Social Responsibility Flashcards
(27 cards)
What is corporate governance?
The set of rules and the processes that are used by top management to direct and control the business; provides a framework and control measures to look after the TRIPLE bottom line of the business and consider the interests of all stakeholders in the business.
Stakeholders in corporate governance may include?
Management
Shareholders
Customers
Suppliers
Government
Community as a whole
Environment
Employees
Land lords
Describe King Code I.
King I
* Recommended standards of conduct for companies listed on JSE and state owned businesses
- Regarding their responsibilities towards citizens in the societies within which they function
* Triple bottom line reporting People, Planet, Profit was introduced (link to PESTLE)
- Also referred to as integrated reporting (financial statements)
- A requirement for management
- Management was expected to focus on
–> Shareholders (profits)
–> Stakeholders (society and environment)
What was introduced in King Code II?
The King Code Principles (RADSTIF)
What does RADSTIF stand for?
- Responsibility
- Accountability
- Discipline
- Social Responsibility
- Transparency
- Independence
- Fairness
Discuss transparency as part of the KC Principles.
- The decisions being taken in accordance with a set of rules and with which everyone is familiar and that these rules are understood by everyone
- A pre-condition for accountability.
- If there is no transparency, it is not possible to hold someone accountable (DIRECTORS) for their
decisions. - Does not mean:
–> Everybody has to know what decisions are taken
–> Why the decisions are taken
Discuss accountability as part of the KC Principles.
- Refers to the person taking responsibility for their actions
- Increases the confidence that stakeholders have in the business when decisions are taken
- Integrity, honesty, truthfulness will be part of decision making if the person or organisation knows
they will be held accountable for decision made
Discuss independence as part of the KC Principles.
- No unfair influences from any stakeholder that will result in a biased or unethical decision being taken
in favour of a particular person or organisation - Networking is a critical component of a person’s success
- May reduce the independence of decisions taken in a business if the decision maker feels they have an obligation towards someone they have networked with
Discuss discipline as part of the KC Principles.
- When one looks at discipline, the starting point is self-discipline
- Relates to integrity shown by management when important decisions are made
- Market discipline: Market punishes the business if they do not make responsible decisions (e.g. stop using the business’ products and/or services; investors may sell shares in the business)
- Results in lower market capitalisation (lower share price) and could lead to the collapse of the business
- When will investors do this?
–> Management is acting incompetently
–> Management is promoting their own interests not the business or stakeholders - Regulatory discipline LAWS
–> Can only be imposed once the damage is already done
–> No amount of regulatory force will force someone to act with integrity if they can justify their unethical behaviour
Discuss social responsibility as part of the KC Principles.
- A business that follows a process of good governance will be publicly accountable
- Will act responsibly when it comes to social issues
Discuss fairness as part of the KC principles.
- The business will be considerate when evaluating all relevant parties’ interests when decisions are taken
- It is not realistic or feasible to always act in a manner that promotes all stakeholder’s interests
- Sometimes the business must make a trade off between benefiting one group of people over
another
Discuss responsibility as part of the KC principles.
- Management should be responsible
- Directors should be responsible
Discuss the board of directors in relation to the KC.
- BoD is a key performance driver of the success of the company
- Directors represent shareholders
–> Shareholders have high expectations of directors to do the right thing - Directors are in a position of trust
- In the past, directors main function was strategic planning for the company
- A change in policy had to make directors accountable for incompetence or wrong doing as positions of trust had been abused in the past
(NB!) Discuss directors’ responsibilities, specifically fiduciary duty
- Must act with skills and care when formulating guidelines, policies and procedures (aligned to the vision & mission)
–> When these are implemented, it should be ensured that there is compliance with laws and good standards - Must act in good faith and honesty (fiduciary duty)
–> In terms of what they believe to be in the best interest of the business and the relevant stakeholders
–> May not abuse power given to them
–> Must use the power to enhance the interest of the business - Try to pre-empt risks and put proper risk management procedures in place (contingency plans, SWOT etc)
- Ethical leadership is non-negotiable
- Audit committees should be established (external) - used to monitor finance and responsible use of technology
- Ensure integrated reporting (FINANCIAL STATEMENTS) and disclosure of relevant information is important
–> Done when a holistic view is given on company’s financial performance
I remember these with the acroynym SPAFIE - S: act with Skills; P: Pre-empt risks; A: Audit committees; F: act in good Faith/Fiduciary duty; I: Integrated reporting; E: Ethical leadership.
Discuss King Code III.
- Applies to all businesses, regardless if it is public, private or non-profit
- Directors may be liable in the case of misrepresentation
- Loophole: Focus is on apply Or explain
–> BoD have to motivate why they are not implementing the King report recommendations - Audit Committee has to ensure that they obtain an external opinion to verify the degree of sustainability indicated in the report
–> Has an impact on the external auditor if they have to comment on an issue - Emphasis on independent directors’
–> Board should investigate and assess to ensure the independent directors are really independent - Independent audit committee (external auditors like KPMG /Deloitte)
–> Apart from the BoD
–> Where there is conflict between the BoD and the Independent Audit committee, the committee’s decision will stand and they will be held accountable by law for the specific issue that is decided upon
Discuss King Code IV.
- Released in 2016, implementation effective 1 April 2017
- BoD is responsible to ensure that 4 broad outcomes are achieved: Ethical culture, good performance effective control, trust and good reputation
- 17 principles of Good Corporate Governance that covers the four broad outcomes
- Fixed previous loophole “or:” Focus on Apply AND Explain
- Assumed principles of good Corporate Governance are implemented, now BoD have to explain HOW they were implemented
- New focus is important because:
–> Create more trust with investors
–> Reduce cost of obtaining capital (NB since SA = Junk Status)
–> Ensures sustainability in the business
–> Good for economy and society - Provides guidelines (sector supplements) to help organisations understand how to implement King Principles
–> Municipalities, NPO, SME and SOE
What are the four Broad Outcomes?
(GATE)
1) Ethical Culture
2) Good Performance
3) Adequate and effective control
4) Trust and good reputation
Discuss ethical culture as one of the four broad outcomes.
- Governing Body should lead ethically & effectively.
- Ethical culture is created in the business
- All actions geared towards organisation seen as a responsible corporate citizen
Discuss good performance as one of the four broad outcomes.
- Governing body should ensure the core business purpose, strategy, risks and opportunities taken are geared towards value creation
- Governing body should ensure that reports issued by the organisation help stakeholders make informed assessments of value creation (ST, MT, LT)
Discuss adequate and effective control as one of the four broad outcomes.
- Governing body has to initiate, manage and look after all corporate governance principles (RADSTIF)
- Should be a balance of knowledge, skills, experience, diversity and independence within the Governing Body
- Accountability is with Governing Body
- GB should ensure a competent executive management team is appointed that acts with
authority and responsibility - Ensure risks and opportunities taken are in line with strategic objectives
- Govern technology and information that supports strategic objectives
- Comply with applicable laws, rules and standards that support the organisation being ethical and a good corporate citizen
- Organisation remunerates fairly, responsibly and transparently
- Effective and sufficient control to trust the integrity of reports
Discuss trust and good reputation as one of the four broad outcomes.
- GB should adopt stakeholder inclusive approach that balances the needs, interests and expectations of stakeholders
- 17th principle refers to institutional investors
- A business where money is pooled to buy securities, real estate, insurance companies and pension funds.
- GB should ensure that all parties interests are protected and expectations met
What are the indicators / Measurements of Performance used by the FTSE/JSE SRI?
SMEG
- Environment: Reduce negative environmental impact, promote awareness of environmental impact, working to use natural resources in a sustainable manner
- Society: Demonstrate a commitment to social sustainability (avoid window-dressing), treat all stakeholders with dignity, fairness and respect, develop and empower employees and the community
- Governance: Maintain good corporate governance practices principles, aim for long term growth and sustainability by managing the risks in the macro economic environment, promote positive social, environmental, ethical and economic activities
- Management of climate change: reduce carbon emissions and climate change
What is the purpose of the FTSE/JSE Responsible Investment Index?
Purpose and intent Measurement:
* Identify the companies listed on the FTSE/JSE that focus on good governance and that use
triple bottom line principles in their reporting
- Environmental sustainability
- Economic sustainability
- Social sustainability
- Measures the policies and procedures of companies that are listed on the FTSE/JSE against globally acceptable CSR and ESG (Economic, Social and Governance) standards
- Give investors a non-financial standard to use as a tool when making investment decisions
- Promote responsible business practice in South Africa and beyond
- Serve as a vehicle for companies to demonstrate to stakeholders that they are acting and reporting in a responsible manner on ESG related issues
Benefits of FTSE/JSE SRI?
- A company that is perceived to be socially responsible may use this as a competitive advantage
- Scoring high on the SRI confirms to shareholders and potential shareholders that the business is
accountable and transparent in its dealings - A good performance on the FTSE/JSE SRI could have a positive impact on the financial performance
increases possible investors of the business - ESG disclosure among JSE-Listed companies is promoted
- Meeting and complying with international standards set by the FTSE/JSE Responsible Investment Index
- Could improve the image of the organisation in the mind of the investors
- Used as a competitive advantage
- Build an organisation culture around this and make it part of their brand
