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Corporate Governance Reform Essay

This assignment will answer three questions. First: is the “apply or explain approach” followed in South Africa merely the result of historic circumstances or is such inherently “better” than “comply or else” approach. Second: “apply or explain” with regard to directors and their decisions and, Third: based on the above two questions which approach is most convincing and why. Question 1 With regard to the South African situation, South Africa is known as a developing post-colonised country.

Corporate governance is “a particularly salient issue in emerging markets attempting to compete for investors and capital with established markets where investors are less concerned about the quality of corporate governance practices” (Andreasson, 2002: 2). This statement rules out the possibility of a “comply or else” approach to corporate governance, and as a result “comply or explain” approach is the most suitable approach for South Africa.

Due to South Africa being considered as a developing country our infrastructure for the law of “comply or else” approach would be difficult to uphold and enforce due to the severity of the legislation. Furthermore the investors are less concerned about the quality of corporate governance practices and if we were to have a practice such as the “comply

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or else” approach then it would not be successful to implement in South Africa. The King report also states further that “the danger is that the board and management may become focused on compliance at the expense of enterprise” (2009:5).

Due to there being so many factors that are detrimental to the success of an organisation in a developing country, profits are already challenging without having to shift the focus of management. South Africa was colonised by the United Kingdom and inherently this would have an effect on the way we do business, be it in the past, in the present or in the future. The UK-based approach, that is, the “lighter” “comply or explain” approach has thus been implemented as a result of UK’s past relationship with South Africa.

“Following the transition from apartheid, stakeholder issues and questions about the societal responsibility of corporations are increasingly salient given the urgent need for socioeconomic development” (Andreasson, 2009:5), this fundamentally results in South Africa has the tendency to move towards a more stakeholder normative approach in that “corporations have a moral obligation and social values that extend beyond the liberal emphasis on the owners. ”(2009: 4) This means that, in a developing country, in order for the country to reach its maximum potential it is necessary for it to invest in its own economy as well as community.

It is crucial for the development of the country that the organisations ensure that there is a balance between economic efficiency and socioeconomic development. However, an organisation needs guidance and cannot have the freedom to create their personal ethical practices without having a basic idea of what it should entail. “Hybridization explains how novel features of governance can be combined with existing practices” (Andreasson, 2009: 15). These combinations of corporations own ethical practices as well as legislated practices allow South African corporate governance the ability to be extraordinary.

The ability to anchor South African corporate governance in “African values” while staying close to the U. K. approach reflects hybridization, (Andreasson, 2009:15). South Africa is such a diverse nation and, therefore, this is crucial for the success of corporate governance to be implemented and accepted in corporations. This results in there being co-operation between so many different organisations, communities as well as stakeholders. Question 2 Corporate governance ensures that companies do not only focus on the interests of shareholders but also on other stakeholders, such as the community.

The fact that a company voluntarily implements corporate governance creates a reputable name for their organisation. In today’s society it is becoming more significant to give back to the community; companies have become more aware of this fact and have resulted in companies tending to be community orientated. The company remains a key component of modern society. In fact, “In many respects companies have become a more immediate presence to many citizens and modern democracies than either governments or other organs of civil society” (IoD, 2002:8).

A company has a direct influence on the community and with that they have a greater responsibility to ensure that their actions don’t adversely affect the community. With that being said there is a greater need for ethical practices to be successfully implemented and enforced. A company will be more willing and devoted to follow a code when opted to by their own choice instead of mandatory or external regulatory approach. As Rossouw says, “this self-regulatory approach requires that companies should be motivated or enticed to accept and apply the recommendations of the Report voluntarily.

” (2005:741). The Code offers a framework for corporations so that, if they are interested in following an ethical route but do not know where to begin this offers them guidance on how to become ethical in principle and practice. This enables companies the opportunity and ability to design a code that specifically caters to their objectives. This voluntary offer of use of the Code also complies with African characteristics of Ubuntu Philosophy “I am what I am because of who we all are.

” (Mokgoro, 1998) With regard to the “apply or explain” approach, it leaves important control issues to the discretion of the directors which has resulted in a lot of controversy rather than the “comply or else approach”. The king 3 states that “it is the legal duty of directors to act in the best interests of the company and allows the board to apply the recommendation differently or apply another practice and still achieve the objective of the overarching corporate governance principles” (2009: 6). This will result in more successful ethical practices. Question 3

Corporate Governance is essentially about the governing of corporations to ensure that they adhere to ethical practices and principles. The repercussions thereof are extensive if not implemented correctly. With good corporate governance, “one can increase the corporate responsibility and improve the reputation of companies, as well as be a deterrent to corruption and unethical business practices” (Rossouw, 2005:95). Corporations need to strike a balance between economic efficiency and societal impact and corporate governance is a means by which this balance is kept.

More and more organisations, businesses and corporations are following a form of corporate governance, whether by choice (“apply or explain approach”) or by force (“comply or else approach”). The “comply or else” approach is considered a ‘one size fits all’ approach due to it being so specified and may not fit all corporations because corporations vary to such a large extent. The King Report states that “United States of America has chosen to codify a significant part of its governance in an act of Congress known as the Sarbanes-Oxley Act” (2009: 5). This approach is governed by fear of

legislation and does not allow for deviation from that code. The “apply or explain” approach conveys the intention of the code. The King Report on Corporate Governance for this approach states “more consideration – application of the mind – and explanation of what has actually been done to implement the principles and best practice recommendations of governance” (2009: 16). This approach allows for a more frequent reflection on the ethics than an organisation is practicing. Furthermore it allows for stakeholders to get involved and ensure that these practices are being implemented.

This is a better approach because a company complies willingly and as a matter of internal policy rather than compliance with the rules through fear of the law. In conclusion, I personally believe that a hybrid approach between the two principles would be the best corporate model for the future of corporations: Firstly, the “apply or explain” approach is more reasonable and universally acceptable. This approach allows you to adapt the code to your own corporation; this will allow for the optimum results out of the organisation, community as well as all the stakeholders involved.

On the other hand, the corporations have to comply with the prerequisites of a global corporate legal and rigid environment and have to adhere to the “comply or else approach”. The corporate model should be “Flexible” (apply or explain approach) to adapt to local conditions and yet “Rigid” (comply or else approach) to satisfy Global requirements. Reference List Andreasson, S. 2009. Understanding Corporate Governance Reform in South Africa: Anglo-American Divergence, the King Reports, and Hybridization. Sage: Business Society

Institute of Directors of South Africa. 2002. King report on corporate governance for South Africa 2002. Johannesburg, South Africa: Author Mokgoro, J. (1998). Ubuntu and the Law in South Africa. [Online]. Available from: Ecoport: http://epf. ecoport. org/appendix3. html. [Accessed: 31 August 2011] Rossouw, G. J. 2005. Business Ethics and Corporate Governance in Africa. Sage: Business Society Rossouw, G. J. 2005. The philosophical premises of the second King Report on corporate governance. University of Pretoria: Koers

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