An Interview with Professor Mervyn King

I first met international expert on corporate governance and sustainability, Professor Mervyn King, two years ago in Johannesburg when I was presenting at a conference. He was kind enough to meet me for a drink at my hotel in Sandton where we discussed a broad range of topics about corporate governance.

Our meeting coincided with the release of “King IIII”, the third iteration of the King Code of Corporate Governance in South Africa. Mervyn King was the chairman of the group which wrote the code.

Corporate law tells us that the board is accountable to the company but the international governance debate has moved to taking account of strategic stakeholders’ needs, interests and expectations in boardroom decision-making. So one of the key issues we discussed that evening was how to create a sustainable business, and how boards needed to be informed about stakeholder management.

Mervyn King was recently in Australia to present to the 2012 Global Reporting Initiative conference in Melbourne. He spoke to Boards and Governance about the board’s role in sustaining value creation.

“Good governance is about quality and not quantity,” says King, who has campaigned for decades to highlight the broader responsibilities and accountabilities of boards in an increasingly complex globalised economy. “It is not a quantitative, mindless, compliance exercise.”

In his books, and in particular in Transient Caretakers, King argues that corporate boards have long grown beyond their original purpose to take account of solely the interests of shareholders.

“Companies have never operated in a vacuum,” he says. “They operate in the milieu in which they are placed by their directors – and today, that milieu is a changed one.”

The stakeholder is increasingly important in boardroom decision-making, argues King. The growing acceptance of the triple context in which a company operates - financially, socially and environmentally - brings the role of the stakeholder into greater prominence.

“The primacy of the shareholder to the exclusion of other stakeholders and a single bottom line  was based on  false assumptions,” King told me. “These false assumptions of limitless resources and the earth having an infinite capacity to absorb waste were the premises on which yesterday’s companies were directed and managed.

“Today, stakeholders expect a company not to have profited at the expense of the environment, human rights, a lack of integrity or society. They expect the company to have adequate controls in place to monitor and manage material risks and opportunities. 

“Today they want remuneration to be linked to overall performance, which includes social, environmental and financial aspects. They want to be able to make an informed assessment from the company’s announcements and reports that its business will sustain value creation in our changed world.”

This theme also runs through South Africa’s Corporations Act, 2008 which requires listed and private company boards to establish “social and ethics” sub-committees.

The social and ethics committee must comprise no less than three directors of the company and it should be supported by a “social and ethics advisory panel” also appointed by the board. This composition of the panel must be broad and include representatives of the company’s employees and stakeholders as well as members of professions related to social and ethical matters. It names professions such as anthropology, psychology, education, environmental assessment, health, sociology, social services, law and theology.

The function of the social and ethics sub-committee includes monitoring the company as a good corporate citizen: is it promoting equity, preventing unfair dismissal, reducing corruption? It is also responsible for monitoring areas such as the environment, health, public safety and consumer relationships.

“The company, to be accountable and transparent, needs to communicate in clear and understandable language the “state of play” in a company,” King told me. “How else could the trustees of your pension fund discharge their duty of care to you to make an informed assessment about the sustained value creation of the business of a company before investing your money in its equity?”

One of the areas in which King III differs from Australia’s principles of best practice corporate governance is that it applies to all entities regardless of the manner and form of incorporation or establishment.

While the ASX Corporate Governance Council’s Principles are mandatory for listed entities to respond to under an “if not, why not?” regime, unlisted entities are not required to use them. However King III has been drafted so that any organisation, whether in the public, private or not-for-profit sectors, can apply its principles or explain why not.

“The exclusive approach to governance, namely the primacy of the shareholder and the single bottom line, is yesterday’s thinking,” King told me. “Today’s thinking is the inclusive approach to governance, taking account of the needs, interests and expectations of stakeholders in the decision making process but always aiming to make a business judgment call in the best interests of the company in order to maximise the total economic value of the company not its book value.

“In learning about the needs, interests and expectations of the stakeholders and by identifying the sustainable issues material to the business, management can manage and develop strategy on a more informed basis. The collective mind of the board can embed the sustainability issues into the long term strategy to give the company a competitive advantage in the changed world in which we live.

“We can no longer use the tools of decision making, such as the primacy of the shareholder and the single bottom line. We have to look at decision making in the triple context of finance, society and the environment taking into account the critical interdependent aspects of finance, human, natural, societal, manufactured and intellectual capital.”