Challenges of Governance in South Africa and Abroad

1. Challenges of Governance in South Africa and Abroad ISACA and Network Finance 23 July 2008 Presented by: Prof Mervyn E King SC

2. Changed world of governance • 1855 limited liability • Wealthy families • Latter half of 20th Century • Shareowner revolutions – politicians • ICT – borderless world • Exclusive/inclusive • Created and destroyed • Scandals

3. Reaction • Comply or else – Sarbanes-Oxley • Guidelines • Comply • Explain • The South African Companies Bill? • Hybrid

4. The company today • Company larger than governments • Integral to society • Civil economy • Reports – preparers and users • After quality of product • Building trust in company • Agents for change

5. Governance about process • Processes to discharge and for directors to be seen to be discharging their responsibilities • Enterprise – strategic • Risk for reward – failure • Good governance and failure • Acceptable • Bad governance – failure – scandal • Not acceptable

6. A director’s duties - responsibilities • Good faith • Care • Skill • Diligence • 150 years of jurisprudence • The Companies Bill

7. Incapacitated person • Human being • Best interests, care, skill, diligence • Decent citizen thing to do • Company an artificial citizen • Incapacitated • Director, heart, mind and soul

8. Multi-national companies • Operating in 150 countries • Function of board? • Court’s realisation • National, lingual, cultural, legal

9. Internal Audit

10. Internal audit • Effective IA function necessary • IA planning informed by strategy • Key contributor to achieving strategy • Objective provider of assurance

11. Assurance of what? • Adequate controls • Quality of corporate information • Identify risks that may impede goals • Identify opportunities to realise goals • Timeous and assessed adequately

12. Strategy • Board responsible, but developed by management • IA included in strategy development process • Better understand risks and opportunities • Assurance that management oversight, risk management and adequate controls act in a coordinated manner

13. Accountable • Assessment of adequacy of controls • Assessment of the three elements in tandem • Audit Committee to consider • Audit Committee to report to board • Board signs adequacy of controls • Audit Committee to appoint and dismiss CAE • Access to board chairman

14. Assessment • Should express clearly : • Evaluation criteria • Scope • Period • Who has responsibility for what

15. Internal Audit relationship • Right arm of the board • Communication skills • Credibility • Boardroom presence • Challenge effectiveness of risk management • Fulfil regulatory requirements

16. Attributes • Chameleon – risk changes means scope of IA has to change • Leadership skills • Communicator • Strategic mindset • Networker

17. Corporate world • Changed in last five years • Sustainability issues are risks • IA/risk management relationships • Included in IA functions

18. Assurance needs • Strategy • Controls • Compliance • Treasury • CR & S • Health and safety

19. IA has to be intellectual

20. Alternative Dispute Resolution

21. Disputes • Resolution • ADR in contracts • Cross border • Management tool

22. Relationships • In business circle • Build relationships • Dispute/litigation • Destroys relationship • Duty to resolve/preserve

23. ADR and the company • Dispute with company • Officers • Investors • Suppliers/customers • Regulators • Communities

24. Management of relationships • A business relationship • Company and major customer • CalPERS • Ford and Firestone

25. Mediation advantages • Novel • Quicker • Less expensive • Confidential • Preserves relationships • Cost of executive time saved • Dilution of focus when litigate

26. ADR a mechanism • A value add • To a commercial relationship • Mechanism to manage • Cost and time • Duties and efficiency

27. Contracted mediation • ADR framework in place at beginning • Parties owners of process – attuned • Conflict prevention • Communication • Build trust • Value of immediate knowledge

28. Questions by a board? • System of early case assessment • Mechanisms addressing employee dispute • Critical procurement contracts • Agreed cross-border mechanisms

29. Upfront in the constitution • Administered ADR • Upfront collaborative solver • Between stakeholders • And the company • IFC

30. Legal recognition • Ireland • Germany • Canada • World bodies • The disappearing civil trial

31. Obstacles • Constitutional right of access to courts • Rights not absolute • Limitations • Enforce good faith? • Time, languages, place, etc? • Enforcing a process

32. Corporate governance check • Have you got ADR with stakeholders? • Decent citizen • World is flat • New constitution of commerce • ADR a dual function • Build business trust – director’s duty • IOD/AFSA clause : • www.arbitration.co.za • www.iodsa.co.za

33. Sustainable development as a business opportunity

34. Business opportunity • 100 largest economies • Pervasive change is sustainability • Philanthropy • CSI • Added value – business opportunity • Alterantive energy resource boom

35. Market capitalisation • Not equal to book value – assessment • Brand and goodwill • Reputation of management and board • Quality of governance and management • Sustainability of the business • Strategic direction • Non-financial aspects, so-called

36. 20 % ? market value $ 105,586 mil 30/09/03 67% Brand value $ 70,453 mil (Interbrand) 13% Book value $ 13,560 mil 30/09/03 Measuring company’s economic value source: SAM

37. Intangible assets • Reputation • Brand • Quality of management and board • Sustainability issues • Procter & Gamble • Coca Cola • Anglo American

38. Stakeholders • Financial information • Backward looking • Forward looking information • First priority – product • Second priority – trust and confidence

40. IT governance

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

42. IT security • Napoleon – the wax seal • Unauthorised • Use • Access • Changes • Cryptography – decryption • Legislation

43. Independence of directors • Ten year “rule” • ASX abandoned it • Critical bystander – perception • Assess independence annually

44. Sarbanes-Oxley • 404 difficulties • As5 amelioration by SEC • Legal? • Rigidity and flexibility • Adopt or explain

45. Reporting • Preparers and users • “How has the company positively and negatively affected the economic life of the community in which it operates?” • “How does the company intend to enhance the positive aspects and eradicate or ameliorate the negative aspects in the year ahead?”

46. Director’s liability • D&O insurance • Business judgment rule • No financial interest • Objectively all the facts • Rational business decisions at that time • Hindsight and foresight

47. A journey • Cadbury, etc and the Combined Code of the UK • King I, II and III Every day you may make progress. Every step may be fruitful. Yet there will stretch out before you an ever-lengthening, ever-ascending, ever-improving path. You know you will never get to the end of the journey. But this, so far from discouraging, only adds to the joy and glory of the climb.” Sir Winston Churchill

48. Thank You Prof Mervyn E King SC