Tackling the Corporate Governance Debacle & Institutionalising BUsiness Ethics-Mr. Mark Victor

©2010 Deloitte Touche Tohmatsu Limited. All rights reserved.
Tackling the Corporate Governance
debacle & institutionalising Business
Ethics
Being a good corporate citizen
Africa Round-Table & Conference on Corporate
Sustainability and Responsibility!

©2010 Deloitte Touche Tohmatsu Limited. All rights reserved.Deloitte2
Background

A history of governance scandals
Deloitte3
Year Organisation Nature
1494 Medici Bank Owned by the Medici family, it ran up large debts due to the
family's profligate spending, extravagant lifestyle, and failure
to control the managers, their bank went insolvent.
1991 BCCI Fraud, money laundering and larceny.
1993 Carrian Group Accounting fraud. An auditor was murdered, an adviser
committed suicide. The largest collapse in Hong Kong history.
1995 Barings Bank An employee in Singapore, Nick Leeson, traded futures,
signed off on his own accounts and became increasingly
indebted. The London directors were subsequently
disqualified, as being unfit to run a company
1998 Long Term Capital
Management
After purporting to have discovered a scientific method of
calculating derivative prices, LTCM lost $4.6bn in the first few
months of 1998.
2000 Equitable Life
Assurance
Company
The insurance company's directors unlawfully used money
from people holding guaranteed annuity rate policies to
subsidize people with current annuity rate policies.
2001 WorldCom After falling share prices, and a failed share buy back
scheme, it was found that the directors had used fraudulent
accounting methods to push up the stock price

A history of governance scandals
Deloitte4
Year Organisation Nature
2002 Enron Directors and executives fraudulently concealed large losses
in Enron's projects. A number were sentenced to prison
2002 Adelphia
Communications
Internal corruption. The Directors were sentenced to prison
2002 Arthur Anderson A US court convicted Andersen of obstruction of justice by
shredding documents relating to Enron scandal.
2003 Parmalat The company's finance directors concealed large debts.
2008 Lehman Brothers Lehman Brothers' financial strategy in from 2003 was to
invest heavily in mortgage debt, in markets which were being
deregulated from consumer protection by the US
government. Forced to file for bancrupcy.
2008 Royal Bank of
Scotland
Following the takeover of ABN-Amro, and the collapse of
Lehman Bros, RBS found itself insolvent as the international
credit market seized up. 58% of the shares were bought by
the UK government.
2008 AIG $57 billion dollar exposure to sub-prime mortgage securities
requiring a 24 month credit facility from the US Federal
Reserve

Emergence of Codes of governance
• The collapse of the Maxwell publishing empire in the late 1980s was a direct
catalyst for the publication of the Cadbury Report on Corporate Governance in
the UK in 1992
• Cadbury report has resulted in a UK Corporate Governance Code for
companies listed on the London Stock Exchange
• Cadbury followed by Turnbull report providing guidance on standards of internal
control for UK listed companies
• The collapse of Enron and WorldCom in 2002 precipitated the enactment of the
Sarbanes-Oxley Act (SOX) in the US later that year
• King Code of Corporate Governance has followed international code
development in South Africa
• Emergence of various governance codes across Europe
• Increased advent of governance principles embedded in company
legislation and listing requirements
• Nigeria Corporate Governance Index proposed in conjunction
with the Nigerian Stock Exchange
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Why focus on governance?
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Corporate failures led to questioning:
Effectiveness of boards Accountability of directors
Directors’ remuneration White collar crime
Risk assessment and management processes Financial reporting
Effectiveness of audits
Which has resulted in:
• Increasing transparency and accountability
• Demands of “corporate citizenship”
• Expectations of protection and growth of shareholder value

Global governance trends

Transparency
• Increased scrutiny
• Increased pressure
• Additional disclosures requested:
• Risk oversight
• Board composition
• Executive pay
• Diversity
• And other topics
• Survey:
• 64% global respondents agreed that the
level of interaction between shareholders
and the board will increase over the next
few years.

Risk Oversight
• A continued focus area for the
board
• Risk management vs. risk
oversight
• Disclosure requirements
• Risk committees
• Who on the board is
responsible?
• Full board vs. committees

Diversity
• Increased focus on board gender diversity
• Global trends: Norway (2006), France, Spain, Italy, Belgium,
Netherlands, Malaysia, India
• Why is this important now?
• Quota implications

Succession Planning
• Oversight of an organization’s talent falls within the board’s
responsibility
• Succession planning is the responsibility of the board –
regardless of the type of organization (public, private/ family
business)
• Executives: promote from within vs.
external hire
• Board qualifications: periodic
assessment

Technology
• Board’s use of technology
• Host of new tools/ applications are available
• Can increase efficiency
• Use of tablets and board portals
• Ease of communication
• Board’s oversight of technology
risks
• Discuss risks with management
• Social media
• IT strategy and investment
• Global IT risks

Sustainability
• The next ‘megatrend’
• What does sustainability include?
• Create business value by building reputation and
enhancing employee morale
The Board’s role
• Sustainability reporting
• Identify stakeholders concerns
• Oversee implementation of
practices
• Incorporate in corporate strategy

Tone at the top
• The board to work with management on setting the tone
• Articulate mission and vision
• The board to oversee ethics program
• Communicate and oversee
non-compliance with organizational
programs

Good governance

Defining good governance
Deloitte16
It regulates the exercise of power within a company in order to
ensure that the company’s purpose is achieved – Sustainable
shareholder value and ultimately business sustainability
It is essentially about effective leadership characterised by the ethical
values of responsibility, accountability, fairness and transparency
It is also about:
 Best business practice
 Enhancing organisational performance and wellbeing
 Adding shareholder and stakeholder value

Defining good governance
Deloitte17
“The system by which corporations are directed and controlled”
“Corporate governance is all those structures, systems, processes,
procedures, and controls within an organisation, at both board of
directors level and within the management structures of the organisation,
that are designed to ensure that this organisation achieves its business
objectives. That it does so within sensible risk management parameters;
and that it does so efficiently, effectively, ethically and equitably”
“Corporate governance is concerned with holding the balance
between economic goals and between individual and
communal goals…the aim is to align as nearly as possible the
interests of individuals, corporations and society.”
Sir Adrian Cadbury
Corporate Governance Overview, 1999
[World Bank Report]

Core characteristics
Deloitte18
Discipline universally accepted behaviour
Transparency candid, accurate, timely information
Independence no board/committee conflicts (of
interest)
Accountability by law/statute to company
Responsibility to relevant stakeholders
Fairness current & future interests
Social responsibility not discriminatory or exploitive
environmentally or personally

Statutory duties of Directors
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• Agent of the company
o Represent the company, not individual shareholders, your
constituency, etc.
o Independence and objectivity
o Avoid/manage conflicts of interest, else independent judgment
impaired
• Ensure organisation trades towards achieving objectives
• Duty of good faith/loyalty
• Duty of care and skill
• Duty of attention
• Statutory obligations
In essence:
• Drive, Strive, Survive and Thrive
• The Buck Stops Here !
If management is about running a business properly, then …
Governance is about ensuring the business is run properly

Goal is to ensure that the company trades towards its strategic
and business objectives, sustainably
The Chairman • Manage/run the board
• Independent non-executive director
The Board
• Agree + approve strategic direction
• Review and monitor, oversight over executive
management delivery against strategic and
business plans
• Accountable to the company, the shareholders, the
stakeholders, the socio-economic community, for
the health and wealth of the company
The Chief
Executive
Officer
• Manage/run the company, its operations,
• Deliver against the strategic and business plans
• Accountable to the board for performance, for
health and wealth of the company
Differentiating roles

Governance process
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• Setting board purpose, objectives, priorities and agendas
• Boards own processes for monitoring:
- progress in creating shareholder value
- achieving financial and non-financial business objectives
- integrity of internal control and management information
systems
- CEO and top management performance
• Timeliness, relevance and quality of information to monitor
• Effectiveness of meetings; debate and challenge, minutes and
action
• Ability to focus on processes and systems vs. transactions and
details
• Assessment of board performance
• On-going development and updates

Essential elements of a Code of Governance
(King 3 example)
Deloitte22
• Ethical leadership and corporate citizenship
• Boards and directors
• Audit committees
• The governance of risk
• The governance of information technology
• Compliance with laws, rules, codes and standards
• Internal audit
• Governing stakeholder relationships
• Integrated reporting and disclosure

Delegation of authority
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• Governance framework needs to that inform roles, responsibilities,
behaviours, and decisions carried out on behalf of all corporate stakeholders
to obtain a target level of performance
• Delegation of Authorities (DoA) provide role clarity to the organization and
improve the decision-making process through more explicit authorities
delegated to the business units from the Regions and Corporate
Inform Decision-Making to Achieve
Business Objectives
Delegation of Authority
Roles &
Responsibilities
Corporate Governance
People Strategy
Culture Audit
Risk
Management
Performance
Management Compliance
Code of Ethics Core Values
Risk Management
Model & framework
Mission &
Strategy
Statement
Policies &
Procedures
Governance
Training

An integrated governance model
Deloitte24
AssuranceControl
Governance
Risk
Management
• Effective use of technology.
• Identifying and monitoring
critical controls.
• Establishing controls culture.
• Establishing a balance
between cost and control.
• Compliance frameworks e.g.
Anti-bribery and corruption
control.
• Change management .
• Assessing board
effectiveness.
• Assessing governance
structure and effectiveness.
• Regulatoryoverburden.
• Governance over decision
making.
• Integrated risk and
governance.
• Effective delegation and
control within the
organisation and across the
value chain.
• King III Report on Corporate
Governance.
• Multiple assurance providers
and assurance mapping.
• Balance between riskbased
auditing and assurance over
core business processes.
• Auditing decisions.
• Auditing control culture and
behaviours.
• Auditing incentives.
• Use of technology.
• Providing assurance over the
extended enterprise e.g.
contracts / relationships.
• Defining riskappetite.
• Improving the alignment
between risk and
management decision
making on both an
operational and strategic
level.
• Linking risk and
remuneration.
• Enhancing risk information.
• Scenario planning.
• Defining and establishing a
riskculture.
• Defining a relevant and
complete risk universe.

Defining iGRC
Deloitte25
Risk Management
The effect of uncertainty
on business objectives;
risk management is the
coordinated activities to
direct and control an
organization to
recognize opportunities
while managing
negative events.
Governance
The culture, policies, processes,
laws, and institutions that define
the structure by which
organizations are directed and
managed.
Compliance
Adherence to policies,
plans, procedures,
laws, regulations,
contracts, or other
requirements.

Three lines of defence
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Risk Intelligence
Deloitte27
The RiskIntelligentEnterprise
Nine PrinciplesforBuilding a
RiskIntelligentEnterprise
Governing Bodies Responsibility
Roles & Responsibilities
Common Definition of Risk
Common Risk Framework
Common Risk Infrastructure
Executive Management Responsibility
Objective Assurance and Monitoring
Business Unit Responsibility
Support of Pervasive Functions

Risk Intelligence
Deloitte28
Board of Directors
Executive
Management
Business Units /
Subsidiaries
and Supporting
Functions
Risk Infrastructure
and Management
Risk Ownership
Technology Technology
Board of directors
Enterprise risk group
Executive management
Internal audit Risk management
Business units &
Subsidiaries
Support functions
R
Risk Universe
External Environment Internal Environment Partner Relationships
Risk
Identification
Risk
Quantification
Risk Analysis
Risk
Management
Risk
Monitoring
Communication
Level1Level2

Combined assurance
Deloitte29
“Combined assurance is integrating and aligning assurance processes in a
company to maximise risk and governance oversight and control efficiencies,
and optimise overall assurance to the audit and risk committee, considering
the company’s risk appetite.”
Assurance should be provided on three levels: management (1st line of
defence), internal assurance providers (2nd Line of defence) and
external assurance providers (3rd line of defence)

Ethics

Defining ethics
Deloitte31
“the standards of behaviour,
which indicate how the individual
should act, based on moral
values and norms. They involve
the ability to distinguish between
right and wrong and the
commitment to do what is right.”
“A system of moral principles”
“The rules of conduct recognized in respect to a particular class of human
actions or a particular group, culture, etc.: medical ethics; religious ethics”

Purpose
Deloitte32
• To serve as a fundamental guide to for ethical behaviour within the
organisation and in interactions with stakeholders.
• Integrity is viewed as critical to all behaviour – outweighing the wishes
of customers, revenue growth, economic advantage, and instructions
form higher authority.
• Driven by an organisations values
Equity
Integrity
Spirit of
Partnership
Excellence
Caring

33
“The world is a dangerous place to live not
because of people who are evil… but
because of people who don’t do anything
about it.”
Albert Einstein

Business implications
• Code of Ethics/Conduct
• Programmes to encourage ethical behaviour
• Communication to remind staff e.g. Newsletters, memos, emails
• Workshops and training
• Ethics Champions – Department
• Conflicts of Interest Policy
• Gifts Policy

Duties
and
Responsibilities
Conflicts
of
Interest
Confidential
Information
Corporate
Opportunities
Corporate
Image
Corporate
Assets
Act with
care and
skill
Business
Courtesies,
Bribery
Report
Dishonest
and
Irregular
Activities
Compliance
Equity
Relationships
With other
Employees
Relationships
with
Suppliers
Relationship
with Society

Ethics Management
Deloitte36
Forms of capital
Business model
Creating and sustaining
value
Directors of companies are obliged
to promote the best interest of the
company – this includes the
collective best interest of
shareholders, as well as the
interest of among others, the
community, employees, customers
and suppliers.

Ethics management framework
Deloitte37

Business drivers for ethics
• Corporate Governance & Companies Act including
potential personal liability for directors and executives
• Mandate of Social & Ethics Committee
• Global financial crisis resulting in increased public
scrutiny
• Corporate scandals (e.g. News Corporation)
• Legislation (i.e. UK Bribery Act)
• Social media and increased connectivity
• Integrated Reporting (i.e. increased transparency and
accountability)
• Big data, enriched business intelligence and advanced
analytics
• Changing profile of consumers (i.e. millennial generation)
• Internal audit standards (i.e. evaluation of effectiveness
of the organisation's ethics-related objectives, programs,
and activities)
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Ethics management
Deloitte39

Elements of ethics management
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Element Description
Organisational Arrangements and
Culture
• Positioning of the Social and Ethics Committee
• Embedded, integrated, empowered, capacitated arrangements throughout the organisation
• Board knowledge and effectiveness
• Tone at the top
• Linkage of ethics with organisational values (“the way we do things”)
Risk Intelligence
• Identification of general and specific ethics risks present in business model
• Assistance in obtaining “buy-in”
• Pro-active vs. reactive approach
Values, Standards, Policies and
Procedures
• Social and Ethics Committee Charter/ strategy
• Code of Ethics & values
• Documentation hierarchy
• Universal ethics principles
• Ethics KPI’s
Awareness and Training
• Positioning of Ethics theory, practice and dilemmas
• Implementing, maintaining and reinforcing of codes and policies
• Targeted intervention
• On-going Financial Crime Awareness and Training
Monitoring
• Ethics performance monitoring
• Compliance function and programmes
• Dealing with issues
• Case management
• Escalation policies / arrangements
• Internal Audit Function
Reporting
• Formal and informal feedback on actual ethics performance
• Fulfilling obligations in terms of the Prevention and Combatting of Corrupt Activities Act
• UK Bribery Act / Foreign Corrupt Practices Act / PFMA / MFMA (where applicable)
• Companies Act requirements
Assuring Ethical Performance • Designing and implementing a combined assurance model on ethics performance

Code of conduct
A Code of Conduct is a key vehicle for:
• reducing the risk and associated costs of
fraud, conflicts of interest and other ethical
lapses;
• helping introduce new employees to the
organization’s standards;
• attracting and retaining high-calibre
employees and business partners;
• setting the boundaries of acceptable
behaviour;
• providing employees and others subject to
the Code with comfort that they will not
inadvertently stray offside;
• informing contractors, suppliers and others
doing business with the organization of its
expectations regarding acceptable
behaviour;
• providing the basis for sanctions against
those that deviate from the Code; and
• fulfilling the regulatory obligations of public
companies.
Key questions:
1. What are the objectives of a Code of
Conduct?
2. What is the Code’s relationship to the
organization’s mission, vision, values
and culture?
3. Who are the champions of the Code?
4. Who develops, administers and
maintains the Code?
5. What is the process for developing the
Code?
6. What is the process for the periodic
review and revision of the Code?
7. Is the Code at the right level for the
organization?
8. Is the content and tone of the Code
appropriate for the organization?
9. How has the organization determined its
actual ethical risks?
10. How does the Code apply to foreign
operations?
Deloitte41

Critical considerations
• Is there a common set of beliefs,
values and practices?
• Does the management team
understand the elements of an
ethical culture and reinforce this
culture?
• Is the culture evaluated on a regular
basis?
• At what level is ethics embedded –
Board, Executive, Managers,
Workers
• Does the culture inform strategy and
decision making?
• How effectively is the culture
communicated across the
organisation and accessible to
employees?
• Is there an understanding that a
good ethical culture is good
business?
• Does the Governance framework
support the ethical framework?
• Are there established reputational
values, hypernorms (e.g. honesty)
and ethical decision making criteria?
• Have important issues requiring
cultural guidance been identified,
including stakeholder analysis,
environmental scanning, ethical risk
assessment and ranking?
• Are compliance issues monitored
and resolved?
• Is there independent assessment of
the effectiveness of the key
processes?
Deloitte42

Evaluating the tone at the top
• Analyze Hotline activity
‒ Extent to which number and nature of known incidents of wrong doing impacts on
compliance with policies
‒ Does management dismiss minor violations as unimportant
‒ Is there adequate protection of whistle-blowers
• Employee surveys
‒ Whether senior management “walks the talk” on integrity and ethics
• Tone of management communications
• Board discussions
• Social media reputation assessment
• Facility visits
• Exit interviews
• Customer complaints
Deloitte43

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Tackling the Corporate Governance Debacle & Institutionalising BUsiness Ethics-Mr. Mark Victor