HOW SOUTH AFRICA HAS IMPLEMENTED STRONG CORPORATE GOVERNANCE TO DEVELOP ITS DEBT CAPITAL MARKET ANDREW JOHNSTON

Transcription

1 HOW SOUTH AFRICA HAS IMPLEMENTED STRONG CORPORATE GOVERNANCE TO DEVELOP ITS DEBT CAPITAL MARKET ANDREW JOHNSTON

2 CAPITAL MARKETS DEBT AND EQUITY Ordinarily corporations raise capital either by way of debt or equity Equity (or shares) is regulated via the equity capital market whereas debt (bonds) is regulated via the debt capital market The debt capital market and equity market jointly make up the capital markets Bond markets in general dwarf equity markets globally Typically debt capital markets deal with saleable units of debt in the form of bonds Also referred to as fixed income market bonds typically pay a fixed amount in interest until their redemption date, i.e. when original issuer pays back money to the bondholder at that time

3 CAPITAL MARKETS DEBT AND EQUITY Bonds come in many shapes and sizes: - Treasury bonds by governments; - Municipal bonds; - Investment grade bonds issued by high grade companies; - High yield bonds pay a higher rate of return given increased risks; - Plain vanilla bonds offer a fixed / floating rate of interest and single / multiple principal repayment at maturity; and - Others may be exceptionally complex structured products, i.e. securitisation

4 CAPITAL MARKETS DEBT AND EQUITY (CONT) Debt capital market includes private placement, as well as organised markets and exchanges:- In South Africa, the debt capital market is regulated by the Johannesburg Securities Exchange (JSE), the Financial Services Board, the South African Reserve Bank and STRATE (for settlement purposes):- - Ensures that investors are protected against fraud among other duties Debt capital represents funds supplied by lenders that are part of a company s capital structure Debt capital market is typically availed of by business enterprises (companies) and governments to raise long-term or short-term (in South Africa 3 month commercial paper) funds.

5 CAPITAL MARKETS DEBT AND EQUITY (CONT) Equity capital market exists between companies and financial institutions that is used to raise equity capital for companies. This includes:- - Initial public offerings (IPOs); - Fresh issues of shares; - Special warrants; - Private placements; and - Derivative instruments such as futures, options and swops Equity capital market comprises two distinct markets, namely primary market, i.e. IPOs, and secondary market, i.e. trades between shareholders either through an exchange or private placement In contrast to debt capital, invested money in the equity market is not repaid to investors in the normal course of business. Equity capital represents risk capital staked by the owners through the purchase of a company s shares

6 CAPITAL MARKETS DEBT AND EQUITY (CONT) Debt capital has advantages and disadvantages over equity capital. These include:- - Equity capital is generally more expensive (and dilutive) than debt capital; - Interest payments for debt capital are tax deductible whereas dividends are not; - Interest payments for debt capital represent a cost of doing business and enables the firm to expand its profits indefinitely provided it can make a greater return on the debt capital than the costs of servicing it; - Unlike dividends, interest payments to bond holders must be met on time and in full; - As debt becomes a greater part of a corporation s capital structure, a downturn in business threatens the company s survival as the costs of servicing debt capital mount; and

7 CAPITAL MARKETS DEBT AND EQUITY (CONT) - Debt capital, i.e. high grade bonds are usually not accompanied by security for bond holders and there are limited covenants, versus more traditional bank funded short-term debt structures - In South Africa, national government has R1.37 trillion listed bonds on the JSE which are currently outstanding - The JSE regulates the largest debt market in Africa both by market capitalisation and by liquidity. In 2009 it acquired the bond exchange - At the end of 2013 the JSE had roughly listed debt instruments totaling more than R1.8 trillion nominal outstanding. The South African debt market is liquid and well developed in terms of the number of participants and their daily activity (approximately R25 billion traded daily) - Excluding national government, the slide which follows sets out data on JSE listed bond issuances for banks, state owned entities, municipalities and corporates

8 ISSUANCE TRENDS: LISTED JSE BOND MARKET Rand value of bond issuances per quarter Rbn Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4TD Rbn SOE Corporate Bank Muni Cumulative issuances (RHS) 2012 (Rm) 2013 (Rm) 2014 (Rm) Total % Total % Q1 Q2 Q3 Q4 Total % Q1 Q2 Q3 Q4TD Total % 2015 (Rm) SOE 17,259 16% 22,151 22% 5,910 4,958 5,198 6,175 22,241 24% 7,957 6,397 7, ,084 27% Corporate 29,814 28% 29,354 30% 5,351 9,424 5,274 4,642 24,691 26% 3,361 5,860 9,901 1,570 19,122 23% Bank 56,823 54% 44,025 45% 12,614 21,190 8,510 3,520 45,834 49% 17,256 15,934 6, ,778 49% Muni 800 1% 2,940 3% % % Source: JSE Bond Data (12 Oct 2015) Total 104, % 98, % 23,875 36,137 18,982 14,337 93, % 28,574 28,941 24,219 1,944 81, %

9 SOME PERCEPTIONS REGARDING CAPITAL MARKETS AND THE ROLE OF CORPORATE GOVERNANCE The capital market of a country can exert considerable influence on firms by imposing rules and regulations regarding the firm s governance practices Capital markets in developing countries provide little incentive for better corporate governance primarily because of low trading volumes and liquidity, absence of long-term debt instruments and inactivity of institutional shareholders (Iskander and Chamlou 2000) While there is alignment of interests between debt holders and shareholders there are also potential conflicts of interests between them. A corporate governance system that protects the interests of shareholders will not necessarily be aligned with the interests of debt / bond holders A firm is likely to get external finance not only because of the reputation of the capital market and excessive investor optimism, but also due to assurances provided by the corporate governance system (Shleifer and Vishny 1997)

10 SOME PERCEPTIONS REGARDING CAPITAL MARKETS AND THE ROLE OF CORPORATE GOVERNANCE (CONT) A firm s corporate governance quality is largely dependent on the institutional mechanisms of a country including the political economy factors, the legal and regulatory standards and the markets A firm s legal compliance as well as voluntary activism in corporate governance matters can reduce the expropriation costs in the governance process and partly compensate for the inefficiency in the institutional arrangements in a developing economy The legal system of a country determines the corporate governance structure in relation to the rules regarding the ownership and board structures, corporate disclosure, audit committees and shareholder rights protection

11 SOME PERCEPTIONS REGARDING CAPITAL MARKETS AND THE ROLE OF CORPORATE GOVERNANCE (CONT) A capital market tends to have both direct and indirect influence on the governance practices of listed firms (Singh ). The direct governance measures include:- - Tightening of listing requirements; - Controlling insider trading / dealing; - Imposing disclosure and accounting rules; and - Ensuring protection of minority shareholders The indirect influence, through pricing mechanisms, includes allocative and disciplinary measures and take-over mechanisms Corporate governance influences the firms access to external finance and capital market development through controlling insiders and / controlling shareholders expropriation and thus enhancing investors confidence

12 SOME PERCEPTIONS REGARDING CAPITAL MARKETS AND THE ROLE OF CORPORATE GOVERNANCE (CONT) The political process in each country creates or changes laws and thus acts as a link between legal rules and economic outcomes (Pagano and Volpin 2005) Institutional investors, being an important part of capital markets tend to influence the process of corporate governance. In South Africa the major asset owners including the Government Employees Pension Fund, Old Mutual and Sanlam hold between 10% - 15% of the issued share capital of every public listed company on the JSE. The balance is held predominantly by asset managers and retail investors Corporate governance reforms aim to strengthen the corporate governance of listed companies, state owned entities and financial institutions to improve their operations, increase their ability to attract capital and enable them to provide greater contributions to job growth and economic development. They contribute to market stability by ensuring greater transparency, accountability, fairness and responsibility

13 SOME PERCEPTIONS REGARDING CAPITAL MARKETS AND THE ROLE OF CORPORATE GOVERNANCE (CONT) Corporate governance is recognised as the system by which an entity is directed and controlled with a view to ensuring the achievement of its objectives in a sustainable manner within an environment of accountability to its stakeholders So how has the above influenced the debt capital market in South Africa and what role has corporate governance, i.e. checks and balances played in respect hereof in terms of protecting bond holders and developing the debt capital market?

14 SOME COMMENTS ON CORPORATE GOVERNANCE, KING III AND THE NEW COMPANIES ACT ON THE DEBT CAPITAL MARKET IN SOUTH AFRICA

15 THE KING REPORT ON GOVERNANCE FOR SOUTH AFRICA 2009 (KING 111) AND THE COMPANIES ACT OF 2008 Final King III Report, Code and practice notes published on 1 September 2009 King III implemented on 1 March 2010 New Companies Act became effective on 1 May 2011 King III as a worldwide brand:- - An emphasis on sustainability, rather than simply on profit; and - Achievement of strategic economical and financial objectives in a socially responsible and environmentally friendly manner King Code applies to all companies regardless of the manner of form of incorporation or establishment :- - Public, private and non-profit sectors

16 DISTINGUISHING FEATURES OF KING III AND RELEVANCE FROM A DEBT CAPITAL MARKET PERSPECTIVE Apply or explain policy versus comply or explain as is common in European and American jurisdictions:- - Shareholders of a company can say not necessary ; - Costs of compliance reduced Language and terminology - Certain aspects of governance are legislated in the Companies Act and the Public Finance Management Act use of instructive language is important; - Must indicates a legal requirement; - Should indicates where application of the Code will result in good governance; - May indicates where certain practices are recommended for consideration

17 DISTINGUISHING FEATURES OF KING III AND RELEVANCE FROM A DEBT CAPITAL MARKET PERSPECTIVE (CONT) Promotes stakeholder inclusive rather than shareholder exclusive approach:- - Boards to consider the legitimate interests and expectations of stakeholders other than just shareholders when deciding in the best interests of the company; - Similar to the enlightened shareholder model, however, stakeholders only considered insofar as it would be in the interests of shareholders to do so Recommends integrated sustainability performance and integrated reporting to enable stakeholders to make a more informed assessment of the economic value of a company:- - The market capitalisation of any company listed on the JSE equals its economic value and not its book value; - Financial report on its own is merely a snapshot of a company s position in a moment of time; and - Increases trust and confidence of stakeholders and legitimacy of its operations

18 DISTINGUISHING FEATURES OF KING III AND RELEVANCE FROM A DEBT CAPITAL MARKET PERSPECTIVE (CONT) Introduced a risk based approach rather than a compliance based approach to internal audit seeing that risk involves issues over the whole spectrum of conducting business and enterprise:- - Allows internal audit to determine whether controls are effective in managing the risks which arise from the strategic direction that a company through its board has decided to adopt Adopted practice notes and aligned governance principles with contemporary South African corporate law pertaining to, among others, alternative dispute resolution, fundamental and affected transactions (i.e. shareholders rights in terms of a takeover), business rescue (an alternative to liquidation) and boards of directors (performance, evaluation and remuneration)

19 BEST PRACTICE VS. LEGISLATION None of the King Codes have statutory backing any failure to meet a recognised standard of governance, albeit not legislated, may render a board or individual director liable Many of the provisions set out in King III have been carefully crafted around the new Companies Act in South Africa to ensure that these principles support rather than detract from the legal regime. By the same token the Companies Act in South Africa is broadly aligned with King III

20 BEST PRACTICE VS. LEGISLATION (CONT) JSE has adopted some of the King III principles in its Listings Requirements which have to be complied with by listed companies on the JSE:- - See Sections 3.84 and 8.63 (a); - Lists specific requirements concerning corporate governance and their disclosure in the integrated report (Section 3.84 (a) (j)); and - Calls for narrative statement on how a listed company has applied the principles set out in King III, providing explanations to enable shareholders to evaluate how the principles have been applied and a statement addressing reasons for each and every instance of non-application during the accounting period

21 SANCTION FOR NON-COMPLIANCE? Market forces which may impact on the share price, the cost of debt and the risk rating Profit at all costs approach (shareholder exclusive) vs. company is a good corporate citizen (stakeholder inclusive)

22 STATUTORY DUTIES IN TERMS OF THE COMPANIES ACT AND THE SPECIFIC PROVISIONS OF THE COMPANY S ARTICLES AND MEMORANDUM Other statutory requirements (imposed by legislation) Business decisions and business skills The principles and recommendations of King III: the establishment of structures and processes

23 KING III CHAPTERS King III provides guidance to all corporate entities on various governance related aspects, including different chapters on:- - Board and directors; - Corporate citizenship: leadership, integrity (ethics) and responsibility; - Audit committees; - Risk management; - Internal audit; - Integrated sustainability reporting and disclosure; - Compliance with laws, regulations, rules and standards; - Managing stakeholder relationships; and - Fundamental and affected transactions

24 TYING KING III TO DEBT CAPITAL MARKET IN SOUTH AFRICA Already seen that corporations rely on external finance (i.e. debt or equity in meeting their investment needs) and that the legal system of a country determines the corporate governance structure in relation to the rules regarding ownership and board structures, shareholders rights, transparency and accountability and responsibility towards stakeholders In addition reputational agents including accounting and auditing professionals, attorneys, investment bankers and analysts, credit rating agencies, environmentalists, and the media can play important roles in enhancing better corporate governance and monitoring the performance of the firms in the process of corporate governance and capital markets In South Africa, as in many global markets, corporate governance in the debt capital market has received far less focus and attention compared to equity capital markets. In the debt capital market, corporate governance has been somewhat of a subliminal issue which has directly tended to shape the rating and pricing of the debt and indirectly in more subtle ways

25 TYING KING III TO DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) In South Africa: - Debt represents a significant portion of the value of a typical corporation and debt holding can provide an equilibrium point between shareholders and managers; - The information environment in the debt financing market is characterised by credit rating agencies and banks; and - Debt pricing is relatively well defined and has small measurement measures compared with equity pricing Studies conducted in South Africa have found that firms with sound corporate governance practices have lower industry adjusted leverage ratios, lower interest rates and higher bond ratings

26 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA Ownership and Control - Typically bond holders and more generally debt stakeholders face two types of agency conflicts that increase the probability of default, namely:- Between management and bond holders, particularly where self interest managerial behavior reduces information flow and creates moral hazards; and Between bond holders and shareholders since shareholders may have incentives to make decisions that can transfer wealth from bond holders to themselves. This wealth transfer can affect future cash flows and increase the probability of default - In most emerging markets, a concentrated ownership structure makes it difficult for outside shareholders to monitor corporate insiders (i.e. controlling shareholders and their associated managers). This is where the importance of having a majority of independent directors on the board, unrelated to major shareholders, cannot be underestimated;

27 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) - Specifically firms with greater institutional ownership and stronger outside control may result in lower bond yields and higher credit ratings of their bond issues; - South African companies predominantly widely held by shareholders, i.e. foreign investors, banks, non-financial institutions and retail investors; - Family owned corporations are fewer than in Europe; - Institutional investors hold strong interests in listed companies on the JSE which has improved the efficiency of the governance role of the capital market with which the companies are valued and governed; - This has been in contrast to many developing economies where institutional investors represent only a small part of a diversified portfolio and are not strong enough to impose fairness, efficiency and transparency;

28 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) - As a result of King III and the new Companies Act (including the composition of the board), institutional investors are able to exert influence on boards to ensure that their goals are closely aligned with the stakeholders and to obtain information regarding the company and monitor its activities; - Minority shareholders protected in terms of prevailing legislation, i.e. Companies Act and the provisions of the JSE Listings Requirements. King III also lends support in this regard; - Competition in product markets solves associated problems of corporate governance including the problems of ownership and control; - In general bond holders and shareholders have a conflicting interest over dividend policies. If shareholders demand direct payouts of firm assets (i.e. dividends) as opposed to supporting the manager s investments in positive net present value projects, then the mean of a firms future cash flow distribution could be lower. Consequently the reduction in a firms future cash flows increases bond holders default risk, thereby impacting the price of borrowed cash in future; and

29 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) - To address the above, South Africa has from a corporate governance and legal perspective:- Placed the decision of declaring and paying dividends in the hands of the board as opposed to shareholders; and Introduced a statutory solvency and liquidity regime before dividends can be declared and paid Section 4 of the Companies Act: the solvency test: if, considering all reasonable foreseeable financial circumstances at that time, the assets of the company, as fairly valued, equal or exceed the liabilities fairly valued Section 4 (2) (b) provides that in applying the solvency and liquidity test the board or any other person must consider a fair valuation of the company s assets and liabilities including any reasonably foreseeable contingent assets and liabilities, and may consider any other valuation that is reasonable in the circumstances

30 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) This has resulted in the payment of dividends being a good signal of future earnings to debt holders thereby decreasing the information asymmetry and perceived default risk Furthermore, paying dividends has forced firms with high growth opportunities to the external capital markets in which they are subject to additional monitoring and is useful in adjusting the level of risk taken by managers. Overall dividend policy results in protecting the interests of debt holders when management is strongly monitored by the market

31 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) Board and Management Diversity - Credit rating agencies seem to regard the structure of the board of directors and disclosure behavior of a firm as important determinants for the credit quality of the debt / bond issuer. This relates directly to risk assessment; - Better board structure and processes lead to strong monitoring of management that restricts managerial opportunism; - The effective monitoring of management affects bond yields and ratings through its impact on the default risk of firms. Specifically firms with greater institutional ownership and stronger outside control of the board have lower bond yields and higher ratings of their bond issues; - The board of directors and executive management are important components of a company s governance process. This includes the responsibility, structure and independence of the board; - Boards are primarily responsible for recruiting and monitoring the executive management to protect the interests of the stakeholders;

32 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) - South Africa has adopted the unitary board structure for purposes of King III and encourages the use of committees; - Majority of non-executive independent directors (Paragraph 67); - PPWAWU National Provident Fund v Chemical, Energy, Paper, printing, Wood and Allied Workers Union 2008 (2) SA 351 (W), directors must act independently regardless of the views or decisions of those who appointed them; - Reduces the possibility of conflicts of interest and play an importance governance role in relation to the welfare of the investors, especially non-controlling; - The presence of independent directors improves the degree of corporate accountability and creates a balance of power between the CEO and the board; - Paragraph 68: a lack of available and sufficiently experienced directors should not be a reason for boards not to seek to constitute the majority of the non-executive directors as independent;

33 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) - The roles of Chairman and CEO have been separated (King III and JSE Listings Requirements); - Conflicts of interest (Section 75), standards of directors conduct (Section 76), directors liability (Section 77) and indemnities and insurance (Section 78) have all been included in the new Companies Act and closely mirror the relevant provisions in King III - Companies Act codifies standard of directors conduct (Section 76)

34 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) A person, acting in the capacity of director, must exercise his powers and perform his functions:- - in good faith and for a proper purpose; - in the best interest of the company; and - with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions and having the general knowledge, skill and experience of that director

35 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) Business judgment rule codified A director will not be liable if he:- - took reasonable steps to become informed about the matter; - declared any conflict of interest; and - believes that the decision was in the best interests of the company Personal liability for directors if the standard of conduct is not met (Section 77)

36 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) Transparency and Accountability - Firms with high disclosure quality ratings from financial analysts enjoy a lower effective interest cost of issuing debts. Firms with more timely and informative disclosures are perceived to have a lower likelihood of hiding bad information. As a result these firms are expected to be charged a lower risk premium by debt holders; - The control of financial reporting quality by the board is extremely important since debt holders count on accounting based covenants in their loan agreements. Furthermore financial transparency such as accrual quality and earnings timeliness is positively associated with credit ratings; - A well designed corporate governance system can reduce the possibility of information asymmetry and managerial opportunistic behavior and therefore outside investors (i.e. debt holders) discount of the future firm value at a lower rate of return; - Studies have shown that there is a positive relation between bond ratings and the transparency of the financial reporting of firms;

37 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) - Transparency and accountability are two closely related issues that are crucial not only in enhancing the disclosure and auditing standards of a company but also in developing regulators capacity to monitor and discipline the company s governance practices; - It is therefore imperative for a company to make its financial and non-financial information available and easily accessible to outsiders in order that everyone can make informed decisions; - In South Africa, this has been a role of integrated reporting as endorsed by King III and the JSE; - To be able to list a bond in South Africa, the JSE requires the company listing the bond to be a public company in order that stakeholders can have sight of the company s financials. See Section 3.6 of JSE Debt Listing Requirements. No private companies can list a bond in South Africa; - Effective disclosures enable existing as well as prospective investors to evaluate managements past performance, forecast the company s future cash flows and decide whether the risk profile of a company is within an acceptable level;

38 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) Audit committees - Composition of committee 3 independent, non-executive directors, appointed by shareholders (in terms of Companies Act); - Clearly defined role and functions of the audit committee; - Integrated reporting (both financial and sustainability reporting); - Responsibility for risk management (including credit and IT risks); and - Combined assurance model Section 214 of the Companies Act If any financial statement of a company is false or misleading, any person who is a party to the preparation, approval or publication of that statement is guilty of an offence

39 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) Risk based approach to internal audit - Internal auditor must take account of the company s strategy; - Identify risks and opportunities to achieve strategy, test controls; and - Inclusive approach all risks and opportunities, all controls to achieve strategy Risk management - Inter-relation between risk management and the company s strategic and business processes; and - Three lines of defense for risk management i.e. line management, risk experts and assurance functions

40 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) IT governance and IT risk management - Directors to ensure proper management of operational risk with regard to IT systems and security; and - Directors need to take the necessary steps to ensure authenticity, confidentiality, security and integrity of data, as well as the availability, reliability and function of IT systems

41 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) Responsibility Towards Stakeholders An effective governance system enhances corporate transparency and accountability and maintains a balance between the shareholders wealth maximum and the diverse interests of stakeholders:- - King III stresses the need to engage with stakeholders; - Effective management of stakeholder relationships; - The board should not ignore the expectations of its stakeholders; - King III (Paragraph 48): ensure that there is transparent and relevant communication with stakeholders; Furthermore, greater shareholder rights protection is related to more efficient monitoring of manager behavior which also benefits bond holders

42 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) Stakeholder relationships and alternative dispute resolution - Identify different stakeholder groups, manage relationships between company and different groups; - ADR specialists to partake in all stakeholder interaction and negotiations; - ADR clauses in contracts; and - Class action, any stakeholders

43 HOW KING III AND COMPANY LAW HAVE INFLUENCED THE DEBT CAPITAL MARKET IN SOUTH AFRICA (CONT) - King III emphasises sustainability Environmental sustainability (resource management with an eye on future needs); Social responsibility (ensuring a positive impact on the community within which the company operates); Respect for human rights; and Effective management of stakeholder relationships (including the utilisation of alternative dispute resolution mechanisms to resolve potential disputes efficiently, expeditiously and inexpensively) - Economic value vs. book value

44 ACHIEVE GOALS BY GOOD CORPORATE GOVERNANCE: ENSURES EFFICIENT STRATETIC LEADERSHIP WHICH LEADS TO GOOD MANAGEMENT AND THE MOBILISATION AND ALLOCATION OF RESOURCES Strategies Good corporate governance ensures the board has an independent focus on strategy Stakeholders Purpose Good corporate governance has a focus on the purpose of the business Values Good corporate governance identifies values of the company

45 RECOMMENDATIONS FOR NIGERIA Critically evaluate local appetite to invest in local bonds as a general rule of thumb offshore investors infrequently invest in foreign currency denominated debt. Does Nigeria have sufficient local investors to invest in a sustainable debt capital market? Transparency and governance are key factors in terms of stimulating interest and confidence in a debt capital market. How does Nigeria s code of corporate governance compare with international best practice? A credible listing authority such as the Nigerian Stock Exchange which can effectively regulate the debt capital market Competent rating agencies on the ground, i.e. S & P, Moodys, Fitch, Global Credit Rating, etc. A developed settlement authority to settle all trades T + 2 or T + 3

46 CONCLUSION Strong corporate governance practices have a positive influence on the cost of debt and commensurate credit rating The right board of directors, corporate disclosure, audit committee, shareholder rights protection and dividend policies play a role to lower the cost of debt financing King III s emphasis on stakeholder inclusivity as opposed to shareholder exclusivity has heightened governance within the debt capital market South Africa s corporate governance and legal framework have been designed to complement rather than detract from each other Additional work and focus still need to be directed to the debt capital market as has happened in the equity capital market King IV being drafted key themes emerging include enhancing stakeholder relationships through integrated reporting and leveraging the Code for Responsible Investment in South Africa (CRISA), value creation through integrated thinking and reward systems and optimising board structures, decision making and group governance

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