw materials, to production processes, to shipping and administration. It's a "cradle to grave" approach and in some cases "cradle to cradle" i.e. taking some responsibility for goods after they've been sold - for example, offering a recycling or take-back program. A triple bottom line business will also refrain from the production of toxic items.
(c)Profit (economic objectives)
It is also referred to as financial capital emphasize. This is more about making an honest profit than raking in a profit at any cost - it must be made in harmony with the other two principles of People and Planet.