PGDRM - Corporate Governance Ethics and Risk PDF

Postgraduate Diploma in Risk Management CORPORATE GOVERNANCE ETHICS AND RISK Module Guide Copyright © 2025 MANCOSA All rights reserved, no part of this book may be reproduced in any form or by any means, including photocopying machines, without the written permission of the publisher.Please report all errors and omissions to the following email address: [email protected] Corporate Governance Ethics and Risk Table of Contents Preface 2 Unit 1: Introduction to Risk and Corporate Governance 11 Unit 2: Behavioural Risk and Corporate Governance 41 Unit 3: Personality and Corporate Governance 72 Unit 4: Corporate Governance Management and Stakeholders 103 Unit 5: Models of Corporate Governance 135 Unit 6: Theories and Philosophies of Corporate Governance 169 Unit 7: Ethics in Business 199 Unit 8: Risk, Compliance and Controls Framework 227 References 267 Bibliography 272 1 Corporate Governance Ethics and Risk Preface A. Welcome Dear Student Welcome to the Corporate Governance, Ethics and Risk (CGER8). module. You are encouraged to read this overview and module guide carefully, as it will aid you through your study journey. This module guide intends to develop your knowledge and proficiency. The field of Corporate Governance is dynamic and innovative. The learning content and special features contained in this module guide will provide you with opportunities to explore current industry developments and theories. As this is a distance-learning module, self-discipline and time management would need to be applied effectively. You will have the opportunity to engage with interactive digital tools via MANCOSA Connect to enhance your learning journey. Through the inclusion of relevant content and industry aligned practices within the learning content, you will develop critical thinking and problem-solving skills, empowering you as change agents for a more sustainable world. Please note that some special features may not have answers available, where answers are not available this can be further discussed with your lecturer during the webinar session. We hope you enjoy the module MANCOSA does not own or purport to own, unless explicitly stated otherwise, any intellectual property rights in or to multimedia used or provided in the Corporate Governance, Ethics and Risk guide. Such multimedia is copyrighted by the respective creators thereto and used by MANCOSA for educational purposes only. Should you wish to use copyrighted material from this guide for purposes of your own that extend beyond fair dealing/use, you must obtain permission from the copyright owner. 2 Corporate Governance Ethics and Risk B. Module Overview The module is a 15 credit module at NQF level 8 The purpose of this module is to introduce students to the importance of corporate governance and risk management within contemporary organisations. The module emphasises the integration of corporate governance and risk management into all business activities by providing key concepts, principles, processes and strategies central to corporate governance and risk management. C. Exit Level Outcomes and Associated Assessment Criteria of the Programme Exit Level Outcomes(ELOs) Associated Assessment Criteria(AACs) Evolution and importance of Understand the evolution and establishing a risk management culture importance of establishing a risk is understood to assist in controlling management culture and managing risk Display an understanding of the risk Growth in an organisation is promoted management framework and risk by assessing risks using risk models specific modelling as a means of and through the implementation of a assessing risk so as to promote and risk management framework grow the organisation Integrated knowledge is employed to Employ integrated knowledge to solve assist in solving and providing complex risk management problems in solutions for risk management an organisation and pose viable problems that an organisation is faced solutions with Risk relating to an individual project Identify and mitigate risk relating to an and an organisation are identified and individual project or organisation as a mitigated in order to reduce the whole likelihood and impact of the risk in the future 3 Corporate Governance Ethics and Risk Role of management and leadership is Understand the role of management understood to establish the manner in and leadership in organisational which it contributes to an organisations success success Understanding of the various risks that Demonstrate an understanding of exist within different corporate levels of varying risks within the different an organisation are demonstrated to corporate levels of an organisation encourage the risk control processes Possess the ability to identify and Ability to identify and manage fraud in manage the various types of fraud that an organisation is processed to assist is prevalent within an organisational in preventing any future fraudulent context activities from occurring Appreciation of ethics, compliance and Demonstrate an appreciation and accountability is demonstrated to understanding of ethics, compliance promote a healthy organisational and accountability environment Concepts of risk mapping and Apply the concepts of risk mapping and modelling are applied to enable risk modelling to process information management to make an informed for decision-making decision with regard to the risk process. 4 Corporate Governance Ethics and Risk D. Learning Outcomes and Associated Assessment Criteria of the Module Module Outcomes Associated Assessment Criteria Social, economic, political, technological and ecological dimensions are explored to understand the importance of considering internal and external environments in business Demonstrate and understanding of how decision-making social, economic, political, technological and ecological Role, elements and functions of dimensions of internal and external corporate governance are examined to environments create a moral and social gain an understanding of its dynamics context for business decision-making within broader environments Relationship between corporate governance and risk management are explored to understand their influence on the organisation Business ethics dimensions and concepts are investigated to provide a foundational understanding of the importance of ethical principles within Apply personal value and ethical the field of risk management principles as a basis for identifying, analysing and managing ethical issues Link between corporate governance in contemporary business settings – and ethics are explored and applied to risk management issues inform effective use Business ethics theories are outlined and discussed to display their relevance within risk management 5 Corporate Governance Ethics and Risk Components and elements of behavioural risk are discussed to showcase how behaviour of company personnel can result to related risks Analyse the influence of critical and failures stakeholders on business operations Corporate cases are presented to and to apply principles of stakeholder provide practical understanding of risks management in risk management and their implications Relevant measures that can be used in addressing the series of corporate risks and failures are explored and applied Analyse the complex Relationship between business and interdependencies that exist between government is explored to determine business and government and of their the complex nature of decision-making strategic importance to corporate decision-making Pillars of Governance, Risk and Compliance are explored and applied to organisational contexts to Evaluate the legal, ethical and social emphasise the importance of corporate responsibilities of business toward their responsibility members, their customer and the Practices and strategies are natural environment investigated to ensure that Pillars of Governance, Risk and Compliance are successfully integrated within risk management processes 6 Corporate Governance Ethics and Risk Institutions that have played a key role in developing corporate governance are defined and explored to determine the various efforts that have been Criticise and resolve contemporary risk made in developing corporate management ethical and social issues governance principles in business, economics or public Models of corporate governance together with their assumptions and significance are investigated to recognise and solve risk management issues E. Programme Notional Learning Hours Learnin Types of learning activities g Time % Lectures/Workshops (face to face, limited or technologically mediated) 10 Tutorials: individual groups of 30 or less 0 Syndicate groups 0 Practical workplace experience (experiential learning/work-based learning etc.) 0 Independent self-study of standard texts and references (study guides, books, journal 70 articles) Independent self-study of specially prepared materials (case studies, multi-media, etc.) 15 Other: Online 5 Total 100 F. How to Use this Module This Module Guide was compiled to assist you with your study journey. The purpose of the Module Guide is to allow you the opportunity to integrate the theoretical concepts discussed within the content of the Module Guide. We suggest that you read through the entire module guide to get an overview of its contents. At the beginning of each Unit, you will find a list of Learning Outcomes This outlines the main points that you should understand when you have completed the Unit/s. 7 Corporate Governance Ethics and Risk This Module Guide should be studied in conjunction with the prescribed, recommended textbook(s)/ reading(s) and other relevant study material. It is important that you make your own notes as you work through the prescribed, recommended textbook(s)/ reading(s), other relevant study material, and the module guide. You may obtain additional reading material by utilising publications referenced at the end module guide under the reference list and bibliography. G. Study Material The study material for this module includes, programme handbook, this Module Guide, and a list of prescribed and recommended textbooks/readings which may be supplemented by additional readings. H. Prescribed Textbook The prescribed and recommended reading(s)/textbook(s) presents a tremendous amount of material in a simple, easy-to-learn format. You should read ahead during your course. Make a point of it to re- read the learning content in your module textbook. This will increase your retention of important concepts and skills. You may wish to read more widely than just the Module Guide and the prescribed and recommended textbooks/readings, the Bibliography and Reference list provides you with additional reading. The prescribed and recommended textbook(s)/reading(s) for this module are: Prescribed Reading(s)/Textbook(s) Mallin, C.A. (2019). Corporate Governance. Sixth Edition. Oxford University Press. Ramani, N. (2021). Corporate Governance – An Essential Guide for South African Companies. Third Edition. LexisNexis. Recommended Reading(s)/Textbook(s) Okoye, N.V. (2015). Behavioural risk in Corporate Governance: Regulatory intervention as a risk management mechanism. Routledge Taylor and Francis Group. Tricker, B. (2012). Corporate Governance: Principles, Policies and Practices. Second Edition. Oxford University Press. Wixley, T., Everingham, G and Louw, K. (2019). Corporate Governance. Fifth Edition. Siber Ink: South Africa. 8 Corporate Governance Ethics and Risk Muhammad, H., Migliori, S. and Mohsni, S (2023). Corporate Governance and Firm Risk-Taking: The Moderating Role of Board Gender Diversity. Meditari Accountancy Research, 31(3), pp.706- 728. Mallin, C.A. (2015). Corporate Governance. Fourth Edition. Oxford University Press. I. Special Features In the Module Guide, you will find the following icons together with a description. These are designed to help you study. It is imperative that you work through them as they also provide guidelines for examination purposes. ~~~~~~~~~~~~~~ 9 Corporate Governance Ethics and Risk Special Feature Icon Description A Think Point allows you to apply your analytical skills to reflect THINK POINT on the topic. You may be asked to apply a concept to your own experience or to think of an example. An Activity tests your knowledge on content that is highlighted ACTIVITY within specific content areas. The purpose of an activity is to give you an opportunity to apply what you have learned. The readings provided should be read in order to develop your knowledge of the content areas. If you are unable to acquire the READINGS suggested readings, then you may consult with any current sources that deal with the subject. PRACTICAL A Practical Application or an Example provides insight and APPLICATION enhances your learning of the topic, allowing you to apply the OR EXAMPLES theory learnt through real-life scenarios within this module. Knowledge Check Questions (KCQ) appear in the form of KNOWLEDGE True/False or Multiple Choice Questions throughout the Module CHECK Guide. KCQs will test your knowledge of the content areas QUESTIONS covered. REVISION Revision Questions will test your understanding of module and QUESTIONS unit outcomes. A Case Study provides different scenarios to illustrate how CASE STUDY theory is practiced. VIDEO A Video Activity with links are included in your Module Guide ACTIVITY along with instructions to attempt after watching the video. 10 Corporate Governance Ethics and Risk Unit 1: Introduction to Risk and Corporate Governance Unit 1: Introduction to Risk and Corporate Governance 11 Corporate Governance Ethics and Risk Unit Learning Outcomes CONTENT LIST LEARNING OUTCOMES FOR THIS UNIT Introduces the topic areas covered for 1.1 Introduction the unit Define the concept of corporate governance 1.2 Corporate Governance defined Describe the outcomes and principles of corporate governance Evaluate risk management from a 1.3 Risk Management defined and its Key Components managerial point of view Analyse the relationship that exists 1.4 Interaction between Risk and Corporate between corporate governance and Governance risk management Summarises the topic areas covered 1.5 Summary for the unit 12 Corporate Governance Ethics and Risk Prescribed and Recommended Reading(s)/Textbook(s) Prescribed Reading(s)/Textbook(s) Mallin, C.A. (2019). Corporate Governance. Sixth Edition. Oxford university press. Ramani, N. (2021). Corporate Governance – An Essential Guide for South African Companies. Third Edition. LexisNexis. Recommended Reading(s)/Textbook(s) Ramani, N. (2021). ‘An Introduction to Corporate Governance’. In: Ramani, N., Third Edition. Corporate Governance – An Essential Guide for South African Companies. Third Edition. LexisNexis, pp. 3-8. Okoye, N.V. (2015). Behavioural risk in Corporate Governance: Regulatory intervention as a risk management mechanism. Routledge Taylor and Francis Group. Tricker, B. (2012). Corporate Governance: Principles, Policies and Practices. Second Edition. Oxford University Press. Wixley, T., Everingham, G and Louw, K. (2019). Corporate Governance. Fifth Edition. Siber Ink: South Africa. Mallin, C.A. (2015). Corporate Governance. Fourth Edition. Oxford University Press. 13 Corporate Governance Ethics and Risk 1.1 Introduction This Unit will provide an overall description of Corporate Governance and Risk Management, with is an emphasis on how these have been closely integrated and also how they have influenced the manner in which activities are conducted. As the scale and activity of corporations has increased immeasurably, the governance of these entities has assumed considerable importance. In the wake of previous financial crisis and scandals, requests were made for stricter corporate governance policies, leading to the prominence of the issue of corporate governance (Abdullah and Tursoy, 2023; Naz et al., 2022). This curiosity arose during a time when business leaders and auditors are being held to increasingly high levels of accountability and responsibility (Driel, 2019; Mardnly et al., 2019). Think Point 1.1 Why is corporate governance an important aspect of business management? In recent years' ethical scandals have manifested themselves and have become common across the world, amongst them are those by the number of top management executives of corporate giants like Arthur Anderson, Lehman Brothers and WorldCom in the US, Satyam Computer Services of India amongst others. Steinhoff in South Africa, for instance, grew throughout five decades to become one of the largest companies in the country (Again, 2018:20-21; Chauke, 2019; Naude et al., 2018:15- 21). According to Krisnauli and Hadiprajitno (2014), companies certainly need something that can affect the direction of the company, and company control so that the company can easily meet the requirements. This can be achieved through processes, habits, policies, or rules that are implemented by the company properly, which is usually called Good Corporate Governance. It is also understood that business operation has tremendous effects on stakeholders, society, and the community; hence, concerns on ethical and socially responsible actions that corporations undertake are increasingly considered (Huynh, 2019). Social and ethical concerns are making (firm) organisations incorporate managerial tools that take into consideration the execution of firm-related regulations and rules and take good conduct for society, the community and stakeholders (Rodriguez-Fernandez, 2016). Meanwhile Handoko (2014) argues that the balance between the power and authority of the company, especially the manager in providing accountability to shareholders or company stakeholders, can be done by way of 14 Corporate Governance Ethics and Risk shareholders providing direction and special control to managers. Kana (2019) argue that these scandals are never far from news headlines with more sensational examples of malfeasance and inconsequence on the part of those charged with governance, nested in the ineffectiveness or complicity of the guardians of governance. The damage has been incalculable: direct losses of staggering quantum for individual and institutional shareholders added to indirect costs such as a deeper deficit of trust in the motives of business; the credibility of public and private institutions; and indeed, democratic capitalism itself. Consequently, corporate governance has been considered to handle organisational social and ethical issues after the falls of numerous big corporations related to the misconduct of managers (Dhu and Hbp, 2019). Many companies are realising that winning in today’s complex and interconnected market means marrying global regulatory expectations with long-term strategic objectives. The financial crisis provided a rude awakening to boards, senior management teams and regulators alike, resulting in significant challenges for firms trying to adapt their business models to meet heightened financial stability expectations of regulators and other stakeholders. Risk governance, culture and control are now priorities for regulators; they are also the industry’s central concerns in light of unprecedented regulatory fines. Meanwhile, stakeholder expectations of robust governance balanced with improved profitability are increasing. Financial institutions began focusing on governance, risks and controls as soon as the fog of the crisis began to lift, and many have taken significant strides in the right direction. Firms are stronger. However, for most, regulators have concluded that current approaches do not go far enough. Significant work remains to create a holistic approach that reaches day-to-day behaviour at all levels of the firm and creates meaningful and sustainable change in the way business is conducted and overseen. Going forward, companies will have to take a more strategic approach to risk governance. 1.2 Corporate Governance Defined Corporate governance has competing definitions, it encompasses the whole set of legal, cultural, and institutional arrangements that determine what publicly traded corporations can do, who controls them, how that control is exercised, and how the risks and returns from the activities they undertake are allocated. Lanozska (2022: 01) defines corporate governance as … the structures and processes for the direction and control of companies. Corporate governance concerns the relationships among the management, board of directors, controlling shareholders, minority shareholders and other stakeholders”. They argue that good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing 15 Corporate Governance Ethics and Risk their access to outside capital. According to the United Kingdom (UK) Corporate Governance Code of 2016, corporate governance deals with ‘what the board of a company does and how it sets the values of the company. It is to be distinguished from the day-to-day operational management of the company by full-time executives’ The (UK) Code (2016) defines corporate governance as follows- “Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business, and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations, and the shareholders in general meeting”. King IV Report of Corporate Governance (IoDSA, 2016) defines corporate governance as the exercise of ethical and effective leadership by the governing body towards the achievement of the following governance outcomes: Ethical culture and effective leadership Good performance: value creation in a sustainable manner Effective control: adequate and effective controls with informed oversight; and Legitimacy - Trust and confidence in the organisation by stakeholders and the communities in which it operates According to Ramani (2021:4), Corporate governance regulates the exercise of power (that is authority, direction and control) within a company in order to ensure that the company’s purpose is achieved (namely the creation of sustainable shareholder value, the raison d’etre of most for-profit companies). Sithole and Lotter (2024:03) define corporate governance as a system that controls and directs companies and comprises structures and processes that outline relationships within an organisation. They argue that corporate governance involves the connection between, stakeholders, investors, and management, where the investor supplies capital to management with expectations of returns on investments They also indicate that one aspect of corporate governance involves the internal structure’s role in facilitating the establishment and attainment of organisational objectives and implementing controls for performance monitoring and resource utilisation. We can therefore argue that corporate governance is a set of relationships between institution management, policymakers and stakeholders that specify how an institution’s goals will be met, monitored and evaluated to measure the organisation’s performance level. From the discussions above, a conclusion may be made that corporate governance is a process that aims to allocate corporate resources in a manner that maximises value for all stakeholders such as shareholders, investors, employees, customers, suppliers, environment and the community at large and holds those at the 16 Corporate Governance Ethics and Risk helms to account by evaluating their decisions on transparency, inclusivity, equity and responsibility. Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered, or controlled. Good corporate governance is a set of rules that govern relationships between creditors, company managers, shareholders, employees, and governments, as well as external and internal stakeholders related to rights and their obligations or can be said to be a system that controls and regulates the company. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. In contemporary business corporations, the main external stakeholder groups are shareholders, debt holders, trade creditors, suppliers, customers, and communities affected by the corporation's activities. Internal stakeholders are the board of directors, executives, and other employees. Activity 1.1 Critically assess the differences in the definition of corporate governance as according to the King IV (2016) and the UK Corporate Governance Code (2016) Corporate Governance principles are intended to help policy makers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view to support economic efficiency, sustainable growth and financial stability. According to Rodriguez-Fernandez (2016), corporate governance is developed to overcome the separation between ownership and management, and to balance the benefits among various stakeholders, for instance shareholders, consumers, banks, suppliers, local communities, governments, managers, and employees. This is primarily achieved by providing shareholders, board members and executives as well as financial intermediaries and service providers with the right incentives to perform their roles within a framework of checks and balances. Corporate governance can be defined as a process or pattern that must be implemented by company managers in running a company to increase shareholder profit value while paying attention to all parties involved and contributing to the company (Ayunitha, Sulastri, Fauzi, Sakti and Nugraha, 2020). In this study, we argue that corporate governance cannot just be simply relegated to the management of relationships at corporate levels in both public and private businesses but applies to all forms of organisations that exist. Corporate governance is an ecosystem made up of public companies, SMEs, non-profit organisations, and institutional investors such as retirement funds and 17 Corporate Governance Ethics and Risk public sector entities. All of these types of organisations affect the governance of one another in the bigger ecosystem. In support of the above, IoDSA (2016) indicates that the King Committee designed King IV (i.e. South African corporate governance code) to make it more accessible for users across this eco-system by: Using a vocabulary that indicates the Report’s applicability to all organisations. Thus, King IV talks about “organisations” rather “businesses” or “companies”, “governing bodies” rather than “boards”, and “those charged with governance duties” rather than “directors” Providing supplements to help organisations across a variety of sectors and organisational types to interpret and implement King IV to suit their particular circumstances Providing guidance on how to scale the recommended practices in accordance proportionally, in line with the organisation’s size and resources, and the extent and complexity of its activities Activity 1.2 Describe the features that King IV Report has put in place to distinguish between all organisations in the corporate governance as an eco-system. Agustin, Maharani and Effendi (2021) provides the five (5) basic principles of good corporate governance, which consist of: The principle of transparency The principle of accountability The principle of responsibility The principle of independence, and The principle of fairness and equality Think Point 1.2 Are principles of good corporate governance having similar impacts to all types organisations? The principles do not intend to prejudice or second-guess the business judgment of individual market participants, board members and company officials. What works in one company or for one group of investors may not necessarily be generally applicable to all of the business or the systemic economic importance. As interest in understanding corporate governance has grown, the question of 18 Corporate Governance Ethics and Risk how this relates to the institutions and practices of public and global governance has arisen, while large corporations are becoming increasingly significant as they operate on a multinational basis, public organisations remain influential in many national sectors, and the role of global institutions has become more critical both for regulation and coordination of the world economy. The G20/OECD (2015) Corporate Governance Principles conceptualises corporate governance as ‘a set of relationships between a company’s management, its board, its shareholders, and other stakeholders’. Corporate governance also deals with the structure through which the objectives of the company are set, and the means of achieving those aims and supervising performance (Yafet, 2021:271). Activity 1.3 Describe the governance outcomes and the five (5) principles of corporate governance The principles are developed with an understanding that corporate governance policies have an important role to play in achieving broader economic objectives with respect to investor confidence, capital formation and allocation. The quality of corporate governance affects the cost for corporations to access capital for growth and the confidence with which those that provide capital – directly or indirectly – can participate and share in their value-creation on fair and equitable terms. Together, the body of corporate governance rules and practices therefore provides a framework that helps to bridge the gap between household savings and investment in the real economy. As a consequence, good corporate governance will reassure shareholders and other stakeholders that their rights are protected and make it possible for corporations to decrease the cost of capital and to facilitate their access to the capital market. 1.2.1 Parties to Corporate Governance Parties to Corporate Governance signify all the factors, stakeholders and variables that have a direct impact or influence. The most influential parties involved in corporate governance include government agencies and authorities, stock exchanges, management (including the board of directors and its chair, the Chief Executive Officer or the equivalent, other executives and line management, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large. The agency view of the corporation parties that the shareholder forgoes decision rights (control) and entrusts the manager to act in the shareholders' best (joint) interests. Lanozska (2022: 01) avers that a country’s corporate governance system is the concept that covers a network of regulatory connections – statutory, legal, 19 Corporate Governance Ethics and Risk self-governing normally enforced by the legal system and organised around different levels of government (federal, state, provincial).Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Ramani (2021: 11) depicts the authority and accountability of the parties to corporate governance as in Figure 1.1 below- Figure 1.1: Diagrammatic Representation of the Flow of Authority and Accountability (Source: Ramani, 2021:01) Usually, authority flows downwards whereas accountability flows upwards. It is the power given to a manager or leader to act and make decisions within designated boundaries and achieve organisational objectives. Accountability always flows upwards; it is the act of being liable for actions and decisions. Accountability in terms of the above diagram is the obligation of Exco and Management Authority to report formally to the Board Committees about the work they did to discharge their responsibility. The Board Committees who act in Advisory Roles then further report to the Board of Directors on the actions of the lower levels in command. The Chief Executive and Exco 20 Corporate Governance Ethics and Risk should be held accountable for jobs assigned to them and be able to complete those jobs as per the standards set by the Board of Directors. A Memorandum of Incorporation (MOI) is defined in the Companies Act, 71 of 2008 as the document, that sets out rights, duties, and responsibilities of shareholders, directors, and others within and in relation to a company, (corporate governance) and other matters as contemplated in section 15 of the Act. A board’s role is to help to set and steer an organisation’s strategic direction, monitor planning and policies, and ensure accountability. The outcomes of good corporate governance are therefore, not only good financial performance, but also the development of an ethical culture, effective control systems, and ultimately organisational legitimacy (IODSA 2016). Accountability is when people take responsibility for their own actions. It’s about taking initiative and recognising not only that individuals have the power to cause problems, but also to fix them. Accountability thus involves providing answers through reporting or other devices or giving an account. In the corporate governance context, accountability is connected to financial auditing, transparency, and reporting, as well as accountability, auditing, and reporting of a social, ethical, or environmental sort. According to IoDSA (2018) Governing bodies in South Africa, are in general terms permitted to establish committees to assist the governing body with its role and duties. Where the organisation is a company, the Companies Act 71 of 2008, as amended (the Act) also contemplates that the board of directors may appoint committees as needed or determined by the board. The Act also requires certain companies to establish an Audit Committee, Social, and Ethics Committee in specific instances. King III (2009) provided that a governing body have the following governing body committees: Audit Committee (in terms of the Companies Act if legally required) Social and Ethics Committee (in terms of the Companies Act if legally required) Risk Committee (as standing committee) Remuneration Committee (as standing committee) Nomination Committee (as standing committee) Governance Committee (if deemed necessary) IT Steering Committee (if deemed necessary); and Sustainability Committee (if deemed necessary) King IV (IoDSA, 2016) however moved away from prescribing specific governing body committees that should be established and indicates that the governing body should judge which governing body committees are appropriate for the organisation. King IV requires the governing body to make a 21 Corporate Governance Ethics and Risk judgement decision around the needs and interests of the organisation and not to think of committees as a compliance requirement. Principle 8: of King IV (2016) provided that “the governing body should ensure that its arrangements for delegation within its own structures promote independent judgement and assist with balance of power and the effective discharge of its duties” (IoDSA, 2018). Think Point 1.3 Are board of directors involved in addressing agency concerns? Agency concerns (risk) that will be discussed in the following Units are necessarily lower for a controlling shareholder. A board of directors is expected to play a key role in corporate governance. The board has the responsibility of endorsing the organisation's strategy, developing directional policy, appointing, supervising, and remunerating senior executives, and ensuring accountability of the organisation to its investors and authorities. All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers, and management receive salaries, benefits, and reputation, while investors expect to receive financial returns. For lenders, it is specified interest payments while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services and possible continued trading relationships. These parties provide value to the corporation in the form of financial, physical, human, and other forms of capital. Many other parties may also be concerned with corporate social performance, for example, environmental stewardship in the oil and gas sector has become increasingly critical in addressing the industry's ecological footprint and mitigating its environmental impact (Okeke, 2021). The oil and gas industry are a significant contributor to greenhouse gas emissions, primarily through the burning of fossil fuels and methane leaks during extraction and transportation (Lee et al., 2022). To combat this, companies have been investing in innovative technologies to minimise emissions at every stage of the production process. 22 Corporate Governance Ethics and Risk Knowledge Check Questions 1.1 Fill in the missing words. 1. …………………….., are in general terms permitted to establish committees to assist the governing body with its role and duties 2. ….…………………….. may include lenders, suppliers, employees, creditors, customers and the community at large 3. Directors, workers and management receive ……………………….., while investors expect to receive …………… returns There is no single model of good corporate governance. However, some common elements underlie good corporate governance. The principles build on these common elements and are formulated to embrace the different models that exist. For example, they do not advocate any particular board structure and the term “board” as used in the principles is meant to embrace the different national models of board structures. In the typical two-tier system, found in some countries, “board” as used in the principles refers to the “supervisory board” while “key executives” refers to the “management board”. In systems where the unitary board is overseen by an internal auditor’s body, the principles applicable to the board are also, mutatis mutandis, applicable. As the definition of the term “key executive” may vary among jurisdictions and depending on context, for example remuneration or related party transactions, the principles leave it to individual jurisdictions to define this term in a functional manner that meets the intended outcome of the principles. The terms “corporation” and “company” are used interchangeably in the text. Practical Application 1.1 Research on the SABC and Telkom board and show any distinctions amongst the two in terms of the board representation. 1.3 Risk Management Defined and its Key Components The management of risk is becoming a crucial management concept, supported by various institutions and commissions, such as the Basel Committee on Banking Supervision and the King Commission. However, before dealing with the detail of these institutions’ approaches, it is imperative to come to a thorough understanding of the concept of risk management. Therefore, this section of the unit deals with various definitions and approaches to risk management to deduce a generic set of characteristics which will lead to a clear understanding of the concept. Risk management involves identification, description, estimation, pre-reporting, treatment, residual risk reporting, and monitoring 23 Corporate Governance Ethics and Risk strategic organisational objectives and risk inherent in achieving these objectives (Busru, Shanmugasundaram and Bhat, 2020). Organisations internal governance mechanism can help in the ratification of riskier policies and choices through oversight mechanism and supervisory role of the board and their independence, more specifically through their representation in different board committees. Moreover, external governance mechanism through competition and market control can alleviate the problem of being standing on thin ice. Risk, an integral feature of business has a huge impact on determining prospect future of business entity and stakeholders around. Thus, not only stakeholders demand higher returns but also security and sustainability persist the important concern while transacting with any business entity. Video Activity 1.1 Watch the video using the link below and answer the questions that follows. Forjan, J. (2019). Corporate Governance and Risk Management. Available at: https://www.youtube.com/watch?v=LFSAjD3zJXo Questions: 1. Describe the importance of risk management as an important component of corporate governance? 2. Describe the origin of the concept of risk governance? According to Rossouw and van Vuuren (2016:11), risk management is the process of planning, organising, directing, and controlling resources and operations to achieve given objectives, despite the uncertainty of events. Effective risk management enables an organisation to manage the probability of any unforeseen events that may arise, and to limit the effect of the consequences, along with responding proactively to opportunities. This means the organisation will be better able to carry out its plans, in other words, achieve its organisational objectives despite the uncertainty of events occurring in the environment in which it functions. Risk management may therefore be defined as the discipline by which an organisation in an industry assesses controls, exploits finances and monitors risks from all sources to increase the organisation’s value to the stakeholders. There have been numerous definitions that have been used in the description of risk management as stated and identified below. Risk management refers to a prescribed conduct or a pattern of behaviour followed by business enterprises and applies to all businesses; (Okoye, 2015) 24 Corporate Governance Ethics and Risk Risk management intends to create value as well as mitigate risks Risk management focuses on all sources of risks Risk management considers all stakeholders, not only shareholders Implicitly, this definition recognises risk management’s contribution to strategic decision making and the value-adding effect it has on decision-making throughout the organisation A strong risk management system will include elements such as a risk culture that reflects full understanding of business activity and the related risks; determining a risk appetite framework, oversight of the correspondence of the banking corporation’s business profile to this framework; establishment of an independent risk management function headed by a Risk Officer; provision of forward-looking risk assessment and measurement tools; and resources for the oversight and control of risks identified (Mallin, 2015). Risk management and protective mechanism of corporate governance supports that better corporate governance mitigates derivation of private benefits by agents and concentrated owners leading to excess risk-avoidance thus adding investor protection and firm value (Srivastav and Hagendorff, 2016). Knowledge Check Questions 1.2 State if the following is True or False and Provide Explanation. 1. Project Manager heads the risk management function in organisations. 2. The process of planning, organising, directing, and controlling resources and operations to achieve given objectives, despite the uncertainty of events is called risk profiling. 3. A strong risk management system will include elements such as a risk culture that reflects full understanding of business activity and the related risks The key question among many organisations has been pertaining to the justification of why the sudden interest in risk management. The major challenges that have been highlighted that sanction the need for a focus in risk, compliance and control structures are as a result of the following major challenges as highlighted by (Okoye, 2015) a) Regulatory Pressure to Improve Governance and Behaviour: Regulatory attention has progressed beyond financial condition; resiliency- that is, improved capital, and liquidity, decreased leverage, and strengthened recovery and resolution plans. Improving governance and conduct at large financial service firms is now a priority in the regulatory agenda. Major control failures and conduct violations across the industry drove this change, leading regulators to conclude that stronger risk governance is critical to financial reform (Konzelmann, 25 Corporate Governance Ethics and Risk 2005). Regulators in certain jurisdictions are leading the way by addressing this cycle of misconduct through increased accountability and consequences for firms and individual employees. Video Activity 1.2 Watch the video using the link below and answer the questions that follows. Adubato, S (2019). The Impact of Environmental Regulations on Business. Available at: https://www.youtube.com/watch?v=vEIXSAyf7-k Questions: 1. Relate some of the reasons why organisations must do something about environmental sustainability? 2. Identify the most appropriate stakeholder (s) to set up policies to mitigate climate change in a country? b) Inappropriate Behaviour A recent spate of complex market failures, including market manipulation, anti-money-laundering and sanctions program failures, rogue trading, and miss-selling, highlighted significant issues of misconduct and operational failures in certain banks and organisations, which in turn revealed significant weaknesses in governance, controls and culture (Okoye, 2015). While the majority of these problems have been in banking, firms in other financial service sectors have experienced similar breakdowns. Current risk approaches may therefore be inadequate to addressing root causes, known weaknesses or emerging risks (e.g., digital risks) and raise broader questions around firms’ general inability to manage and control their nonfinancial risks. The onus is now on firms to demonstrate they are taking swift and meaningful action. The resulting conduct costs and related provisions have been substantial, surpassing US$270b from 2009 to 2013 globally. c) Cost Control Operating with returns below the cost of capital is not sustainable or acceptable to investors. In grappling with increasing regulatory expectations and fines, shortened implementation timelines, and major reputational events, firms have often resorted to firefighting immediate issues, leading to disjointed or piecemeal implementation efforts. The outcomes have been significant risk and control expenses, increased headcount with the potential for duplication of efforts in managing risks and controls, lack of clarity in roles and responsibilities, and fractured and uncoordinated infrastructure. All this is the significant cost of compliance with limited return in terms of running the businesses. 26 Corporate Governance Ethics and Risk Shareholder and investor demands for higher returns require firms to manage risks and controls in a more consistent and cost-effective manner. One-way firms can begin addressing cost-of-control issues is to use a common risk taxonomy, integrated risk assessments, standardised control frameworks and improved management information systems. The ability to deliver organisational change balanced with improved returns on equity (RoE) will be a true distinguisher for firms in the industry (Mallin, 2019). A risk management framework is the component that serve as the foundation and guide for an organisation’s risk management programme, but it can also be stated that a framework is typically supported with related objectives, policies, commitments, plans, relationships, accountabilities, processes and activities. The emphasis among different organisations has been to ensure that corporate governance and risk are collectively aligned based on three lines of defence, which include- i. Business Line Management (i.e. the first line of defence) Business line management is responsible for the identification, assessment, management, monitoring, mitigation, and reporting of risks inherent in products, activities, processes, and systems in their purviews, and for the management of a sound environment of risk management control. Support functions such as IT management are part of the first line of defence. According to Harmoinen, Suominen (2020), first or business line managers are links between an organisations’ administration and the workforce. They transmit information from higher managers to workers and vice versa. Their management skills and especially their interaction with staff are a key point in successful management. ii. Independent Risk Management Function (i.e. the second line of defence) An independent risk management function is the second line of defence. Its job is to complement the management activities of the business line. This function has a reporting structure independent of the risk-generating business lines and is responsible for the planning, maintenance, and ongoing development of the banking corporation’s risk management framework. One of its major duties is to challenge the adequacy of the business lines’ inputs for risk management, risk measurement, the banking corporation is reporting systems, and the adequacy of the outputs obtained. Other compliance, monitoring, and control functions such as the compliance and anti-money laundering officer, the Chief Accounting Officer, and control of financial reportage are part of the second line of defence. A banking corporation shall define the interfaces between all functions that comprise the second line of defence to ensure coordination and cooperation. 27 Corporate Governance Ethics and Risk iii. Internal Audit (i.e third line of defence) Internal audit (IA) plays an increasingly important role in risk management and corporate governance, especially in the current complex global context (Dinh, Pham and Nguyen 2021). Internal audit provides independent review and challenges the banking corporation’s risk management controls, processes, and systems. Its duties are specified in Proper Conduct of Banking Business Directive 307, “Internal Audit Function.” According to the Institute of Internal Auditors (IIA) in the International Professional Practice Framework for IA (IPPF), internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations (Dinh et al, 2021). It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes (IIA, 2016). According to Jankensgard (2019); Lois et al, (2020); Wilkinson and Coetzee (2015), changes in regulatory frameworks and the introduction of new standards of internal audit, risk management and corporate governance required the interdependence of internal audit and risk management through the use of a systematic and structured audit methodology, i.e., risk-based internal audit (RBIA). RBIA involves assessing an organisation’s overall risk management framework to investigate the extent to which the board of directors and management: Determine, assess, manage and monitor risks Establish a control environment Assess risk exposure level Create a risk-based control plan, with the aim of meeting the needs of the organisation and Conducting annual and periodic audits to finally communicate audit results to the audit committee (ac), the board and the management in a timely manner RBIA therefore locates and compels Internal Auditors (IAs) to function at organisational strategic level in that their focus is shifted to the future and to “high-risk” areas that must be considered as a priority when preparing the internal audit plans. Understanding business objectives and strategies and aligning them with business objectives and activities, as well as assessing business risks on an annual basis and in individual audit assignments, i.e, identifying, measuring and prioritising the negative effects for the entity, contributes to an effective risk management that follows a holistic approach at the lowest possible cost. 28 Corporate Governance Ethics and Risk Knowledge Check Questions 1.3 Fill in the missing words 1. ………………………….. stands for Risk Based Internal Audit. 2. IAs refers to ………………………………… 3. ………………………… is an abbreviation of Audit Committee. Keeping in view the contention that behavioural issues and personality add to corporate failures and, in this way, constitute risks in the corporate governance handle, it is fundamental to understand the significance of the risk. It is likewise important to understand what risk management involves as that is crucial in the assurance of arrangements, which address saw risks in corporate governance (Okoye, 2015). The cases of corporate failures that have been highlighted and the contributory component of behavioural issues to those failures means that the conduct of organisation directors is a risk issue in regard of corporate governance forms (Tricker, 2014). The way that personality adds to behavioural issues places personality as a risk component also in connection to conduct. The essence of the matter then remains whether display corporate governance components are successful in connection to overseeing personality risks and behavioural risks, or whether different choices, for example, direction in such manner would demonstrate more compelling. Case Study 1.1 Read the following article and answer the questions below. 2020 Global and Regional Corporate Governance Trends Posted by Rusty O’Kelly and Anthony Goodman, Russell Reynolds Associates, on Saturday, January 18, 2020 Introduction and Background For the first time, in 2020, we see the focus on the “E” and the “S” of environment, social and governance (ESG) as the leading trend globally, including in the United States, where it traditionally has not received as much attention by boards. Indeed, many of the key global trends for 2020, such as board oversight of Human Capital Management (HCM), can be seen as subsets of ESG. This year, as in the previous four years, Russell Reynolds Associates interviewed over 40 global institutional and activist investors, pension fund managers, proxy advisors and other corporate governance professionals to identify the corporate governance trends that will impact boards and directors 29 Corporate Governance Ethics and Risk in 2020. This year we have recognised that the UK is expected to leave the EU on January 31, 2020, and we have also added Australia to our global survey. 1. Greater focus on the E&S of ESG - Beyond the global emphasis on good governance, environmental and social issues appear to be taking the greatest precedence for investors, moving from being a national or regional focus to being a truly global phenomenon. Boards and management alike are mostly playing catch-up on how best to define, integrate and oversee the E&S issues that are material to their business. In 2020, boards will be expected to strengthen their oversight and knowledge of material E&S matters and disclose their connection to the business in the form of risks and opportunities. We expect to see a consensus emerge around reporting frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) to help guide companies when reporting on E&S criteria 2. Increasing importance of corporate purpose - Corporate purpose and stakeholder considerations have been business norms in various parts of the world for decades. In August 2019, 181 out of 188 member CEOs of the US Business Roundtable signed on to an amended Statement on the Purpose of a Corporation, putting aside the traditional view that maximising shareholder returns is priority one. This was followed by a December announcement from the World Economic Forum updating their 2020 Davos Manifesto (last published in 1973) to centre on principles that guide companies into the Fourth Industrial Revolution. The manifesto— like the Business Roundtable’s statement—challenges companies to put stakeholders at the heart of a company’s purpose. There remains a great deal of scepticism concerning the practical application of these documents, but public opinion in many countries appears to be shifting against shareholder primacy 3. Better board oversight of corporate culture and HCM - Investors are 30 Corporate Governance Ethics and Risk asking what the board is doing to ensure the culture is robust and can withstand transformation and change. Investors would like more transparency on board involvement in culture and HCM to determine whether boards are providing adequate oversight. Data and analysis on corporate culture will play a key part in this oversight by boards. Directors in 2020 should appreciate the impact of culture on hiring, retention and productivity. Management will need to satisfy the board that the company has the culture and talent needed to successfully execute on strategy. (For more information, see our white paper on this topic here. 4. More expansive view of board diversity that includes ethnicity and race - Considerable strides have been made globally around board gender diversity. As institutional investor voting power grew dramatically, so did demands for gender diversity. In 2020, boards will begin to experience additional pressure to consider ethnic and racial diversity. This phenomenon will vary by country. In the United States, it will be driven by investors such as Vanguard. In the UK, it will be as a consequence of the Parker Review. In Japan, the push to add directors that are more international will also broaden board diversity. In Canada, it will be the Business Corporations Act legislation that will require federally incorporated companies to disclose detailed information on the diversity of board directors and senior management. There will continue to be jurisdictions around the world where it will be harder for this trend to gain traction because the collection of data on ethnicity and race is illegal or highly regulated. 5. Companies facing wider forms of activism - Globally, investor activism continues to evolve and grow, creating a kaleidoscope of styles and approaches that change year to year. What remains constant is that directors must maintain a degree of vigilance, ready to respond to activists or assuage the concerns of investors. In 2020, we expect to see increased activism success rates and greater influence from both the traditional “activist” investors in this space as well as larger non-governmental organisations (NGOs). In some countries, employee shareholder activism around “#me-too” or climate risk has been successful at garnering public attention and impacting management decision-making. To prepare for these situations, boards are improving their effectiveness through more robust board evaluation processes. Boards are also engaged with management in scenario planning to ensure role clarity in crisis situations. 31 Corporate Governance Ethics and Risk Source: Harvard Law School Forum on Corporate Governance. Available from- https://corpgov.law.harvard.edu/2020/01/18/2020-global-and-regional- corporate-governance-trends/ Questions: 1. Define what ‘ESG’ stands for according to the extract above? 2. Identify the interviewees targeted for this study? 3. Discuss the importance of this study.? 4. Describe the trends that emerged from the study? 1.4 Interaction between Risk and Corporate Governance Risk management failures at major corporations have captured the headlines for many years, primarily in the financial sector, but in other sectors as well, and have not always been the result of shortcomings in financial risk-taking. Environmental catastrophes such as Deep-Water Horizon or Fukushima come to mind (or, less recently, Bhopal and Seveso), as well as accounting fraud (e.g., Olympus, Enron, WorldCom, Satyam, Parmalat), or foreign bribery (e.g., Siemens) cases, to name just a few from the non-financial sector. Often these failures were (at least) facilitated by corporate governance failures, where boards did not fully appreciate the risks that the companies were taking (if they were not engaging in reckless risk- taking themselves), and/or deficient risk management systems. Practical Application 1.2 Identify a company of your own and examine the corporate governance committees that exist in the company. Analyse the importance of the committees and check whether such committees are effective or not. The importance of an effective risk governance framework was underlined in the Committee’s report from 2009 on The Corporate Governance Lessons from the Financial Crisis. The present review complements the Committee’s 2009/10 reviews with a survey of member and partner jurisdictions participating in the Corporate Governance Committee, with a view toward drawing lessons about the adequacy of existing corporate governance principles, guidelines, and practices in this area. Risk 32 Corporate Governance Ethics and Risk governance has also been addressed in the Committee’s thematic reviews following the financial crisis, notably in the review on board practices, where the Committee examined incentives influencing corporate risk-taking, notably with regard to compensation practices (OECD, 2011). The issue has also been dealt with by the OECD’s Asian and Latin American Corporate Governance Roundtables. The Financial Stability Board (FSB), in its recently issued Thematic Review on Risk Governance, called on the OECD to review its principles for governance, taking into consideration the sound risk governance practices listed in the FSB report and reproduced in Annexure A to this report (Financial Stability Board, 2013). The risks that companies face are both financial and non- financial. In the context of financial institutions, the focus naturally tends to be on financial risks, such as credit, liquidity or market risks, although there is also an increasing emphasis on operational risk. In the case of non-financial institutions, the same risks will also be present, although not always to the same extent as in financial institutions. Other risks, such as IT and outsourcing risks are likely to concern non-financial institutions just as much, and in some cases (environmental, safety and health risks) are of stronger primary concern to non-financial corporations. Risk governance rules and practices appropriate for financial institutions therefore may not be directly applicable to non-financial institutions. At the same time, some more general lessons can probably be learned from risk management failures in the financial sector. Readings Jankensgard, H. (2019). “A theory of enterprise risk management”, Corporate Governance: The International Journal of Business in Society, 19 (3) 565-579 Wilkinson, N. and Coetzee, P. (2015). “Internal Audit Assurance or Consulting Services Rendered on Governance: How Does One Decide?”, Journal of Governance and Regulation, 4(1), 187-200 Lois, P., Drogalas, G., Nerantzidis, M., Georgiou, I. and Gkampeta, E. (2020). "Risk-based internal audit: factors related to its implementation", Corporate Governance. Emerald Publishing Limited. https://doi.org/10.1108/CG-08-2020-0316 33 Corporate Governance Ethics and Risk Revision Questions 1. Explain why organisations are to develop corporate governance frameworks? 2. Discuss the lines of defence upon which corporate governance and risk management are collectively aligned. 3. Describe numerous definitions used in the description of risk management. 4. Describe various governing body committees that may be established by the governing body 1.5 Summary Following the financial crisis and a number of prominent risk management failures or shortcomings, Organisations have increased their attention to risk. While financial risk has thus been the focus of attention, the consequences of reputational risks are also becoming increasingly clear to companies. The strongest efforts to strengthen risk management can be observed at companies that have faced major risk issues in the recent past. Outside of the financial sector, this increased attention is, however, not always reflected in a more formal approach to the organisation of risk management. Risk often remains the responsibility of business functions, with centralised risk management functions playing more of a coordinating and supportive role and reporting to management rather than to the board of directors. While a stronger emphasis on people rather than procedures has its advantages, the financial crisis has shown that risk is an area where formal procedures may also have a role to play. Some corporates still heavily rely on models that were designed for the financial sector, and that have proven unreliable during the financial crisis. It would seem that boards would be well advised to place more emphasis on the identification, monitoring and mitigation of potentially catastrophic risks, regardless of their supposed (and sometimes underestimated) likelihood of occurrence. In the case of state-owned enterprises, the state should ensure that, as part of the nomination process, the boards of directors have sufficient expertise to understand the risks incurred by the SOE. Without intervening in the day-to-day management of SOEs, the relevant ownership function should use all the opportunities it has, both in formulating strategic directives, and in its regular ownership dialogues, to ensure that the SOEs have proper risk management frameworks in place. 34 Corporate Governance Ethics and Risk Answers Activity 1.1 Critically assess the differences in the definition of corporate governance as according to the King IV (2016) and the UK Corporate Governance Code (2016) Answer: The (UK) Code (2016) defines corporate governance as follows- “Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies Maroun. and Cerbone (2024) defines governance as the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity Activity 1.2 Describe the features that King IV Report has put in place to distinguish between all organisations in the corporate governance as an eco-system. Answer: Using a vocabulary that indicates the Report’s applicability to all organisations. Thus, King IV talks about “organisations” rather “businesses” or “companies”, “governing bodies” rather than “boards”, and “those charged with governance duties” rather than “directors” Providing supplements to help organisations across a variety of sectors and organisational types to interpret and implement King IV to suit their particular circumstances Providing guidance on how to scale the recommended practices in accordance proportionally, in line with the organisation’s size and resources, and the extent and complexity of its activities Activity 1.3 1. Describe the governance outcomes and the five (5) principles of corporate governance Answer: Governance outcomes include Ethical culture and effective leadership Good performance: value creation in a sustainable manner Effective control: adequate and effective controls with informed oversight; and 35 Corporate Governance Ethics and Risk Legitimacy: trust and confidence in the organisation by stakeholders and the communities in which it operates The five basic principles of good corporate governance are the following: Answer: The principle of transparency The principle of accountability The principle of responsibility The principle of independence and The principle of fairness and equality Case Study 1.1 1. Define what ‘ESG’ stands for according to the extract above? Answer: Environment, Social, and Governance (ESG) 2. Identify the interviewees targeted for this study? Answer: Over 40 global institutional and activist investors, pension fund managers, proxy advisors and other corporate governance professionals. 3. Discuss the importance of this study.? Answer: The study was to identify the corporate governance trends that will impact boards and directors in 2020. 4. Describe the trends that emerged from the study? Answer: Consider the trends below - 36 Corporate Governance Ethics and Risk Knowledge Check Questions 1.1 1. ……………………., are in general terms permitted to establish committees to assist the governing body with its role and duties Answer: Governing bodies in South Africa, are in general terms permitted to establish committees to assist the governing body with its role and duties 2. ….…………………….. may include lenders, suppliers, employees, creditors, customers and the community at large Answer: Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large 3. Directors, workers and management receive ……………………….., while investors expect to receive …………… returns Answer: Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns Knowledge Check Questions 1.2. 1. Project Manager heads the risk management function in organisations. Answer: False - Risk Officer Head the risk management function in organisations. 2. The process of planning, organising, directing, and controlling resources and operations to achieve given objectives, despite the uncertainty of events is called risk profiling. 37 Corporate Governance Ethics and Risk Answer: False - The process of planning, organising, directing, and controlling resources and operations to achieve given objectives, despite the uncertainty of events is called risk management. 3. A strong risk management system will include elements such as a risk culture that reflects full understanding of business activity and the related risks Answer: True - A strong risk management system will include elements such as a risk culture that reflects full understanding of business activity and the related risks Knowledge Check Questions 1.3 1. …………………………….. stands for Risk Based Internal Audit. Answer: RBIA stands for Risk Based Internal Audit. 2. IAs refers to ………………………………… Answer: IAs refers to Internal Auditors. 3. ………………………… is an abbreviation of Audit Committee. Answer: AC is an abbreviation of Audit Committee Practical Application 1.1 Research on the SABC and Telkom boards and show any distinctions amongst the two in terms of the board representation. Answer: Discussion Brief Use search engines like corporate sites for both institutions Identify how many board members does each have Describe how each board was appointed What are the gender profiles of board members Summarise the important key aspects in the discussion 38 Corporate Governance Ethics and Risk Close the discussion Practical Application 1.2 1. Identify a company of your own and examine the corporate governance committees that exist in the company. Analyse the importance of the committees and check whether such committees are effective or not. Answer: Discussion Brief Agree on a company for the discussion Define corporate governance committees and related terminologies Identify the committee applicable to the company you have chosen Describe the functions of the committee in the company? Summarise the important key aspects in the discussion Close the discussion Think Point 1.1 1. Why is corporate governance an important aspect of business management? Answer: Business operation has tremendous effects on stakeholders, society, and the community; hence, concerns on ethical and socially responsible actions that corporations undertake must be greatly are increasingly considered Think Point 1.2 1. Are principles of good corporate governance having similar impacts to all types organisations? Answer: The principles do not intend to prejudice or second-guess the business judgment of individual market participants, board members and company officials. What works in one company or for one group of investors may not necessarily be generally applicable to all of business or of systemic economic importance 39 Corporate Governance Ethics and Risk Think Point 1.3 1. Are board of directors involved in addressing agency concerns? Answer: Yes - The board has the responsibility of endorsing the organisation's strategy, developing directional policy, appointing, supervising and remunerating senior executives, and ensuring accountability of the organisation to its investors and authorities. They are therefore directly concerned with agency concerns. Video Activity 1.1 1. Describe the importance of risk management as an important component of corporate governance? Answer: Because it is important for firms to come up with clear rules, regulations, and procedures that govern all risk management activities; secondly failure of the risk management function is always blamed on improper governance. 2. Describe the origin of the concept of risk governance? Answer: The process of aligning the goals of corporate governance with those of risk management. Video Activity 1.2 1. Relate some of the reasons why organisations must do something about environmental sustainability? Answer: Investors want to see the environmental sustainability of businesses. It is a business, national, regional, and global issue to resolve climate-related incidents. 2. Identify the most appropriate stakeholder (s) to set up policies to mitigate climate change in a country? Answer: The government is responsible boards and management, and all employees of the companies are responsible for adopting the policies. 40 Corporate Governance Ethics and Risk Unit 2: Behavioural Risk and Corporate Governance Unit 2: Behavioural Risk and Corporate Governance 41 Corporate Governance Ethics and Risk Unit Learning Outcomes CONTENT LIST LEARNING OUTCOMES FOR THIS UNIT Introduces the topic areas covered for the unit 2.1 Introduction and Elements of Behavioural Risk Explain the components and elements of behavioural risk Examine major cases of corporate 2.2 Causes and some of the Major governance failures and explore Corporate Failures causes thereof Evaluate how behaviour of company 2.3 The Behaviour of Company Directors in personnel can result to related risks Corporate Failures and failures Examine the UK Turner Review, EU 2.4 The Way Forward Green Paper and UK Walker Reviews to develop a way forward Recommendations of lessons learnt 2.5 Lessons Learnt from corporate failures are discussed Summarises the topic areas covered 2.6 Summary for the unit 42 Corporate Governance Ethics and Risk Prescribed and Recommended Reading(s)/Textbook(s) Prescribed Reading(s)/Textbook(s) Ramani N. (2021). Corporate Governance – An Essential Guide for South African Companies. Third Edition. LexisNexis. Mallin, C.A. (2019). Corporate Governance. Sixth Edition. Oxford University Press. Recommended Reading(s)/Textbook(s) Okoye, N.V. (2015). Behavioural risk in Corporate Governance: Regulatory intervention as a risk management mechanism. Routledge Taylor and Francis Group. Tricker, B. (2012). Corporate Governance: Principles, Policies and Practices. Second Edition. Oxford University Press. Wixley, T., Everingham, G and Louw, K. (2019). Corporate Governance. Fifth Edition. Siber Ink: South Africa. Mallin, C.A. (2015). Corporate Governance. Fourth Edition. Oxford University Press. 43 Corporate Governance Ethics and Risk 2.1 Introduction and Elements of Behavioural Risk Long, Wann and Brockman (2016) state that a well-established concept in corporate finance is that business decisions should be based on maximising the wealth of its shareholders. However, a criticism of this concept is that the goal of wealth maximisation will encourage businesses to engage in unethical business behaviour. Based on the above several questions may arise, for example- is it unethical for a company to implement a strategy of cost cutting that leads to large layoffs? Some would argue that the damage such layoffs impose on local communities outweighs any gains current shareholders may receive. However, the consequences of continuing to operate an inefficient plant also need to be considered. For example, failure to cut costs could lead to bankruptcy and to even greater job losses than the original planned layoff. The above is compounded by the belief that the goal of shareholder wealth maximisation provides the best framework to serve the needs of all stakeholder groups, not just shareholders. However, in many instances, many executives end up engaging themselves in many forms of risky behaviours. Think Point 2.1 In light of the above, can you establish a link between unethical behaviours and corporate misconduct? Risky behaviours emanate from unethical behaviours by people working in companies, which may lead to consumer suffering or the collapse of the organisational reputation and profit. At times risky behaviours may lead to the total collapse or closure of the business as a whole. Judging from Long, Wann and Brockman (2016), unethical behaviour can be defined as specific illegal activity (i.e., white collar crime involving bribery and illegal payments, employee discrimination, environmental pollution, and insider trading). Unethical behaviour includes illegal activities by companies that involve consumer and security fraud, bribery, price fixing, kickbacks, OHSA violations, conspiracy, patent infringement, and many other forms of violations by companies. Kim, Krishna and Dhanesh (2019) define corporate misconduct as unacceptable or improper behaviour perpetrated, shared, promoted, and or practiced by multiple employees of a company, or at the top management level of a company, or through formal or informal policy or culture within a company. Davies and Olmedo-Cifuentes (2016:1428) argued for the adoption of a broader definition of corporate misconduct, “that of unacceptable or improper behaviour” by a corporation. According to Okoye (2015), risky behaviour or risk-taking behaviour is defined as any consciously or 44 Corporate Governance Ethics and Risk non-consciously controlled behaviour with a perceived uncertainty about its outcome, and/or about its possible benefits, or costs for the physical, economic or psychosocial well-being of oneself or others. According to Huynh (2020) and Ehsan et al., (2018) good corporate governance functions as an effective controlling tool to lessen unethical behaviours in manipulating reported earnings, which is related to earnings management. Earnings management is mentioned in Maharani and Soewarno (2018) as the behaviour of directors in manipulating their reported earnings due to several motivations. Following Uwuigbe, Peter, and Oyeniyi's (2014) research, Maharani and Soewarno (2018) argued that the management of earnings is negatively determined by the corporate governance mechanism. Ehsan et al. (2018) consented that good corporate governance mechanism could help a company be more effective in restricting directors from taking advantages of organisational resources for their self-interest by overseeing the managerial boards, because corporate governance is a supervising system. The purpose of it is to monitor business decisions by directors and to restrain their opportunism. Therefore, corporate governance mechanism is recognised essential in limiting the management of earnings by supervising director's self-interest decisions. Corporate governance has been at the centre of every crisis involving global business practices since at least the Armstrong investigation of the insurance industry in 1905-06, the Zondo Commission into state Capture 2018 and many other organisations that have been implicated for wrongdoing for instance Venda Banking Society (VBS) and Steinhoff among others. Public anger re-emerges after each new revelation of mismanagement, though it varies in degree with the scope of the crisis. Fraud and abuse cases make front-page news, with the media pointing to failures in organisational leadership. Politicians hold hearings, and changes in laws and regulations often ensue. While the public costs of a given crisis are difficult to measure, settlements associated with the lawsuits that invariably follow can be in the hundreds of billions of dollars, as with the 2007-09 crisis. In the aftermath, academics try to isolate the factors that contributed to the crisis (Tricker, 2014). Although it is hard to identify the root cause of a crisis or to fully understand the contributing factors, the focus eventually turns to the effectiveness of governance and how it might be improved. Typical questions include: Were boards forsaking their obligations to shareholders and to the public? What did the boards do or not do? What do we want them to do differently going forward? Government and relevant authorities have raised all these questions in the aftermath of financial disasters with the objective of ensuring that solutions are identified. 45 Corporate Governance Ethics and Risk Knowledge Check Questions 2.1 State if the following is True or False and Provide an Explanation. 1. Risk-taking behaviour. is defined as any consciously or non-consciously controlled behaviour with a perceived uncertainty about its outcome, and/or about its possible benefits, or costs for the physical, economic, or psychosocial well-being of oneself or others 2. Good corporate governance mechanism could help a company be more effective in restricting directors from taking advantages of organisational resources for their self-interest by overseeing the managerial boards, because corporate governance is a supervising system. 3. Good governance include illegal activities by companies that involve consumer and security fraud, bribery, price fixing, kickbacks Corporate governance as an idea has turned out to be progressively unmistakable because of the event of prominent failures of corporate sector. Some of these failures brought about negative results, for example, occupation and capital misfortunes that influenced the welfare of society monetari

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