Mohamed Adam is a long standing member of the King Committee. He shared his reflections on integrated reporting, its implications and the need for effective leadership in corporate governance during an interview with business journalist Bruce Whitfield and EY Senior Researcher, Jess Schulschenk, on 24 April 2012. The video interview is included above, and reflections from both this and the longer research interview are given below. These findings were made possible by the Gordon Institute of Business Science (GIBS) and form part of the ongoing Corporate Governance Research Programme with the Albert Luthuli Centre for Responsible Leadership (University of Pretoria) supported by Ernst & Young.
Looking back at the foundations that laid the premise for the King Code of Governance Principles, Adam identifies how King I was one of the first set of principles to recognise that stakeholders have a critical role to play in organisations. From there, the thinking in King II progressed to focus on integrated sustainability reporting (and performance). King III sought to elevate these issues as a leadership responsibility, with an emphasis on the need for leaders to ensure that the organisation acts as a good corporate citizen and integrates decision-making, sustainability and strategy – integrated thinking. This ‘creative, pioneering thinking’ is a hallmark of the King Reports.
Adam is concerned that South Africa’s implementation of corporate governance principles does not as yet necessarily reflect the progressive thinking underpinning the King Codes. He identifies that there are certainly pockets of excellence and examples of companies doing well, but we still have a way to go. Encouraging, though, are the high levels of awareness and the extent to which companies are starting to grapple with the right issues. Where to from here? Adam puts forward that we need to continue to move away from the tick box approach to governance and really internalise what it means to lead in today’s environment.
For so long as corporate governance is viewed only as a compliance matter it will remain something that will be delegated to various functionaries in an organisation. The result of such an approach is that the leadership will end up not applying their mind to crucial matters that could impact the value of the orgainsation and its reputation. For example, engaging with stakeholders is not a matter for the communications department. Leaders must recognize the need to engage with and report to stakeholders in an effective manner.
A critical and often undervalued aspect of the King Codes is the apply or explain approach which provides leadership with the opportunity to consider their own unique business requirements. The key issue being that they have thought about the applicability of the codes to their situation and have the opportunity to explain to their stakeholders why they have chosen a different approach.
“The bottom line of the King Report is that directors need to apply themselves as leaders - thinking broader than the financial bottom line, and making leadership choices that lead to ethical, successful and sustainable organisations. It is about applying the codes and guiding principles in a manner that shows reflection and insight – adapting the implementation of the guidelines to suit the needs of the business and doing so in a manner that is transparent about the choices made. Leaders need to be courageous about the choices they make and if they believe they do not want to apply the King Report in certain aspects, it is absolutely fine as long as it is explained and is transparent”.
Integrating Governance, Sustainability and Strategy
King III places a strong emphasis on the recognition of the limited carrying capacity of the supporting natural environment, and the extent to which both social and environmental sustainability is central to any company’s long term success. Whilst it has attempted to express these burning issues through the King Report, the challenge that remains is how companies are able to integrate decision-making, sustainability and strategy.
“The critical challenge for leadership is to build sustainable and ethical businesses. That includes an understanding of the role and impact of the business in society, as well as the impact on the environment. We need a paradigm shift where the focus is not only on the short- term. If you want to be around in 20 years time, then the only way to do so is to build a sustainable business.”
Social, economic and environmental issues cannot be managed in silos, and apart from the strategy of the business. The strategy must take into account all of these issues and charter a way forward in a manner that is effective. For example, the availability of water may be crucial to a particular manufacturing process and the absence of a strategy to manage the water resources more effectively could present a significant risk for the continued operations of the business. Therefore the issue of water cannot be regarded as an environmental issue that has no relevance to the strategy of the business.
The other crucial aspect of good governance is transparency.
Towards integrated reporting
Adam cautioned that companies are too quick to concentrate on form (one vs. multiple reports etc), when they should be focusing on the core issue of integration: “What should be the focus is integrated thinking – and if there is integrated thinking - effective integration of strategy, sustainability and governance, then integrated performance will be the result. Integrated reporting is trying to show the integrated and holistic performance of a business and its impact on society”.
Perhaps what the King Codes of Governance Principles are really asking for is a radical shift in how we define success. Adam shared his favourite phrase from King III which states that it is necessary to redefine the notion of success in terms of positive lasting benefits for the business, society and the environment.
Effective corporate governance is essentially about effective leadership. Adam points out that “good leaders need to be innovative and pioneering – they need to assist the business deal with the paradox between short-term and long term objectives. One of the critical roles of leadership is to manage those contradictions and paradoxes - to show the path forward and stay true to that path. Simply because something may be difficult to achieve does not mean that we should lower our aspirations.”
“Good governance is essentially about good leadership, effective and responsible leadership, and responsible leadership is based on an ethical foundation and realising the ethical relationship that you have with society and your impact with society”