Questions directors need to ask themselves about corruption
What to look for when assessing an organisation’s anticorruption measures
South Africans need no persuading that corruption is a cancer that eats at the fabric of society. Increasingly, boards are being seen by regulators (and stakeholders more generally) as key actors in the anticorruption playbook.
First off, one needs to understand that corruption occurs when one party gives anything of value to entice a second party to fulfil his or her duties in a particular manner, or when one party solicits something of value to fulfil his or her duties in a particular manner. The relevant South African law is the Prevention and Combating of Corrupt Activities Act (12 of 2004).
The act applies to both public and private sector entities, including transactions or relationships that involve only private parties. It also governs the activities of SA companies operating outside SA and foreign companies doing business here.
Under the act, directors are obliged to report contraventions of the law to the Directorate for Priority Crime Investigation. Companies are also obligated to prosecute offenders.
It’s worth reminding oneself just how damaging corruption can be. Potential consequences include reputational damage not only to the organisation but also its directors and office-bearers; commercial consequences such as the cancellation of contracts and being disbarred from bidding for tenders; criminal prosecution; and civil claims by parties who suffered a loss as a result of the corruption.
So what to do? As with any governance or compliance issue, and in line with the outcomes-based approach of the King IV report on corporate governance, the key issue for directors when crafting and assessing their anticorruption programme is whether it works.
A good approach is to assess the organisation’s anticorruption programme in terms of the three questions typically considered by the US department of justice and the Securities and Exchange Commission (SEC). Boards should be asking themselves these questions, and ensuring that management is responding to them too.
Is it well designed? In the first place, boards should ensure the programme is in line with legal requirements and stakeholder expectations. It is also important to ensure it focuses on the key business risks and is integral to the way the business operates. A bolt-on programme will never be effective.
Is it being applied in good faith? The issue of whether the programme is integral to the business or not is ultimately a question of corporate culture, a notoriously difficult thing to get right. The corporate leaders — and ultimately the board — must ensure ethics are routine.
Key drivers here include the tone at and from the top, the training offered and how well the anticorruption policy is communicated. Other good indicators of good-faith implementation are adequate resourcing and a record of swift action taken against malefactors.
Does it work? The board has a big role to play in monitoring the effectiveness of the anticorruption programme it has put in place. One mark of effectiveness is a declining incidence of corruption. Another is the protection that a solid, well-designed programme has in helping the organisation avoid penalties from regulators when corruption does occur, or reduces any penalty.
Boards need to ensure that monitoring takes place and that they review it to identify and remediate any gaps that occur. Key areas to monitor would include the code of conduct, anticorruption training, whether the internal controls are appropriate, whether service providers are contractually bound to refrain from corruption, due diligence processes for new business ventures and foreign jurisdictions, and the appropriate response to detected corruption.
Internal and external auditors fulfil an important assurance role, and an adequate whistle-blowing facility is also critical. However, many employees do not trust the whistle-blower hotlines and many do not believe any action will follow. One could argue that how whistle-blowers are treated is a litmus test of how successfully anticorruption has been integrated into business as usual.
Corruption can never be wholly eradicated, but the severity of the penalties exacted for corruption will depend on how effective the organisation’s anticorruption programme is. The board’s governance function has a critical role to play, and this issue should receive sustained attention from boards.
• Natesan and Dr Du Plessis are respectively CEO and facilitator of the Institute of Directors of SA.
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