Corruption Risks: A new era for corporate governance?

For years, corporate governance is a term that has captured the imagination of the corporate world. In the Cadbury report of 1992, this term was simply defined as “the system by which companies are directed and controlled”. One thing that has become apparent since then, is that the “system by which companies are directed and controlled” is not static, but rather ever evolving as the business world is ever evolving. Additionally, it is clear that there is no “one size fits all” system by which all organisations can be directed and controlled. These two facts are illustrated by South Africa’s own King Code or King Report on Good Corporate Governance. This is a document of broadly agreed principles of good governance that is already in its fourth iteration, and also has various sector supplements aimed at simplifying its application within different sectors.

Over the past two-odd years, various players in South Africa’s economy – including private companies, have become entangled in allegations of corruption of the grandest scale. In the age of state capture, it is quickly becoming apparent that no one is bullet proof when it comes to corruption and the financial and reputational risks that flow from it. In this insight, I discuss what this era might mean for corporate governance going forward and what companies should be doing to mitigate corruption risks.

As South Africa continues to be rocked by revelations of state capture and corruption, it has now more than ever, become apparent to organisations that corruption is a serious risk to be avoided at all costs. There are now countless examples of companies, including well-regarded and multi-national companies, that have failed to act against corruption or have fallen victim to its risk. The impacts of these failures cannot be understated, in many instances the result has been the severe erosion of shareholder value, the significant loss of market share and countless job losses. These stories serve as a harbinger of a new era for corporate governance, one in which boards gives due regard to corruption risks and act more dilligently to avoid its devastating impacts.

Any board that is interested in effectively controlling and directing its company must pay close attention to corruption risks, and respond by mitigating exposure in various ways. As already stated, there is no one size fits all to good corporate governance, but boards can mitigate risks by paying attention to the following broad areas:

Regulatory compliance: Ensuring that a company is fully compliant with regulatory prescripts is the first step towards mitigating against corruption risks. While regulatory compliance will not cover all of the required bases, it will certainly ensure that a company does not fall foul of the law. There are various regulatory instruments, that are in themselves, designed to combat corruption and fraud such as the Financial Intelligence Centre Act 38 of 2001. Ensuring strict compliance with such an act (if the company in question is an ‘accountable institution’) will ensure that a company: has a record of exactly which clients it is serving, avoids penalties and other sanctions applicable, if found to be non-compliant; and is able to mitigate against reputational harm by cooperating with law enforcement as and when required.

Internal policies and procedures: Policies and procedures are an easy way to ensure that the standard of conduct expected of all employees are clearly set out in an accessible form. They also go a long way in regulating employee conduct, which can be a huge factor when it comes to corruption risks. Companies should consider having policies that are specifically aimed at mitigating corruption risks such as: a gifts and donations policy, a procurement policy, financial policies and procedures and a whistle-blower protection policy, to name a few. Having such policies in place will help a company act swiftly when employees fall foul of the expected standard of conduct, and can also save it from reputational harm. By way of example, the Protected Disclosures Act 26 of 2000, is designed to protect whistle-blowers that may disclose information regarding unlawful or irregular conduct by their employers or other employees or workers. Alive to the many challenges that whistle-blowers may encounter in trying to expose corruption or other forms of impropriety, the Act protects employees who report impropriety to various bodies outside of the company, including the media, in certain instances. Having a clear whistle-blower protection policy, that creates a safe space for the disclosure of impropriety can go a long way in protecting not only the whistle-blower but the company, which will be able to deal with the reported conduct appropriately.

Risk Assessments and due diligence: Boards can also mitigate against corruption risks by constantly assessing areas of vulnerability and exposure. Such areas include third party relationships, employees, clients, industry within which the company operates and internal compliance to existing policies and procedures . Having a good handle on what is happening within and outside the company can assist the company is preventing, detecting and remedying instances of corruption that may occur swiftly and appropriately. If the past two years have taught those in the business world anything, it is that companies do not know what they do not know. It is therefore imperative to take adequate steps to be informed at all relevant times.

Building and sustaining an ethical culture: This can take the form of enunciating the company’s values and aligning them with a strong stance against corruption and unethical behaviour. It is also important that board members, prescribed officers and senior employees within the company make firm commitments to act ethically, honestly and transparently at all times. Senior employees and board members can also act this out by regularly declaring personal financial interests and conflicts when they arise. As the adage goes- a fish rots from the head, therefor holding those in leadership within the company accountable to such commitments, will have a tremendous impact on other staff members.

For more specific advice suited to your company, contact us on [email protected].

Deborah Mutemwa-Tumbo, Chairwoman: Tumbo Scott