Importance of Corporate Governance and Ethical Leadership in Business

Good governance is important for corporations and society

If the board decides to proceed with civil action, Section 77 of the Companies Act of 2008 which makes provision for directors to be held liable for financial losses on their watch — will no doubt be crucial to the case. The board has the opportunity to send a strong message that corporate governance lapses will not go unpunished, and that executives will be held accountable even after they leave the company.
The board is also co-operating with the police and National Prosecuting Authority (NPA) to determine whether criminal charges should be brought against those involved in wrongdoing. This approach could set the tone for a new era in corporate governance where accountability and consequence management are prioritised.
Ensuring good governance in the private and public sectors is vital to the long-term health of the SA economy. However, we often find that executives involved in wrongdoing are let off the hook, even though their actions cost shareholders, pension funds and investors billions of rand. Similarly, the NPA has said that just nine out of 293 cases of maladministration and fraud at municipalities have been finalised in court. National director of public prosecutions Shamila Batohi is on record saying public servants found guilty of wrongdoing have received light sentences that have had little or no effect as deterrents.
These examples tell us that governance failures are not a function of weak legislation or ineffective codes of best practice, but are due to poor implementation and a lack of political will.
In the corporate world, directors of companies are expected to adhere to their fiduciary duties as stipulated in the Companies Act, while the Public Finance Management Act and the Municipal Finance Management Act govern conduct in the public sector. Principles of good governance are also codified in the fourth iteration of the King Report. 
Tongaat Hulett is under public scrutiny for overstating its profits and assets in its financial reports. A six-month investigation by PwC Advisory Services into alleged irregularities at the company found that a host of senior executives including former CEO Peter Staude, who retired in October 2018 “initiated or participated in undesirable accounting practices”.
The PwC report highlighted shortfalls in governance practices, inefficient oversight, weak financial discipline and reporting practices, and problems with record keeping. Media commentators were quick to draw comparisons between the Tongaat Hulett probe and the scandal that engulfed Steinhoff International in December 2017. Steinhoff’s share price plummeted 95% after the company announced it had discovered “accounting irregularities requiring further investigation” and that CEO Markus Jooste had resigned. One of the biggest casualties of the Steinhoff meltdown has been the Government Employees Pension Fund, which reportedly suffered an unrealised loss of nearly R20bn. Corporate governance should never be a tick-box exercise, but we see it devolve into a meaningless concept when the independence of oversight bodies is compromised. Usually this happens when senior executives and long-serving board members become too chummy or familiar with one another.
This situation can be avoided if board members stick to the principles of independence set out in King IV.
The accounting and auditing profession has seen its fair share of scandal in the wake of state capture investigations involving state-owned enterprises and the Gupta brothers. In my experience, serving as a member of an audit or risk committee for public sector entities, I found that in some instances our recommendations for corrective measures were disregarded by department heads due to a lack of political will or budgetary constraints.
This particular issue was highlighted by auditor-general Kimi Makwetu in his report on the financial outcomes of the country’s municipalities for 2017/2018. According to Makwetu, the overall decline in municipal audit results shows that local government officials are slow to implement his
recommendations or are disregarding them. If the provisions of the Public Finance Management Act and the Municipal Finance Management Act are strictly adhered to, I doubt we would see government departments, municipalities and state-owned enterprises incurring more than R60bn in irregular expenditure.
If people knew they could go to jail for not complying with the law, we would not have a situation where 31% of SA’s 257 municipalities are not financially viable meaning they are technically bankrupt. As at the end of 2018, at least 24 municipalities had been placed under administration
since 2016. 

Though wasteful expenditure is a huge drain on state resources, the greatest risk to the SA economy is undoubtedly the financial crisis at Eskom. The state-owned power utility is in debt of about R450bn, barely surviving on government bailouts, like the R59bn it was recently allocated. Newly appointed CEO Andre de Ruyter (the 13th person to take the reins since 2009) has his work cut out to turn around the parastatal. His success will ultimately depend on whether he gets the political support he needs to clean house at Eskom, which will serve as a litmus test for other ailing state-owned enterprises (SOEs).
Perhaps the recent placing of SAA under business rescue is the first test to see if the government has the will to take the harsh decisions necessary to turn around ailing SOEs, including Eskom. The examples I have pointed to suggest that SA firms and state-owned enterprises are taking a lax approach to governance. If we are to turn the situation around it must start from the top with ethical leadership and a strong commitment to consequence management and accountability. We might then be able to avoid another Steinhoff or Tongaat Hulett debacle coming at the expense of investors and pensioners. 

The need for consequence management and accountability

Questions:
1.1 Critically discuss the following statement in the context of the above article: “Good governance is not only important for corporations, it’s important forsociety.” (15)
1.2 “If we are to turn the situation around it must start from the top with ethical leadership and a strong commitment to consequence management and accountability.” With reference to this, discuss the relationship between ethical leadership and effective corporate governance. 

Growthpoint properties is a leading international property company that provides space to thrive. The company creates value for all their stakeholders through innovative and sustainable property  37 solutions. The property company has assets on three continents and is the largest South African primary REIT (Real Estate Investment Trust) listed on the JSE. It owns and manages a diversified portfolio of property assets, locally and internationally.
Growthpoint is a Top 10 constituent of the FTSE EPRA/NAREIT Emerging Index. It is also a constituent of the FTSE/JSE Top 40 Index and the FTSE4Good Emerging Index and has been included in the FTSE/JSE Responsible Investment Index for nine years running. Growthpoint properties are committed to environmental, social and governance (ESG) performance and, as leaders in sustainability, they take governance very seriously by aligning themselves with global best practices. The company has developed a sustainable development strategy and has won many awards for their Green Star rated Buildings. Growthpoint design new and refurbished buildings to achieve a minimum GBCSA 4-Star Green Star SA rating. Their strategy integrates sustainability into its strategic business planning and leadership have made a commitment to People, Planet, and Profit.
Growthpoint has grown its asset base from R1.5 billion to about R100 billion in 14 years, but there are now fewer local acquisitions and more competition. In 2015, Growthpoint entered into a fifty-fifty joint venture with Investec Asset Management to create Growthpoint Investec African Properties (GIAP) Limited. The partnership, according to Norbert Sasse, CEO of Growthpoint, made the new initiative a “compelling proposition” and the holding company intends to seek out acquisition or development opportunities in Africa. The African real-estate markets are “well positioned for a long-term growth” phase, given the significant supply deficit across the continent. Norbert Sasse, CEO, told the media that “Growthpoint has taken a while to get its strategy together for Africa and how to play the African theme.” He added that “key to analysing the opportunity has been finding the right partners” which is why it took Growthpoint a few years to find the right associates. The International Finance Corporation (IFC) came on board as partner. Norbert Sasse noted that “finding the team” was a critical “ingredient” necessary for implementing their Africa investment strategy. The IFC director agreed and expressed his belief that together with Investec's pan-African investment experience, Growthpoint's industry-leading property investment expertise, and the IFC's deep African knowledge – the team had the ingredients to “create an excellent formula for success” in Africa. 
Analysts from Old Mutual and Stanlib have expressed their support for the venture. These analysts expressed that “it is a good move for Growthpoint to diversify” and gain additional “non-South African exposure.” Commenting on the type of investment, analysts saw this move as a “long term story” noting that “African investments take time. They are targeting a listing in five to seven years.” Despite African economies “going through short-term challenges” there was a shared belief that “the continent has pretty amazing long-term prospects” and that Investec Asset Management and Growthpoint Properties provide the right combination to successfully create a robust portfolio of property investments across Africa."
In 2018, Growthpoint Properties announced that they have repositioned executive management as the company looks to diversify against growing risks in SA and in order to look at potential investments in Africa. The company announced that long-standing group CEO Norbert Sasse would assume a new role, in which he would focus on the company’s offshore expansion (Australia, Poland and Romania). Managing Director Estienne de Klerk became the CEO for Growthpoint South Africa and he has been charged with managing the company’s R80 billion domestic portfolio. Other people in senior management at Growthpoint have been assigned new executive roles, including industrial portfolio director Engelbert Binedell, who has been promoted to Chief Operating Officer for South Africa.
The company is also looking for acquisitions for its new Africa fund GIAP. GIAP has secured capital commitments of more than US$212 million from large institutional investors and has itself committed US$50 million. The company has been considering potential acquisitions in Ghana despite challenges experienced in finding investors prepared to commit to investing in Africa after the demise of many of the economies following the oil and commodity crisis. Targeted investments will be further diversified by sector, with GIAP’s mandate spanning office, retail and industrial properties. Growthpoint’s investment in Africa is viewed as a being part of its “longer-term strategy” aimed at getting US$750 million of equity listed on a recognised exchange so as to target global investors.
Managing Director of Growthpoint South Africa, Estienne De Klerk, said that domestically Growthpoint had to negotiate a slow growth and tough economic times. The domestic market has not grown which has been a challenge for Growthpoint, making it difficult to achieve growth in rentals and revenues. GDP (Gross Domestic Product) growth was downgraded to 1.2% for 2018 and it is  39 believed that it is unlikely to reach 2% before 2020. In 2018, Growthpoint South Africa made the decision to diversify into Healthcare. The property company launched a Healthcare Property Holdings portfolio valued at R2.4 billion comprising of five private healthcare assets. The new property holding vehicle invests exclusively in healthcare assets in South Africa.

Failures in corporate governance in Tongaat Hulett, Steinhoff scandals and municipalities

Two of Growthpoint’s healthcare properties are operated by private healthcare provider Busamed, and one each by JSE-listed healthcare players MediClinic and Netcare. In addition, Netcare also rents 50% of the space in N1 City Medical Chambers, the medical suites adjacent to the N1 City Hospital. The company also has a R750 million pipeline of hospital developments, which will benefit from Growthpoint’s well-established property development expertise. Growthpoint also has several acquisition and development opportunities on the horizon, which are being evaluated. 

1. Critically evaluate the strategy making approaches of Growthpoint’s top management from an Intended, Emergent and Deliberate perspective. Support your evaluation with theory and examples from the case study. (15)
2. “The partnership, according to Norbert Sasse, made the new initiative a “compelling proposition.” With reference to this statement, critically discuss Growthpoint’s collaborative advantages and challenges associated with their recent partnerships. 
Edcon is a 90-year-old retailer in South Africa that came within an inch of collapse in 2018 like its rival Stuttafords. It was touch and go but it is fair to say that the rescue can be deemed a success. As part of this restructuring, Jetsmart, Red Square and Boardmans are history. 150 of the 1350 stores have been shut down and floor space has been slashed by 10% (14000 square meters) – which is about the size of Sandton City. In two of SA’s largest malls (Mall of Africa and Eastgate), Edgars has shrunk to one floor from two.
The first Edgars store was opened in Johannesburg’s Joubert Street in 1929 by brothers Morris and Eli Ross and Edgars is alive today thanks to one man: Grant Pattison. Grant Pattison, an engineer with experience in retail having been CEO of Massmart (Walmart), took on the position of CEO of Edcon because he was keen for a new strategic challenge and being an engineer: he wanted fix Edcon. When Grant Pattison arrived at Edcon as the new CEO he was full of bravado with intentions of opening more stores, putting more product on the shelves, dropping costs and pumping up advertising. However, when the financial realities of Edcon hit home, he has to create a new financial model and salvage Edcon. Grant Pattison says salvaging Edcon was far harder than he expected. In 2007, Bain Capital, a Boston firm, bought Edcon in a private equity deal and delisted it from the JSE. The problem was Bain heaped huge amounts of debt (in Euros, Pounds and Dollars) onto the company. Instead of using money to invest in new stores and new merchandise, it was diverted to having the exorbitant interest bill. Pattison described Bain Capital as being ‘morally liable’ for what happened to Edcon. “How were they [Bain] allowed to use foreign debt to do a leveraged buyout in SA? Surely no-one would look at the most volatile currency in the world in 2007/2008 and believe it is a good idea to borrow money instead of investing it. Edcon’s collapse was inevitable after this deal. Before the Bain Capital deal, Edcon was a powerhouse but in the decade that followed, Edcon lost 30% of its market share and its most talented staff, and its reputation was savaged. In 2016, Bain was forced to hand over ownership of Edcon, unable to pay debt to creditors in the debt-equity deal. It left Edcon with R7 billion in debt which was too much for Edcon. 
When Pattison joined Edcon as CEO he inherited a ‘recapitalisation plan’ but he soon figured it was a non-starter ‘Pie in sky stuff’ because Edcon was deep in the red. Pattison began having uncomfortable meetings with shareholders, explaining that they were not going to make R2 billion in profit but they were actually going to make zero. Shareholders did not like hearing this news. Pattison considered selling Edcon but no-one would bite. Pattison recalled it being “quite a disheartening process going around the world asking for some money and effectively failing.” Pattison began preparing for the worst bit, explaining to everyone the consequences of Edcon failing. “We started to tell people we were going to run out money in February 2019, which we did.” If Edcon failed, it would be a crippling blow to the 40 000 staff employed, the landlords and the banks to which it owed debt. Not to mention the 60 000 people who work in companies who supply to Edgars such as the shoe manufacturers in the Cape.

Questions:
3.1 Edgars, under the leadership of Grant Pattison reverted to its original business level (competitive) strategy. Identify this competitive strategy and evaluate the competitive strategy in terms of its contribution to the organisation’s objectives. (15)
3.2 Grant Pattison led the Edcon turnaround With regard to this, critically discuss leadership as a driver of strategy implementation (15)
3.3 Grant Pattison wants to ensure there is organisational alignment and that strategy implementation is achieved through organisational architecture
With reference to this, critically discuss organisational alignment, strategy implementation and organisational architecture as critical components of the strategic management process.