TRENDS IN CORPORATE GOVERNANCE AND THE RELEVANCE FOR DIRECTORS AND INVESTORS. UN PRI 21 November 2018 Presented by Mervyn E King SC

Transcription

1 TRENDS IN CORPORATE GOVERNANCE AND THE RELEVANCE FOR DIRECTORS AND INVESTORS UN PRI 21 November 2018 Presented by Mervyn E King SC

2 17 TH - 19 TH CENTURIES 17 th century unincorporated entities With unlimited liability Wealthy families baulked against it Politicians wanted to create more jobs By middle of 19 th century question debated Create an artificial person with limited liability?

3 ACADEMIC OPPOSITION An individual with immortality lacks a soul to be punished by the Almighty Negative reaction by society to a person not being a creature of the Almighty Lacks a body Is a person without a conscience No soul to be damned and no body to be kicked. Lord Thurlow 1844 The limited liability act was passed in the UK in the middle of the 19 th century

4 INCAPACITATED PERSON Young healthy individual, soul and heart in the body Incapacitated of mind Artificial person no heart, mind or soul Directors become the heart, mind and soul Content to a director s duties of good faith, care, skill and diligence Conscious companies have conscious leaders

5 OWNERSHIP A SOCIAL CONSEQUENCE Wealthy families provided the equity capital Members of the families directors Seen as owners of the company Primacy of the shareholder developed Public discourse of shareholders ownership Focus on financial capital

6 THE PRIMACY OF SHAREHOLDERS REINFORCED The Dodge Brothers vs Henry Ford 1919 minority shareholder Ford wanted to use profits to pay better wages Court ordered Ford to discharge its primary duty to shareholders and pay a special dividend So thinking was directors had to act in the best interests of the shareholders - primacy Corporate success was equated with profit, share price and dividends

7 OWNERSHIP? Shareholders are the owners of the business and the responsibility of the corporate executive is to conduct the business in accordance with their designs, which generally will be to make as much money as possible while conforming to the basic rules of society. There is one and only one responsibility of business to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game. Friedman Tacit company not part of society Principal (shareholders) agent (directors and managers)

8 OWNERSHIP Entitles one to consume, waste or destroy a thing Shareholders have shares They own the shares not assets of the company Evidence of a conglomeration of important incorporeal rights purpose, vote, dividends They do not own the company The company, a sovereign person

9 TRANSIENT SHAREHOLDERS IPOers Secondary market traders Transient shareholders Have a claim to a future stream of income if company can pay its debts on due date and/or has readily realisable assets to pay its debts On bankruptcy shareholders stand at the back of the queue Shareholders self-protection - can disperse investment by investing in the equities of other companies Stakeholders such as employees or managers cannot disperse these risks in other companies

10 THE ERROR OF CORPORATE LEADERS Duty to the company not shareholders Agency theory requires directors to obey Independence of mind fettered A company s health not its shareholder s wealth Time has come to challenge maximising shareholder value Distracts boards from building the company s health Professors Stout (Cornell) and Paine (Harvard)

11 UNTIL THE END OF THE 20 TH CENTURY Company and its activities seen through a financial lens Corporate reporting was only financial Backward looking In automotive terms a car with rear view mirrors and no windscreen 20 th century unsustainable development 21 st century one of sustainable development The SDGs of 2015

12 COMPONENTS OF MARKET VALUE Source: OCEAN TOMO LLC January 1,2015

13 INTANGIBLE ASSETS OPPORTUNITY INFORMED OVERSIGHT Ecological overshoot and population explosion Strategy long term value creation Reputation perceptions of stakeholders Supply chain legitimacy of operations Human rights child labour Stakeholder relationships civil society Positive and negative impacts on triple context The quality of governance of the organisation How does the company make its money?

14 INNOVATIONS IN CORPORATE REPORTING AT BEGINNING OF 21 ST CENTURY Enhanced business reporting Balanced score cards Triple bottom line theory - context Sustainability reporting Each trying to communicate value creation

15 BEYOND FINANCIAL REPORTING Triple context dimensions SDG s Reporting in monetary terms FR critical but not sufficient SR critical but not sufficient The two in silos divorced from reality

16 SECOND DECADE OF 21 ST CENTURY 2009 UNCTAD and IFAC at Geneva Chatham House Rules Financial reporting critical but not sufficient 2010 IIRC formed at St James Palace IRC SA IR guidelines SASB formed 2013 December, IIRC Framework SDGs

17 THE SIX CAPITALS Financial Manufactured Human Intellectual Natural Social

18 AN ORGANISATION S VALUE CREATION PROCESS 18

19 W F E 88% of member exchanges Embrace ESG initiatives 18 exchanges planning incorporation of TCFD Exchanges now offering green or climate bonds FSCA draft ESG disclosures

20 FROM PROFIT TO VALUE CREATION From Friedman s free economy profits 21 st century value creation by a company Historically book value the difference between total assets and total liabilities Book value greater or less than the market value Value of money the present value of discounted future cash flows All through a financial lens

21 VALUE TODAY How does the company make its money? The positive and negative impacts on the triple aspects of the company s business model and output financial, social and environmental Enhancing the positives, eradicating or ameliorating the negatives Embedding sustainability issues into strategy As water is critical to the beverage manufacturer Now value is seen through a sustainable lens in a resource deprived world In the long term better interests of shareholders

22 NEW THINKING Understanding, knowing and then planning: How the company makes it money? How the company will sustain value creation in the long term? Board should determine, inputs, how, outputs and outcomes

23 INTEGRATED THINKING Every company dependent on relationships and sources of value creation Mindset change at board & senior management level, including the CFO Symphony of resources and relationships Knowledge of stakeholders legitimate NIE s Greater stakeholder expectations Agenda items: Inputs to outcomes stakeholder relationships

24 BLACKROCK At the beginning of February 2016, Larry Fink, CEO of BlackRock, the world s largest investor with $6 trillion in assets under management, sent a letter to the CEOs of the S&P 500 and a number of large European companies. In his letter Mr. Fink urges CEOs to lay out for shareholders each year a strategic framework for longterm value creation. He repeated that in 2017 In 2018 what is the purpose of the company and ESG metrics in the next five years OM open letter to CEO s on ESG

25 STRATEGY NEW CHALLENGE AND OPPORTUNITY Strategy no longer stops at output Board needs to be informed of stakeholder relationships, sources of value creation and how the company makes its money Board needs an informed oversight Hence agenda items of inputs to outcomes and stakeholder relationships CFO working with C-suite on an integrated strategy guardian of values - CVO

26 CORPORATE TOOL BOX Ethical effective leadership Adequate and effective controls Informed oversight Changed agendas Sustainability issues and outcomes embedded into strategy Value creation in a sustainable manner Knowledge not lost in information Trust and confidence in the company Legitimacy of operations

27 NEW CHALLENGES Mindset changes Capitals and stakeholder relationships Population growth, technological advances and diminishing natural assets Greater stakeholder expectations Responsible investment UNPRI Financial capital to inclusive capital Short term capital to sustainable capital Outcomes based approach to governance

28 COMPANY CENTRIC GOVERNANCE What are common sense principles of corporate governance in this changed corporate world? I C R A F T It must be company centric Has to be in the context of value creation in a sustainable manner the health of the company It has to be mindful and a value add with positive outcomes for the company Cannot be a mindless check list approach SDG s indivisible and integrated outcomes based

29 NEW THINKING Inclusive company centric model 16 basic good governance principles King IV To achieve four outcomes Regimen of apply principles and explain practices Equal consideration to the sources of value creation and stakeholder relationships in the decision making process in the best interests of the company

30 FOUR OUTCOMES Ethical culture and effective leadership Value creation in a sustainable manner Adequate and effective controls/informed oversight Trust and confidence of community and legitimacy of operations

31 QUALITY VS QUANTITY Quality governance needs to be mindful Quality governance needs to be a value add Needs to achieve the four outcomes If basic principles are practised and the four outcomes are achieved, a company has practised good governance

32 DIRECTOR Century of intangible assets and sustainable development Approve a business model Strive for positive impacts On all three dimensions strategy for positive and negative impacts CRISA raising capital - UNPRI BJR Collective spends more time understanding Report in clear, concise and understandable language

33 CRITICAL QUESTIONS FOR INVESTORS (1) 1. What is the purpose of the company? 2. How has this company made its money and how does it intend creating value long term in a sustainable manner? 3. Does it have a business model which will result in the long term health of the company? 4. Are the customers of the company paying up on due date? 5. What could really hurt the company in the next few years? 6. How is the company doing relative to its competitors? 7. If the CEO were headhunted tomorrow, who would assume the position as CEO? 8. How is the company going to grow either organically or by acquisition? If by acquisition, how is it going to be financed?

34 CRITICAL QUESTIONS FOR INVESTORS (2) 9. Is the company living within its means? 10. How much does the CEO get paid having regard to the inequality gap between the tone at the top and the beat of the feet at the bottom? Is remuneration variable? 11. How does bad news in the company get to the tone at the top, or are the people at the top the last people to hear of bad news? 12. What are the pertinent sustainability issues? 13. Are they embedded into strategy? 14. How has company dealt with ESG issues?

35 INVESTORS Representative shareholders Due diligence changed Four outcomes value business model Financial not sufficient FSCA on ESG for pension funds Blackrock Stranded assets CRISA principle one King IV principle 17

36 HELEN KELLER The only thing worse than being blind is having sight and no vision

37 NEW CHALLENGES, OPPORTUNITIES AND THINKING The vision must be to have a company centric governance model which moves away from yesterday s primacy of the shareholder. It needs to be implemented mindfully to achieve the four outcomes of effective leadership, value creation in a sustainable manner, adequate controls and legitimacy of operations We don t have to grope in the dark We have the light the IIRC Framework of December 2013 and outcomes based governance as per King IV

38 THANK YOU Prof Mervyn E King SC