Corporate scandals: The buck stops at the boardroom table
Wednesday, 28 February 2018
Directors must understand their duties and responsibilities to protect not only themselves but also society as a whole.
By Parmi Natesan and Prieur du Plessis
It is now well established that directors bear the ultimate responsibility for any corruption that occurs within their organisations. We have already seen some examples of directors falling on their swords when corruption becomes apparent, and we can expect demands for this level of accountability to intensify.
The need for South African boards to up their game as regards corruption is evident, not least in the fact that we have slid from 86 out of 183 countries in the World Governance Indicator for 1996 to 114 out of 209 countries in 2013.
At the outset, it is worth recognising how difficult it is for businesses to operate in a corrupt environment in which bribery is often the only way to obtain contracts ̶̶ especially when economic conditions are bad and the pressure to “make the numbers” is intense. However, it is important that companies resist the temptation, and avoid entrenching this culture, and put severe sanctions in place for corrupt behaviour. One global example: Siemens paid approximately $1,6 billion in fines to American and European authorities in 2008 as a result of having paid bribes amounting to $1,4 billion, and some senior members were criminally prosecuted.
A paper by the Institute of Directors in South Africa’s Corporate Governance Network defines corruption as “giving anything of value to entice someone to fulfil that person’s duties in a particular manner, or to accept or solicit anything of value to fulfil duties in a particular manner”. It includes the whole gamut of facilitation payments, tips and gifts that are used to influence events and encourage a certain outcome.
The legal framework is provided by the Prevention and Combating of Corrupt Activities Act (12 of 2004) (PRECCA), but South African companies may also be impacted by foreign legislation such as the United States’ Foreign Corrupt Practices Act and the United Kingdom’s Bribery Act. Directors must take care to ensure they understand if and how these other pieces of legislation affect them as they are very wide ranging.
King IV Report’s emphasis on ethical leadership, the establishment of an ethical culture and being a responsible corporate citizen also makes it quite clear that ensuring mechanisms are in place to prevent corruption is a board responsibility, and critical for good governance. Principle 3 around corporate citizenship explicitly mentions corruption.
In addition, fraud and corruption should be considered within the context of risk governance.
Plan of action to prevent corruption
- So what are the practical steps directors should take to ensure they have a robust anti-corruption culture in place? The Corporate Governance Network paper advises some key actions: Set the tone at the top. Directors and executives must lead by example, and only an entrenched ethical culture can prevent corruption from happening.
- Ensure management has the right anti-corruption programme. Board committees, such as the social and ethics committee, the audit and risk committee and the remuneration committee, have a big role to play here.
- Monitor the right things. In monitoring management, the board should ensure there is a code of conduct in place, and that anti-corruption training and appropriate internal controls are in place. It is also important to ensure service providers are vetted and sign contracts explicitly outlawing corrupt activities, and that due diligence is performed for new business ventures and foreign jurisdictions.
- Establish a whistle-blowing facility. Employees are the most likely source of intelligence about corruption.
- Enforce zero tolerance for corruption. To support and deepen the ethical culture referred to in the first point, boards must ensure the corporate culture and code of conduct are seen to work.
While boards do have a daunting responsibility to stamp out corruption, they also have the above tested methodologies to help them.
- Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively. Enquiries: firstname.lastname@example.org. Better Directors. Better Boards. Better Business.