This year marks the 30th anniversary not only of the first democratic elections but also of the release of the first “King Report on Corporate Governance”. It was a slim, easy-to-read report, aimed at promoting “the highest standards of corporate governance”.
We’re now on King 4, which, though running to only 120 pages, is a much more ambitious document that claims universal applicability. The King 4 report was released in November 2016.
In the 30 years since King 1, the governance industry has grown like Topsy, and in its wake the once modest corporate annual report, with a few black-and-white photos, some narrative and lots of figures, has ballooned into a daunting communications project with many colour pictures, dense text and a few figures. Also in its wake are screeds of recommendations and regulations governing almost every aspect of a listed company’s life.
And that’s just part of what listed companies have to contend with. There’s also the growing mountain of JSE listings requirements.
So have we reached peak governance? Or is there more to come? Corporate executives and shareholders seem a bit weary. They feel the governance regulation industry has become like the government which, failing to enforce existing laws, decides the solution is more laws and then still more. As one frustrated executive recently said, boards are focusing on complying with pointless checklists instead of just ensuring their employees are behaving properly.
But perhaps increasing and more complex regulations are inevitable in an increasingly complex world. In which case we’re far off peak governance.
Sadly, the effect of ever more laws and regulations does little to discourage those intent on ignoring them — but it does penalise law-abiding people with a heavier compliance burden.
Mind you, the regulators and the King committee are in a difficult position. There is no way of proving how many disasters they have prevented, but every disaster not prevented is laid at their feet — or nearby. The disturbing reality is that every company that imploded in the past decade ticked almost all the many King compliance boxes. Not just the big implosions like Steinhoff and Tongaat, but also the smaller ones, including those in the Gupta empire.
What seems certain to ramp up the volumes of regulations and recommendations is the near total lack of enforcement by authorities. The King committee has no enforcement powers and relies on the JSE to enforce its recommendations. In terms of the JSE’s listings requirements, listed companies have to sign off on the King code. However, it’s hard to recall an instance of a listed company being censured because of noncompliance with this obligation.
As for the JSE, it’s commendably regular when it comes to issuing censures and fines, particularly to smaller companies that often seem to forget they’re operating in a regulated environment. The Financial Sector Conduct Authority, which is responsible for regulating market conduct, has gone fairly quiet since it tackled former Steinhoff CEO Markus Jooste on insider trading allegations.
And then there’s the South African Institute of Chartered Accountants (Saica) and the Independent Regulatory Board for Auditors (Irba), which should be playing crucial oversight roles, given how frequently accountants and auditors are on the frontline of a collapse in governance.
[Saica and Irba] should be playing crucial oversight roles, given how frequently accountants and auditors are on the frontline of a governance scandal
The Tongaat and Steinhoff boards were packed with accountants; indeed, Steinhoff director Heather Sonn once remarked unhappily that almost everyone at Steinhoff was an accountant. So there was lots of scope for Saica and Irba to play an effective role in stopping the rot early. But for that to happen auditors and accountants would have to believe they would suffer consequences if they were caught — and they know there’s almost zero chance of that.
Saica has just confirmed, after six years, that it has made no progress with its disciplinary hearing concerning Jooste. As for the other accountants at Steinhoff, not one was subjected to a Saica censure.
So there’s little chance of Saica making progress on its promise to investigate all its members mentioned in the Zondo report. So far it has finalised an investigation of former SAA board member Yakhe Kwinana and fined her R6.1m, though the money appears not to have been paid.
Those looking for comfort from Irba will find none. Its recently released “Public Inspections Report on Audit Quality” gives little away. Lucky — for the three listed companies flagged for issues of auditor independence, material misstatements and inappropriate audit opinion — that Irba doesn’t name names.
And how bizarre that Irba, which is regulated by the Auditing Profession Act, should call for accountants to be regulated in the same way it is. Saica’s self-regulating authority comes from Irba via sections 32 and 33 of the act.
With so many inept regulators, it’s inevitable that more regulations are on the way.
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