Proficient, high-calibre directors are the essential elements of a high-performance board that can successfully navigate the current complex volatile business and economic environment.

 

“This demands not just the technical or scientific attributes of traditional business school competencies, but includes a mix of politics and intuition,” according to Dr Douglas Board, author of ‘Choosing Leaders’ and advisor on board services to Amrop Landelahni.

Like financial statements, an integrated report is the result of certain activities that have taken place within an organisation. In the case of integrated reporting specifically, these activities relate to the way in which an organisation has executed and is planning to execute strategy.

While most organisations go to great lengths to ‘comply’ with requirements related to corporate governance, the increasingly important area of IT basically remains overlooked.  Perhaps it is largely due to the fact that most directors don’t have the necessary knowledge, skills or experience to ‘apply’ comprehensive oversight of this area of the business. Nevertheless, IT forms a significant part of a business’s core competency and any comprehensive corporate governance strategy focusing on maximising value for all stakeholders must include IT.

South Africa has an excellent corporate governance regime, with a raft of laws, codes and guidelines designed to enforce compliance with the highest global ethical standards.

 

“At its heart, ethical business practice is about accountability,” says Kevin Phillips, MD of idu Software. If I am the director of a business, I am in effect managing the money of the shareholders in that business – and I have a duty to manage it with care, skill and honesty, and to account for my actions. That is what a “fiduciary duty” is – to uphold the trust people place in us when they give us charge of their cash. The principle is ancient (the word “fiduciary” comes from the Latin), but nowadays it is also enshrined in statutory as well as common law. Directors who fail in this duty now face criminal prosecution and even prison time.

The latest report investigating individuals at UK-based Barclays Bank regarding the rigging of the LIBOR rate (London interbank offered rate), which controls the rate of home loans, credit cards and other financial transactions, cites the company’s flawed culture as a primary reason for its demise.

 

The report reveals that the subsequent high-earnings paid to top executives was only possible if management ignored the culture of its workforce.  Bob Diamond, the star investment banker and CEO of the bank worth over an estimated $350 trillion globally, was forced to resign after being implicated in the scandal.

 

According to Tjaart Minnaar, MD of OIM International, a leading business consultancy firm, an organisation’s culture is now more relevant than ever to ensure sound risk and performance management. This is in light of the scale of global woes experienced against the backdrop of the financial crisis.

 

“An organisation’s culture relies on high levels of transparency, corporate governance and accountability – all standards required by investors and society in order for a business to function effectively. This puts pressure on boards and executives to take and create responsibility for the organisational culture that reflects a company’s values and ethics.

 

“The test of how serious a company is about maintaining its values occurs when a key player does not live or adhere to the values of an organisation.  Are we happy to make an exception to the values of our organisation to not lose a key player’s contributions, or just turn a blind eye in order to reap the profits without adherence to the ethics and culture depicted by our business?”

 

Minnaar argues that it’s easy to use an organisation’s values as part of a conversation to steer a poor performer in the right direction.

 

“The problem comes in when a star performer does not adequately reflect an organisation’s culture, which comes about when there is something to gain and a person is tempted. The collective ethos of a business is more important than the individual and so tough decisions are required when star players don’t live the organisation’s values. Sound leadership requires the values of an organisation to be upheld, and calls for transparency when poor decision-making leads a star performer to misrepresent the organisation,” he says.

 

A company should consider such a situation as part of its risk management portfolio.  Company management should be able to identify the internal risks their company faces, and properly evaluate, communicate and address them, as part of a preventable risk category. A preventable risk exists within a company as, for example, fraud, corruption or bribery. This can be best managed through active prevention, putting monitoring operational mechanisms in place and guiding people’s behaviours towards that which fits the company’s culture. 

 

Minnaar believes a good example of responsible leadership includes the decision by the English cricket team to drop its best performer, Kevin Pietersen, from its team. Pietersen, a South African-born English cricketer, was implicated in a texting scandal when he messaged South African Proteas players, criticising his own team mates and coaching staff. He was subsequently dropped, but will be starting a reintegration process back into the English cricketing team.

 

Minnaar explains that an organisation’s values are set by the standards upheld by the organisation’s leaders, and that regular, consistent and constant communication and feedback will allow for transparency and accountability to occur at top level management. 

 

Senior management, as the custodians of an organisation's culture, need to clearly communicate the values and its meaning. By unpacking the values and practices and ensuring consistent application thereof, instilling regular feedback mechanisms and providing channels for transparency and accountability, leaders will exemplify the culture of the organisation.

 

Minnaar points to a recent example whereby BHP Billiton executive, Marius Klopper, decided to forfeit his bonus due to poor investment decisions made by the company, demonstrated a leader willing to set the example of accountability. In political circles, the ANC expelled the ANC Youth League leader Julius Malema after criticising its parent-body, the ANC. These moves, Minnaar adds, demonstrate sound leadership, as the leaders upheld the values of their organisations. 

 

Minnaar believes that entrenching an organisation’s values is a vital cog in the wheel that will enable a company to guard against a flawed culture.

 

“Business managers need to understand that an organisation’s culture and brand is to be upheld in order to protect its integrity.  Companies need to ensure that the values reflecting its brand personality are defined and clearly communicated throughout a participative process involving internal and external stakeholders.  

 

“The second tier to communicating and defining the values involves making sure that all stakeholders understand and are able to apply them in their respective roles. By unpacking the values in behaviours relevant to the type and level of work people do, as well as ensuring regular conversation about the company’s code of conduct and how this plays out in each person’s role in teams and in one-on-one meetings, will empower each employee to live the company’s values. 

 

Minnaar adds that regular communication, assessments and continuous feedback ensure the entrenchment of an organisation’s values.

“Assessment can occur through individual and team feedback and also through culture surveys. Other feedback channels such as an ethics telephone hotline where irregular behaviour can be reported by employees have also proven to be very useful.

 

“Lastly, developing the organisation’s values means taking feedback into account and building it into the leadership development of the organisation. Incorporating constructive criticism and appropriate comments when hiring and making succession decisions, will go far in safeguarding the values, and the culture, of an organisation.

 

After advising companies on how to implement BEE since 1999, there are few scenarios that we have not yet encountered. We have seen companies that have spent more money trying to circumvent BEE than apply it; and on the other end of the spectrum, we have seen companies implement it beautifully and achieve strong performance as a result.

The early days of BEE were all about visibility. The appointment of high profile, politically connected individuals to a board and their inclusion in poorly constructed BEE deals defined the market's perception of what BEE had set out to achieve.
Then we had the shift towards compliance – as opposed to avoiding BEE, the plan became about spending money to make sure that as many points as possible were achieved with little thought or consideration for how we would perform next year, whether it was sustainable and whether or not it added any return to the business.
Finally, we are seeing the penny drop and companies and individuals realising that if they implement it well, BEE is a powerful tool for organisational performance that does not detract from but rather adds to the bottom line.
At the recent ANC National Policy Conference, there was debate about whether BEE should be scrapped as it has failed to achieve what it set out to do. In our experience, the biggest critics of BEE generally fall into two distinct groups.

The first group includes those individuals who are ignorant when it comes to BEE or have failed to understand the policy, the framework and how they can participate in South Africa's transformation. It could perhaps be said that they were in fact trying not to participate and refusing to engage in transformation. How else could one explain their failure to acknowledge that 18 years after our first democratic election, nine years after the BEE Act and five years after the finalisation of the Codes, remarkable progress has been seen in the inclusion of women, people with disabilities and black employees, suppliers or customers. Even if you were a latecomer to the BEE process and only started engaging when the Codes of Good Practice where promulgated, you would have had at least five years to shift your policies to provide an inclusive environment for employees, suppliers and communities and therefore to have improved your representation.

The second group includes those individuals who are of the right age and race, but have missed the opportunities to participate in the big BEE deals and therefore lambast its effectiveness and suggest rather that we scrap the broad-based approach for a more definitive allocation of opportunities to black individuals.
However what is interesting is that whilst all of the posturing, debate, accusations and misinformation are flying around, the real benefits of BEE are quietly at play.

If we ignore the critics in the two groups above, we see an exciting shift and realisation that transformation is about an operating ethos. It need not be a cost to the business, but rather should create return in several ways:

• Improved supplier performance
• Improved corporate governance
• Deeper commitment to skills development, inclusivity and employee progression
• New suppliers which improve operating efficiencies and pricing
• Localisation which drives down prices in the long term and minimises the expense and exposure to currency fluctuations of fully imported products
• The opportunity to take products and services to a broader market as communities become purchasers and independent consumers
• Simple, effective ownership transactions that create diverse, local boards and shareholders who are matched on the basis of their commitment and the management of expectations to increase access to new markets.

We have seen several announcements in the past few months around BEE, the changes being made to Sector Codes and policy documents, and pending change in the Employment Equity legislation. The debate of whether it is a model that has succeeded is continually being discussed and yet our observation is that there is a distinct shift in the sentiment around the policy within the private and public sector.

Our private sector clients are asking 'How can we do more?' and the public sector is finally coming to the table to understand the policy and see how they can participate by implementing transformation internally and how their activities can impact transformation externally.

Multinationals coming into South Africa are never that shocked by the model for BEE. Once they understand it, the issue of ensuring that South Africa benefits from its own expenditure is relatively commonplace, albeit delivered in a different format to elsewhere in the world.

So what has created a sense of commitment and understanding in some organisations? Perhaps, the differentiator is companies or individuals that can remove the emotional response to change and rather focus on growing the opportunities to do business. In a tight economic market, the priority becomes about maximising access to opportunity. For many companies, this often means targeting Africa and they will set themselves up according to whatever model is best for them to get the work.

We need to grow the number of opportunities to do business to benefit all South Africans. The assumption that transformation is about taking from one group and giving to another is so flawed that it is almost funny. We need to increase the number of jobs, the volume of work, and the organisational growth in order to increase the benefits of business and then ensure that the beneficiaries include all South Africans.
Creating an environment where everyone can participate in economic growth is the real power behind a transformation strategy.

In 2012, a brand of customer activism that is unprecedented and more aggressive than ever before has spread like wildfire across the globe. Household brands like McDonald’s, Starbucks, KFC and many others have come under worldwide public scrutiny via Facebook, Twitter, blogs and now, petition sites. In this way, citizens acting as customer activists have, for example, forced companies to change manufacturing processes in a matter of days.

Moreover, if you’re wondering how fundamental a change there has been in the behaviour of organisations as a result of these trends – just compare an annual report from 30 years ago to a current one. The change in emphasis on what is reported, as well as the extent of reporting has shifted dramatically as a result of demands for transparency and parallel stringent corporate governance standards.

So, we live in a world where customers and any other key stakeholder can see right through us and have the power to do something about what they don’t like (see sites like Change.org as a perfect example of customer activism).

But there is another trend that has affected the way in which organisations are expected to behave – a trend that has resulted from a shift in authority from social structures to individuals. This is often referred to as a new spiritualism – a dedication to inner purpose, to being connected and to truth.

These trends have forced a re-think for marketers, who must respond urgently with strategies to make organisations more meaningful to customers. One new purpose is for marketers to make the organisation more ‘human’ in manner and delivery. This means shifting from a transactional relationship to a partner-based relationship. It means identifying how to integrate the hallmarks of human interaction into the business.

Let’s take a simple example. In everyday life, is it likely that you would give every one of your friends the same gift for the festive season – with no regard for personal taste, style etc. Well no – it’s highly unlikely. Therefore the same should apply in how you reward or recognise customers. Likewise, you know which friends would prefer a call and which ones are happy with email or for that matter a broadcast BBM . Yet, customers are sent random communication using platforms that they find inaccessible or inconvenient.

These are simplified examples but ‘humanising’ the business might extend as far as co-innovating new products with customers or spending much more time understanding customer behaviours rather than customer demographics.

A second ‘new’ purpose for marketers is to discard marketing principles that have become second-nature to organisations, but with a new social order, are harming them. And here, one must ask a question that is just short of heretical for most marketers. The question: ‘Is positioning shifting?’

Let me tell you why I think it is shitfting. Positioning is about ‘what you put into the mind of the customer.’ But if there is a shift towards the authentic and transparent, then working to ‘position’ ourselves does exactly the opposite by forcing us to purport to be what we are not. So, if positioning is too ‘fake’ for a world demanding honesty – then what do marketers do to differentiate the organisation. What we need to do is go back to the organisation’s core purpose – to the reasons for its creation.

Charles Revlon, founder of Revlon Cosmetics apparently said: ‘In my factories, I make lipstick. In my stores, I sell hope.’ Revlon understood the core purpose of the company, i.e. to help women feel desirable and profit was a by-product of purpose.

Some iconic organisations have maintained a fundamental connection to their core purpose, which has resulted in their success. This often comes from strong leadership who are connected to the founding principles of the organisation. Liberty, with Donald Gordon at its helm, was able to live its core purpose which was to find ways for people, who never before had access to the comfort of insurance, to be able to buy policies. Likewise, a return to this core purpose would re-invigorate the organisation, provide a natural course of action for how the company does business and ensure a more ‘human’ culture.

Likewise, an organisation like Disney had a simple core purpose: ‘to make children happy and to help them dream.’ As long as Disney understands and remains true to its core purpose, every point at which stakeholders interact with the organisation, will be a reflection of this purpose and a natural authenticity will flow through the veins of the organisation.

In short, how aware the organisation is of its core purpose, how well-connected employees are to that purpose and how emotionally healthy the organisation is – will get customers through the door and keep them there. It is the job of marketers in this era to re-discover the core purpose of the organisation and to live that purpose by designing interactions that are less mechanical, less driven by linear business models and more human – driven by personal and inter-personal social behaviours.

It is the only response to an all-powerful customer who is demanding transparency and making it happen.

Part of the reason I am dedicated to producing technology that simplifies financial management and forecasting is because I enjoy order and structure. I am drawn to the unspoken rules, boundaries and balance of accounting, budgeting and corporate governance. Having said that, I cannot find fault with the laws, codes and guidelines that our government has put into place to enforce compliance with what must be the highest global ethical standards.

Lack of effective corporate governance seriously undermines any fraud risk management programme. The organisation’s overall tone at the top sets the standard regarding its tolerance of fraud.

That’s the view of Richard Walker, Head of Business Risk Services at Grant Thornton Johannesburg.

“Even with numerous checklists in place, we observe that many companies are still losing valuable assets by not setting the right tone at the top regarding fraud,” says Walker.

He emphasises that it depends on a company’s senior management and directors to determine the attitude which the business has towards fraud. “It ultimately comes down to what management is saying about fraud, for example, are they prepared to prosecute – on criminal and civil counts – or ask the person to resign with a payback clause?”

According to Walker, it is essential to remember that it is the people in a business – not a computer or accounting systems – that perpetrate fraud. “When trying to prevent fraud, businesses should start by looking carefully at the kind of people they hire, by simply thinking about its recruitment practices.”

These include doing proper background checks, such as the verification of credit status, research into criminal records and confirming education levels.

While companies might focus on big items for fraud detection, Walker warns that it is very often the smaller items that can have the biggest impact.

“The smallest of crimes start with cash. The fraudulent use of company credit cards and expense claims for personal gain are simple, but well-known examples of where some of the worst instances of fraud occur. These might seem like insignificant amounts in the greater scheme of a company’s expenses, but it all adds up eventually.”

Another area where fraud is rife is in the accounts payables division where duplicate payments are made internally and externally. “This is one of the biggest fraud activities. It can involve false invoices or payments, or alternatively cash or cheque payments.”

An aspect that people often forget when it comes to fraud is that it doesn’t only revolve around money. “Theft of data and corporate information, as well as intellectual property, seems to be the norm nowadays,” he says.

Walker believes it ultimately boils down to the management’s approach to dealing with fraud. “It should never be too much trouble for a company to report fraud. One trend we see is that some companies are prepared to understate the amount of assets believed to be taken, so that they are not obliged to report it to the police.”

He refers to the Prevention and Combating of Corrupt Activities Act which requires people in a position of authority to report any fraud amounting to more than R100 000 to the authorities.

While audit committees and legislation can give guidelines on how companies should be dealing with fraud, Walker says it is about much more than merely ticking a box. Management should consider their strategy with regards to fraud is and develop a fraud prevention plan accordingly.

“Red flags should be raised when the internal and external audits do not believe a company’s control systems are adequate especially if they are seeing instances of inconsistency,” says Walker.

He advises that all companies, no matter how small, should have strict internal controls, on handling cash, including segregation of duties and training on how to spot a stolen credit card. There should also be systems that can monitor duplicate payments and very strict rules on the distribution of bank details.

“It is of vital importance to have a data handling policy for what is considered sensitive data, along with confidentiality agreements for all employees.”

In this era of information moving increasingly freely, he believes companies should consider an information classification program or text analytics system. This would, based on the usage of keywords, prohibit the transfer of sensitive data.

Control mechanisms such as anti-virus software and complex passwords will ensure protection against hacking. The frequent review and reconciliation of company bank accounts should not be forgotten.

“Simply complying with regulations by having a fraud hotline, for example, will not solve any deeper problems that your company might have. It depends on management’s attitude and principles which will ultimately be able to save companies a lot of monetary and possible reputational damage,” concludes Walker