Corporate governance: South Africa’s secret weapon

By Parmi Natesan and Prieur du Plessis

As business  ̶  and the country as a whole  ̶  looks for ways out of the COVID morass, we must not ignore the real benefits corporate governance can offer.

The economy, and the country as a whole, has been particularly hard hit by our response to COVID. Now, as the dust begins to settle, business and Government are moving (with varying degrees of urgency) to set their organisations and the economy on the road to recovery. One effective weapon we have in our armoury should not be ignored: corporate governance.

A 2018 article by the International Finance Corporation’s Corporate Governance Lead for Europe and Central Asia, Merima Zupcevic Buzadzic, lists ways in which corporate governance can help countries out of a crisis. She argues that corporate governance creates the framework to enable economies to recover from wars or economic meltdown. 

Buzadzic also makes the important point that a commitment to corporate governance sends a powerful message to a demoralised country and the outside world.

Locally, the past decade and more have provided a graphic illustration of what happens when a country’s leadership is not focused on realising desirable goals. If his party had adopted King IV’s principles, we venture to suggest that the President would not have had to pen that famous/infamous seven-page letter to his own party, but would rather be in the enviable position of detailing how well the country was rising to the challenge of reconstructing an inclusive and vibrant economy.

Of course, South Africa has a solid base when it comes to corporate governance (albeit not always pervasively and effectively applied in everyday practices). Our King Reports have received worldwide recognition, and their various iterations chart the move away from a primitive compliance mindset to one focused on how ethical and effective leadership by the board or other governing body is used to achieve clearly defined outcomes, among them ethical culture, good performance, effective control and legitimacy.

Let’s look at some of the specific benefits of corporate governance for both countries and businesses, as revealed by research.

Lower cost of capital

OECD research shows that capital markets favour companies and countries where corporate governance is strong. Capital is highly mobile, and it favours well-governed markets. As Arthur Levitt, former chair of the US Securities and Exchange Commission, said: “If a country does not have a reputation for strong governance, capital flows elsewhere.” When it comes to capital, the destinies of companies and the countries in which they operate are thus intertwined.

Enhanced corporate performance

Studies in the US, summarised by Jay Eisenhofer’s article, Does corporate governance matter to investment returns?, found that “the quality of a particular company’s governance practices and procedures positively correlates with both good corporate financial performance and shareholder value. Simply put, good corporate governance does in fact pay.”

A local study by Isaih Dzingai and Michael Bamidele Fakoya on the Effect of Corporate Governance Structure on the Financial Performance of JSE-listed Mining Firms concludes that if mining companies comply with corporate governance codes, they as well as the economy as a whole will benefit.

An OECD study in Latin America, a geography with many similarities to ours, looks at a wider group of companies and draws similar conclusions. Well-governed companies across various sectors and countries produced better operational and market results than their peers, “reflected in higher levels of profitability, relative share prices and liquidity, and reduced cost of capital”.

Good governance helps in good and bad economic times

Corporate governance does not only help firms outperform when markets are good; it also helps them weather the consequences of an economic downturn better, as demonstrated during the 2008 financial crisis. On 31 December 2008, shares in well-governed companies bought in 1997 were worth five times a similar investment in the broad Latin American stock market.

Overall, companies with a strong commitment to corporate governance saw the market reward them with an average 8% increase in market value when communicating improvements in their corporate governance structures and processes.

“The definition of a successful company, and as true for countries, is one that develops a corporate soul – not just a group of people gathered together for a joint commercial purpose,” says Bonang Mohale, chair of Bidvest. “This is much more than the sum of its many and varied parts. It is the ethos that drives it and makes it special. This requires not only doing right by the business but also the societies in which it operates.”

The tangible benefits of corporate governance are complemented by a greatly reduced risk from reputational damage and position the company to deliver positive results to its stakeholders and society more broadly. The same could be said of the country  ̶  South Africa Inc  ̶  with whose fortunes all of us are completely aligned.

Parmi Natesan		Dr Prieur du Plessis