Mindful Governance : How Value Drives Impact
A former judge of the Supreme Court of South Africa, the Chairman of the Integrated Reporting Council and of the Global Reporting Initiative, Professor Mervyn King is most well known for chairing the King Committee on Corporate Governance, endorsing an integrated and inclusive approach to corporate governance. On his recent visit to Namibia as a guest of PwC Namibia, 99FM’s MYD Smart sat down with Professor King, to talk about how mindful governance is a key to business in the future and how value drives impact.
“The top list of companies are seen as amongst the best governed in the world and so foreign investors are prepared to pay a premium for the equity of those companies. This is because the thinking goes along the lines that they operate in a corrupt environment, and yet they run a very ethical company with effective leadership, we can entrust our beneficiaries money with these directors.”
“Governance started with governments. You’ll find it hard to believe that because governance is one of the big problems of the African continent. It’s very interesting that the top list of companies on the Johannesburg Stock Exchange are seen as amongst the best governed in the world, and so foreign investors are prepared to pay a premium for the equity of those companies. This is because the thinking goes along the lines that they operate in a corrupt environment, and yet they run a very ethical company with effective leadership, we can entrust our beneficiaries money with these directors.”
“Governance must be a value add. It became, unfortunately, a grudge compliance because people set down a lot of rules with which to comply and unfortunately it became a mindless compliance.”
When asked about how governance, correctly done, can be an advantage for your business, Professor King advises, “Governance must be a value add. It became, unfortunately, a grudge compliance because people set down a lot of rules with which to comply and unfortunately it became a mindless compliance. It was mindless instead of the board applying its mind to the issues. I happen to Chair the World Body on Corporate Reporting and we developed an incomes based approach. As directors we should be reporting, not only on the tangible assets, assets which would be added to the balance sheet according to financial reporting standards, but also on the ‘so called’ intangible assets. How was the company, in making its money, is impacting on the environment in Namibia? Was it a positive impact, or was it a negative impact? If it was positive, how in the years ahead was the long-term strategy thought out, to ensure that they were enhancing those positive impacts?”
“Companies operate in a triple context of the economy, society and the environment and the activities of a company has an effect on those three and those three have an effect on the company.”
“Companies operate in a triple context of the economy, society and the environment and the activities of a company has an effect on those three and those three have an effect on the company. So you could be making a hundred million dollars profit before tax but, if you doing it on a negative impact on society and the environment then you are actually destroying value.”
“I’ll give you an example. I was the chairman of the largest textile company in Southern Africa. We even had a Warehouse here in Windhoek. A dye house is a very large building. If you print fabric, you use very toxic chemicals, the dye, and particularly if you’ve got computer aided printing. Those toxic chemicals go down the waste. Regulations provide that you must have qualified chemists who treat those toxic chemicals, to remove the toxins. Our main dye house was in Durban, and the water flowed from the factory down into the River. I had eleven chemists there. Now if those chemists had not been treating those toxins, I would have increased the profit bottom line, because I could have got rid of eleven professional people and the whole laboratory. Reduced expenditure and increased profit, but the toxins would have gone into the River, which is a main source of supply for the Durban Municipality. Milton Friedman in 1977 became the Laureat Economist, but he said the sole purpose of a company is to make profit without deception of fraud. He never concerned himself how the profit was made. In my philosophies, which have gone around the world, I say we have to look at it holistically. It’s no good having a company which makes a monetary bottom line but takes from society and the environment and reduces overall value.”
“It’s quite clear that we have finite natural assets. We have already reached that stage. In technical terms, it’s ecological over shoot, that we are using natural assets today faster than nature is regenerating them. In corporate terms, we are eating into shareholders funds.”
“Companies are the biggest destroyer of the environment and the biggest user of natural assets. We have 7.4 billion people on planet earth at the moment. In my book Transient Caretakers, I play the role of an innkeeper and I describe planet earth as a hotel, because you and I expect to board and lodge here. But last night one in eight went to bed hungry and one in eight went to bed without water. That’s two out of eight people that have already being impacted adversely by a world where directors and individuals could never have for seen that the turn into the twentieth century, when we had 1.2 billion people on the planet, would see the population explosion of the twentieth century because of the advancement of medical science.”
“It’s quite clear that we have finite natural assets. We have already reached that stage. In technical terms, it’s ecological over shoot, that we are using natural assets today faster than nature is regenerating them. In corporate terms, we are eating into shareholders funds.”
“It’s not an option anymore to carry on business as usual. When I see photos of the amount of plastic waste in the ocean and rivers around the world, it’s absolutely disgusting. It is horrifying to think what we have done.”
“Directors have to erase from their mind how much money does the company make. The critical issue is, how has the company made its money. Has it made its money with a positive impact on society and the environment and the economy.”
“That is why governance has to have this holistic approach. If you going to be a Director who is only concerned on making profit at any cost, you are going to destroy the earth and you are actually a bad citizen, you are actually stealing from your fellow citizens. Directors have to erase from their minds, how much money does the company make. The critical issue is, how has the company made its money. Has it made its money with a positive impact on society and the environment and the economy.”
“The great companies in the world are doing it. The great asset owners of the world and asset managers are just not underwriting capital, new capital, for companies anymore unless they practice good governance. They ask, How have you dealt with environment and social governance issues? Have you done an integrated report? An integrated report, which is a body I Chair in London, is one where you’ve been able to report on how the company has made its money and that you’ve got a long-term strategy of value creation in a sustainable manner that is not profit. They are doing due diligence on your supply chain, because the great asset owners of the world have learnt from the Nike case, about six years ago where it was discovered that child labour was making the shoes. In three days they (Nike) lost sixty per cent of their market capital on the New York Stock Exchange. So companies want to know what’s happening in the supply chain, have you got a supply chain code of conduct.”
Professor King explains that it is clearly visible when looking at a company’s performance on a stock exchange, to see whether the company practices good governance. Companies who drive mindful governance see results in tangible terms of success whereas companies who seek profits alone, often do so at the expense of their reputation. Which is bad for business as Professor King explains, “As soon as a company’s trust and confidence is lost by their customer and their public then the company loses its value.”
“Companies today are practicing quality governance, that’s what King Four is a driver to, to move away from mindless is to make it mindful. To achieve four outcomes, an excellent culture of effective leadership; value creation in a sustainable manner; effective controls and oversight; and trust and confidence in the company by the general community who see the company having legitimacy of operations.”
Written by Kirsty Watermeyer