ETHICS AND CORPORATE GOVERNANCE

ETHICS AND CORPORATE GOVERNANCE

Ethics has become a permanent and prominent feature of corporate governance in South Africa. According to the Kind Report on Corporate Governance, there are three key responsibilities that directors, collectively and individually, must discharge with regard to ethics. 

Ethics has become a permanent and prominent feature of corporate governance in South Africa. This growth in prominence can be traced through the three versions of the Kings Codes of Governance for South Africa. Whereas the First King Report (1994) addressed the topic of ethics almost as an afterthought in one of the last chapters, the Third King Report (2009) started with a chapter on ‘Ethical leadership and corporate citizenship’. This prominent positioning of ethics in King III reflects a growing recognition that ethics is indeed the foundation of good governance. It would not surprise if the Fourth King Report that is due for publication in 2016 continues to provide similar prominence to ethics. 

Business ethics is defined as follows in King III: ‘Business Ethics refers to the ethical values that determine the interaction between a company and its stakeholders.’ Business Ethics is thus about the ethical standards adopted by a company to guide staff on how they should behave towards one another and in their daily operations, but also how they should behave in their interactions with external stakeholders such as clients, suppliers and communities. 

There are three ethical responsibilities that directors, collectively and individually, must discharge with regard to ethics. 

ETHICAL DUTIES OF DIRECTORS 

First, individual board members have to accept that they have a set of basic ethical duties to the company over and above their other responsibilities as directors. It is impossible to discharge one’s duties as a director if one does not fulfil these ethical obligations towards the company. 

These ethical duties include the commitment of directors to always act in the best interest of the company and to avoid conflicts of interest that might detract them from doing so. Furthermore, these duties also include the ethical obligation to consider the legitimate interests of stakeholders, the responsibility to acquire the required knowledge and competence needed to fulfil one’s duty as director, and to act with ethical courage in board deliberations and decisions. 

These ethical duties of directors are discussed under the first principle of the Third Kind Report: ‘The board should provide effective leadership based on an ethical foundation.’ 

ETHICAL DUTIES TO SOCIETY 

The second ethical responsibility of directors is to ensure that the company acts as a responsible corporate citizen. The board has to ensure that, at a minimum, the company has no negative impact on society and the environment – and, if possible, a positive one. This governance duty is captured in Principle 1.2 of King III that states that ‘The board should ensure that the company is and is seen to be a responsible corporate citizen.’ 

The responsibility of the board to ensure that the company acts as a responsible corporate citizen was given statuary status with the Companies Act (2008) that requires certain categories of the companies to have a mandatory social and ethics sub-committee of the board. The prescribed mandate of this committee compels the committee to monitor and report on the impact of the company on the economy, the workplace, society and the natural environment. 

Whereas the Companies Act compels companies to monitor and report on their corporate citizenship, the King III Report reminds companies that it is in the interest of their own sustainability to do – so businesses need to build relationships with their stakeholders in society and depend on society’s health and the health of the natural environment to be sustainable. 

GOVERNING THE ETHICS OF THE CORPORATION 

The third governance responsibility that relates to ethics is probably the most demanding of the three responsibilities of the board regarding ethics. This responsibility relates to the obligation to ensure that the company integrates ethical standards into the way it operates. This responsibility is captured in Principle 1.3 pf the Kind III Report that states: ‘The board should ensure that the company’s ethics is managed effectively.’ 

This is a much more ambitious target than simply developing a code of ethics and implementing a whistle-blowing line. It requires the commitment of the board and the CEO to the company’s ethical standards, but also their oversight and strategic guidance of the ethics of the company. In addition, it entails that the board must ensure that there are effective ethics management processes in place as well as competent people to run them. The purpose of such an ethics management process is to ensure that staff, but also the company’s supply chain, are familiar with and adhere to the company’s ethics. 

The governance of ethics furthermore entails that the internal audit function of companies should assess the adequacy and effectiveness of ethics management processes and systems, and also that the ethics performance of the company is reported to stakeholders through integrated reporting. 

The governance of corporate ethics is recommended in the King III Report has unfortunately not been included in the mandate of the social and ethics committee as prescribed in the Companies Act (2008). Many leading companies have however since corrected this oversight by expanding the mandate of the social and ethics committee to also include the strategic oversight of the ethics of the company in the mandate of the committee. 

CONCLUSION 

The Third King Report on Governance for South Africa, in combination with the social and ethics committee requirement of the Companies Act (2008), has created conditions within which the ethical dimension of the corporate governance enjoys great recognition in South African than in most other jurisdictions. King IV is likely to provide further impetus to the prominence of ethics in corporate governance in South Africa. 

Reference: 

Deon Rossouw CD(SA) – CEO of Ethics Institute of South Africa (Accountancy SA)