Corporate Governance in the International Context

(Governance beyond Compliance)

A thesis submitted to the Bucerius/WHU Master of Law and Business Program in partial fulfillment of the requirements for the award of the Master of Law and Business (“MLB”) Degree

Laura Kapenauarue Tjombonde

July 26, 2013

14.318 words (excluding footnotes) Supervisor 1: Dr. Carsten Jungmann

Supervisor 2: Prof. Peter Witt

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TABLE OF CONTENTS

DEFINITIONS AND ABBREVIATIONS ……………………………………....................... 2

LIMITATIONS AND SCOPE OF STUDY.………………………………………………….. 4

EXECUTIVE SUMMARY ……………….………………..........……….….............................. 5

1. CHAPTER ONE – Overview on International Corporate Governance

1.1 Introduction ………………………….…………………………….…………….……... 7

1.2 Definitions of Corporate Governance…..................................................................... 9

1.3 Pillars of International Corporate Governance………….……................................. 10

1.4 Theories of Corporate Governance and Relevance to the Topic…………..…......... 14

2. CHAPTER TWO – Corporate Governance, Ethics and the law

2.1 Context of the Research............................................................................................... 19

2.2 Problem Statement …….…………………………………………………..……........... 20

2.3 Current State of the Topic………………………………………………..…................. 21

2.4 The meaning of “beyond compliance”...................................................................... 21

2.5 Corporate Governance and Ethics ……………………..…….….………………...…. 23

2.6 Ethics and the Law………………………………………….…………………….......... 26

3. CHAPTER THREE – Corporate governance in Namibian and Germany

3.1 Namibia: background, legal framework, corporate governance

and relevance to the topic………………………………………………….……….… 28

3.2 Germany: background, legal framework, corporate governance,

and relevance to the topic……………………………………………………………... 36

4. CHAPTER FOUR – Discussion of the two governance systems

4.1 Purpose of the Research……………………………………………………………..… 43

4.2 Analysis of the German and the Namibian Governance Systems…..……….… 44

5. CHAPTER FIVE- Summary of findings and conclusion

5.1 Findings and Conclusion …………………………………………………….….......... 51

List of References……………………………………………….………………………….… 55

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DEFINITIONS

Director(s) – means board of directors of the one-tier and the second level of the

two-tier structure.

One-tier board - is a single board structure composed of executive and non-executive

directors.

Two-tier board - denotes a dual board structure consisting of supervisory board and

management board.

Executive(s) - means the management of the company as well as the first level

(management board) of the two-tier board system

Shareholder(s) – refers to equity or capital providers

King Report - Refers to the King Report on Governance for South Africa 2009,

which stipulates the principles of corporate governance - the third

in sequence of same reports since 1994.

King Code - Refers to the King Code of Governance Principles for South Africa

2009, which details the recommended practices corresponding to

the principles explained in the King Report.

Business(es), Enterprise(s), Corporation(s) and Company(ies) are used

interchangeably.

ABBREVIATIONS

CG – corporate governance

GCGC – German Corporate Governance Code

IFRS – International Financial Reporting Standards

OECD – Organization for Economic Co-Operation and Development

BEE - Black Economic Empowerment

NEEEF - New Equitable Economic Empowerment Framework

SOE Act – State-Owned Enterprises Act, 2006 (Act No. 2 of 2006)

Companies Act - Namibian Companies Act, 2004 (No. 28 of 2004)

SOEGC – State-Owned Enterprises Governance Council

NSX – Namibian Stock Exchange

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ICGN - International Network for Corporate Governance

LIMITATIONS AND SCOPE OF STUDY

A constraint of sources on Namibian corporate governance was noticed.

Specific and relevant sections in the selected legislations and codes were studied only.

The chosen topic is immense, and this study could not validate the numerous opinions, but

attempts to contribute to the important debate on ethics and compliance in view of enhanced

corporate governance.

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EXECUTIVE SUMMARY

Purpose of the research: The purpose of this study was to establish the ethical dimension of

corporate governance and to evaluate the influence of a value-based approach in

corporate governance. This paper looked at the responsibility of directors in

relation to adequate ethical compliance to corporate governance frameworks. In

particular, two countries with diverse corporate governance systems, Namibia

and Germany, were considered. A distinctive feature of the German corporate

governance system is the two-tier board system (the management board and the

supervisory board), while Namibia like the United Kingdom and United States of

America follows one-tier board system. In addition to the two-tier system,

Germany allows for participation of employees on the supervisory board.

Findings: There seem to be no universal definition for corporate governance; accordingly the

study looked at various definitions of corporate governance as well as relevant

theories of corporate governance to qualify the question of governance beyond

compliance. These were examined within the two chosen corporate governance

systems.

The definitions chosen advocates for corporate governance as being stakeholder-

oriented. These definitions support the stakeholder theory, which theory is

connected to business ethics by various authors, because it has to do with the

ethical implications of decisions taken at every level in the corporation. The

implication is that, directors have a responsibility to instill enterprise-wide

ethicality.

The study further asserts that corporate governance system based on voluntary

corporate governance principle provides more support to ethical compliance, as

opposed to the system based on legislated governance principle, which is more

legal compliance-driven.

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The pillars of corporate governance were found to be converging, which implies

congruence in the foundation of corporate governance internationally and all

focused on the integrity of the board.

Methodology: A literature study of publications was conducted, with major focus on the most

recent evolution in corporate governance. The rationale behind the literature study

was to explore the level and opinions on the effectiveness of corporate governance

compliance; and to asses if there is more to that, consequently answer the question

if there is an ethical dimension to this age of governance frameworks.

Practical implications: This study asserts the importance of moving beyond mere legal

compliance to embrace ethical compliance and serves as such realization to policy

regulators, corporate advisors and corporate leaders. It is imperative that the

corporate governance debate continues and intensifies towards ethicality moving

into the future.

Value: This paper is one of the first in Namibia that provides a comparative study between

two divergent corporate governance systems. The paper also provides empirical

contribution towards the new thinking of corporate governance

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CHAPTER ONE

This chapter gives a general overview of international corporate governance in order to put

the topic into perspective. This chapter considers the theories, diverse definitions and pillars

of corporate governance in relation to the topic of this thesis. The context of the topic and the

problem statement will also be discussed. The structure of the subsequent chapters is as

follows:

Chapter two discusses corporate governance, ethics and the relevant law.

Chapter three looks at corporate governance in Germany and Namibia.

Chapter four will elaborate on the findings of the Namibian and German corporate

governance systems.

Chapter five contains a summary of findings and the conclusion

1.1 Introduction

This paper with its title, “Corporate Governance in the international context”, discusses two

diverse systems of corporate governance, Germany and Namibia, in relation to “governance

beyond compliance”. The thesis predominantly focuses on the public companies, but because

of the different business entity structures in the two countries, governance of the state-owned

enterprises in Namibia will also be included. Namibia, unlike Germany, does not have a

corporate governance code, but regulates corporate governance through Acts of Parliament –

the State-Owned Enterprises Act of 2006 and Companies Act of 2004.

Corporate governance involves the separation of ownership, those who own the assets, and

control, those who know what to do with the assets of a corporation. It is an area that has

evolved rapidly in the last years, mostly fuelled by renowned corporate collapses such as

Enron. Enron, Sims and Brinkmann state, was the best corporation ethically and economically

in the 21st century, but the well paid executives managed to load themselves with millions of

dollars, disregarding the livelihood of thousands of employees.1

Subsequently, all nations have been thumped by similar scandals. Greediness and self-regard

crept into businesses and is causing disrespect to the interest of stakeholders of corporations.

1 Sims and Brinkmann, 2003, p 243.

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This state of affairs causes major imbalances in the business, as it can bring about serious

conflict of interest amongst the various players in a corporation.

Accordingly, efforts went into developing buffers against these ignominies in the form of

laws, codes, rules and structures of corporate governance. In developing these corporate

governance systems, cultures, legal systems and forms of financing business will naturally

have a foundational influence on the outcome of such systems. Be that as it may, the systems

developed were primarily aimed at form as opposed to function, in that, accent was placed on

the need for independent directors, auditing functions, board committees, and the clear

distinction between the functions of the CEO and the Chairman of the board2. This is further

affirmed by Svensson et.al., who says that recently buzz words like corporate governance,

sustainability, corporate social responsibility, triple bottom line became daily concepts. He

continues to say that: “These concepts need to be embedded in the philosophical treaties that are

business ethics…Our great concern has been that corporate governance for example has become just

another checklist to be completed and filed and forgotten until the next time the specific legislative

requirement needs to be met.”3

The text above, in a nutshell, suggests that, while any form of corporate governance structures

are fundamental to sound businesses; the results may be valueless if it’s just for purposes of

formality or window-dressing. Unless the function of top management and directors

encapsulates the full responsibility in establishing an ethical tone at the top that will permeate

and define the organizational culture, the governance structures will not be purposeful.

Furthermore, as the interrelatedness of corporations increases, that necessitates transparency

as well as accountability, business governance seems not to be just about operating businesses

efficiently and in isolation any longer, but involves more responsibilities. The reality is,

whereas businesses seem to be conforming to corporate governance framework, the law, boast

state-of-the-art information systems, fraud has become more prevalent. This is evidenced by

frequent newspaper reports on corrupt and unethical conduct in the businesses all over the

world.

2 Tricker, 2012, p 2. 3 Svensson et.al, 2010, p 337.

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The question now is: what is missing? Is compliance to the corporate governance framework

and structures really what it takes to have a well balanced and successful company? This

paper will endeavor to delve into the missing link that might bring about the required balance

into a business. But firstly what is corporate governance?

1.2 Definitions of Corporate Governance

Capital markets, legal systems, cultures determine the various definitions of corporate

governance. I chose four different definitions to portray the evolution of corporate

governance over time and to illustrate the perspective of the topic.

“From a German point of view, corporate governance describes legal mechanisms and external

capital market-oriented mechanisms governing the relationship of the active management, its

supervision and the function of the shareholders’ meeting within (mainly listed) corporations.

… the German and European understanding not only considers the relationship of

management and shareholders but also includes the relationship between management and

other stakeholders; and the relationship among stakeholders themselves”. (2007)4

“Corporate governance is primarily concerned with the effective control, business efficacy and

accountability of management of public listed companies for the benefit of the stakeholders.

Stakeholders in this context mean all those who are directly and indirectly affected by the

company’s activities”. (2008)5

“Good governance is essentially about effective leadership. Leaders should rise to the challenges

of modern governance. Such leadership is characterized by ethical values of responsibility,

accountability, fairness, and transparency based on moral duties that find expression in the

concept of Ubuntu”. (2009)6

4 Du Plessis et.al, 2007, p 10. 5 Sagar et.al, 2007/2008, p 324. 5 King Code of Governance Principles for South Africa, 2009, p 9. (Bishop Tutu describes Ubuntu as: “A person with Ubuntu is open and available to others, affirming of others, does not feel threatened that others are able and good, for he or she has a proper self-assurance that comes from knowing that he or she belongs in a greater whole and is diminished when others are humiliated or diminished, when others are tortured or oppressed.”). 5 Hilb, 2011, p 7.

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“New corporate governance is a system by which a company is strategically directed,

integratively managed and holistically controlled in an entrepreneurial and ethical way and in

a manner appropriate to each particular context. This new approach to corporate governance is

based on four guiding principles: keep it situational, keep it strategic, keep it integrated, and

keep it controlled. … The new corporate governance framework presented here integrates the

interest of shareholders, customers, employees and public”. (2011)7

The underlined concepts above show synchrony in the perspective of corporate governance

by the various authors; in that there must be a form of structure or system that governs the

business with the view of sound relationships with stakeholders. But for the relationships to

be functional and successful the board must set the governing ethical compass that guides the

quality of relations and resultant quality service.

There are, nevertheless, other divergent definitions, which primarily focus on shareholder

value and not so much on stakeholder interests for example: “Corporate governance deals with

the ways in which suppliers of finance to corporations assure themselves of getting a return on their

investment”.8

To build on the earlier stakeholder-oriented definitions, it goes without saying that for

relationships to be functional and sustainable, however, and especially in the corporate

governance sphere, there are fundamentals of corporate governance to be considered as part

of the parcel, as seen in the subsequent section.

1.3 Pillars of International Corporate Governance

The foregoing section connects to the four fundamental pillars of international corporate

stated by Sullivan as:

Transparency: The directors have a duty to enlighten all equity providers as well as the

important stakeholders about the substance and procedure of decisions

taken. 8 Shleifer and Vishny, 1997, p 737.

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Accountability: The directors have to act accountable for their actions, additional to being

accountable to their equity providers.

Responsibility: The directors have a duty to act with truthfulness, integrity and decency as

they carry out their duties.

Fairness: All the equity providers should be treated equally, without any

discrimination or self-interest.9

On the other hand, the King Report on Governance for South Africa states the same principles

as ethical values with the following descriptions:

Transparency: The board should disclose information to the stakeholder in a proper

format for stakeholders to be sufficiently enlightened of the company’s

performance and sustainability.

Accountability: The board should be accountable for its decisions and actions to

shareholders and stakeholders.

Responsibility: The board should act responsibly as regards the assets and business

conduct and be willing to maintain the company on a strategic path that

is ethical and sustainable.

Fairness: The board should act fairly in the legitimate interests’ and expectations of

all stakeholders of the company.10

The Organization for Economic Co-Operation and Development (OECD) of which Germany is

a member, indicates that its principles of corporate governance, although chiefly for publicly

traded companies, are applied to non-traded companies, such as private and state-owned

enterprises if relevant. The principles of the corporate governance framework are extracted as

follows:

Ensuring the Basis for an Effective Corporate Governance Framework - The framework

should uphold transparency and efficiency, consistent with the law.

9 Sullivan, 2009, p 9. 10 King Report on Governance, 2009.

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The Rights of Shareholders and Key Ownership Functions - The framework should guard

and ease shareholders to exercise their rights.

The Equitable Treatment of Shareholders - The framework should promote equitable

treatment of all shareholders.

The Role of Stakeholders in Corporate Governance - The legal rights of stakeholders should

be recognized and collaboration between corporations and stakeholders

effectively promoted.

Disclosure and Transparency - Timely and accurate disclosure is vital made on all the

corporations’ material matters, such as financial position, performance,

ownership, and governance.

The Responsibilities of the Board - The framework should effectively provide strategic

guidance, effective monitoring of management, and ensure board’s

accountability.11

In analyzing the above sets of ideologies, it goes to show that directors are expected to act

truthfully, without self-interest, practice accurate disclosure in their dealing with shareholders

and stakeholder, and within the enterprise. The German Corporate Governance Code equally

emphasizes the need for a responsible and accountable management that is transparent and

presenting a fair financial position of the corporation at any given time. Below is a

presentation of the thread of commonalities in the foundation of corporate governance. Figure 1: Foundations of corporate governance (source author)

11 OECD, 2004, pp 17-24.

Transparency

Accountability

Resposibility

Fairness

King Code

Transparency

Accountability

Responsibility

Fairness

Sullivan

Disclosure

Accountabilty

Responsibility

"True and fair view" principle

German CG Code

Transparency

Accountability

Responsibility

Fairness

Namibian CG basedon SA's

King Code

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It is worth noting, that Namibia does not have a corporate governance code but has taken

advantage of the King Code of Corporate Governance Principles for South Africa of 2009

(King Code), as the benchmark for best practice in conjunctions with the Companies Act and

SOEs Act as indicated above. That is why in Figure 1 above, the principles of corporate

governance in Namibia are identical to those of the King Code, but the reality shall be

explored below.

Most corporations both in the public as well as private sector in Namibia, base their corporate

governance practices on the King Code of Governance Principles, a gesture that indicates the

willingness and eagerness of the corporations to align to the international context. And

perhaps the time has come for Namibia to formalize this spirit and develop its own

customized corporate governance code - that is one of the valuable contributions of this

paper!

Included below, and before proceeding to discuss the theories of corporate governance, is a

newspaper extract of 24th March 200912, illustrating the discretionary application of the King

Code in Namibia.

Newspaper excerpt FRONT PAGE | 2009-03-24 Strict corporate governance control issues on the agenda

THORSTEN SCHIER NAMIBIAN companies adhering to the King Codes on corporate governance will soon have to show stricter internal financial controls and be more accountable for their directors' pay packages. These rulings are part of the new King III report, which is up for public comment. The code, which South African companies are legally obliged to adhere to and which constitutes best practice in Namibia, has been rewritten to include much tougher stances on for example directors' remuneration and auditing practices. …. This hints at transgressions that have recently occurred in light of the financial crisis. … The change in King III with the most impact, according to Schalk Walters of PriceWaterhouseCoopers, is that companies are now required to provide more assurances for their internal financial controls. For example an independent auditor has to verify that their controls are effective. … On the compliance of Namibian companies, Walters said that 'most large Namibian companies adhere to the King code' . Tarah Shaanika, CEO of the Namibia Chamber of Commerce and Industry, said mining companies for example follow the code 'to the letter' . He says the new version 'makes companies much more transparent and directors much more accountable' . Shaanika expressed the hope that parastatals should also start adhering to the code to make them more open to public scrutiny. ... The problem with applying the King Report to parastatals, however, is that Government is the only shareholder in the company, and so it can set directors' remuneration and determine their powers without any real public scrutiny. ….

12 http://www.namibian.com.na/indexx.php?archive_id=51813&page_type=archive_story_detail&page=1

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1.4 Theories of corporate governance

This section explains the various theories of corporate governance and attempts to link the

relevant theories to the objective of this paper.

Theories of corporate governance existed long before the concept of corporate governance and

are a culmination of economics, finance and accounting, law, management, and

organizational behavior. The relevance of the theories in the different countries are therefore,

determined by the level of economic development, legal system, corporate structures, but

most of all the objectives and main focus of the respective companies. Below, are succinct

descriptions of the theories and a depiction of the relevance to the topic.

Figure 2: Theories of corporate governance13

1.4.1 Agency Theory

This theory represents the agency-principal relationship in a corporation. In this relationship

the principals are the shareholders who entrust the work of the corporations into the hands of

the agents, the executives, to carry out the work in the business. Due to the fact that

executives are naturally in direct contact with the company, they tend to have access to much

13 Mallin, 2010, p13-21.

Corporate Governance

Theories

Managerial hegemony

Transaction cost

economics

Stakeholder theory

Agency Theory

Stewardship theory

Class hegemony

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more information at various levels compared to the more distant shareholders. The

shareholders rely on the filtered information provided by the executives and this creates a

huge imbalance in the level of access to information, and such information asymmetry makes

it hard and costly to control the executives. The theory also suggests that often there is

conflict of interests as executives are self-interested and might not often have the best interest

of the shareholders at heart.14

1.4.2 Transaction cost economics

Mallin argues that the version of Transaction cost economics, created by Oliver Williamson

(1975, 1985, 1993b), became progressively vital to anchoring a wide spectrum of strategic and

organizational issue analysis, which are significant to the corporation. 15 Martens one of the

key proponents, argues that the theory aims at influencing practice and not just to explain

(Masten, 1993). The view that organizations are substitutes for structuring of the efficient

transactions when markets fail is not supported by Ghoshal & Moran. They argue that

organizations possess unique advantages for governing certain kinds of economic activities

through a logic that is very different from that of a market. They further submit that, TCE is

"bad for practice" because it fails to recognize this difference.16

1.4.3 Stakeholder Theory

The stakeholder theory has to do with the relationship amongst an expansive spectrum of

clusters, that is, government, suppliers, employees, creditors, customers, local community

instead of just focusing on the shareholders. This theory advocates for the consideration of

the interests of all the relevant stakeholders of the corporation.17

1.4.4 Stewardship Theory

Donaldson and Davis state that the stewardship theory is an option to agency theory. The

stewardship theory provides for better shareholder returns, because management acts in the

best interest of the shareholder and is empowered to take independent actions and decisions.

14 Mallin, 2010, p 49. 15 Ghoshal & Moran, 1996, p 13. 16 Ghoshal & Moran, supra. 17 Mallin, 2010, p18.

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This theory is in direct contrast with the agency theory, seeing that the latter focuses on the

management self-interest and not the shareholder interest.18

1.4.5 Class hegemony

This theory presents the view that the directors upon selecting new directors, will choose

those candidates who seem to fit the elitism of the class of the respective directors.19

1.4.6 Managerial hegemony

According to this theory the directors may have less power over the company due to the fact

that management may be in better control of the company since the latter is more involved

with the company on a daily basis. This is in line with the agency theorists.20

1.4.7 Discussion of the relevant theories

The managerial hegemony theory discussed in the section above paints a picture that as much

as directors have a responsibility to oversee the companies, they only provide equity but do

not run the day-to-day operations of the business. Additionally, directors often do not have

the necessary skills and expertise to run the business, but have a responsibility to select the

right executives, formulate appropriate policies, approve budgets, and ensure adequate

resources – with very limited information and relying and trusting the information provided

by the executives. Unless there is a trustful and transparent relationship between the equity

providers and management there may be diverging interest in the management of the

company, called the popular agency problem.

The agency problem suggests that there is discrepancy between the agents and shareholders’

interests and impliedly with their values. The question is: how can the interests be

converged? Will compliance to contracts and liability management policies provide the

solution? All culminates in compliance again, but for how long? Or else closely monitoring of

the managers, but do the directors have the requisite expertise and motivation to monitor the

managers? Alignment of interest can be achieved by incentivizing the managers with stock-

18 Mallin, 2010, p 19. 19 Mallin, 2010, p 14. 20 Mallin, 2010, p 14.

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based compensation as some authors submit, but is this sustainable and durable? What about

ethics? Divergent interests sets the company up for poor performance and consequently

attractive for take-over. What is the cause of the regulated insider-trading issue? Can the

executives act loyal and ethical on what to disclose and what not? All these questions are

about the morals of the executives relating to their behavior and business decisions – about

the strategic goals, what is been done and why; by who.21

The behavior of business today is critical to the point that executive ethical programs are

being introduced. America, for instance, has an established industry on ethics consultancy to

deal with the new ethical dilemmas in corporations and of globalization. Accounting firms

are commissioned for ethical performance audits while academic philosophers are utilized for

seminars and even as far as expert witnesses in civil cases.22

Corporate governance has been linked to principal-agent relationship problem, while

governance has been attempting to bring the interests of the two parties in line and ensuring

that firms are run for the benefit of investors, the structures of boards affect the involvement

of the boards. Institutional investors, for example, who dominate holdings in the UK and US,

have been under pressure to be more involved monitoring and controlling the firms. Investors

responsibilities of overseeing the functioning of companies extend beyond own financial

interests towards the stewardship of firms.

The stewardship theory, explains that management acts as stewards of the shareholders, and

shareholders are less involved while getting their return on investment. But what about the

other parties, other than shareholders? At one point, it was proposed that it is in the interests

of shareholders to take account of a broader constituency including employees, suppliers and

purchasers from the firm. This view regards the development of long-term relations, trust and

21 Murphy, Doing Business and Doing Good: The Role of Business Ethics Categories, 2006. Retrieved at: // Issue 52 Mental Illness in Irish Prisons: A Solitary Experience?, 2006, http://www.workingnotes.ie/index.php/item/doing-business-and-doing-good-the-role-of-business-ethics

22 The Economist, 22 April 2000.

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commitment as part of the successful development of firms. The best firms, according to this

line of argument, are the ones with committed suppliers, customers and employees. This line

of argument sees the firm as an entity which is distinct from its investors, where ownership

and control is spread amongst a number of parties – the stakeholder theory. But this

stakeholder-focused thinking is in conflict with the objective of shareholder wealth

maximization - the stewardship theory.

The stakeholder theory features in German Corporate Governance through codetermination,

since it promotes consideration of the interests of the relevant stakeholders of the corporation.

In Germany employees are allowed to sit on the supervisory board and it is obligatory

depending on the size of the corporation, this is what is called codetermination. This

arrangement makes sense for employees to participate in decision-making at a strategic level,

as employees are affected if the corporation collapses or they benefit if the corporation

prospers. It is equally important that the employee representatives act with integrity and not

solely sit on the board to fulfill the codetermination legal requirement instead must realize an

ethical obligation.

The stakeholder theory, noticeably, dominated the definitions of corporate governance above

and literature has it that the same theory is associated with most European states, Asia and

Africa23. The stakeholder theory is also connected to business ethics by various authors

because it has to do with the ethical implications of decisions taken at every level as well as

ethical interactions. The King Code, also states that stakeholder inclusion is indispensable to

realizing sustainability, thus stakeholder’s rightful interests and expectations is imperative in

making business and strategic decisions.

There is a concern, however, that the ever-growing competition is constantly putting

managers under strain to strike a balance of all stakeholder interests, and as such may lead to

abuse of power and improper actions on the side of the managers. These are the mostly the

times when corporations are tested to maintain their moral duty of ascertaining that

stakeholder interests are not compromised.

23 Khomba and Vermaak, 2012, p 3512.

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CHAPTER TWO

Chapter one set the stage and this chapter now looks at the context of the paper, problem

statement, current state of the topic, the meaning of beyond compliance, corporate governance

and ethics, as well as ethics and the law.

2.1 The context of the topic

Firstly, The World Trade Organization reports that more than two-thirds of Namibia's

imports stem from South Africa, whereas just about one-third of Namibian exports are

doomed for South African. Of note is that the UK mainly presents as market for Namibian

exports, i.e. diamonds and other minerals, meat, grapes, fish and light manufactures. In

addition to the UK, the value of mineral exports from Namibia to China is improving. It is

noteworthy that, Europe is a main market for export of fish and meat from Namibia. The

Namibian mining industry has been purchasing heavy equipment and machinery from

Canada, Germany, Italy, UK, and US.24 This is evidence that Namibia is in pursuit of more

international trading relationships to participate in the global village and thus need to be in

sync with the requirements of international good corporate governance principles hence, the

comparison with the German governance systems.

Secondly, it is common that, the emphasis of corporate governance has principally been in the

form of pure compliance to laws, policies, codes, best practices and international accounting

standards. And the word “principally”, is deliberately included to trigger the questions such

as: 1) is corporate governance exclusively legal compliance? (“do it right”); or (2) does it include ethical

compliance too? (“do the right thing”).

The directors have a legal duty and responsibility to ensure absolute compliance to all

instruments, yes, but does that sufficiently make the business immune to malpractices and

fraud? What is the responsibility of directors in this regard? To, solely, promote the interest of

the shareholders at whatever associated costs or to also consider the interests of other

stakeholders in the process? Typically, this is a question of:

24 https://globaledge.msu.edu/countries/namibia/economy [29 June 2013].

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either disclosing financial statements in the right format and construction, as prescribed

by IFRS, the relevant laws and company policies with the primary focus of having

complied to the regulatory framework but misrepresent the numbers in the sole interest

of the shareholders; alternatively,

while ensuring that the financials are aligned to the regulatory framework, the contents

is correct BUT also accurate in the interest of all stakeholders to foster factual

transparency.

There seem to be a link between virtue and representational faithfulness in making judgments

in a principles-based environment. Even in a rules-based system, there are principles that

provide a foundation for making decisions about the selection and implementation of

accounting standards, financial statement presentation, estimates, and the sufficiency of

evidence.

Accordingly, the main objective of this paper is to explore the foundation of making business

decisions.

2.2 Problem statement

As indicted above corporate governance is in pursuit of establishing structures that bring

about management accountability, responsibility, transparency and fairness; but it seems

these do not sufficiently close all the loops in the system to curb scams. Consequently, this

paper will explore, if international corporate governance is solely about compliance or does it

include a value-based approach in decision-making? Is there an ethical dimension to

international corporate governance or is it purely about legal and policy compliance? What is

the responsibility of the directors?

In an effort to address these questions the link between corporate governance and ethics as

well ethics and the law will be looked at. The German and Namibian corporate governance

systems will be discussed. The next section will look at the status of the topic, at the outset.

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2.3 The Current State of the Topic

From an international perspective, Rossouw, argues that, research on ethics in corporate

governance generally continues to exclude the ethics of corporate governance, in spite of the

conspicuous nexus between ethics and corporate governance. This is evidenced by the non-

inclusion of ethics and corporate governance in the Corporate Governance Network, initiated

in 2009. He further explains that corporate governance is assumed to be more a part of

corporate law as opposed to business ethics, but corporate governance is actually more than

regulations and laws.25 Tricker also remarks that incorporation of corporate governance codes

into the rules of numerous stock exchanges resulted in compliance as a listing requirement.

The structures for compliance have been developed and reinforced, but has corporate

behavoiur changed?26

These observations by Rossouw and Tricker, insinuate that there is a need for governance

beyond the compliance to laws and regulations, and this will be explored in the next section.

2.4 The meaning of ‘beyond compliance’

“Ethics is obedience to the unenforceable”. (Kidder 1995)

This section will elaborate on governance beyond compliance, but before that, and as

preamble to the detailed discussion what is compliance? Compliance has two different forms

in law namely, formal compliance and actual compliance. Formal compliance entails

adhering to the provisions of law, word-for-word and staying within the boundaries of the

rules through minimum requirement. Conversely, actual compliance is about moving beyond

the minimum requirement in search to achieve the actual purpose.27

Overemphasis on legal compliance mechanisms, Longstaff argues, could come at the risk of

ethical reflection since people may have less reason to form their own opinions to take

25 Rossouw, 2011, p 328 26 Tricker, 2012, p 2 27 Sagar, 2007, p 286.

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personal responsibility for the decisions they make. This could culminate in slight substitution

of “accountability” for “responsibility”.28

In light of that, beyond compliance implies to cross the bridge and move beyond just

compliance to law but also find meaning in the law and act ethically. In fact, there is an

increase of regulation and surveillance, and directors’ liability is adjoined, in case of failure to

comply with these regulations while focusing on corporate performance. Instead, boards

have become obsessed by the need to ensure that they comply with their legal obligations.

The fact that the board is focused on legal requirements has not necessarily led to any increase

in the level of attention by boards, to the ethics of their actions. Since the law lays down the

rules, the individuals or organizations do not feel obliged to form own opinions, that may

result that they be personally responsible for their decisions. They opt to follow the law.

Indeed, it is submitted that too much emphasis on law may well be at the expense of ethical

expression.

There are two schools of thought that of enhancing company performance and the other

focused on the need for a consistent and 'behaviorally evident' commitment to ethical

business practice, which is only achievable with absolute backing. This does not imply that

good ethics leads to good business. This thinking can be valuable to those who choose to act

in this way because it is sincere and not merely tactical.29

The evidence of ethical thinking can be linked to the results of the National Business Ethics

Survey of Fortune 500 Employees of 2012. It is estimated that 60 per cent of all companies and

95 per cent of Fortune 500 firms have codes of conduct. The National Business Ethics Survey

by the Ethics Resource Centre in Arlington, Va. demonstrated that companies with good

ethics programmes ranked higher in employee satisfaction. Pressure to engage in misconduct,

28 Arjoon, S., Corporate Governance: an Ethical Perspective, para 1. Retrieved from: http://soc.kuleuven.be/io/ethics/paper/Paper%20WS4_pdf/Surendra%20Arjoon.pdf

29 Longstaff, S., The ethical dimension of corporate governance, 1998. Retrieved from:

http://www.ethics.org.au/ethics-articles/ethical-dimension-corporate-governance

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in contrast, was more closely aligned with a lack of ethics programmes.30 The Survey is

conducted though 2,044 online replies at with US companies with $5 billion and more as

annual revenue.

Below is a discussion on more of ethics and corporate governance.

2.5 Corporate Governance and Ethics

In order to contextualize the preceding discussion this section looks at the linkage between

ethics and corporate governance.

While the term corporate governance is about effective business leadership and holistic

control, ethics defines the wrong and right conduct in the leadership and control, thus in the

governance of the business realm. This shows that there is an overlap between corporate

governance and ethics. Ethics encompasses the right or wrong way of power been exercised

within the framework of the corporate governance structures31. This in turn becomes business

ethics and is defined by Rossouw and Khomba respectively:

“Business ethics entails the study of the ethical dimensions of organizational economic activity

on the systematic, organizational and intra-organizational levels”. 32

“Moral principles are fundamental to ethics. Ethical behavior would be characterized by

unselfish attributes that balance what is good for an organization and what is good for the

stakeholders as well. Thus business ethics would embrace all theoretical perspectives regarding

the ethicality of competing economic and social systems”.33

In reflecting on the latter definition, it prompts the argument by various authors that the

major cause of the tumble of Maxwell in the UK as well as Enron and Sarbanes-Oxley of the

USA were wide-spread unethical actions. This is the case, as these leaders did not seem to

have considered what was good for the organization and the stakeholders, but for themselves,

an illustration of the shareholder theory. It is therefore submitted that, this argument

confirms the link between corporate governance and ethical leadership. 30 http://www.bna.com/fortune-500-firms-n12884910891/ 31 Khomba and Vermaak, 2012, p 3511. 32 Rossouw, 2009; pp 37-45. 33 Khomba and Vermaak, 2012, p 3511.

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Secondly, and linking ethics to the business Dessain says that ethical behavior in corporate

governance is viewed as the collective action in which company’s stakeholders try to consider

the interest of the majority, while averting destructive behavior and through controlled power

and responsibilities of company managers.34 This demonstrates the notion that behavior in

the business environment determines the outcome of the decisions as every decision has an

ethical implication. And especially with the involvement of stakeholders, the ethical

implications will be felt at each and every level in a business – in the board room at a strategic

level, at very management level in the business, and in its day-to-day activities at the

operational level. Ethical risks seem to breed across the organization, at strategic, managerial,

or operational level35, thus affect all stakeholders.

In light of the foregoing, there seem to be a dire need for directors to focus on moving beyond

governance concerns of their functional responsibilities and appreciate how their personal

values and actions affect their leadership, and how in turn these affect the external

communities.36 Governance concerns are concerns of compliance, thus meaning to move

beyond compliance and providing corporate principles that set the ethical tone and level of

risk appetite. Corporate Governance is not the theory on paper, or about the implementation

of what is on paper. It is about the effectiveness of the implementation of the theory.

The directors have the burden to structure their businesses to be more responsible and

accountable. In fact, the structure has been provided which is the legal framework on

corporate governance and the directors have the responsibility to define and adhere to the

standard of the implementation of the legal framework – the ethics! It follows that, if the

standards of compliance are weak, than the structure will not be effective, but if the standards

are high than the structure will be effective. It is unquestionable that the directors are

responsible for what the company does, how it does is and what is stands for.

34Dessain. et.al, 2008, p 65. 35 Tricker, 2012. 36 Maessen, et.al, International Journal of Business Governance and Ethics, 2007, pp 77 – 94. Retrieved from: http://www.inderscience.com/info/inarticle.php?artid=11935

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It is in this light that the King III Code included as part of the corporate governance principles

ethical leadership and corporate citizenship” and further states that ethics is the rationale for

corporate governance. Corporate governance is about the expressed standards. The board

thus has a daunting task to ensure ethicality in the corporation that will earn the required

support the customers, employees and the suppliers.37

In concluding this section, the Corporate Governance-Ethics Matrix by Sullivan below gives

an indication of how the new business should shift focus:

Figure 3: Corporate Governance-Ethics Matrix38

CORPORATE GOVERNANCE FRAMEWORK

WEAK STRONG

ETHICAL

WEAK

Focus on Overcoming

Systemic Corruption

Focus on Building an Ethical

Organization

STRONG

Focus on Improving Corporate

Governance Framework

Focus on Compliance,

Disseminating Best Practice

Experience

The table above represents a situation where the ethics or corporate governance is weak or

strong and the corporations should strive to move towards the lower right-hand quadrant

and become a trend-setter of good governance and ethical culture. The benefits could be

enormous as many academic studies show that in America, ethically sensitive staff performs

better and that after reports of unethical conduct the share price declines.39 KPMG also assert

that doing the right thing increases employee satisfaction. Therefore, in 2007, a survey of

ninety-four percent respondents revealed that they believed that KPMG had the highest

standards of integrity, and ninety percent indicated that KPMG was a great employer. The

foregoing, KPMG affirms, that the focus on ethics and compliance could potentially translate

into business success as KPMG is convinced that the implementation of development of an

ethics and compliance model program enabled the Firm to be a leader in the regulated

37 King report on Corporate Governance, 2009, p 21. 38 Sullivan, 2009, p 4 39 The Economist, 22 April 2000, p 74.

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environment of operation. Interestingly, in 2007, the Firm recorded the greatest growth

among the Big Four accounting firms with record results in all aspects of its business.40

2.6 Ethics and the law

In general, every society requires law to maintain order and regulates the duties and

obligations of people in a given society. Law is more about conduct, whereas ethical

requirements are about reasons, motives, intentions, and generally to do with character.

Law is known to be the set of rules included in the constitution, acts, legal opinions and case

law, used to govern and control behaviour of members in society. 41 In a civil legal society all

the laws and regulations are codified, like in Germany; whereas in a common law society

some laws are written and there is heavy reliance on case law, as is the case of Namibia.

In looking at the relation between ethics and the law, the question that comes to mind is, are

ethics shaped by the law or does the law enforce the ethical norms that already exist? The

function of the legal system is to incentivize and promote ethical behaviour through its rules,

regulations, and punishments. In this new economy with advanced technology, the context of

interpretation of these values must be responsive and so the legal system, but also maintain

sufficient strength to defend these essential values.

Furthermore, the link between law and ethics is that, ethics, defines what is right and wrong

behavior; while law controls the behaviour. The reality is that contemporary societies are

characterized by interdependence of individual actions and thus need to have law as a

mechanism to manage relations but also moral principles to have balanced relationships. That

flows from the question that if the law was sufficient why was corporate governance created?

And if corporate governance was sufficient why is there a debate about corporate governance

and ethics?

40 KPMG, The Road to a Model Ethics and Compliance Program, 2007.

41 http://sixthformlaw.info/01_modules/other_material/law_and_morality/0_what_is_law.htm

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Quite noticeably, this shows that there has been a gap somewhere somehow and the executives

have been able to outsmart the system. Some of the reasons advanced for this state of affairs

are that the shareholders of public companies have predominantly been interested in their

dividends and not being concerned about how the company is managed. Moreover, the

institutional investors invest in a number of corporations and this makes it taxing, if not

realistic, to be involved in the respective businesses. Or else, the shareholders are too many

and dispersed thus not easily organized to exercise sufficient control over the corporation or

regulate the board activities. Laws and policies alone are not sufficient to ensure the

effectiveness, a deeper understanding and appreciation of consequences is required, an ethical

behavior is required to observe the law and to act fairly and transparent.

There are, nevertheless, in any legal system, criminally punishable actions, that are viewed as

either immoral or unethical. In corporate governance for example, some of the directors’

activities that relate to ethics and law, concern the insider-trading transactions. In another

example, Namibia has an Anti-Corruption Act of 2003, geared towards punishing corruptive

practices such as being in breach of, or against the spirit of any law, procedure, system,

regulation, practice, directive, order or any other term in employment relationships, or

contracts, or acting in whatever capacity.42

Directors’ have a legal duty to create ethical codes and to educate their teams on the values

stated therein in order to ensure business integrity. It should be noted that as much as the

ethics will shape the behavior of the business, it also has to do with the ethics of the

individuals or employees of the business. Select carefully! The stated values will be the

guiding principles of all the employees in their daily or strategic business activities, internally

and externally. The World’s Most Ethical (WME) Companies designation celebrates

companies that translate their ethical statements into tangible action. These companies are not

only viewed to be upholding business ethics and internal practices, but also exceed the

minimums of legal compliance and set the trend for the identity of future industry best

practices standards. Since the list’s inception, companies such as Starbucks, Milliken &

42 Anti-Corruption Act, s 32.

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Company American Express, Patagonia, Fluor, Rabobank , General Electric and Aflac, among

others.43

Furthermore, the King code states that ethical standards as articulated in a code of conduct, if

primarily focused on curtailing negative ethics risks, are prone to be rules and guidelines that

can prevent unethical behaviour. But if the main purpose of the code of conduct is aimed at

taking advantage of the opportunities that comes with a strong ethical culture, it promotes

core ethical values. In the end, a code may strife to balance of those goals by unequivocally

connecting the core values to rules and guide lines, in order to illustrate the behavioural

expectations of those values. The King Code further states that the code of conduct should

not be in isolation of other ethics related policies, to provide comprehensive guidelines for

dealing with specific ethical issues or the code of conduct, should be holistic enough to

include detailed guidelines as well.44

CHAPTER THREE

Chapter three discusses the German corporate governance system compared to that of

Namibia since there are fundamental differences between the two systems.

3.1 The Namibian corporate governance system

As indicated above, Namibia does not have a corporate governance code as yet, but most

corporations in the public and private sector, utilize the King Code of Governance Principles

for South Africa, as benchmark for best practice. Under this section, the relevant background

on Namibia will be provided; the relevant legal framework, as well as the management of

corporate governance will be discussed.

3.1.1 Relevant background on Namibia

43 http://ethisphere.com/worlds-most-ethical/wme-honorees/ 44 King Code, 2009.

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Namibia with a country with 2.3 million people is demarked in 13 regions. The Namibian

Constitution provides for the principle of separation of powers, with government divided into

the legislature, judiciary and the executive as organs of state.

The current President has decided to work towards an anti-corruption Namibia since his

appointment, in 2004. As such an Anti-Corruption Commission (ACC) was established in

2006 and the executives state-owned enterprises (SOEs) were encouraged to refrain from

corrupt practices, in affirmation of his drive towards good governance. Additionally, in high-

profile corruption cases, actions were taken against the perpetrators.

Namibia has established as State Owned-Enterprises Governance Council, with the advent of

the State-Owned Enterprises Act of 2006, in an effort to improve the performance of the SOEs

to ultimately make a contribution to national growth and employment. SOEs are currently

considered the employers of choice and contribute to “brain-drain" in Namibia and the debate

on privatization is still in its infancy in Namibia, however.

According to the Namibian Financial Sector Strategy of 2011-2021, Namibia’s financial system

shows that the system is sound and well-functioning, but can only improve to contribute

meaningfully to enhanced performance as well as national economy. The improvements need

to be effected to inadequate financial buffers, superficial financial market; poor competition,

immature capital market; limited access to financial services; insufficient and less effective

regulation; low financial literacy and poor consumer protection; low degree of skills levels

and non-active consumers; and low participation by Namibians and thus dominance of

foreign ownership. The financial system includes the central bank, Bank of Namibia, five

commercial banks, other banking institutions, non-bank financial institutions, i.e. pension

funds and insurance firms and, smaller financial intermediaries in the form of stockbrokers

and money market funds, and the Namibian Stock Exchange (NSX). The Namibian financial

system is not considered deep enough, but relatively well developed compared to most

financial systems in African countries.45

45 Namibia Financial Sector Strategy: 2011-2021.

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The NSX is a bit passive due to the availability of only some equity firms, as well as scarce

venture capital. The pension funds are compelled by law46 to invest 35% of capital in Namibia,

but asset managers are really challenged to find suitable assets thus opt to invest in SA due to

the dual listing possibilities, in that foreign-owned company can list in Namibia, and be

considered Namibian for this purpose. This developments cause little development, and the

Namibian government is contemplating to compel pension funds to invest in unlisted

Namibian stock.

3.2.1 Relevant Legal Framework

The Namibian Companies Act of 2004, Section 20(1) stipulates two types of companies that

can be incorporated under the Act, as company with a share capital and a company without a

share capital and having the liability of its members limited by the memorandum of

association.

By virtue of the Namibian Institute of Public Administration and Management Act of 2010,

the Institute of Public Administration and Management (NIPAM) was established.47 One of

the objectives of NIPAM as provided in Section 5(h) of the said Act is to ensure awareness in

Namibia and internationally on public sector management and good governance in pursuit of

excellent public administration.48

In addition, Section 2(1) of the State-owned Enterprises Governance Act of 2006 establishes

the SOE Council. One the functions as details in Section 4(1)(a) of the Act are to establish

commonly accepted principles of sound governance and practices in the governance of state-

owned enterprises.

The Financial Intelligence Act of 200749 provides for anti-money laundering interventions;

such as fast-tracked cross-border asset recovery. Namibia is a member of the Eastern and

Southern Africa Anti-Money-laundering Group (ESAAMLG) and the Financial Intelligence

Act provides for anti-money-laundering interventions.

46 Long-term Insurance Act of 1998.

47 NIPAM Act, 2010. 48 NIPAM Act, 2010. 49 FIA, 2007.

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Under Common Law50 the board of directors must conduct the company’s affairs with skill

and care. Failure, due to negligence may result in liability to the company for any damage as

a consequence. The business judgment rule also applies and the courts consider that directors

must be allowed to make business judgments and business decisions in a spirit of

enterprise enhancement.51

3.2.2 Governance system

Namibia has a one-tier board system as in the UK and in the USA. In the private sector the

board is appointed by the shareholders as regulated by the Companies Act while in the public

sector (referring to the SOEs) the board is appointed, in terms of Section 15 of the SOE Act, by

the SOEGC, as recommended by the Head of secretariat, who consults with the respective

portfolio Minister.

Although Namibia does not have corporate governance code there is significant evidence that

illustrate the country’s zeal in good corporate governance values. One such evidence is that

in the corporate governance survey conducted by Deloitte, in 2012, the first of its kind

(according to the Deloitte’s report on the survey), the survey was based on the principles

enumerated in the King Code (defined above), although the Code is not formerly adopted in

Namibia. The survey was conducted with the expressed anticipation to intensify

consciousness on the significance of corporate governance in Namibia. Below is a summation

of some of the results of the survey in which forty-eight responses were received from both

private (52%) and public (48%) sector52:

Figure 4: Some results of the Deloitte survey on Corporate Governance in Namibia

Element As per King III

guideline/SOEGC

directive

Survey result Comment

50 “Common law is the legal tradition which evolved in England from the 11th century onwards. Its principles appear for the most part in reported judgments, usually of the higher courts, in relation to specific fact situations arising in disputes which courts have adjudicated” http://www.cisg.law.pace.edu/cisg/biblio/tetley.html 51 http://www.cronjelaw.com/directors 52 Deloitte survey, 2011/2

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Board of directors At least two executive

directors and majority

non-executive directors

(King III)

Average eight

directors - five

average are non-

executive

directors

Overall compliant with

King III and Code on

Governance

Transparency of

board

appointment

Board appointment

must be transparent

(King III)

86% yes to

transparency

Existence of formal

process to appointment

to the board shows

governance discipline

Board reviews of

mix of skill and

experience, for

effectiveness

Appropriate mix is

required (SOEGC

directive)

54% no and 50%

yes53 that the

mix is not

regularly

reviewed

The board can only be

effective if it is suitably

composed, and the

results attracts serious

need for improvement

Active board sub-

committees

Active audit committee

with independent non-

executive directors (King

III)

92% have an

audit committee

There is an apparent

value in audit committees

even if not all compliant

Formal signed

board performance

agreements

Code prescribes annual

appraisals (King III and

SOEGC directive)

14% yes and

86% no

For the appraisal to

happen there must be an

agreement and there is

apathy on this note

Regular board

evaluation for

effectiveness

Code prescribes annual

appraisals to identify

skills gap (King III)

23% yes and

77% no

It is pertinent that the re-

appointment of the board

is premised on

performance evaluation,

tremendous

53 It was noted that some respondents gave more than one answer

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improvement is required

here.

Board corporate

governance

training

Induction and ongoing

training of the for

director development

(King III)

64% yes, 36% no The training is vital the

deep understanding of

the director’s duties and

liabilities and also for

enhancing the pool of

qualified directors.

Annual CEO

appraisal by the

board

Performance agreements

with the CEO are

obligatory (SOEGC

directive) with inherent

periodic appraisals

76% yes and

24% no

Since the CEO is the

driver of the corporation

it is crucial that the board

and shareholders

periodically evaluate the

CEO effectiveness. The

result is worrisome.

SOEs specific

question:

Compliance with

the SOEGC

directive on

executive

remuneration

Remuneration of the

CEO is in line with the

classification of the

enterprise (SOEGC

directive)

24% yes and

76% no

Reasons for ‘no’

advanced: no new

appointments, in process

of implementation, pay is

below directive, or

exempted, need to be

verified.

Published

procurement

practices relating

to BEE

N/A 48% yes and

52% no

NEEEF policy aims at

achieving greater equity

in private sector and to

make a greater

contribution towards

national economic

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empowerment and

transformation54

Generally the results reveal that Namibia has miles to move towards good corporate

governance, this maybe the case due to the fact that the country does not have a Namibian

corporate governance code and corporation act discretionary. It will be very valuable for the

development of Namibian corporate governance, if more of these surveys are conducted more

often and shared with the authorities to seriously consider the development and enforcement

of a corporate governance code. A customized Namibian code will harmonize the interest

and principles of corporate governance in the country.

But if compliance to the current corporate governance framework is low what will guarantee

compliance to a governance code? This is exactly the purpose of this paper, for corporations

to consider moving beyond compliance to legal instruments, but to act ethically! The survey

also reported some challenges that corporations can already improve in the meantime, for the

betterment of the performance of the businesses: 1) board induction and development ; 2)

enhanced understanding of conflict of interest; 3) board and CEO performance agreements; to

mention but a few.

Currently the SOE Act provides for governance rules relevant to state-owned enterprises

solely, as the title is self-elucidative. The SOE Act mandates the establishment of an SOEGC

that has powers to formulate common policies relating to the governance of the all SOEs for

example; Board and CEO remuneration, governance principles and investments. The SOEGC

has strong emphasis on board and executive performance and governance contracts for SOEs.

The Act mandates performance agreements between Minister and the board as individual

members. These guidelines enables the SOEGC to discharge its mandate and to ensure

enhance good governance within the SOEs. The SOE Act, however is silent on non-

compliance which is crucial to the enforcement of the guidelines, the effectiveness of the

SOEGC and ultimately of the governance framework in Namibia in its current form.

54 The New Equitable Economic Empowerment Framework, P 6.

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The lack of reprimand on compliance in the Act could also contribute to the compliance

lethargy revealed by the Deloitte survey. For example, the results on performance agreements

with the board, is only fourteen percent compliant and that of agreements with the CEOs is

only twenty three percent compliant. The SOE Act, Section 17 stipulates that the Portfolio

Minister should within one month of institution of the board and in line with any directives

laid down by the SOGC as per Section 4, conclude written agreement with the board

stipulating, State expectations, portfolio Minister obligations, business plan, key performance

indicators, etc. Similarly, Section 18 provides that the portfolio Minister must also enter into

performance agreement with the individual board member within one month of appointment.

Section 21, further provides for performance agreements between the CEO and the

management staff and Section 26 obliges the enterprises to report annually on the operations

to the portfolio Minister and Council.55

The provisions of the SOE Act are comparable to some of the of the King Code guidelines of

requirements and that may well be the reason of the survey be aligned to the provisions of the

SOE Act as well as the King Code of Governance Principles.

As regards the governance of publicly traded companies, the Namibian Companies Act lays

the rules for corporate governance. Section 216-218 provides for the number and appointment

proceedings of the directors, by the shareholders. Section 240 stipulates that the directors and

other officers have an obligation to register their interest and section 242 obliges for disclosure

of interests in contracts, as an act of transparency. In section 257-259 the prohibition of

falsification of statements or records is provided with if breached will be sanctioned. The

auditor of the company is appointed in terms of section 277 and every year the company is

obligated to appoint an auditor. The auditor has the right to access the accounting books at

any time as per section 289, while section 294 places a duty on the directors to ensure that the

financial statements are prepared and presented at the annual general meeting. The financial

statements must represent a fair position of the company (section 294(3)).

Furthermore, the Namibian Stock Exchange Annual Report of 2012 indicates that a NamCode

Report on Corporate Governance, which is aligned to international best practices, including

55 SOE Act, 2006, ss 17-26.

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the King III report, is yet to be implemented. Regardless, NSX currently adheres to the

recommendations contained in the NamCode. The report further states that NSX Board is

responsible for evaluation of NSX policies with respect to the duties and responsibilities of the

Board as well as the delegation of powers. This, the Annual Report states is to ensure

compliance to the corporate governance requirements in addition to the adherence of the core

principles of accountability, integrity and transparency.56 This illustrates a good appetite for

sound corporate governance.

With this fertile soil Namibia has to look into harmonizing the governance principles for both

private and public sector, because the market is not so huge. But in the meantime it can be

concluded that the Namibian corporate governance framework consist of the provisions in

SOE Act for the public sector and the Companies Act for the private sector.

Context

To contextualize the Namibian corporate governance to the purpose of the research,

‘governance beyond compliance’, the above literature demonstrates that there is first and

foremost a need to comply with the current corporate governance framework. What will

drive corporate Namibia to the compliance is the attitude towards good governance and such

attitude is embedded in the values and norms of the respective individuals. That culminates

in the business ethics discussed above – the urge of doing the right thing in the business

operations and especially in the absence of sanctions under the SOE Act.

While government, as a major shareholder in the SOE’s is regulating the governance it may be

viewed as interference with the business objectives of the SOE’s – typical agency problem. The

government has total corporate control over the SOEs, which corporate control is defined by

Ruback as the rights to determine the management of corporate resources that includes the

hiring, firing and determining the pay of executives.57

3.2 German Corporate Governance System

56 Namibian Stock Exchange Annual Report December 2012

57 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=244158

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This section will elucidate the German corporate governance system, its relevant legal

framework, but firstly discusses the relevant background of Germany.

3.2.1 Relevant Background on Germany

Germany with a population of 81.1 million consists of 16 states. The government is also

divided into three organs of the Federal as the legislative, judiciary, and the executive

branches.

Germany is the fifth largest in the world economy with capital market, based on bank-

intermediated products and a small number on capital market processes. The country has a

three-pillar banking system, and, bank credits are very vital comparative to market products -

equity and bonds - than in the Anglo-Saxon countries, especially in the financing of firms.58

The three-pillar banking system consists of the public sector banks which are mostly owned by

the state; cooperatives mainly owned by the local government; and commercial banks are

operated by the development institutions. These banking structures have diverse purposes

and ownership forms as noticed.59

The German Corporate Governance system is predominantly premised on the German

Corporate Governance Code. The GCGC was developed by the Government Commission of

German Corporate Governance and the Commission also mandated to review the Code

constantly. The date of the latest version of the Code is May 2012.

The Commission was established in 2000, in response to corporate scandals for example the

global giant Philipp Holzmann AG, an ancient company established in 1849 that filed for

insolvency in 1999.60 The Federal government established a Government Commission on

Corporate Governance (Baums Commission) without passing a bill through parliament to look

after the affairs of corporate governance in Germany. Subsequently, the Baums Commission

recommended the development of a uniform German Corporate Governance Code and in 58 http://ideas.repec.org/p/kie/kieliw/1206.html 59 Brunner et.al., 2004, P 1

60 http://hermann-law.de/uploads/media/Philipp_Holzmann_AG_-_insolvency_of_a_construction_giant_01.pdf

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September 2001, the Government Commission of the German Corporate Governance Code

(Cromme Commission) was instituted to just create the code. There is an inherent synchrony

between the corporations’ law and the labour law, in that the corporations have to understand

the rights and duties of the employee representatives who serve on the supervisory board.

This is a fundamental and a peculiar feature of the German system and is called

codetermination. 61

3.2.2 Relevant Legal framework

As indicated above the German corporations’ law is allied to the labour laws for the purpose of

the sound corporate governance.

The relevant regulatory framework to this paper entails Acts, GCGC, stock exchange listing

requirements compliance and Codes of conduct. The Federal is a civil law system country and

has a rich database of laws. The sources of German Company Law are, the German Civil code

of 2011 (relates to the governance of civil partnerships), German Commercial Code of 2003

(regulates the commercial partnerships), German Stock Corporation Act of 2010 (govern the

listed corporations), German Act pertaining to Companies with Limited Liability 2011, and

finally the German Insolvency Law of 2011 (contain rules on bankruptcy pertaining to

individuals and companies).

Additional relevant legislation includes, the Fourth Financial Market Promotion Act of 2002

(relates to the exchanges services), Securities Trading Act of 1994, which regulates the stock

market provides for the establishment of the Federal Securities Trading Supervisory Agency.

The Agency later became the Federal Financial Services Supervisory Authority, an

independent federal administrative agency under the supervision of the Ministry of Finance.

Baum states that with the Securities Trading Act, “the cornerstones of a modern market-based

regulatory and supervisory regime are in place”. There is a Codetermination Act (determines

the level of employee representation on the supervisory board), Act on Improved Investor

61 Du Plessis et.al, 2007, p 2.

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Protection as well as Takeover Act of 2002 which was triggered by Mannesmann AG takeover

by Vodafone AirTouch plc62.

In terms of the types of companies or business entity classification in Germany are stock

corporations or "Aktiengesellschaften" ("AG") which are the only listed companies, and

private limited companies ("Gesellschaften mit beschränkter Haftung" or "GmbH"), company

without personal liability companies to the shareholders or the management does not.

3.2.3 Corporate Governance system

Germany has a unique two-tier board system, comprising the management board and

supervisory board. The German Corporate Governance Code is applicable to the German

listed companies in order to promote transparency and the Code recommends that the non-

listed companies also respect the Code63. The code is aimed at creating trust by the various

stakeholders in a given listed corporation, as well as trust by the public at large. The Code was

established on two basic principles:

- That is would only apply to listed companies and

- That the listed companies would follow the ‘comply or explain’ principle.64

The German Stock Corporation Act, Section 30 provides for the appointment of the

supervisory board, the management board and the auditor of annual financial statements.65

Consequently, the supervisory board and the auditor of annual financial statements are

appointed by the founders or shareholders of the corporation and the supervisory board in

turn appoints the management board. In addition and depending on the size of the

corporation the supervisory board shall also appoint a proportional quota of employee

representatives to serve on the supervisory board.

62 Baum, 2004, 19-27 63 German Code, 2012, p 1. 64 Du Plessis, et.al., 2011, p 24. 65 German Stock Crporations Act

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The function of the management board is to manage the corporation and be responsible and

accountable for the operations of the corporation. The work of the members of the

management board is synchronized by the chairperson of the management board.66

On the other hand, the German Code states that the Supervisory Board is responsible for the

appointment, supervision, and provision of advice to the members of the management board

and is directly involved in decisions of fundamental importance to the enterprise. The

chairman of the Supervisory Board harmonize the work of the Supervisory Board. In

enterprises having more than 500 or 2000 employees in Germany, employees are also

represented on the Supervisory Board. The supervisory board is composed of employee

representatives to one third or to one half respectively. For the enterprise with more than 2000

employees, the chairman of the Supervisory Board, has a casting vote in an event of split

resolutions. The representatives as elected by the shareholders and the employees are equally

obliged to act in the enterprise’s best interest.

In line with the motive of the German code, that of promoting transparency; the Code under

section 3 enumerates ways how the Management Board and the Supervisory Board should

work together in the best interest of the enterprise. Section 3 amongst others specifies that the

management board will collaborate with the Supervisory board on strategic matters of the

enterprise; fundamental decisions that might change the assets and financials of the company.

Section 3.4 stipulates that and I quote: “Providing sufficient information to the Supervisory Board is

the joint responsibility of the Management Board and the Supervisory Board”. Both boards have a

duty to perform under this provision, which means that the management board has a duty to

provide correct information on all important matters to the enterprise, to the Supervisory

board on time. The Supervisory Board, equally, has a duty to provide a specific instruction to

the management board on the latter’s information and reporting duties67.

66 German Code, 2012, supra. 67 GCGC, 2012, s 3.4.

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Section 6 of the GCGC provides for transparency to the extent that the Management must aptly

disclose insider information equally and fairly to all shareholder. The transparency provision

also states that various suitable methods of information shall be employed to ensure uniform

and speedy information disclosure68.

Section 7 stipulates the “Reporting and Audit of the Annual Financial Statements”. The section

provides for the periodic release of Consolidated Financial Statements and the Group

Management Report, half-year and interim or quarterly reports, based on the internationally

recognized accounting principles. The auditor with the Supervisory Board will scrutinize and

approve the statements before publication.69

3.2.4 Context

In context the above literature demonstrate that the German Corporate Governance has been

around and is supported by the necessary legal framework. “The German corporate governance

system is both, deeply rooted in German history since 1945 and incorporated in German company and

capital market law”, says Steger70.

The GCGC states that the executive and the supervisory board of listed corporations must,

once a year, comply with the recommendations or explain failure to comply with the

provisions. This is called the ‘comply or explain’ principle. This flexibility has been debated

for its non-legalistic force but on the reverse it can be argued that the unreasonable non-

compliance by the supervisory board implies failure of legal duty of care. For example, the

annual declaration shall be accessible on the corporation’s website on the internet. This is

squarely in line with the transparency objective of the GCGC.71 The foregoing converges with

the ethicality of corporate governance based on the conduct of the executives and what they

will choose to comply with and what the justification for non-compliance would be. Besides,

68 GCGC, 2012, s 6. 69 GCGC, s 7. 70 Steger, 2005, p 1. 71 Lowry and Poole, 2010, pp 723-733.

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this will show if it is just question of just compliance or the search to achieve the actual

purpose of the provision, thus move beyond compliance?72

The GCGC in section 4.3.4 requires the executive board to declare any conflict of interest

without undue delay and that any potential conflict of interest transactions must be consented

by the supervisory board. Again a test of business decision ethicality by the management

board, to disclose transactions with people they are closely connected. Section 5.5.2 similarly

provides that the supervisory board members should report to the general meeting, any

association with creditors, suppliers, customers or any person associated with the corporation

in any way. This is normally a potential area of high risk, determined by the values and

motives of the person behind such disclosure. The German Stock Corporation Act sections

93(2) and 116(1) provides for liabilities of both the management and the supervisory boards,

in terms of where disclosure was omitted or not given accurately, and partial or non-

conformance to accepted recommendations as stated in the GCGC. In order for liability to be

incurred it is required that damage incurred by the company must be proved and it can be

quite challenging to proof such damages as it might not be tangible.73 The German courts also

integrated the Anglo-American business judgment rule into the German Company Law,

which provides that the management board member shall not be held liable if the decision

taken is understood to be in the best interest of the company. Prudence application of this

rule is paramount not to defeat its purpose! Again the executive is expected to apply sound

business judgment in his dealings and this will be judged on the justification of his actions

and the motives behind such decision.

Accounting and auditing services of the corporations as per section 7 of the GCGC must be

carried out by a competent and independent auditor. Any association with the corporation

must be presented and considered by the supervisory board. This is a critical function of the

corporation which very is specialized and technical thus must be executed by an independent,

competent and credible auditor. Both the management board and supervisory board might

72 Sagar, 2007, p 279. 73 Lowry and Poole, 2010, p 731.

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not have the expertise on auditing, thus have a duty to select a plausible auditor since the

boards need to rely and trust work of the appointed auditor.

The auditor is expected to act as a gatekeeper of the corporation. A gatekeeper, Coffee defines

as “an agent who acts as a reputational intermediary to assure the investors as to the quality of the

signal sent by the corporate issuer… Examples of gatekeepers providing such certification or

verification services to investors are obvious: the auditor certifies that the corporation’s financial

statements comply with the generally accepted accounting principles…”74 This ties in with the dual

responsibility of the statutory auditor in the German system, firstly as an internal supporting

expert and secondly as an external corporate governance auditor, who confirms the truth and

fairness of the financial statements.

Co-determination as a feature in the German system presents a feature of the stakeholder

theory and the notation of balancing what is good for an organization as well as what is good

for stakeholders.

In closing this chapter, the ICGN: Global Principles of Corporate Governance states that

sustainable shareholder value creation can only be achieved over time if the stakeholder

relationships are managed effectively.75

CHAPTER FOUR

This chapter will discuss the two corporate governance systems in relation to the purpose of

the paper.

4.1 Purpose of the research

The question of this research is: Is international corporate governance solely about compliance

or does it include a value-based approach, is there an ethical dimension to international

corporate governance or is it purely about legal and policy compliance? This question is

74 Coffee, 2006, p 2. 75 ICGN: Global Principles of Corporate Governance, 2009

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answered in this chapter by analyzing corporate governance systems in Namibia and

Germany.

At the onset, it is noticeable that Namibia has a one-tier board structure consisting of a

combination of executive and non-executive directors, like the UK and the USA. Germany to

the contrary, has a two-tier board structure consisting of the supervisory board and the

management board, like Indonesia (“Board of Commissioners” and Board of Directors”).76

Figure 4: Diverging corporate governance board systems (source author)

The implications of the one-tier and the two-tier board is that the two-tier board has been argued to be

more effective, in terms of monitoring, especially by the upper supervisory board. This is, however,

fading away as this obligation is now part of the function of the one-tier board, and this now has

diminished the importance of the distinction between the two structures.77 Below is detailed discussion of

the two systems.

4.2 Analysis of the German and Namibian Corporate Governance Systems

It is noted that the corporate governance systems in the two selected countries is totally

different, it is thus submitted that in addition to analyzing value-based governance, the

comparison is equally for purposes of contributing to the corporate governance question or

development in Namibia.

One of the conspicuous differences is that Namibia does not have a corporate governance

code, but regulates governance by Acts of Parliament, while Germany has a Code of

Corporate Governance. The King Code of Governance Principles discusses firstly, the

76http://academia.edu/1547057/Board_Compensation_Corporate_Governance_and_Firm_Performance_in_Indonesia 77 Davies, 2006, p 45.

Namibian Corporate Governanace:

system: one-tier German Corporate

Governance System: two-tier

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legislated basis for governance compliance framework also known as the ‘comply or else’.78

This principle was adopted in the USA, as the Sarbanes-Oxley Act, and Namibia where the

governance provisions are codified in legislations and non-compliance leads to legal

sanctions. It is further argued that this kind of framework leads to greater focus on

compliance to avoid the sanctions and at times at the expense of the company.

Secondly, there is a voluntary basis for governance compliance framework, also known as the

‘comply or explain’ which Germany and other twenty seven EU States, RSA and the UK

elected. The King Code further qualifies that by adopting this principle the board always

assures that it acts in the best interest of the company with consideration of the legitimate

interest of all the stakeholders.79 The responsibility of the board under the two principles

differs. Under the ‘comply or else’ principle, the board views their primary responsibility as

ensuring that corporations comply to the provisions in order to avoid sanctions and liabilities.

This will however, cloud the board and divert its focus on compliance or ‘do it right’ at

whatever expenses, and overlook the value of ‘doing the right thing’. Conversely the ‘comply

or explain’ principle allows for actions with due consideration of stakeholders’ interests – a

principle that seeks to focus on doing the right thing, therefore tilting towards ethicality.

But this is not automatic, the board has a very crucial role to create the corporate culture and

inculcating such culture in a manner that will ensure that the executives execute their duties

within the bounds and also set the tone for the entire corporations. The board thus has a duty

to codify the ethical considerations, communicate and cascading the ethical values down to

the lower levels in the corporation. This could assists in the management of relationships

with external stakeholders and can serve as a buffer against external pressure for unethical

conduct.80 It is argued that strong ethical character realize stakeholder satisfaction, which, in

turn, positively influences a firm’s financial performance81

78 King Code, 2009. 79 King Code, 2009, pp 5-6. 80 Lipton, 2006, pp 48-49. 81 http://www.ieseinsight.com/fichaMaterial.aspx?pk=637&idi=2&origen=1&ar=17

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The Chairman of the Executive Board of Fraport AG, in the Preamble of the Value

Management System 2010 affirms that in addition to compliance with relevant regulations, the

set of corporate values, are the basis of the economically successful performance of Fraport.82

The Value Management System was pioneered in 2003 with the view of creating a corporate

culture in which the employees’ responsibility goes beyond formal compliance with laws and

regulations. But also in 2003, with the implementation of Value Management System at

Fraport AG, The Chairman of the Executive Board, at the time, stated that Fraport AG is

reputable and provides high quality service thus created values, binding on enterprise-widely

to shun potential damage to its reputation and competiveness. These values are binding to all

as the actions and decisions of every member of the workforce, however small, contributes to

the greater corporation. He further states that the implementation of the value system is

responsive to the fact that “illegal and unethical practices can neither be prevented by law nor

by tight internal controls”.83 The statement by the Chairman of Fraport AG Executive Board,

practically, underwrites the contribution of this paper, as it confirms that there is more to just

compliance to the rules.

The figure below compares the respective governance systems.

Figure 5: Comparison table (source author)

Namibia Germany

Legal System

Common law society Civil law society

Relevant laws Companies Act, SOE Act,

NIPAM Act

Civil Code, Commercial Code,

Stock Corporation Act, Act

pertaining to Companies with

Limited Liability, Insolvency Code,

Corporate

Governance Code

No governance code, regulated

by Acts of Parliament

German Corporate Governance

Code

82 Fraport Value Management System, 2010, p 2. 83 Fraport Value Management System, 2003, p 2.

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Board Structure

One-tier Two-tier

Board Member

Number

Average eight members84 Average four members

Corporate

Governance

Framework

Legislated basis for governance

compliance - ‘Comply or else’

Voluntary basis for governance

compliance – ‘comply or explain’

Theory

Shareholder Stakeholder

Advantages

Access to information

Better control

Disadvantages

Board independence affected Supervisory board is remote from

the business leads to information

asymmetry

As observable, from the literature above again, corporate governance in Namibian is still in

developing phases. At present, the Companies Act regulates governance in the private sector,

while the SOE Act regulates governance of the state-owned enterprises. State-owned

enterprises in Namibia are suppliers of the essential services i.e. transportation,

telecommunications, water supply and electrification.

At the Bank of Namibia Symposium, in 2009, on Privatization in Namibia, Kakujaha-Matundu

remarked that Namibia boasts 52 State Owned Enterprises (SOEs) and despite the meager

performance of the current model, Government appears to have concluded that political

involvement will bring about the required improved corporate governance and corporate

84 Deloitte survey, 2012.

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performance.85 The question is: is government involvement and legislated governance

provisions necessarily the best way to improve corporate governance? Maybe not according

to the argument that ‘comply or else’ causes to focus of legal compliance and might overlook

ethical compliance!

In comparison with Germany the provisions of the Companies Act will be contrasted with the

GCGC since both instruments focus on the listed companies or private sector. The Companies

Act extensively provides for the rights and duties of the officers and board of directors of

private companies. For instance, section 139, provides for liability amounting to N$40 000

(approximately 3 000€) or maximum ten year imprisonment in the event any person intents to

defraud, forges, offers, utters of disposes of, any certificate as to shares, debentures or other

securities, with the knowledge; endeavours to benefit in any way, from any company through

forged certificate, form, coupons, share warrant, or other documents; attempts to imitate the

identity of any owner of interest, in order to benefit as if he/she was the legitimate owner.

Section 181(1) states that the Annual Return must be lodged with the registrar not more than

one month after the financial year end, in a specific form with specified details as per section

181(1)(a)-(n). Failure to comply culminates into a fine of N$40 per day for as long as the

company remains in default. This provision encourages transparency. Section 193(1) places

an obligation on the company to circulate notice of resolution and statements upon request of

the members or shareholders. Directors have a duty of disclosure of interest in contracts as

per section 242 and the manner of disclosure is stated in sections 243-245. In terms of

disclosure of interests, sections 258 and 259 the directors are prohibited to engage in

falsification of books and records and to make false statements by directors and other officers.

Any member of the board can in terms of section 260, apply to court for a remedy for in case

of any oppressive or unreasonably prejudicial conduct by the other board members. In

addition, chapter 10 deals with the appointment, rights and duties of the auditor and Chapter

11 states the accounting and disclosure. The directors face a penalty if they fail to take

reasonable steps to ensure the periodic financial reports are not published and are according 85 Kakujaha-Matundu, 2009, https://www.bon.com.na/CMSTemplates/Bon/Files/bon.com.na/71/71a2324f-111a-4dc0-9e6f-8d7cd32d7a61.pdf#page=50

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to the acceptable standards as provide in section 315. The provisions have the force of law

and offenders are liable to be punished if not obliged.86

In contrast, and like 56 Commonwealth countries including the King Code of Governance87,

the GCGC uses the “comply or explain” principle. This is identified as the voluntary basis for

governance as explained above. In the GCGC, those provisions that are identified as

recommendations are recognizable by the word “shall” (the company can divert but compelled

to explain) and the suggestions are identifiable by “should” (can divert without explanation)88.

Thus, the concise GCGC has no force of law and the boards are focusing on the best interest of

the companies as opposed to being in the mundane of just compliance.

The GCGC governs publicly traded corporations, although the Code also encourages the non-

listed entities to follow. As per the GCGC section 2.2.1 specifies the financial reports to be

submitted to the General Meeting and in section 2.2.3 the right of the shareholder to

participate in the General Meeting is stated. The company has an obligation to send a notice

of the meeting with the necessary documents. Section 3.4 indicates that the Supervisory Board

shall specify the details of information expected for the Management Board. The tasks and

responsibilities of the Management Board are stated in Section 4, and it is responsible to

autonomously operate the corporation. In a separate section, section 5 the tasks and

responsibilities of the Supervisory Board are enumerated, among other to advise and

supervise the Management Board. Section 6 states that Management must be transparent on

insider information and share equally with all the shareholders and on time.

Reporting and Auditing of the Annual Financial Statements are provided for in section 7 of

the GCGC, compelling the Supervisory Board and the Auditor to scrutinize the reports before

going public89.

As seen above there is always a nexus between governance and law. This is because the

directors have legal duties towards the corporations, such as the duty of care, skill and

diligence, and the fiduciary duties. The provisions in the GCGC as well as the Namibian

86 Namibian Companies Act 87 King Code, p 5. 88 GCGC, p 2. 89 GCGC, pp 1-15.

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Companies Act are policy or legal provisions that need to be observed by the directors as part

of corporate governance, to exercise power and control, but can only be effective in the value-

based environment.

As stated by Rossouw that corporate governance is assumed to be a matter of corporate law90,

it seem to be true in the Namibian case as the governance provisions are part and parcel of the

companies Act. As much as corporate governance is regulated by law, the results by the

Deloitte survey above reveals incommodious compliance apathy. It is against this background

that it must be noted that corporate governance is beyond compliance and that governance

structures are not sufficient for effective corporate governance.

“When corporate governance is understood as more than mere control via corporate law over

corporations, it creates the space for the ethical dimension of corporate governance to emerge in corporate

governance discourse.”91

In so far as there is a nexus between governance and the law, so is there a bond between

governance and ethics, although ethics is hardly mentioned in the governance codes or

legislations, including the GCGC and the Namibian Companies Act. The King Code however,

explicitly provides for ‘ethical leadership and corporate citizenship’, which include that the

board must provide ethical leadership, manage the ethics of the company and ascertain that

the company is seen as a responsible citizen.92 The nexus between governance and ethics

cannot be overemphasized, as it is becoming clear that legal compliance alone is not sufficient.

In the past many governments of especially, Germany, Japan and France allowed businesses

to write off bribes as part of their corporate income taxes, because that was the only way to get

major businesses in some parts of the world93. Today bribery is legislated and prohibited.

However, Siemens AG, a leading electronic multinational, attempted to obtain business worth

90 Rossouw, 2011, p 328. 91 Rossouw, 2011, p 329. 92 King Code, 2009, pp 19-21. 93 Mitchell, 2003, p 1.

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450 million Euros through advancing 44 million Euro as bribery payment.94 With the German

Corporate Governance Code, being a stakeholder based Code, promotes accountability and

transparency. In addition the German Criminal Code forbids active and passive bribery, in

either domestic or international business transactions95, however, the executives still engage in

such unethical business dealing. The reality is that executives are operating in a highly

competitive environment, with stretched targets and thrust for profitability. Surely, this calls

for executives’ ethics program, to inculcate the required ethicality in business dealings.

Unethical behavior is no longer tolerable in new corporate governance - there is a need to

unleash the link between personal values and business ethics, because our own selves in our

daily lives are who we are in our business dealings! Simple compliance to law can easily be

unraveled if it is believed that the policies does not apply to a particular business goal, for the

reason that, policies or rules can never cater for all situations. Thus the decision to be taken at

that point is critical.

The ICGN’s Global Principles of Corporate Governance places the responsibility of the creating

and sustaining a corporate culture of integrity, squarely on the board. The Principles further

affirm that the codes of ethics of conduct should be formulated and, amongst others, specify

rules with respect to relations with internal and external stakeholders. Fascinatingly, the ICGN

positions ‘Compliance with law’ under the Corporate Culture Principle.96 Impliedly, there is a

need to comply with the law but in an ethical and responsible manner. This statement from

the ICGN, a global network, encapsulates and affirms the thinking that corporate governance

is beyond compliance!

Businesses should note that studies have been contacted that reveals improved financial

performance when including ethics as part of corporate governance. Verschoor argues that the

study identified 26.8 percent of 500 US largest public corporations that, state in their annual

report, that they are committed to ethical behavior toward stakeholders or compliance with

94 http://www.slideshare.net/steveakana/case-analysis-the-bribery-scandal-at-siemens 95 ttp://www.perkinscoie.com/files/upload/12_08_IWCD_Global_Litigator_Germany_Funk_Article.pdf 96 ICGN: Global Corporate Governance Principles, 2012.

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their code of conduct. The ranking of the financial performance of these corporations is

significantly superior to those who do not focus on ethics or stakeholders.97

CHAPTER FIVE

This final chapter presents the summary of findings and conclusion.

West rightly argues that developing economies are vastly different from developed countries

in terms of needs, demands, institutions and structures.98 The same goes for corporate

governance. However, globalization is setting the stage for new corporate governance, and

acting in isolation is detrimental. This is evidenced by the established International Corporate

Governance Network (ICGN) aimed at elevated standards of corporate governance

worldwide.99 The African Corporate Governance Network, launched during February 2013,

Ansie Ramalho, CEO of the IoDSA, at the launch remarked that Africa has enormous growth

potential and promises huge opportunity but require a concrete foundation in the form of a

continent-wide corporate governance framework, that is investor-friendly.100 Namibia must

also consider involvement in the African as well as global corporate governance bodies.

Having said that, the findings show that it is not just about codes and regulations, it is more

about finding actual purpose of the rules. There is a need for corporations to consider striving

beyond sheer legal compliance and being profitable, and establish an ethical business culture

with a reputation that attract more clients and best people want to work for.

The results show that corporate governance in Namibia is still developing to the extend hat

there is no corporate governance code. Conversely, Germany is pretty well established.

Namibia is using the ‘comply or else’ rule of governance associated with sanctions. Deloitte

survey shows major legal compliance apathy and impliedly ethical compliance. In Germany,

on the example of the Siemens case shows imperfect compliance as well, in spite of a well

97 A Study of The Link Between a Corporation’s Financial Performance and its Commitment to Ethics, Journal of Business Ethics, 1998, p 1509. 98 http://www.emeraldinsight.com/journals.htm?articleid=1770522&show=abstract 99 https://www.icgn.org/ 100 http://www.link2media.co.za/index.php?option=com_content&task=view&id=19144&Itemid=12

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developed framework. These are incidences of poor ethical standards in the respective

corporations. Hence, the need to enhance ethical compliance, universally as ethics is

sustainable. It is therefore submitted that there is indeed governance beyond compliance.

In order to successfully inculcate ethics in corporations, it is argued that boards must be alive

to this evolving ethicality phenomenon and take full responsibility by developing corporate

values, set standards and ensure effective implementation of ethics. It is submitted that

directors need to ensure a well-implemented ethics and compliance program that creates a

perception of a strong corporate ethical culture to curb unethical behaviours. The

effectiveness of the ethics and compliance culture requires the involvement of the entire

organization in the design, development and implementation. Practically, I agree that, with

implementation goes frequent review and support of the systems and directors must walk the

talk, reward ethical behaviour and reprimand ethical misconduct.101

In the absence of a universal definition of corporate governance, the definitions above support

the stakeholder theory of corporate governance. Germany has a stakeholder oriented

governance system, through the Codetermination Act, while Namibia has a shareholder

oriented system for SOEs and the listed companies. Today, the stakeholder theory has

evolved to be part of new corporate governance and corporations needs to rethink the

traditional shareholder maximization focal point.102 The study affirms that an ethical culture

leads to satisfied stakeholders and resultant good performance.

The principles of corporate governance internationally, evidently necessitate ethical

leadership and unscrupulous behaviours are not tolerable anymore. In addition to stricter

laws corporations must implement enterprise-wide ethics training programs to enhance

compliance and corporate integrity, the findings reveals that neither controls nor laws can

avert unethical behavior.

101 Veijeren, 2011. 102 Boatright, 2011, p 368.

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Lastly, what’s in it financially? “A Study of The Link Between a Corporation’s Financial

Performance and its Commitment to Ethics” confirmed a significant link between financial

performance and ethics as part of corporate governance.103 Subsequent, paper on “Corporate

Ethical Identity as a Determinant of Firm Performance: A Test of the Mediating Role of

Stakeholder Satisfaction”, further augments the fact that ethical behavior is in the

financial interest of the corporation and greater stakeholder satisfaction.104

Plato - “The more one knows ethics, the more it’s used and the more useful it becomes”105

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Acknowledgements

Firstly, I acknowledge my Supervisors for their time and guidance

during drafting of this thesis.

Secondly, to my Management at the MVA Fund, without your vision and funding, I would not

have achieved this. In particular, the outgoing CEO of the MVA Fund, your confidence in me,

propelled me to unleash wider horizons.

Further, Bucerius Law School, provided financial assistance and opportunity to study at such a

renowned university in Germany is priceless.

To my very supportive and loving family, I was able to study away from home, without

worries about my three boys. Erica and Oscar, Mom, and Marvel,

my deep appreciation is indeed incalculable.

To my lovely husband, Isac, your support, sacrifice and motivation

impelled me through the programme.

My three beautiful boys, you sacrificed your mother at tender ages in your respective

developmental phases! I am deeply indebted…

Finally, to the Almighty it became clear that have a plan for me to lead a purposeful life!