CGF Articles & Editorials

Sustainability depends on a strong governance framework (2015-04-16)

Article by Terrance M. Booysen

Corporate governance is one of the key elements many investors consider when they reflect upon the organisation’s success, as well as when deciding upon their investment choices.  But when the organisation’s governance system shows signs of stress or failure, not only do astute investors understand the unsettling impact it has upon the organisation’s supply chain, they also become wary about its sustainability which may give rise to them re-considering to ‘weather the storm’ or ‘bail out’ so to speak.
Over the years so much has been written about failures of corporate governance within organisations, including the financial, social and political consequences which are typically found in its trail.  Yet in spite of numerous regulation to improve the overall conduct of organisations, including the various King Codes of Corporate Governance written in South Africa, even more organisations are becoming affected by poor governance.

Indeed, there are a number of reasons why an organisation may become prone to poor governance and these matters are often fiercely debated in the hope that such occurrences would be avoided, or at best stopped.  But in reality -- after the scandalous dust linked with poor governance has settled -- people seem to forget these (re-occurring) episodes and somehow the perpetrators seem to escape unscathed and they are not publically brought to book in any meaningful way. The failure of governance of any kind is ultimately the accountability of the board and its directors.  Truthfully there are no bad organisations, only bad boards and it can be just one, or a few directors who may lead the organisation astray.  Through their poor leadership and questionable governance practices immeasurable harm is brought to the organisation, including its exposed stakeholders.  As disgraceful as it may be, even when these brazen individuals are removed from their existing directorship positions after they have been found deficient on their fiduciary duties, they somehow re-appear in different organisations to continue their escapades of greed and destruction.

Why then does poor governance continue to prevail, and what additional measures could assist to improve an increasingly dire situation which costs the South African economy billions of rands in a variety of legal battles, including mediation and arbitration hearings, not least private and out-of-court settlements? For the purpose of addressing this question of repeatedly seeing organisations suffer as a result of poor governance; this article purposely does not focus upon the more typical reasons associated with poor governance practices such as poor leadership, or powerful and greedy directors with selfish motive.  Instead, this article makes a hypothetical case -- albeit just for a few minutes -- that all leaders are ethical and that they are completely mindful of, and serving their fiduciary duties.  If this were true, why then do so many fail when a ‘post-mortem’ is conducted upon the events that damage, or even destroy an organisation or a director’s career?

Rather surprisingly, there is a more fundamental reason why corporate governance is likely to fail in an organisation.  It occurs when an organisation fails to implement a Corporate Governance Framework® which is designed to connect the many intricate components required for ensuring the organisation’s raison d’ etre and its ultimate success. Through its application, a well thought through framework will also allow an organisation to address the qualitative governance issues, and avoid getting bogged down in the quantitative areas that usually have an adverse result upon the organisation’s bottom-line.   By not having such a framework in place -- especially in bigger or more complex organisations -- is a sure recipe for inevitable governance failure, albeit of varying degrees.

As with most successful organisations, it is extremely rare that the organisation will not have a vision and mission as part of its core guiding principles which underpin the reason for the organisation’s existence.  Indeed, these organisations are guided by a clear set of key documents which includes its strategy, policies and procedures in order to achieve the organisational goals. Whilst these documents are, amongst other, essential for creating common purpose; in reality it is the organisation’s Corporate Governance Framework® which unifies all the complexities of the organisation’s strategic and operational processes which gives the organisation its ‘athletic form’ and ‘mental agility’.  If directors and the executive management structures are not sufficiently connected to all the vital business components needed in a sustainable organisation, then the governance of the organisation will undoubtedly suffer.  For example, directors and management must have the necessary and sufficient understanding of their respective roles and functions, and there must be clear and distinct lines of accountability or responsibility as would be outlined respectively by the appointment of directors and managers.

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