Global Corporate Governance Forum Better Companies, Better Societies Eurasia CG Codes Workshop Baku January 2009 Lessons Learned from South Africa

2 South African Context  Well developed mining, industrial and banking sector ↳ But, with large portion of population outside mainstream  Long tradition of law, enforcement and codification  Significant transition to fully fledged democracy ↳ New Constitution embracing transparency, civil liberties  Private sector under pressure ↳ Political demands to demonstrate social conscience ↳ Questions of international competitiveness, integrity  Commitment to open, liberalized economy  Coincided with rapid advance of globalization  Heavy expectations among previously disenfranchised

3 Rationale for 2 nd Report  1 st Report outdated ↳ …… against transformed socio-political and economic environment  Significant international advances in Codification ↳ e.g. OECD CG Principles, Commonwealth Guidelines (1999) ↳ e.g. Various UK Codes post Cadbury, Malaysia, etc.  Considerable regulatory reform ↳ Generating need for boardroom guidance and practices  Concerns regarding corporate integrity ↳ Attracting foreign investment a key policy criteria  Issues of compliance and enforcement  Reconcile local practices with international standards

4 Framework for Code Formulation  Global/Regional standards setting the benchmark ↳ OECD [part of World Bank/IMF 12 Core Standards] ↳ European Commission Directives  Country standards ↳ e.g. United Kingdom, The Netherlands, Bulgaria, etc.  Industry initiatives ↳ e.g. Mining (EITI), Forestry, Banking (Basel)  Investor-specific standards ↳ e.g. ICGN, CalPERS, Aberdeen, Morley/Aviva, ABI, etc.  Regulatory standards ↳ e.g. NYSE, Johannesburg, Sydney, etc.  Corporate-specific standards ↳ e.g. Rio Tinto, BP, Lockheed Martin, Westpac, etc.

5 A Debate Not Yet Resolved…….! “A key lesson from the recent scandals is that the checks on the system simply have not worked. The honor code among CEO’s didn’t work. Board oversight didn’t work. Self-regulation was a complete failure. But one thing has worked: law enforcement.” Eliot Spitzer Former New York State Attorney “You can’t prosecute your way to a healthy corporate culture.” Deputy U.S. Attorney General James Corney Chair of the President’s Corporate Fraud Task Force “The areas in which law will be necessary are two: disclosure and the ability of shareholders to exercise their ownership rights. Without sufficient disclosure, the investor is unable to make sensible and informed judgments about the issues.” (Late) Alastair Ross Goobey Former Chairman, International Corporate Governance Network

6 Reasons for a CG Code  Be clear on rationale for formulating a Code ↳ Not just because the country next door has one!  For e.g., is it to ….. ↳ …..enhance established law and set higher business practices? ↳ …..address particular standards for a specific sector? ↳ …..reconcile domestic practices with international requirements?  Code should NOT be a substitute for legal deficiencies  Understand distinction, and implications, between….. ↳ …..a voluntary initiative, e.g. UK, South Africa, India, etc. ↳ …..an officially commissioned process, e.g. Germany, Malaysia, etc.  Understand market framework and policy priorities

7 Setting the Frame of Reference  Identify the institution to co-ordinate (lead?) process  Determine composition of review body ↳ Preferably members should have institutional reference ↳ Ensure Chairman has appropriate credentials and authority ↳ Identify project manager to co-ordinate, guide entire process ↳ Establish scope and timetable  Some important points to consider ↳ “Names” on the main committee, “Doers” on the task forces ↳ Fully brief everyone involved on expectations, commitment ↳ Meet with key regulators expected to enforce Code at the outset ↳ Don’t reinvent the wheel, contact other similar initiatives  Media can be a valuable tool for dissemination

8 Factors for Success  “Perceived” neutrality and credibility of Code Committee  Inclusive participation of key stakeholder interests ↳ Therefore capturing wide group of opinions (and interests!) ↳ Role of government, policy makers must be navigated  Encourage open, transparent public consultation ↳ Sensitizes market to key areas of focus ↳ Highlights corporate governance as a matter of public interest  Code should NOT be a reflection of status quo ↳ Must contain inspirational elements = raise the bar!  Isolate issues that can only be resolved by legislation ↳ This may be key to process that follows promulgation of Code  Don’t be over ambitious ↳ Success rests on ability to implement and relevance

9 And, the Challenges!  “Comply or Explain” assumes strong functioning institutions  Inability of legislature to respond to recommended reforms  Diffused regulatory structures, inconsistent application  Domestic investors insufficiently engaged  Focused on narrow band of companies, market relevance  Conflicts and vested interests among key players  Lack of follow through and guidance  Lack of appreciation of “market incentives”

10 Some Lessons from South Africa  Local ownership of the process is essential  Include all key stakeholders, private sector role critical  Must be broad national commitment  Actively engaged, informed media played critical role  International consultation brings credibility, recognition  Relying on volunteers has serious potential limitations  Understand market incentives, what drives compliance  Is the King Report a good model to follow……. ↳ …….I think so, BUT with conditions

11 Source: KPMG, 2004 Board Governance Framework Governance system and controls Chairman Board Meetings Reporting & Disclosure Company Secretary Board of Directors Achievement of strategic objectives and value creation Fulfil responsibilities and duties in law and prescribed functions Audit Committee Compensation Other Committees Board Committees Internal Controls & Assurance Executive Committee Internal AuditExternal Audit Other Assurance Providers Management Combined Assurance Model CEO & Management Strategy Board Operations Corporate Policies & Procedures Board Governance Instruments Monitoring and Supervision Key areas of responsibility Shareholders

12 THANK YOU Philip Armstrong Global Corporate Governance Forum Telephone “…the substance of good corporate governance is more important than its form; adoption of a set of rules or principles or of any particular practice or policy is not a substitute for, and does not itself assure, good corporate governance.” The Business Roundtable, USA