South African Philip Armstrong, a director at local law firm Edward Nathan, has been appointed head of the Global Corporate Governance Forum (GCGF) - a joint initiative of the World Bank and the Organisation for Economic Co-operation and Development. He talked to iWeek on the eve of his departure to the US for his two-year tenure, about the challenges that await him in Washington, and offers a progress report of SA embracing corporate governance. South African companies are traditionally hard on themselves in assessing their corporate governance performance. How do they fare in the eyes of an expert? Philip Armstrong draws the analogy of his son`s school report card: while he`s doing well, he could be doing better.

SA is unique in the world in that it is possibly the only country to have developed a corporate governance code, namely the King Report, in the absence of a particular economic or corporate crisis, he notes.

"South Africa is probably up there [with the international community]," he claims, with some of its market sectors, such as banking, possibly even better developed in terms of corporate governance risk management processes than those of more developed economies.

Culture of compliance

However, there are rumblings that the policy document of the new Companies Act, currently being crafted, contains a section on corporate governance. This is cause for some concern on his part.

"To my mind, you`ve got to create a culture of compliance, and this is not drawn from creating lots of laws, but from making the laws you`ve already got effective," says Armstrong.

"Since 1994, we`ve introduced world-class laws in a number of areas, such as the Public Finance Management Act. What South Africa needs now is to look at the laws and regulations it already has to understand, whether they`re working or not, and, if not, why not. Very often it`s purely a lack of proper enforcement," he maintains.

Armstrong notes that a lack of enforcement is not necessarily the result of a lack of willingness. "We need to understand what prevents enforcement: is it the law itself, or is it structural?" he asks.

His concern is also that much of SA`s legislation is breached because there is no automatic sanction of a transgressor.

"It`s simply unacceptable to have a situation where a case like LeisureNet has taken years to resolve, and we don`t seem to be any closer to the sanction of people who may have been complicit in its downfall," he insists.

"You compare this to Enron, WorldCom and Parmalat, where within months the complicit have been arraigned, put in jail or fined, whatever the case might be; its done and dusted."

He also questions the message that is conveyed with the non-observance of complex laws which rely largely on a criminal justice system for enforcement. "You could [contribute to] a culture of non-observance," he says.

Protecting other people`s money

Armstrong also observes that South African companies, among others, often do not encourage shareholder activism.

The real issue is that corporate governance is about protecting other people`s money, and shareholders need to exercise their ownership rights in the face of potential governance deficiencies, he says.

"What we`re not seeing enough of in this country is boards admitting that shareholders do have rights and that they should exercise them. There is a natural inclination for boards to automatically go on the defence, when the question is not so much `who is right`, but how each party interprets their position. Usually, all the shareholder wants is an assurance that the board has followed a process objectively and in the company`s interest," he explains.

Democracy in SA is based on constructive engagement, and in many ways there is a promise for that in corporate governance too, maintains Armstrong.

"Too many boards translate governance as compliance; it`s not about compliance, but understanding how certain practices may improve your board by helping it discharge its legal obligations."

This, then, is to be his focus once he takes office as head of the GCGF. "There is a lot of evidence of all the good things corporate governance contributes to a company and the premium it adds to your share price, but this argument doesn`t sell in an emerging market, where the stock exchanges are often not entirely significant in the market," he says.

Armstrong indicates that, instead of trying to be all things to all people, his aim is to attempt to narrow the focus of the forum to be a facilitating authority with an advocacy role, promoting corporate governance reform globally, but particularly in emerging economies often dominated by state-owned enterprises.