How state capture has focused corporate minds

Over the last two years, South Africa has witnessed some spectacular failures of corporate governance. Transnet, Eskom, the SABC and Steinhoff top the list.

Companies like Naspers, Net1 UEPS and Resilient have also faced demanding questions about the way they are run. And it wasn’t that long ago that African Bank imploded in what came to be recognised as a corporate governance blowout.

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There is no question that these issues have damaged South Africa’s reputation as a business destination. However, Christina Pretorius, a director at Norton Rose Fulbright, says that not all the impacts have been negative.

“Companies are starting to say I don’t want to act that way,” says Pretorius. “They are asking how they can make sure that they don’t get themselves into trouble, and the answer to that generally is better corporate governance.”

Motivated by state capture

Pretorius feels that it is particularly what has happened in the public sector that has made people want to take action.

“Something like state capture has had a big impact on the way people think because it makes them angry,” she says. “High profile corporate lapses are significant and people are afraid that it might happen to them, but I think the real change in attitude happened around the time that state capture reports started to come out. People said to themselves that this is what happened in government, and we don’t want it to happen in our organisations.”

The result is that businesses both large and small are now proactively approaching her office for guidance on how corporate governance and the principles of the King IV Code on Corporate Governance can be properly implemented.

“I don’t think it’s that good corporate governance hasn’t been practised in the past,” Pretorius says. “Previously, especially in smaller businesses, people were trying to act honourably, but didn’t necessarily follow a written framework. They might not have called it corporate governance or put as much emphasis on written policies, but they were trying to do the right thing most of the time. Now, because it has been brought into the public discourse, people are finding that they can use the framework of good corporate governance as a structure to formalise what they have been trying to do informally.”

King IV

The adoption of the King IV code has been particularly well-timed in this regard. It became effective on April 1 last year, in the midst of a period where many organisations were starting to think more seriously about how to manage their conduct.

“The King III code had 75 principles, but it encouraged a tick-box approach,” says Pretorius. “Because of that, I think many companies were trying to comply with the letter rather than the spirit of it.”

She believes King IV offers a far more simplified code, having condensed everything together into just 17 principles. It also promotes a holistic approach to implementation.

“It provides the guidelines, but directors need to apply their minds to their particular situations,” Pretorius explains. “What is the best way for their company in their circumstances to implement them. It is about getting your head around what the correct principles are rather than ticking things off a list.”

The role of asset managers

What is also noteworthy is that while listed companies have been required to meet corporate governance requirements for some time, few have been willing to engage seriously with asset managers who raise issues in this space. However, Jon Duncan, head of responsible investing at Old Mutual, believes this is changing.

“Our experience is that there is a lot more receptivity to just how important these issues are,” says Duncan. “Companies are responding with more care and sensitivity because they are dealing with asset managers who have experienced material losses as a consequence of either bad actions or lapses in governance.”

This experience has focused attention on how corporate governance issues are a material risk that can’t be ignored.

“The events of the last two years, both in the private and public sectors, have provided a lot of real material supporting how we think,” Duncan says. “I think it has shifted attitudes.”

What is also significant is that more asset managers are taking these issues seriously as well. The types of conversations taking place within the industry on these issues has increased in the past 12 months.

“There is a growing willingness to collaborate to resolve things that collectively impact us all,” Duncan notes. “That has been quite an important shift.”

This is a pattern that has also been observed in other markets, where asset managers have come to realise the benefits of working together to influence corporate behaviour.

“I expect the next feature on the horizon will be shareholders tabling resolutions for consideration at AGMs,” says Duncan. “Once you have asset managers realising that we can deal with this more effectively if we collaborate, the next turn of the wheel is that if we have more than 10% and are more than two shareholders, we can table a resolution for consideration or force a special meeting. That’s not yet a strong feature of the South African market, but I expect it is something that will come in the next two to three years.”