MBA 8 BUSINESS ETHICS & CORPORATE GOVERNANCE · 2018. 8. 13. · BUSINESS ETHICS & CORPORATE GOVERNANCE Class 2a. MBA8 BECG CLASS SCHEDULE 2017. MBA 8 BUSINESS ETHICS & CORPORATE

www.regenesys.co.za

Brad BellApril – May 2017

MBA 8

BUSINESS ETHICS & CORPORATE GOVERNANCE

Class 2a

MBA8 BECG CLASS SCHEDULE 2017

MBA 8BUSINESS ETHICS & CORPORATE GOVERNANCE

KING IVTM

*This intro contains enrichment material that is not in the study guide

PROGRAMME

Practical • King IV• King IV for SMMEs

Case Study• South African “parastatals”

Study Guide• Section 7.2 – Managing ethics in business

KING IVTM, 2016

• Please note that IODSA has trademarked King IV, King IV Report, King IV Code, etc. and copyrighted the entire publication.

DOWNLOAD YOUR KING IVTM COPY NOW

http://www.iodsa.co.za/page/KingIVReportDon’t rely on the short extracts that follow – they are no substitute!

KING IVTM – SHORT & SWEET

• King IV is significantly shorter than King III (it only has 16 principles)

• It comes packaged in 1 book with principles, code and sector supplements all together

WHY SHORTER AND SIMPLER?

Universal Applicability• “The King Committee was requested by many entities

outside the private sector to draft King IV in such a way as to make it more easily applicable to all organisations: public and private, large and small, for-profit and not-for-profit

• King IV has been drafted with this in mind. Thus, for example, it talks of organisations and governing bodies, rather than simply companies and boards of directors.

• Another innovation aimed at making it easier for all organisations to use the King IV Report as a guide for good governance is the inclusion of sector supplements”

(IODSA King IV, 2016: 6)

INTRODUCTION

• “The 21st Century has been characterised by fundamental changes in both business and society ... and have influenced both [King IV’s] content and approach.

• New global realities are testing the leadership of organisations on issues as diverse as inequality, globalisedtrade, social tensions, climate change, population growth, ecological overshoot, geopolitical tensions, radical transparency and rapid technological and scientific advancement.

• The United Nations Sustainable Development Goals … the Africa 2063 Agenda and the SA National Development Plan 2030 have a common theme of value creation that is accomplished in a sustainable manner. This is a fundamental concept of King IV”.


THE CHANGED WORLD

• “Financial instability is one driver of these changes. Financial crises arising out of capital crisis in the United States of America and the Sovereign Fund crisis in the European Union have not been resolved. Brexit created further uncertainty for financial systems

• Another change driver is climate change. Even those who are skeptical about the scientific evidence for climate change, or who question whether climate change is attributable to human agency or simply part of a longer-term cycle, have to acknowledge that the world has experienced extreme weather conditions that pose new risks in the last several years”


• “It is a reality that organisations and individuals are using assets faster than nature is regenerating them. This ecological overshoot will be exacerbated by continued population growth on the African and Asian continents. The global population is currently at 7.6 billion, and could reach 9.3 billion by 2046 according to the United Nations …

• Ubiquitous social media platforms are creating a world characterised by radical transparency. Corporations can no longer conceal their actions or secrets. Technological advances, including the emergence of the Internet of things, are generating huge amounts of data; more importantly, sophisticated analytics is converting that data Into deep insight into the behaviour of humans and their organisations”


• “Technology's disruptions continue … robotics, artificial intelligence, 3D printing, nanotechnology and biotechnology are accelerating the transformation of production and supply chains — and forcing professions like law and accounting to reinvent themselves. Indeed, so profound are the disruptions to industries and business models that many believe we are in the midst of the Fourth Industrial Revolution

• There are greater expectations from stakeholders than ever before. Activism by civil society and shareholders have rocked companies over the last few years. The Millennial Generation (Millennials), roughly those born since 1980, is now the most numerous age cohort Their concerns are beginning to set the global agenda”


• “Millennials have shown that they are concerned about the global environmental crunch much more than the global financial crises. They are consequently attracted to companies who have integrated the six capitals into their business models (financial, manufactured, human, intellectual, natural and social and relationship capital)

• In a similar vein, it is now accepted that organisations operate in the triple context of the economy, society and the environment. How they make their money does have an impact on these three elements and, in turn, they impact on organisations.

• In the context of all the above, governing bodies have the challenge of steering their organisations to create value in a sustainable manner, making more but with less to meet the needs of a growing population and the reality of dwindling natural resources.

(IODSA King IV, 2016: 3 – 4)

KING IVTM APPROACH

• “King IV has moved from "apply or explain" to "apply and explain" , but has reduced the 75 principles in King Ill to 17 basic principles in King IV, one of which applies to institutional investors only …

• 16 of these principles can be applied by any organisation, and all are required to substantiate a claim that good governance is being practised …

• The required explanation allows stakeholders to make an informed decision as to whether or not the organisation is achieving the four good governance outcomes required by King IV”


DEFINITION OF CORPORATE GOVERNANCE

• “Corporate governance” is defined as the exercise of ethical and effective leadership by the governing body towards the achievement of the following governance outcomes:-• Ethical culture• Good performance• Effective control• Legitimacy

• “Corporate” … is used to differentiate it from other forms of governance, for example national or political governance. "Corporate" refers to organisations that are incorporated to form legal entities separate from their founders and therefore applies to all forms of incorporation whether as company, voluntary association, retirement fund, trust, legislated entity or others” (IODSA King IV, 2016: 11)

FUNDAMENTAL CONCEPTS

(IODSA KING IV,2016: 11)

KING IVTM HELPS YOU CATCH THE BIG FISH!

• “Regulation 28(2)(c)(ix) of the Pension Funds Act: “before making an investment in and while invested in an asset [the fund and its board must] consider any factor which may materially affect the sustainable long-term performance of the asset including, but not limited to, those of an environmental, social and governance (“ESG”) character”

• Principle 1 of the Code for Responsible Investing in South Africa (CRISA): institutional investors “should incorporate sustainability considerations, including ESG issues, into their investment processes as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries”



OUTCOMES, PRINCIPLES

& PRACTICES

APPLY IN PROPORTION TO RESOURCES, ETC.

• “Even where not expressly stated in the Code, practices are meant to be scaled in accordance with the following proportionality considerations particular to the organisation:• Size of turnover and workforce• Resources• Extent and complexity of activities, including impact on

the triple context in which it operates”(IODSA King IV, 2016: 37)

KING IVTM PRINCIPLES

• “Principle 1: The governing body should lead ethically and effectively

• Principle 2: The governing body should govern the ethics of the organisation in a way that supports the establishment of an ethical culture.

• Principle 3: The governing body should ensure that the organisation is and is seen to be a responsible corporate citizen. Principle 4: The governing body should appreciate that the organisation's core purpose, its risks and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process”


• “Principle 5: The governing body should ensure that reports issued by the organisation enable stakeholders to make informed assessments of the organisation's performance and its short, medium and long-term prospects.

• Principle 6: The governing body should serve as the focal point and custodian of corporate governance in the organisation.

• Principle 7: The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively.

• Principle 8: The governing body should ensure that its arrangements for delegation within its own structures promote independent judgement, and assist with balance of power and the effective discharge of its duties.”


• “Principle 9: The governing body should ensure that the evaluation of its own performance and that of its committees, its chair and its individual members, support continued improvement in its performance and effectiveness.

• Principle 10: The governing body should ensure that the appointment of, and delegation to, management contribute to role clarity and the effective exercise of authority and responsibilities.

• Principle 11: The governing body should govern risk in a way that supports the organisation in setting and achieving its strategic objectives.

• Principle 12: The governing body should govern technology and information in a way that supports the organisation setting and achieving its strategic objectives”

(IODSA King IV, 2016: 40 – 41)

• “Principle 13: The governing body should govern compliance with applicable laws and adopted, non-binding rules, codes and standards in a way that supports the organisation being ethical and a good corporate citizen.

• Principle 14: The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.

• Principle 15: The governing body should ensure that assurance services and functions enable an effective control environment, and that these support the integrity of information for internal decision-making and of the organisation's external reports.

• Principle 16: The governing body should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time”


KING IVTM PRACTICES

“BUSINESS CONTINUITY”

• Part 5.4 Governance Functional Areas

• Risk Governance• Principle 11: The governing body should govern risk in a

way that supports the organisation in setting and achieving its strategic objectives.

• Recommended Practices• 6(e) The establishment and implementation of business

continuity arrangements that allow the organisation to operate under conditions of volatility, and to withstand and recover from acute shocks”


www.regenesys.co.za

ENDOF

THEUNIT

Congratulations!Nice going … !!

PROGRAMME

Practical• King IV• King IV for SMMEs

Case Study • South African “parastatals”

Study Guide• Section 7.2 – Managing ethics in business


SOUTH AFRICAN PUBLIC SECTOR

*This intro contains enrichment material that is not in the study guide

STATE AND “PARASTATALS”

PFMA / MFMA King Code Companies Act

“State” “Parastatals”National government

departmentse.g. *SAA, Eskom, etc.

Provincial government departments

e.g. GP Growth & Development Agency, GP

Enterprise Propeller, GP Film Commission,

Gauteng Tourism Authority, etc.

Local Government municipalities

e.g. Utilities (City Power, Joburg Water, Pikitup,

etc.); Agencies (Joburg Roads Agency, CityParks,

Joburg Development Agency, etc.), and

Companies (Joburg Zoo, Metrobus, Fresh

Produce Market, etc.)

WHAT IS A STATE-OWNED COMPANY?

Companies Act No. 71 of 2008 (as amended)

• “state-owned company” means an enterprise that is registered in terms of this Act as a company, and either-a)is listed as a public entity in Schedule 2 or 3 of the Public

Finance Management Act, 1999 (Act No. 1 of 1999); or b)is owned by a municipality, as contemplated in the Local

Government: Municipal Systems Act, 2000 (Act No. 32 of 2000), and is otherwise similar to an enterprise referred to in paragraph (a)

HOW MANY NAT AND PROV SOCs DO WE HAVE?

About 300 “main” SOCs …

PLUS MUNICIPAL ENTITIES …

• E.g. City of Joburg

CORP GOV IN ANNUAL REPORT OF JPC

HOW DO WE IDENTIFY WEAKNESS IN SOCs?

Corp Gov of SOCs

1. Changes over time

2. Government reviews

3. Independent research

4. Auditor-General Reports

5. Media reports

6. “Watchdog” investigations

EVALUATING CORPORATE GOVERNANCE OF SOCs

1. Changes over time 2. Government reviews3. Independent research4. Auditor-General reports5. Media reports6. Watchdog investigations

(a) NATIONALLY

• At the start of its investigation, the PRC received a list of recognised SOEs from National Treasury comprising approximately 300 entities …

• For the sake of completeness, the PRC compiled a consolidated national database of SOEs that includes subsidiaries, trusts and section 21 companies … [which] established that as at end May 2012 there were approximately 715 SOEs (including chapter nine institutions) ...

• With such a large portfolio of SOEs, the PRC had to pay particular attention to the capacity and capability of the State to effectively oversee these SOEs and identify the best options to manage SOEs without compromising their service delivery and financial performance

(PRC of SOEs, 2013: Vol 1 Pg 8)

(b) LOCALLY

• Johannesburg - Joburg’s entities such as Pikitup, City Power and Johannesburg Water are soon to be dissolved and the staff reintegrated into the city …

• The city was the sole shareholder of these entities, but they operated under the Companies Act and were semi-autonomous of the city, he pointed out …

• “Boards have all the powers of directing service delivery through these entities with zero accountability to the residents,” he added …

• The non-executive directors on the boards would be the only individuals to lose their positions during this process. This would save the city millions of rand annually, with the salaries of non-executive board members totalling R18million in the current financial year


1. Changes over time

2. Government reviews 3. Independent research4. Auditor-General reports5. Media reports6. Watchdog investigations

(a) PRC OF SOEs

• Report of the Presidential Review Committee (PRC) of state-owned entities (SOEs), 2013

• http://www.gov.za/sites/www.gov.za/files/presreview.pdf

http://www.gov.za/sites/www.gov.za/files/presreview.pdf

(b) CHALLENGES IDENTIFIED

• The legislative framework for SOEs was found to be inadequate, displaying evidence of conflict and duplication.

• The governance, ownership policy, and oversight systems were found to be inadequate.

• The quality of the board and executives’ recruitment was found to be inadequate.

• There is no clarity on the role of the executive authority; boards; and the Chief Executive in the governance and operational management of SOEs.

• The remuneration frameworks and practices are inconsistent … and influence the supply and demand for skilled personnel in the market

(PRC of SOEs, 2013: Vol 1 Pg 8)


1. Changes over time2. Government reviews

3. Independent research 4. Auditor-General reports5. Media reports6. Watchdog investigations

INDEPENDENT RESEARCH BY USB

Six areas of weakness in South African SOCs:-1. Corporate governance incompetence causes poor results 2. Poor selection and development of Boards and Executives 3. Constant turn-over of key players disrupts good practice 4. Dysfunctional working relationships 5. Inadequate structures, systems and fragmented processes 6. Lack of moral norms resulting in corrupt practices

(McGregor, 2015: 5)


1. Changes over time2. Government reviews3. Independent research

4. Auditor-General reports 5. Media reports6. Watchdog investigations

(a) SUMMARY OF PFMA AUDIT, 2016

(b) AUDIT OF SOCs, 2016

(c) SOC AUDIT RESULTS, 2016

Audit Opinion No. of SOCs

UnqualifiedWith no findings Armscor

With findings 5

Qualified SAPO and SABC

Disclaimer IDT

Adverse -

Too late SA Express

(d) WHAT DO AUDIT RESULTS TELL US?

• Whether the claims the SOCs are making (e.g. in their annual reports, containing performance reports and financial statements) accurately reflect the true state of affairs

• So what will an auditor’s opinion be if an SOC has operated badly, at a heavy loss, with board instability, high staff turnover, and poor service delivery – but the SOC accurately and honestly reports all this bad news in their annual report and financial statements … ??


1. Changes over time2. Government reviews3. Independent research4. Auditor-General reports

5. Media reports 6. Watchdog investigations


1. Changes over time2. Government reviews3. Independent research4. Auditor-General reports5. Media reports

6. Watchdog investigations

http://www.pprotect.org/library/investigation_report/ investigation_report.asp

http://www.pprotect.org/library/investigation_report/2015-16/prasa_final_28_august_2015.pdf

www.regenesys.co.za

ENDOF

THEUNIT


PROGRAMME

Practical• King IV• King IV for SMMEs

Case Study• South African “parastatals”

Study Guide • Section 7.2 – Managing ethics in business


SECTION 7.2PAGE 32

Managing Ethics in Business

MODULE OUTLINE

General intro to BECG and “hubris”

7.1 Intro to business ethics and corporate gov

7.2 Managing ethics in business

7.3 Regulating BECG in BRICS countries

7.4 Risk Management

Assignment

www.regenesys.co.za

https://www.youtube.com/watch?v=njf3jhaihtq

7.2.1 INTRODUCTION TO ETHICS IN BUSINESShttps://www.youtube.com/watch?v=njf3jhaihtq

7.2.2 CONTROL MEASURES

• In the context of business, unethical behaviour refers to any activity that is branded as morally unacceptable by the society in which the corporation exists or by the corporation itself, e.g.:-• Bribery and corruption, nepotism, or unfair employment

practices• Fraud, theft, financial discrepancies, or dishonesty• Child or forced labour, infringing intellectual property /

plagiarism • Restricting employees’ labour or human rights

7.2.3 ETHICAL CONTROLS

Ethical controls serve to guide ethical behaviour in organisations, and are associated with:-• Locus of control: Internal (master of your own destiny) vs

external (victim of circumstance)• Ethics programmes:

• An ethics code• Ethics committees• Ethics communication (whistleblowing) systems• Ethics officers or ombudspersons• Ethical processes, e.g. ethical performance appraisals,

ethics awareness programmes, etc.• Disciplinary procedures• Ethical audits (external)

7.2.4 TRANSPARENCY

• In the context of business ethics, transparency refers to the accurate reporting of a company’s operations, including its financial reporting

• ‘The extent to which investors have ready access to any required financial information about a company such as price levels, market depth and audited financial reports. Classically defined as when “much is known by many”, transparency is one of the silent prerequisites of any free and efficient market. When transparency relates to information flow from the company to investors, it is also known as “full disclosure”.’

FINANCIAL TRANSPARENCY

• Transparency refers to financial statements that are of an acceptable quality standard

• The more information is available to investors, the more they can trust the company

• A lack of financial transparency can amount to:-• Fraudulent behaviour• False information• Making investments that aren’t real• Plans designed to conceal something (i.e. multiple

businesses in one)• Complex tax schemes

7.2.4 CORPORATE SOCIAL RESPONSIBILITY

• All corporations have obligations to the societies in which they are operating. Corporate social responsibility is predicated on the concept of corporate accountability

• Shareholder view: The only responsibility a corporation has is to act legally and ethically in order to make as much money as possible for its shareholders above all else

• Stakeholder view: The interests of all the stakeholders, and not just the shareholders, of a company must be considered in corporate governance

ELEMENTS OF CSR

INVESTMENT CRITERIA• Socially responsible investing resulting from the rise in

ethical concerns has meant that investors have started to stipulate criteria in the management of their money, such as:-• Demands for a cohesive investment strategy so that

investing includes more than one asset class• Desires for certain shares to be included where investors

have attachments to these shares• Increasing pressure to follow the United Nations initiative,

“Principles for Responsible Investment”• The fact that proposals often include corporate

governance principles as a prerequisite demand• Socially conscious investors want their financial capital to

have a positive effect on the world and to generate optimal returns

ENVIRONMENTAL ETHICS

• Part of corporate social responsibility is to the environment, which has become a major concern for communities around the world with the rise in fears about global warming

• There is increasing pressure on businesses to minimise hazards caused to the environment by corporate activities, e.g. hazardous dumping of waste

www.regenesys.co.za

https://www.youtube.com/watch?v=3a-tltqm8yu

VIDEO: https://www.youtube.com/watch?v=3a-tltqm8yu

7.2.5 IMPACT OF ETHICS ON BUSINESS PROFITABILITY

• One of the objections to business ethics is based on the fact that organisations exist in order to make a profit and not to satisfy the ethical expectations of the community

• However, socially responsible investing can increase profitability, e.g. through:-• Social screening• Shareholder advocacy• Community investment• Triple bottom line

SOCIAL SCREENING

• Social screening refers to the way in which investors either invest or divest in a company based on its track record of social responsibility.

• It is based on the assumption that companies will do well or badly based on how well they perform according to social responsibility standards. It is divided into:• Negative screening• Positive screening

• Negative screening happens when an investor divests stock based on their assessment of a company’s social responsibility practices

• Positive screening occurs when an investor is attracted to a company based on its social responsibility practices, which thus increase the company’s profit margins.

SHAREHOLDER ADVOCACY

• There are three types of shareholder advocacy actions that can be followed:• Discussions with management (the first step in

approaching socially responsible ideas);• Shareholder Resolutions (if discussions are

unsuccessful, a proposal has to be made and submitted to management); and

• Boycotts (if discussions and the resolution process have failed, then consumers refuse to purchase a company’s product or conduct business with the company).

• By following ethical business practices, a company can avoid the negative impact caused by boycotts or strained relations with management.

COMMUNITY INVESTMENT

• This is the process where investments are made in socially disadvantaged or impoverished communities where financial services have not been properly established

• This type of investment aims to provide financial services that were previously unavailable in these communities. It involves giving communities these previously unavailable financial services such as banking, credit, equity, and healthcare

• But it can also include strengthening the community by building houses or creating employment opportunities. Alternatively, a company may also choose to invest in a community by providing educational opportunities

TRIPLE BOTTOM LINE

• With the obvious objective of making a profit, business models should also consider the economic, social, and environmental factors influenced by their business plans• People• Planet• Profit

• This is called “the triple bottom line”, and is increasingly to be found (under various labels) in more and more companies’ integrated annual reports

• However, the problem is not defining the triple bottom line, but determining how to measure it

EXAMPLE 1: SHOPRITE (RSA)

SHOPRITE’S VALUES

“PEOPLE” HIGHLIGHTS

“PLANET” HIGHLIGHTS

“PROFIT” HIGHLIGHTS

Headline earnings are a measurement of a company's earnings based solely on operational and capital investment activities. It specifically excludes any income that may relate to staff reductions, sales of assets, or accounting write-downs.This method helps financial analysts obtain a clear picture of a company’s ability to generate revenues from its core business activities rather than from non-recurring events such as cost-cutting, sales of assets or accounting write-downs.

EXAMPLE 2: STARBUCKS (USA)

www.regenesys.co.za

ENDOF

THEUNIT


www.regenesys.co.za

Have a good evening!

MBA 8 BUSINESS ETHICS & CORPORATE GOVERNANCE · 2018. 8. 13. · BUSINESS ETHICS & CORPORATE GOVERNANCE Class 2a. MBA8 BECG CLASS SCHEDULE 2017. MBA 8 BUSINESS ETHICS & CORPORATE

Documents