It is no coincidence that many of this year's Top Companies award winners are rated highly for corporate governance. Perhaps even more obvious is the absence from the list of companies that the market perceives as having weak corporate governance.
In the calculation of the scores, corporate governance has a 9% weighting.
Investors know what they are looking for and are prepared to pay up for companies that comply with their checklists of good behaviour. They are also all too aware of the risks they run in going anywhere near a company that flouts best practice .
The corporate governance revolution can be traced to the realisation by institutional shareholders that they owned the companies in which they were invested, and should therefore have some say in the way they were managed. Previously they would not attempt to dictate to management, but would simply vote with their feet, selling out of companies where they felt unhappy rather than getting to the root of the problem.
The shareholder activist movement was driven initially by some of the largest institutions in the US, but in a global economy its impact spread almost immediately. Its importance to an emerging market such as SA's cannot be overestimated. International investors already perceive a heightened risk in our market, and without best practice in governance they will transfer their attentions and their billions to more transparent homes.
The first King Report in 1994 established a framework for corporate governance in SA that was updated and refined by the King Committee in 2002. King 2 presents a code of corporate practices and conduct that, if fully complied with, will ensure that corporate SA is in line with global best practice in corporate governance.
The importance of these concepts is alluded to by the president of the World Bank, James Wolfensohn, in his statement that "the proper governance of companies will become as crucial to the world economy as the proper governing of countries".
Former Securities & Exchange Commission head Arthur Levitt drives home this point: "If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere." Either we establish and maintain a world-class framework of corporate governance, or we can forget about large-scale international investment.
The flip side of this compliance lies in the premium that investors are willing to pay for a well-managed company. McKinsey & Co published its Investor Opinion Survey in June 2000, which demonstrated that good governance was quantifiable and that large institutional investors would pay a significant premium for shares in a well-governed company rather than another company with similar financial performance but which was considered poorly governed. The premium differed from country to country, and was highest in emerging markets; a well-managed company in Venezuela or Indonesia attracted a 27% premium.
This payment for doing what is generally recognised as the right thing must represent one of the simplest ways to create significant shareholder value, and it makes a reluctance to comply with best practice all the more worrying.
SA has a unique set of societal challenges and King 2 recognises explicitly that companies must succeed at balancing economic efficiency and society's broader objectives.
Mervyn King and his team have established a world-class framework based on fairness, accountability, responsibility and transparency, and this has led to SA being ranked in the top five emerging markets for governance, and to King himself to being in demand for advice the world over.
The framework is in place, compliance with the quantitative measures is largely in place, and now the issues are more qualitative.
Enron is an example King uses of a company where the relevant governance boxes may have been ticked, but where management's agenda drove the company to destruction. As King says, "the orchard is healthy, but there are a few rotten apples that we can look at."
