Enterprise

Gundo Masindi CA(SA)

 LEARNING OUTCOMES
On completion of this study unit you should be able to:
 Discuss the roles of the finance function in organisations;
 Explain how the finance function enables the creation and preservation of value;
 Discuss and explain how the finance function shapes the creation and preservation of value;
 Discuss and explain how the finance function narrates the creation and preservation of value
About last week
Business Sectors:
Private and Public

Type of organisations:
Profit-seeking, not-for-profit, Mutual and multinational

Factors that affect finance function:

Owners & stakeholders, funding, goal, performance management, technology

Vision, mission and objectives

Objectives should be SMART

Functions of objectives: Planning, Responsibility, Integration, motivation, Evaluation,

Macro-environment (PESTEL) vs Micro-environment (Porter’s five forces)

The concept of value: Economy, Efficiency, Effectiveness

Basic Finance activities: Assembling information, Analysis for insights, Advising to influence, Applying for impact

Value activities of a finance function: Planning & Forecasting, Resource allocation, Performance management control,
financial reporting
CORPORATE GOVERNANCE, ETHICS AND
SOCIAL RESPONSIBILITIES
 DEFINITION OF CORPORATE GOVERNANCE

What is corporate governance?

 It is a system by which companies are directed and controlled.
 It considers how directors can be held accountable to shareholders for their actions

The main driver for the development of corporate governance was high
profile corporate scandals
 Example: High-profile corporate scandals
Enron scandal Volkswagen emissions scandal

The Enron scandal is undoubtedly one of the most famous The Volkswagen (VW) emissions scandal – also known as
corporate scandals of all time. ‘emissions gate’ and ‘diesel gate’ – started in September 2015,
when the US Environmental Protection Agency (EPA)
The situation started in early 2001 when analysts questioned announced that it believed VW had cheated emissions tests.
the accounts presented in the company’s previous annual
report. These accounts used a variety of irregular procedures, It turned out that the company had been fitting what some
which made it difficult to work out how the company was industry commentators described as ‘defeat devices’ to its diesel
making money – despite it apparently having a foothold in cars, which included software that would detect when the cars
energy, commodities and telecoms among other industries. The were undergoing laboratory testing and turn on controls to
SEC began to investigate and discovered that Enron was hiding reduce nitrogen emissions. The cars would then appear to
billions of dollars in liabilities through special-purpose entities comply with the agency’s standards but, in some cases, were
(companies it controlled), which enabled it to appear profitable actually emitting up to 40 times the nitrogen dioxide limit when
even though it was actually haemorrhaging cash. driving on the road.

The company’s share price fell from $90.56 to under a dollar as This discovery led to investigations worldwide, with some
the crisis unfolded, with Enron forced to file for what was then estimates suggesting the scandal affected up to 11 million cars.
the biggest chapter-11 bankruptcy in history.
 Example: High-profile corporate scandals
Steinhoff VBS Bank

The company inflated its profits and assets by R250 billion. In 2018, advocate Terry Motau released his report, titled The Great Bank Heist, into
Steinhoff did deals with companies that were secretly linked to former CEO fraud and corruption at the bank, compiled with Werksmans Attorneys for the South
Markus Jooste and his cronies. It also used many accounting tricks (and forged African Reserve Bank which estimated that nearly R2 billion was looted from the bank.
documents) to boost its value. Steinhoff cooked up fake income to boost some of
its underperforming companies. Also - Jooste granted himself an undeclared More than 50 people are believed to have benefit, and Motau recommended that
bonus and a loan from Steinhoff and Steinhoff execs received ‘golden visas’ in a criminal proceedings be instituted.
property transaction related to the company.
Executives for many years looted the organisation by among others, creating fictional
Things came to a head in December 2017, when Steinhoff’s share price plunged deposits and convincing municipalities to invest in the bank, Motau said.
by 98% after auditing firm Deloitte discovered “accounting irregularities” and
refused to sign off on the company’s books. Jooste resigned days later. Motau also found that KPMG audit partner Sipho Malaba, had committed fraud in
signing off on the banks 2017 financial statements and on its regulatory reports to
SARB.

Tongaat Hulett

Earlier this year, South Africa’s biggest sugar producer, the 127-year-old Tongaat Hulett, admitted that “certain past practices” do not accurately
reflect the company's business performance.

The company said equity (the value of the business after liabilities) in its 2018 financial results has been overstated by between R3.5 billion to
R4.5 billion. Analysts believe its property portfolio, in particular, was inflated. An external report has blamed ten former executives, including ex-
CEO Peter Staude, who was paid more than R170m in a decade.

Its shares remain suspended on the Johannesburg Stock Exchange (JSE) and in London.
 RISKS AND EXAMPLES OF POOR
CORPORATE GOVERNANCE
Risk of Poor Corporate Examples of poor corporate governance
Governance
Large losses leading to…  Domination by a single individual
 Lack of board involvement
 Lack of adequate control function
 Insolvency
 Lack of supervision
 Stop trade
 Lack of independent scrutiny
 Close downs as a result of serious
 Lack of contact with shareholders
regulatory breaches, e.g. misapplying
the investors’ money  Emphasis on short-term profitability
 Misleading accounts and information
What other examples can you think of that has an indication
of corporate governance concerns

• Eskom?
• Bosasa?
• KPMG?
• Most of our municipalities?
• SAA?
 OECD PRINCIPLES OF CORPORATE GOVERNANCE

The corporate governance framework should…

Principle 1 • Promote transparent and fair markets and the efficient allocation of resources.

Principle 2 • Protect and facilitate the exercise of shareholders’ rights and ensure the equitable
treatment of all shareholders, including minority and foreign shareholders

Principle 3 • Provide sound incentives throughout the investment chain and provide for stock markets to
function in a way that contributes to good corporate governance

• Recognise the rights of shareholders established by law or through mutual agreements

Principle 4 and encourage active cooperation between corporations and stakeholders creating
wealth, jobs and more.

• Ensure that timely and accurate disclosure is made on all material matters regarding the
Principle 5 corporation

• Ensure the strategic guidance of the company, the effective monitoring of management by
Principle 6 the board, and the board’s accountability to the company and the shareholders.
UK CORPORATE GOVERNANCE CODE

The Code applies to all Key principles

UK listed companies,  Board leadership and company purpose
but other companies are  Division of responsibilities
encouraged to follow.  Composition, succession and evaluation
 Audit, risk and internal control
 Remuneration
Any departure from
the code by listed
companies should be SA: King IV code of
Corporate Governance
disclosed and
explained
 RULE-BASED VS FRAMEWORK APPROACH
The rule-based approach is a legislative approach – sometimes referred to as the compliance approach

Advantages Disadvantages
Consistent application Cannot learn every rule
Breaches easy to identify Removes member discretion
Rules for specific outcomes Long and lengthy rulebooks

The framework approach is driven by values and principles – sometimes referred to as the ethics-based approach

Advantages Disadvantages
Encourages proactive action Interpretations can be subjective
Treats members as individuals Potential for inconsistencies
Flexibility helps in complex situations Ambiguity may be confusing
Harder to search for loopholes Guidelines eventually become rules
 ETHICS
This refers to a code of moral principles that people follow with respect to what is right or wrong.
These ethical principles are not necessarily enforced by law, although as we know the law incorporates
moral judgments

Approaches for ethical decisions

Factors to Consider in ethics 1. Egoists: Look after your own need
2. Pluralists: Consider whether other stakeholders are
 Values - rights and obligations from society compromised by the decision

 Principles - such as CIMA’s ethical principles 3. Absolutists: concerned about whether a course of
action is fundamentally incorrect (it is against the law)
 Motivation - the reasons why a person acted
as they did 4. Consequentialists: focus on consequences before
determining a course of action
 Consequences - does the outcome of an
5. Utilitarians: Seek to maximize the benefit to society
action justify how it was carried
 Class example

a business owner may prioritize maximizing their own profits over the well-being of their employees or the environment.
Egoist approach:

a company may consider the interests of its employees, customers, shareholders, and the environment when making
decisions.
Pluralist approach

an absolutist may argue that lying is always wrong, even if it could prevent harm to others.
Absolutist approach

a company may weigh the benefits and costs of a decision, such as outsourcing jobs, to determine if it will result in the
greatest overall good.
Consequentialist approach

a company may choose to invest in renewable energy sources to benefit both the environment and the wider community.
Utilitarian approach:
 CIMA’S FUNDAMENTAL ETHICAL PRINCIPLES

Professional
Integrity Professional Confidentiality Objectivity
competence and
due care behaviour

• Individuals must • This is more than • Accountants should • Employers and • This is founded on
ensure they remain not telling lies – behave in such a clients are entitled fairness and
up-to-date with professional way as to protect to expect that avoiding all forms
current accountants must the reputation of confidential of bias, prejudice
developments and not be party to the professional information will and partiality.
are technically anything which is and the not be revealed
competent. deceptive or professional body, without specific
misleading. and comply with permission or
• Those working relevant laws and unless there is a
under your • You should be regulations. legal or
authority must also straightforward, professional right
have the honest and truthful or duty to do so.
appropriate training in all professional
and supervision. and business
relationships.
 Class activity: Identify the principle that has been compromised

1.A company's senior management deliberately misrepresents financial information to inflate the company's earnings, in
order to meet financial targets and receive performance-related bonuses.
• Integrity

2.A company's auditor has a close personal relationship with the CEO of the company they are auditing. This may
compromise their ability to remain objective and impartial in their audit work.
• Objectivity

3.An accounting firm employs an inexperienced junior accountant to manage a client's complex tax affairs. This may
compromise the professional competence and due care required to provide quality services.
• Professional competence and due care

4.A company's financial information is leaked to a competitor by one of the company's employees, breaching the principle of
confidentiality.
• Confidentiality

5.An accountant is found to have acted unprofessionally by discriminating against a colleague on the basis of their race,
gender, or other personal characteristics.
• Professional behaviour
 CORPORATE SOCIAL RESPONSIBILITY
(CSR)
What is CSR?
CSR can be seen as a set of actions which an organisation is not obligated to take, however, organisation takes
them for the wellbeing of stakeholders and the public.
• Economic responsibilities
• Organisations should provide value for customers’ money, provide a return to shareholders and provide
1 remuneration to staff

We have • Legal responsibilities

four types 2 • It is expected of all organisations to follow legislation.
of CSR
responsibi • Ethical responsibilities
lities 3 • Organisations should act in a fair and just way.
including:
• Philanthropic responsibilities
• Organisations may offer opportunities to improve society by, supporting the community they find
4 themselves in or by donating to charities.
 CORPORATE SOCIAL RESPONSIBILITY (CSR) STRATEGIES

Proactive strategy
• This is the type of strategy an organization follows when they are prepared to take full responsibility
for their actions.

Reactive strategy
• This is when an organisation allows a situation to continue unresolved until the public , government or
consumer groups find out about it.

Defense strategy
• This is the type of strategy why or attempts to avoid additional obligations relating to a
specific problem.
Accommodation strategy
• This is the type of strategy where the organization takes responsibility for their actions.
 Class activity: Identify the CSR Strategy that the company is using

1. Company A
invests in renewable energy and adopts sustainable business practices to reduce its carbon footprint. Which CSR strategy is
Company A adopting?

2. Company B
launches a CSR initiative to address criticism from stakeholders about its environmental impact. Which CSR strategy is
Company B adopting?

3. Company C
denies responsibility for its environmental impact, arguing that it is minimal. Which CSR strategy is Company C adopting?

4. Company D
collaborates with local communities to develop sustainable economic development projects that benefit both the company and
the community. Which CSR strategy is Company D adopting?
CORPORATE DIGITAL RESPONSIBILITY

Corporate Digital Responsibility includes the following

What is principles:
Corporate Digital
Responsibility? • Companies must engage in digital stewardship
• Companies need to develop strategies to manage customer
expectation to greater digital transparency
It is a concept that • Companies should offer their customers digital empowerment by
expanse on utilizing data under their control
• Companies can provide customers with greater digital equity
Corporate Social • Companies should grab the opportunity to practice digital
Responsibility as to inclusion
include data and
digital devices.