Asked by a shareholder at Remgro’s annual general meeting in December what he thought about the recommendation that listed companies should regularly rotate audit firms, the company’s chairman, Johann Rupert, replied that he was “sick of the King code nonsense”.
He added that changing audit firms would cause a lot of disruption at companies: “No sooner has an auditor started to understand your business than you have to get rid of him.”
If Rupert was quoted correctly, he has got the King 4 code completely wrong here. Suggesting it is behind the idea of mandatory firm rotation could not be further from the truth.
Part two of the code, entitled Fundamental Concepts, deals with the issue of auditors and audit requirements. It states: “Mandatory rotation of audit firms and mandatory tendering have been introduced in some jurisdictions in an attempt to reinforce auditor independence and audit quality.
“King 4 leaves the consideration and decision on whether to implement, either to the audit committee and governing body, subject to legal requirements.”
When Rupert referred to “him” in his comment, he meant the designated auditing firm and not the partner or individual within the designated auditing firm. He added that he preferred to rotate audit partners and that Remgro, which is audited by PwC, does so every five years.
This is precisely what the King 4 code advises.
Under principle 8, practice 59 on page 56 the code specifies “the rotation of the designated external audit partner”.
It does not talk about the rotation of the firm.
Prof Mervyn King, in his private capacity, has vociferously spoken out against mandatory firm rotation. It is of concern that an international businessman of Rupert’s stature does not appear to be aware of the actual contents of the King 4 code, or that he and King share the same opinion on this issue.
There is no problem with Rupert or anyone else being responsibly critical about the code; everyone has a right to comment on and criticise it. But as a high-profile public figure, Rupert’s flippant condemnation on an erroneous point is damaging; he should correct this.
In Remgro’s 2016 integrated report, under the chairman’s report, it states, “Remgro manages its business sustainably and upholds the highest standards of ethics and corporate governance practices.”
Shoot the Messenger
This is precisely what King 4 is all about. How many captains of industry and business commentators have actually sat down and read the code? At a time when so many questions are raised about poor governance, it seems the easier option is to shoot the messenger.
The essence of King 4 is ethical and effective leadership. This requires organisations to consider the six capitals — financial, social, intellectual, human, natural and manufactured — to tackle proactively the many concerns around social inequality, climate change, short-term profit drivers and whether sustainable value is being created.
Ethical and effective leadership is about taking into consideration the legitimate and reasonable needs, interests and expectations of material stakeholders in an era in which leadership has become increasingly remote from them. We are seeing this all over the world, where a rising chorus is questioning whether neoliberal economic policies actually work.
King 4 was not developed to create nonsense or unnecessary burdens for business. It offers a road map and philosophy of good corporate governance and ethical and effective leadership that can transform short-term capital markets into long-term sustainable capital markets.
Those who don’t embrace this or who pay lip service to it remind me of a cartoon that MAD Magazine’s Don Martin created of a spider and a fly.
It shows the spider efficiently making an impressive web, jumping from twig to twig with absolute conviction and self-assurance, embellished with the written sound effects that only the genius Martin could describe. After completing the web, the spider looks smug and self-satisfied in anticipation of bounty. Zooming out, however, you see that the spider has in fact made its web between the fingers of a very large fly that is about to swallow it up.
I use this analogy to teach my students about the difference between effectiveness and efficiency. We are so often caught up in our own smugness, self-assurance and self-serving efficiencies that despite the impressiveness of our webs, we don’t pay sufficient attention to our effectiveness in the bigger scheme of things and to the much larger events and potentially fatal inevitabilities surrounding us.
First published in Business Day on Wednesday, 18 January 2017.Source: Business Day Live