Corporate Governance

and Growth Development

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 Public sector Corporate Governance
 The private sector model views shareholders as main stakeholders.
 In the public sector, those directly responsible for funding and the
community at large assume great importance as stakeholders.
 Stewardship and accountability of use of funds and assets is particularly
important in the public sector.
 It is becoming more important to focus on corporate governance in the
public sector to maintain faith in the system and promote better service to
the public.
 Good institutional governance should be instilled by the development of
governance systems in ministries and authorities, with the aim of focusing
on enhancing the quality of public services consistent with citizen
expectations, promoting compliance and conformance, with appropriate
transparency and flexibility.
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 Public Sector
• Definition:
1. “Businesses, industries or organization that are owned or controlled by
the government, or things that are related to theses businesses or
industries”
2. “The office and responsibilities of government”
(Cambridge Dictionary)
• Generally, the public sector consists of governments and all publicly
controlled or publicly funded agencies, enterprises, and other entities that
deliver public programs, goods, or services
• Public sector organizations may exist at any of four levels:
 International
 National
 Regional (a province/state within a nation)
 Local (a municipal-level body such as a city/ county/ district) 3

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 Public Sector

• At any of these levels, the public sector generally consists of at least

three types of organizations:
1. Core government consists of a governing body with a defined
territorial authority. Core governments include all departments,
ministries, or branches of the government that are integral parts of
the structure, and are accountable to and report directly to the
central authority

2. Agencies consist of public organizations that are clearly a part of the

government and deliver public programs, goods, or services, but
that exist as separate organizations in their own right — possibly as
legal entities — and operate with a partial degree of operational
independence. They often are, but not necessarily, headed by a
board of directors, commission or other appointed body 4

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 Public Sector
• At any of these levels, the public sector generally consists of at least three types
of organizations (continued):
3. Public enterprises are agencies that deliver public programs, goods or
services, but operate independently of government and often have their own
sources of revenue in addition to direct public funding. They also may
compete in private markets and may make profits. However, in most cases the
government is the major shareholder, and these enterprises partly follow the
acts and regulations that govern the core government
• Outside this clear public sector area is a gray zone, or boundary zone, with
organizations that might or might not be part of the public sector.
 State businesses are government owned and controlled businesses that sell
goods or services for profit in the private market. Although they do not
deliver what would be considered public programs, goods, or services, they
might be considered part of the public sector

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 Public Sector Characteristics
1. Requires leadership and coordination
2. Primary objective – service delivery not
profit generation
3. Range of functions e.g. service provider,
regulator, etc
4. Funding by taxation
5. Resource re-distribution
6. Non-exchange transactions – budget and
accountability are key
7. Broader accountabilities – outputs,
outcomes and value for money

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Critical Differences in
Public Sector
that Impact Corporate
Governance Challenges in Public
Sector for Good
1. Objectives – public welfare
Corporate Governance
2. Profit is not the main
priority 1. Shortage of funding
3. Funding mechanism – 2. Short-termism
usually taxpayers
3. Corruption
4. Broader stakeholder
4. Internalization,
accountability
technology, complexity
5. Agendas are likely to be 7
5. Sovereign debt crisis
politically motivated ®
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 “New Economy”
Revolution in
Open new markets
Globalization of Information
Business Technology

Radical
restructuring
Global
competition

Widespread
deregulation
8
STEPHEN B. SHEPARD
Editor-In-Chief of BUSINESS WEEK.
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Private and Public Sector Corporate
Governance - Similar Questions
1. How to ensure trust between Shareholders & Company/ Citizen
& State?
2. How to create conditions for participation in a Modern
Company/ Modern Economy (Democracy)?
3. Modern companies listens to its Stakeholders and takes into
account its interest/ How do Democracies listen to its Civil
Society and takes into account its opinions

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 Similar Questions take into Account
1. Quality of managers/ of politicians
2. Transparency of decision-making in a company/ in a state
3. Stakeholder’s ability to engage with a company/ Civil Society’s ability to
participate in the running of its local government, state, nation

 Link between private and public entities – lies in the importance

given to stakeholders interest in companies and the importance of
private economic and social interests in modern economies
 Governance aims to reach the decision acceptable to everyone (and
their views and interests)
 Choice must serve the social interests of the company/ the public
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interest of the community, state or nation
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 UK Public Sector
Corporate Governance
• In 1994, the UK government established a Committee on Standards in
Public Life.
• The committee was chaired by Lord Nolan, and was tasked with
making recommendations to improve standards of behaviour in public
life.
• The first report of the committee established the seven principles of
public life - known as the “Nolan Principles”.
• The fact that the Nolan Principles are widely used suggests that they
are relevant and useful. E.g. apply for any public appointment in
Northern Ireland and you will be asked as an applicant to “subscribe to
and uphold the seven principles of public life (the “Nolan
principles”)”.
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 Nolan’s 7 Principles of Public Life
1. Selflessness – Holders of public office should act solely in terms of
the public interest. They should not do so in order to
gain financial or other benefits for themselves, their
family or their friends.

2. Integrity – Holders of public office should not place themselves

under any financial or other obligation to outside
individuals or organisations that might seek to influence
them in the performance of their official duties.

3. Objectivity – In carrying out public business, including making

public appointments, awarding contracts, or
recommending individuals for rewards and benefits,
holders of public office should make choices on merit.

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 Nolan’s 7 Principles of Public Life
4. Accountability – Holders of public office are accountable for their
decisions and actions to the public and must submit
themselves to whatever scrutiny is appropriate to their
office.

5. Openness – Holders of public office should be as open as possible

about all the decisions and actions they take. They
should give reasons for their decisions and restrict
information only when the wider public interest clearly
demands.

6. Honesty – Holders of public office have a duty to declare any

private interests relating to their public duties and to
take steps to resolve any conflicts arising in a way that
protects the public interest.

7. Leadership – Holders of public office should promote and support

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these principles by leadership and example. 13
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 Nolan’s 7 Principles of Public Life
• The Nolan principles were revolutionary at the time because they
focused on behaviour and culture versus processes.
• If someone lived by these values, it will go a long way to improving
behaviour.
 If a public official really practiced accountability, integrity and
leadership, he will ensure his office has a plan in place, is
spending public money wisely and is delivering exceptional
service for all customers.
 If a public official is selfless and honest, he will be making
decisions which are in the interests of the organisation, putting
aside any personal interest and acting objectively and
independently.
 Organisations which are open have been shown to have more
stakeholder involvement in the planning process, leading to
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enhanced public service.
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 Importance of Nolan’s 7 Principles
• It's much wider than just personal and interpersonal ethics.

• Public officials need to do the right thing so their elected bodies

can achieve benefit for their public.

• Senior officers have a duty to promote ethical behaviour and

transparency:
 wherever public money is spent
 whenever policy choices are discussed
 when choices are made between competing priorities or
conflicting interest groups
 where decisions are taken about resource levels and allocation,
which in austerity increasingly assume an ethical/moral dimension
in their impact on potentially vulnerable groups.

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 Importance of Nolan’s 7 Principles
 UK’s National Health Service (NHS) Board members sign a personal
statement that says:
“To justify the trust placed in me by patients, service users and the public, I
will abide by the (NHS Governing Body Standards) at all times when at the
service of the NHS. I understand that I must act in the interests of patients,
service users and the community I serve, and that I must uphold the law and
be fair and honest in all my dealings.”

 The UK Local Public Services Senior Managers’ Code of Ethics requires

officers to:
“uphold the principles of representative government and ensure the
effective working of the democratic process.”

It continues:
“…any unprofessional behaviour detracts from the important services
provided to the public and harms the profession’s reputation and with it, the
ability to perform effectively.”
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 Importance of Nolan’s 7 Principles
• High standards and values are a public expectation and a public good
in a civilised society.

• Such foundation is at the heart of a civilised society.

• They need to be supported by ethical based leadership to deliver

society’s priorities and objectives.

• At a practical level, every officer’s planning, commissioning and

procurement decisions have a major impact on the lives and life quality
of real people – many of whom are vulnerable and have any other
choice.

• So standards matter!

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 Constantcy of Nolan’s Principles
• In 2014, the UK public expected the same high standards whether
provided by public or private providers.

• Research by the UK’s Committee on Standards in Public Life showed

that the public still strongly identifies with the Nolan Principles – they
might use different words but their expectations of public servants
remain constant.

• The ethical appeal in service still lives on. Youngmillennials:

 want to work for employers who enshrine values and ethics in
their business model
 want to work for companies with a positive impact
 prefer purposeful work to a high salary
 are prepared to work harder if it makes a difference to others

• Many companies’ brand have a set of core ethical values as ingrained

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as those in local government. 18
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 Challenges to the Nolan Principles
• Public sector entities - critical elements of the overall delivery
mechanism relied on by governments to transmit policy goals to the
population.

• Persistent history of weaknesses in their governance – undermined

their effectiveness in fulfilling their mandates to undertake a range of
administrative, service delivery and regulatory functions.

• Responses to standards issues usually come too late and only in

response to scandals that have done damage.
 It is therefore, vital to stay vigilant of conduct risks.

• Politics is a competition for power, and money flows to power like

water down a hill.

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 Challenges to the Nolan Principles
• The opportunities for the abuse of power are always considerable. New
situations continually arise and pose new issues to standards.
 Examples include the inflow of international money – clean or unclean
into development/ property investment, the aggressive marketing of
some sections of the outsourcing market.
 Ethical drift is a constant danger.

• Importance of maintaining focus on the preventative side of standards.

 Especially in drawing up new constitutions and partnership governance
arrangements.
 Try to “hardwire” transparency and accountability in at the design
stage.
“The risks arising from misconduct are one of the largest contingent risks
on a firm’s balance sheet. It rarely matures, can't be sold or hedged. Any
other risk this large with these characteristics would be managed and
mitigated within an inch of its life. Yet stick the word ‘conduct’ in front ofit
and suddenly it's not.” 20
(Financial Conduct Authority)20 ®
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 Challenges to the Nolan Principles
• Leadership is the overarching Nolan Principle and the most
demanding.

• Simple questions for leaders to ask themselves:

1. Is my decision in line with the principles and expected behaviour?
2. Will I be comfortable explaining my decision to me managers,
peers and the public?
3. Will my decision bring discredit to me and my Service?

• Leaders need to exemplify Codes through their behaviour.

• They need to be aware of their ethical responsibilities and be prepared

to speak out and act as ethical leaders.

• The public expects nothing less.

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Good Governance in the Public Sector:
An International Framework
• In 2015 – Framework by the Internal Federation ofAccountants
(IFAC) and The Chartered Institute of Public Finance &
Accountancy (CIPFA)

• Framework states:

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• Dedicated to serving the • CIPFA is the only
public interest by professional accountancy
strengthening the profession body in the world
and contributing to the exclusively dedicated to
development of strong public finance
international economies • 14,000 members
• 3 million members • HQ - UK
• HQ - US

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Good Governance in the Public Sector:
An International Framework

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Good Governance in the Public Sector:
An International Framework

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Good Governance in the Public Sector:
An International Framework

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Good Governance in the Public Sector:
An International Framework

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 Public sector Corporate Governance
 It should focus on the public entity’s purpose and on the outcome for
citizens and service users.

 The responsibilities of executive management and governing body

should be clear.

 Include engagement of stakeholders and making accountability real.

 Constructive dialogue should exist between the governing body and

the general public and particular interest groups.

 There should be risk management and responsibility of the governing

body for internal controls.

 There should be integrity and ethical behaviour.

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 Transparent, stable and predictable investment
Good climate:
Governance • Appropriate legislation to support
by Host investment
Country • Anti corruption measures
• Effective, speedy and transparent resolution
• Good faith
of disputes
• Business Integrity
• Forum for Investors
• Governance Policies
• Capacity Building
• Human Capital
• Corruption Practices
Good Corporate
Governance, Good
Good Good Governance
Governance Government & by Private
by Investors
Good Business Sector
go hand in hand
• Institutional Framework
• Role of Board of Directors
• Management
• Self Regulation
• Risk factors
• Transparency & Disclosure
• Transparency & Disclosure
• Accountability
Good • Reputation
• Commitment
• Sound and ClearAdministrative Governance
Policies by Investment
• Stakeholder engagement Promotion
Agencies 29
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 Driven by External Requirements

early year
1990’s end
Financial 2005
controls Internal
Risk
controls
Management
Business Ethics

1992: Treadway Commission (USA), Cadbury Committee (UK)

1995: Greenbury Committee (UK)
1998: Hampel / Combined Code (UK), OECD Ad hoc Task Force
1999: ‘Turnbull’ Guidance (UK)
2000: Code on Corporate Governance (Malaysia)
2000 & 2001: Code for Good Corporate Governance (Indonesia)
2001 : Statement of Internal Control (Malaysia)
2002: Guidelines on Internal Audit Function (Malaysia)
2002: Sarbanes Oxley Act (USA)
2003: Amended SC Act (Malaysia)

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 The King Reports & Codes
• In 1993, a retired Supreme Court Judge in South Africa, Mervyn King
chaired a committee on corporate governance @ the King Committee on
Corporate Governance
• The King Committee produced the following King Reports on Corporate
Governance and King Codes on Corporate Governance in
 1994 (King I)
 2002 (King II)
 2009 (King III)
 2016 (King IV)
• Non-legislative, based on principles and practices
• Apply or explain approach
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 The King Reports & Codes
• Views governance as essentially being effective and ethical
• Code philosophy has 3 key elements:
1. Leadership
2. Sustainability
3. Social and environmental performance i.e. being a good corporate
citizen
• Emphasizes sustainable economic, social and environmental performance

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 King I (1994)
• 1st corporate governance code in SouthAfrica
• Applicable to listed companies on main board of the Johannesburg Stock
Exchange, financial institutions, large unlisted companies (>R50 million equity)
• Encouraged all companies to adopt the code
• Requirements covered:
 Board of directors makeup and mandate (including role of non-executive
directors and who qualifies as non-executive directors)
 Appointments to the board
 Maximum term for executive directors
 Disclosure of non-executive director’s remuneration
 Board meeting frequency
 The requirement for effective auditing
 Company’s code of ethics, etc 33
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 King II (2002)
• Revisions included sections on sustainability and risk management
• Applied also to state departments/ national and local government entities
– not courts or judicial officers
• Requirements covered:
 Directors and their responsibility
 Risk management
 Internal audit
 Integrated sustainability reporting
 Accounting and auditing
 Legislative enforcement

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 King III (2009)
• Integration of governance, strategy and sustainability
• Applicable to all entities - public, private and non-profit
• Recommended integrated report to replace the annual financial report
• Requirements covered:
 IT Governance
 Business rescue proceedings once there is financial distress
 director’s responsibilities during mergers, acquisitions and amalgamations
• Incorporated global governance trends:
 Alternative dispute resolution
 Risk-based internal audit
 Shareholder approval of non-executive directors’remuneration
 Evaluation of board and directors’performance
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 King IV (2017)
• Defines Corporate Governance as:
“the exercise of ethical and effective leadership by the governingbody”

• To exercise ethical and effective leadership – there are 4 overarching

responsibilities of the governing body:
 Provide strategic direction
 Approve policies to effect strategy
 Provide informed oversight for strategic implementation and
performance
 Make corporate disclosures

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• Objectives of the Code:
 Promote good corporate governance as integral to running a business
 Broaden the acceptance of good corporate governance through
enhanced accessibility and fit for application by various
organizations
 Reinforce good corporate governance as a holistic and inter-related
set of arrangements that should be understood and implemented in a
integrated manner
 Present good corporate governance as an ethical consciousness -
concerned with corporate structure, process and corporate behaviour 37
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• The exercise of ethical and effective leadership should result in
following governance outcomes:
 Ethical culture
 Sustainable performance and value creation
 Adequate and effective control by the governing body
 Protecting and building trust in the organization, its reputation and
legitimacy

• Governance Outcomes (drive) Principles (which drive) Practices

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(Governance Outcomes > Principles > Practices) 38
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 King IV Philosophies
1. Ethical and Effective Leadership
2. Organization as an Integral Part of Society
3. Corporate Citizenship
4. Sustainable Development
5. Stakeholder Inclusivity and Responsiveness
6. Integrated Thinking
7. Integrated Corporate Reporting
8. 3 Shifts in Future Trajectory
i. From Financial Capitalism to Inclusive Capitalism
ii. From Short-term Capital Markets to Long-term Sustainable
Capital Markets
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iii. From Silo Reporting to Integrated Reporting
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 King IV Philosophies
1. Ethical and Effective Leadership
i. Ethics of Governance
a) Good Corporate Governance is founded on ethical and
effective leadership
b) Ethical Leadership is exemplified by integrity, responsibility,
accountability, honesty, fairness, and transparency
c) Effective Leadership is about directing corporate performance
and is result driven
d) Ethical Leadership and Effective Leadership should reinforce
each other. The governing body as a collective should be
unified on matters such as the core purpose of the
organization, its culture, the drivers of value, its key
stakeholder groupings and their legitimate and reasonable
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needs, interests and expectations. 40
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 King IV Philosophies
1. Ethical and Effective Leadership
ii. Responsibility, Accountability, Fairness and Transparency’s
respective relationships to Ethical Leadership:
a) Responsibility – the governing body assumes ultimate
responsibility for the organization, including the protection of
its resources – financial, manufactured, human, social and
relational, and intellectual and natural capitals
b) Accountability - the governing body should be held
responsible for its decisions and actions by stakeholders.
Accountability follows from the assumption or designated or
responsibility and cannot be delegated or abdicated.
Governance structures and arrangements must connect
responsibility and accountability
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 King IV Philosophies
1. Ethical and Effective Leadership
ii. Responsibility, Accountability, Fairness and Transparency’s
respective relationships to Ethical Leadership: (continued)
c) Fairness - the governing body should ensure that it balances
in its decisions the legitimate and reasonable needs, interests
and expectations of material stakeholders of the organization in
the best interests of the organization
d) Transparency - the governing body should ensure that all
reports and disclosures enable all stakeholders to make an
informed assessment of the performance, including the impact
of the organization’s activities and its ability to sustain the
creation of value.

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 King IV Philosophies
1. Ethical and Effective Leadership
iii. Governing Ethically includes adherence to the following statutory/
legal duties:
a) the duty to act with due care, skill and diligence
b) fiduciary duty to act in good faith in the best interests of the
organization

iv. Governance of Ethics

a) The governance of ethics refers to role of governing body in
ensuring that management of ethics results in an ethical culture
b) The governance of ethics in an organization is the manner in which
values are given expression and implemented
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c) Good ethics is the foundation of good business 43
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 King IV Philosophies
2. Organization as an Integral Part of Society
i. The organization operates in a societal context – they affect and are
affected
ii. Existence of an interdependency between organizations and
society – their fate are intertwined
iii. Organizations has their own societies made up of its stakeholders
iv. Organizations dependent on broader society to provide a conducive
operating environment, a customer base and talent
v. Organizations contribute to wider society as creators of wealth,
providers of goods, services and employment, sources of taxes and
developers of skillsOrganizational and Societal Interdependency
supported by African concept of Ubuntu, captured in expression –
“I am because you are; you are because we are”
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 King IV Philosophies
3. Corporate Citizenship
i. Corporate Citizenship – about organization’s status in the broader society
ii. Corporate Citizenship an inevitable consequence of being an integral part of
society
iii. As a Corporate Citizen organization has rights, obligations and responsibilities
towards society
iv. Corporate Citizenship involve how an organization uses its resources and how it
balances its needs with the needs of society to achieve positive lasting outcomes
for itself, society and the environment
v. Responsible Corporate Citizenship means organization responds to changing
societal demands
vi. Status of organization in society requires that it be accountable not only for
financial performance and isolated corporate social initiatives, but also for
outcomes in the “Triple Context” (i.e. economic, social and environmental
context)
vii. Corporate strategies and policies to achieve responsible corporate citizenship
45
should be planned and integrated across the organization.
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 King IV Philosophies
4. Sustainable Development
i. Sustainable Development is the organization’s Response
ii. Sustainable Development is understood as “conducting business
operations in a manner that meets the existing needs without
compromising the ability of future generations to meet their needs”
iii. Reference to the “triple context” or “combined economic, social and
environmental context” denoting the fact that these three dimensions are
intertwined and should be viewed as an integrated whole
iv. Sustainable Development, being an integrated response, is not about
environmental matters in isolation, or is it concerned only with the
sustainability of the organization. It is also not about corporate social
responsibility in isolation from the overall business strategy
v. It is about developing strategies so that the success of the organization
can be measured in the economic, social and environmental context
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 King IV Philosophies
4. Sustainable Development
This “triple context” within which organizations operates is
portrayed by the forms of capital it uses and affects. KING IV refers
to the “Six Capitals Model” which identifies:
(i) Financial capital
(ii) Manufactured capital
(iii) Intellectual capital
(iv) Human capital
(v) Social and relational capital
(vi) Natural capital

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 King IV Philosophies
5. Stakeholder Inclusivity & Responsiveness
i. A key duty of the governing body is balancing the legitimate and reasonable needs,
interests and expectations off all the organization’s material stakeholders
ii. The governing body’s decision-making should always be in the best interests of the
organization considering the issues at hand and the surrounding circumstances at the
time of the decision
iii. By responding to the legitimate and reasonable needs, interests and expectations of
material stakeholders and by establishing relationships, an organization becomes
attuned to opportunities and challenges
iv. Each of the forms of capital (Six Capital Forms Model) has one or more stakeholders
with an interest in it
v. A stakeholder-inclusive approach to corporate decision-making supports the
enhancement of the capitals and therefore also sustainable development
vi. KING IV intentionally requires a stakeholder-inclusive model in terms of which the
governing body is encouraged to consider, weigh and balance the legitimate and
reasonable needs, interests and expectations of all material stakeholders when
making decisions in the best interest of the organization 48
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 The Stakeholder-Inclusive Model
1. Stakeholders other than shareholders are seen as having an
intrinsic value for decision-making by the governing body in the
best interests of the organization
2. The best interests of the company are not necessarily equated to
the best interests of the shareholders
3. Shareholders do not have predetermined precedence over other
stakeholders
4. The interests of shareholders or any other stakeholder grouping
may be afforded precedence based on what is believed to serve
the best interests of the organization at a point in time and
depending on the circumstances
5. Value to shareholders derived from the effective and responsible
use of resources as well as from good relationships with all
material stakeholders 49
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The Enlightened Shareholder Model
1. Stakeholders other than shareholders only have an instrumental
value.
2. Other stakeholders’ legitimate needs, interests and expectations
only considered if it is in the interests of the shareholders to do
so
3. The interest of shareholders have a predetermined precedence
over that of all other stakeholders
4. Other stakeholders are merely seen as instruments to serve the
interests of the organization’s shareholders
5. Best interests of organization often equated to what is in the best
interests of its shareholders
Note: Refer Session 3’s slides on “Stakeholder Theory in the UK”
for the concept on Enlightened Shareholder Value (ESV).
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 King IV Philosophies
6. Integrated Thinking
i. Integrated Thinking is defined as “consideration by an organization of
the relationships between its various operating and functional units
and the capitals that the organization uses or affects. Integrated
thinking leads to integrated decision-making and actions that consider
the creation of value over the short, medium and long term. Integrated
thinking takes into account the connectivity and interdependencies
between the range of factors that affect an organization’s ability to
create value overt time…”
ii. Integrated Thinking
a) Is more than elimination of silos
b) presupposes that the governing body gives regular consideration to
how responsive the business model and activities are to changes in
the external environment and expectations of all material
stakeholders
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 King IV Philosophies
6. Integrated Thinking
ii. Integrated Thinking (continued)
c)should be embedded through the integration of strategy, risk and
opportunity, sustainable development, performance and outcomes
d)has particular relevance to the capital that an organization uses and
affects – results in an appreciation of the relationships among the
capitals
e)helps with establishing a holistic view of the value-creation process of
the organization
f) assists with integrated reporting which in turn encourages integrated
strategy formulation and implementation.

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 King IV Philosophies
7. Integrated Annual Reports
i. KING III defines Integrated Annual Reporting as “a holistic and
integrated representation of the company’s performance in terms
of both its finances and sustainability”
ii. KING III replaced the “triple bottom-line” (and its depiction of the
three separate bottom lines of the economic, social and environment)
with the intertwined economic, social and environmental “ triple
context”
iii. An Integrated Annual Report explains the performance of an
organization, should have sufficient information on how the
organization has positively and negatively affected the economy,
society and the environment.

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 King IV Philosophies
7. Integrated Annual Reporting
iv. Encourages those charged with governance to apply their minds to
deciding what information in material. Understanding materiality –
i.e. those matters that could substantive affect the ability of an
organization to create value over time – is fundamental to the
execution of fiduciary duties
v. Should show what value the organization has created (or not) through
the enhancement or diminution of each of the different forms of capital
vi. Should be future orientated to enable stakeholders to judge whether an
organization can sustain delivery of value
Enables all material stakeholders to make informed decisions about the
vii. organization, its financial performance and its future value creating
prospects

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 King IV Philosophies
8. The Future Trajectory - The Three Shifts
The concepts dealt with thus far i.e. Leadership, The Organization in Society, Corporate
Citizenship, Sustainable Development, Stakeholder Inclusivity, Integrated Thinking, and
Integrated Reporting – are relevant to three connected paradigm shifts in corporate
thinking
1. From Financial Capitalism to Inclusive Capitalism
a) A general acceptance that a singular focus on the employment, transformation and
provision of financial capital represents only a fraction of corporate decision-
making and activities
b) Instead, Inclusive Capitalism takes account of employment, transformation and
provision of ALL forms of capitals
c) Capitalism should be inclusive because it’s the engine of shared prosperity
d) Financial Performance alone can no longer serve as proxy for holistic value
creation
e) Long-term Financial Performance is dependent on efficient and productive
management of resources i.e. human, intellectual, social and relationship and
natural capitals - not currently measured by traditional accounting methodologies 55
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 King IV Philosophies
8. The Future Trajectory: The Three Shifts
2. From Short-term Capital Markets to Long-term Sustainable Capital
Markets
a) Performance in terms of all-inclusive value should be assessed over the
longer term. Therefore, the capital market system must reward long-
term decision-making
b) Period for long-term and longer-term dependent on strategic objectives
of an organization and the risks and opportunities presented by its
external environment, including its material stakeholders

3. From Silo Reporting to Integrated Reporting

a) Modern era of globalisation and radical transparency leading to a rethink
on corporate reporting in the light of challenges, risks and opportunities.
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 King IV Philosophies
8. The Future Trajectory: The Three Shifts
3. From Silo Reporting to Integrated Reporting (continued)
b)Globalisation and increased competition require organizations to be
innovative to retain competitive advantage and to attract and retain
investors, shareholders, employees and customers
c)Ever increasing and more complex legislation and regulatory
requirements have encouraged the move away from the more traditional
reporting methodologies (e.g. audited financial statements)
d)While fully compliant and duly audited financial statements remain
critical, it is now accepted that they are by themselves insufficient to
discharge the duty of accountability by governing bodies
e)The move from silo reporting to integrated reporting consistent with
concept of an inclusive, sustainable capital market system which has been
given impetus by the acceptance of the triple context and the evolution of
integrated thinking
57
f) KING IV takes cognisance of all these shifts 57
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 Issues & Challenges to
Corporate Governance
Clashing Business Laws and
Lack of political will
Practices.

Poor law enforcement

Changing Accounting Rules

Form over substance

Sarbanes Oxley Act

Treat as Cost not

Investment Lack of Regulations

Poor Financial Disclosure

Independent effective Board still a
in many Countries
rarity
58
2006 ISS Global Investor Study covering 300 Investment Institutions over 18 countries managing nearly 1/3 of world’s estimated US 22.1 trillion in equity assets

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 Issues & Challenges to
Corporate Governance
• Good governance is an ideal which is difficult to achieve in its
totality.
• In the US, plenty of well-intentioned people have brought their ideas
and experiences to the policy-making table but it hasn't resulted in
any clear-cut framework.
• In the US, stock exchanges compete for listings and imposing
rigorous corporate governance responsibilities might lose them
business.
• The Securities and Exchange Commission (SEC), the primary
regulator of listed companies, requires transparency and comes down
hard on companies that don't prepare their financial reports properly
or disclose information to stakeholders in the appropriate way.

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 Issues & Challenges to
Corporate Governance
• However, it doesn't look beyond the issue of disclosure.
• For example, a company might defy shareholders' wishes and offer a
large cash bonus to an unpopular and under-performing director.
• On the face of it, the decision is an example of poor governance as
there's no consensus, inclusion or stakeholder accountability in the
decision-making.
• But the SEC would allow it as long as the company made full
disclosure in its reports.
• This type of regulation has been likened turning the on the red light at
a traffic light – useful to prevent serious accidents but is not
substitute for skilled and judicious driving.

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 Issues & Challenges to
Corporate Governance
• Main problem with corporate governance is that it doesn't stand alone
- it has to work in conjunction with a company's mission and values
statement to give directors and stakeholders a clear guide about how
they should behave.

• Several problems that a business face are as follows:

1. Conflicts of Interest
Occurs when controlling members of the company have other financial interests
that could influence their decision-making or conflict with the objectives of the
company. E.g. a person appointed o the board of a green energy company who
also owns significant stock in an oil company is likely to be conflicted because
the board member has a financial interest in not advancing green energy.
Situations of conflicts of interest can potentially negatively affect the trust from
stakeholders and the public.
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 Issues & Challenges to
Corporate Governance
2. Governance standards’Implementation

i. Board can have all the equitable rules and policies but it needs to
cultivate those standards throughout the business.

ii. Resistant managers can undermine the power and authority of good
corporate governance at the operational level, leaving the business
exposed to legislative/ regulatory violations and reputational
damage.

iii. Good corporate governance policies need clear ways for

enforcement and it needs to be applied consistently - as a check and
balance against the potentially sabotaging actions of executive staff.

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 Issues & Challenges to
Corporate Governance
3. Short-Termism
Good corporate governance requires that boards should have the right to create
sustainable value and manage the company for long-term business. The potential
problems are:

i. Rules governing a listed company's performance tend to prioritize short-

term performance for the benefit of shareholders. Managers face pressure
to meet quarterly earnings targets as a drop in the earnings per share by
even by 1 or 2 cents could hit the company’s share price. Sometimes
companies go private (from public listed) to achieve the sustainable
innovation that cannot be achieved under the glare of the public.

ii. Another problem is that directors only sit on boards for a certain (brief)
period and face re-election every three years. While this has some benefits,
there's argument that directors cannot be considered independent after 9
years of service so such tenures may affect boards’ long-term oversight.
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 Issues & Challenges to
Corporate Governance
4. Lack of Diversity
While it is common sense that boards should have an obligation to
ensure the proper mix of skills and perspectives in the boardroom but
few boards take an objective look at their composition and assess
whether it reflects the stakeholders’expectations of the company.
E.g. Employees being given a place on the board is the norm across
most of Europe and evidence suggests that worker participation leads
to companies having lower pay inequalities and a greater regard for
their workforce. However such companies will need to balance - a
focus on protecting jobs instead of making tough decisions.

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 Issues & Challenges to
Corporate Governance
5. Accountability Issues
Under current models of corporate governance, the board of directors is
positioned right in between shareholders and management. Authority flows from
the shareholders at the top to directors and accountability flows back to them
from directors.
Shareholders – not stakeholders generally – who are most protected by corporate
governance and shareholders hold critical votes. Shareholders have the collective
action to take action against companies for not practicing good corporate
governance.

 While it is certainly desirable to have the actions of the board checked by

shareholders - the future of corporate governance is perhaps more
holistic.
 Companies do have ethical obligations to their communities, customers,
suppliers, creditors and employees.
 Companies must take steps to protect the interests of non-owners/
stakeholders in their codes of conduct. 65
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Issues & Challenges – From the Approach
(2008 study by National University of Singapore and WatsonWyatt)

• Unlike in the US, most other countries have adopted codes of

corporate governance where companies are expected to:
 Describe their corporate governance practices in relation to
principles
 Comply with guidelines or provision under each principle or
explain why they do not comply
 The “Comply or Explain” Approach has issues and challenges

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 Issues & Challenges – The Comply
or Explain Approach
• Effective implementation of the approach depends on:
 Monitoring and enforcement of disclosure obligations by regulators
 Scrutiny of corporate governance disclosures by investors, media and
other market participants
• Study of the implementation of the comply or explain approach in
Singapore found the following:
 Non or partial compliance with no explanations
 False or misleading disclosures
 Disclosures or explanations which are not informative
• Lack of regulatory and market sanctions have led to questions whether
the approach has successfully raised corporate governance standards 67
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 Barriers to Improving
Corporate Governance in Asia
Regulatory enforcement Market enforcement
1. Enforcement capacity 1. Apathy among
shareholders including
2. Balancing interests of
institutional shareholders
suppliers and users of
capital 2. Shareholder lawsuits
against directors are costly
3. Concerns about rising
and therefore rare
costs
3. Barriers to shareholder
4. Competition for listings
activism
4. Limits to media scrutiny

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 Other Issues & Challenges
1. Direct relationships between all players – management, board
members and shareholders
 significant issues for the true independence of independent
directors, and the oversight of director and executive
remuneration and related party transactions
2. Independent directors
 Most companies have less than half of their board members who
are independent directors
 2004 CGFRC-S&P study on large capital companies with
board % comprised of more than half independent directors -
5% in Indonesia, 6% in Thailand, 9% in HK, 18% in
Malaysia, 33% in Singapore

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Issues & Challenges - Independent Directors
i. Most companies have less than half of their board members who
are independent directors (continued)
 In 2007 - only 20% of main board Singapore listed companies
had board’s with more than half independent directors, 71%
had 1/3 to half independent directors and for 8.9% less than 1/3
of their boards was independent
ii. True independence versus different definitions of independence
iii. Form over substance assessment of independence
iv. “Threats” to independence – long tenure, cross directorships
v. Multiple directorships

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Issues & Challenges - Independent Directors
vi. Challenge for independent directors - dominance of
controlling shareholders and management who are
controlling shareholders
vii. Duties of independent directors lack resolution
viii. Lack of supply of independent directors
ix. Lack of competent independent directors
x. Issues with the proper appointment/ removal/ resignation of
independent directors

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Issues & Challenges – Audit Committees
1. Few Audit Committees (ACs) have all independent directors –
may have all non-executive directors
 2004 study on large capital companies with board % of wholly
independent ACs - 38% in Indonesia, 80% in Thailand, 58% in
HK, 8% in Malaysia, 38% in Singapore
 Controlling shareholder may be in the AC as well as an
executive director
2. Hong Kong and Malaysia are stricter on the need for accounting
expertise in ACs
 Accounting/ financial management expertise of often a matter
of judgement for the board

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 Challenges – Internal Auditors
1. Internal Audit (IA) function is generally not mandatory (Malaysia
makes it mandatory for listed companies)
2. Outsourcing of the function is still common except among large
companies – an outsourced IA function makes it difficult for IA to
really know what is happening in the company
3. IA function may exist without professionally trained auditors who
apply IA professional standards
4. IA sometimes has other roles which may affect its independence
and quality of reports
5. IA may be “part” of management rather than accountable to the
AC

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 Challenges – Internal Auditors
6. IA reports primarily to the AC but the AC itself may not be truly
independent from management or major shareholders
7. AC may not have the necessary competencies to understand the
role of IA and to oversee the IA function e.g. asking IA questions
beyond superficial questions about the IA function and about its
reports
8. AC members sit on many boards
9. AC meetings are often infrequent
10. Small amount of time spent on IA matters in meetings

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 Q & As
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