The South African Treasurer within the Contemporary Corporate Governance Framework

by Vaughan E Firman, Finance Director - South African Operations, Netcare Ltd

Jean Renoir’s classic film, ‘La Règle du jeu’ (‘The Rules of the Game’) and contemporary corporate governance within the Corporate Treasury Department might not be readily discernible. Renoir’s film, a box office flop at the time of its release in 1939, was notable for displaying a set of strictly ordered social rules and mores of the French haute bourgeoisie, which dissolves as the film progresses. Renoir said that his aim in making the film was to show “a rich, complex society where ... we are dancing on a volcano”.

In the early years of the twenty-first century corporate malfeasance and individual scandals rocked the capital markets, led to the loss of fortunes by the rich, bankrupted the poor and destroyed the confidence and faith of investors in many institutions that were and are fundamental to making the capitalistic markets work. A sampling of headlines that were splashed across financial journals during that time included:

• ‘Special Report: The crises in Corporate Governance’

• ‘Trouble in the Boardroom’

• ‘Enron’s Demise has taken the shine off the Boardroom Table’

• ‘Tyco Board is criticised for Kozlowski Dealings’

• ‘The Wickedness of Wall Street’

Following on from these international corporate collapses, contemporary corporate governance has had a seismic shift, where many jurisdictions such as the USA, UK, Australia, Canada and South Africa introduced a variety of regulatory responses to the corporate scandals. In South Africa a number of self regulatory practices, recommendations and legislations are in the process of being adopted and have been adopted by many listed and unlisted corporates. These include regulations such as the JSE Limited regulations issued in terms of the Securities Services Act 2004, Sarbanes-Oxley Act of 2002 and Public Finance Management Act best practice guidance such as the King Report on Corporate Governance for South Africa (King ll report) or the COSO Enterprise Risk Management Framework.

Governance within South African corporates

In the Top 10 Challenges facing corporates Brinkpoint Consulting in their February 2005 article list ‘Redefining Risk: Think Landscape not Garden Plot’ as one of the 10 Challenges. Such enterprises need to approach corporate governance holistically by applying the Group’s strategic decision-making processes to maximise shareholder value, whilst recognising the enterprise’s ultimate strategic purpose. Corporates need to acknowledge that in return for their ability to function, they are subject to the rules and constraints of society and stakeholder imperatives. As such the twin requirements of conformance and performance need to be complied with. The organisational culture where sound corporate governance becomes a way of corporate life for each member needs to be achieved by embedding the under mentioned practices in the enterprise’s strategy:

• Compliance with the law and adherence to commercial legitimacy;

• Fair treatment of employees and business partners;

• Responsibility to the environment and the community in which it operates; and

• Probity, integrity and business ethics in operational practices.

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Within the enterprise’s business structure, corporate governance needs to be embedded in the organisation’s structure, where values, policies, processes and systems are not viewed in isolation as a series of peripheral guidelines on which a company must report simply to meet its regulatory obligations. What needs to be deliberately avoided is the ‘box-ticking’ approach in assessing corporate governance strategy. An enterprise’s corporate governance policies need to form an integral part of the overall strategy by which it intends to meet its commitments to its stakeholders.

In addition, cognisance needs to be taken of the dynamic nature of corporate governance. Reviews of current and emerging trends, in benchmarking the enterprise’s governance systems against local and international best practice should be undertaken.

Within the Netcare group, Netcare’s Corporate Governance standards are

incorporated into the Group’s overall balance scorecard performance appraisal programme, thereby ensuring that the integration between governance standards and performance is achieved.

Treasury Department within the overall corporate governance framework

A typical governance framework within an enterprise is shown in Figure 1 and is the current framework that Netcare follows:

Board of directors and corporate treasury

Corporates need to acknowledge that in return for their ability to function, they are subject to the rules and constraints of society and stakeholder imperatives.

The Ivey Business Journal of September 2003 covers the relationship between corporate governance, the board structure and corporate financial performance. They argue that the ‘Board Process’ is the most important factor in determining a board’s overall effectiveness. The process of a board within a corporate as suggested

by Monks and Minnow ‘Corporate Governance 2001’ in their definition of the role and responsibility of a board, states that as a starting point the risk management process of the corporate needs to be addressed. Included within risk management and integral to this is the effectiveness of the treasury management process. In the Netcare group, this process and its management has been delegated to the Finance and Investment Committee. [[[PAGE]]]

Finance and Investment Committee

The treasury committee which is a part of the finance and investment committee is integrated into the full risk governance of the enterprise and is seen as a fundamental part of the governance framework and strategic planning process. Within the Netcare Group the treasury committee meets monthly and more often if so required for urgent matters. The committee includes the majority of the executive directors (three of the four) and relevant financial executives including the treasury manager, risk manager, corporate finance executives and the divisional financial executives as so required. The inclusion of the executive directors allows the treasury risk to be seen within a holistic view of the enterprise. This integration removes the silo approach and prevents potential blind spots and risks from being overlooked.

The treasury committee has the mandate to manage the following risks:

• Credit Risk Management. This includes the management of the settlement, counterparty and concentration risk of the enterprise.

• Market Risk Management. This includes the management of the foreign exchange, interest rate, commodity and equity price risk.

• Liquidity Risk Management. This includes the management of the net funding requirements, forecasting future liquidity needs and managing the corporate reputation within the financial community.

• Operational Risk Management. This includes threats to the enterprise’s reputation as well as competitive edge.

The committee should have:

• A well-documented, board-approved treasury policy and strategy;

• A ‘treasury sensitised’ ERP system;

• Reporting templates that present the risk information in a clear, meaningful way to both internal and external stakeholders;

• Clear documented strategy in dealing with the external counterparties;

• Clear delineated lines of responsibility between the various committees to ensure that blind spots are removed.

Within each of the different risk management portfolios listed above, risk exposure can be calculated and quantified. This depends on the weighting attached to the risks and includes:

• Daily or monthly risk monitoring;

• Dynamic or non-dynamic risk monitoring including stress or back testing;

• Market risk sensitivity analysis; and

• Scenario risk management including alternative courses of action.

Treasury policy

The underlying framework of the operational and day to day activities of the treasury department would be to have a formal written treasury policy supplemented by a treasury operational procedures manual. The policy and procedures manual in combination should set out a clear framework for treasury management.

The detailed contents of a treasury policy and operational policy cannot be covered in an article of this size, but should include the risk identification and assessment methodology, risk criteria differentiating between tolerable and unacceptable levels of risk, risk management guidelines covering risk elimination, risk control, risk retention and risk transfer. The risk reporting guidelines also need to be documented. [[[PAGE]]]

Reporting

The effective treasury management process within a corporate must have a well-designed reporting system where reports are meaningful, accurate, relevant and timeously delivered. Corporates need to determine a standard reporting system from basic operational reports to board level treasury information. The article ‘Better Governance Reporting - A Practical Framework’ written by Independent Audit Limited in January 2006, states that nothing focuses the mind more than a document which is on public record. The accountancy profession has to some extent led the way by requiring extensive disclosure in the annual reports of companies by issuing IFRS 7 ‘Financial Instruments: Disclosures” and IAS 39 “Financial Instruments Recognition and Measurement’. This to some extent has forced corporates to increase their reporting to both internal and external stakeholders.

At Netcare a standard template has been developed that covers all the risks mentioned above and is presented at each board meeting. In addition the requirements of International Financial Reporting Standards have been blended into the reports to both the Finance and Investment Committee and the Board.

Conclusion

The unique contours of the various regulatory impositions on an enterprise challenges the corporate to respond appropriately. Although the role of the treasury committee within the framework of the corporate governance operational committees is relatively new, it is rapidly gaining acceptance. The growing complexity of the business environment and the dangers lying in wait, provide added impetus for this acceptance. This development and ongoing maturation of the framework addressed above reflect a complex and interesting picture of contemporary corporate governance worthy of ‘La Règle du jeu’.