Ethical business practice provides assurance of the highest legal and moral standards and builds trust among employees, associates and suppliers.
The IDC Act, No 22 of 1940, mandates the IDC – as one of its main objectives – to enhance corporate governance and achieve business excellence. The IDC’s business conduct stems from our commitment to ethical behaviour and sound corporate governance within the Corporation and on the boards of the companies in which we invest.
Changes to the Board
All the directors of the IDC Board retired at our annual general meeting on 29 January 2015. Nine Board members were reappointed, namely Ms BA Mabuza, Mr MG Qhena, Mr RM Godsell, Dr SM Magwentshu-Rensburg, Ms LI Bethlehem, Mr BA Dames, Mr ZJ Vavi, Ms PM Mthethwa and Mr NE Zalk.
Three new Board members were appointed, namely Mr B Molefe, Transnet Chief Executive Officer (CEO), Ms ND Orleyn, Chairperson of BP South Africa and previously a Deputy Governor at the South African Reserve Bank, and Ms NP Mnxasana, who serves on the boards of the Land Bank, Nedbank, Johannesburg Securities Exchange and other entities. The Minister of Economic Development announced the appointment of Ms BA Mabuza to replace Ms MW Hlahla as the Chairperson of the IDC Board and the reappointment of Mr MG Qhena as IDC CEO for a period of five years. He thanked Ms MW Hlahla for her exceptional leadership as Board Chairperson during the past six years and paid tribute to Mr JA Copelyn, Mr S Mapetla and Mr R Pitot, who retired as Board members, for their contributions. He also thanked Ms LL Dhlamini who stepped down in August 2014.
Board meetings and meeting attendance
The IDC Board meets at least once every quarter and holds a strategy session at least once a year. Special Board meetings are convened when necessary. Our Board members attended the following meetings during the reporting period:
Information about the IDC Board Committees, the Executive Committee and members’ meeting attendances can be found in Section 5 online.
The following three of the IDC’s fourteen key risks are directly related to corporate governance:
- Ethical conduct and behaviour
- Subsidiary delivery and performance risk
- Legal and regulatory compliance
These three risks are discussed below with reference to examples of cases experienced during the past financial year.
Risk: Ethical conduct and behaviour
Ethical conduct and behaviour is seen as a risk when unethical business practices and behaviour result in theft or fraudulent activities. The risk applies to the IDC’s internal and external business environments, respectively employees within the Corporation and investee companies.
This is regarded as a top risk because it could cause financial loss and reputational damage to the IDC. The risk is mitigated by, inter alia, fraud and ethics awareness training and the activities of the Governance and Ethics Committee.
Code of ethics and business conduct
Our Code of Ethics is endorsed by the IDC Board and has been communicated to all internal and external stakeholders. Employees, particularly, must know and comply with the Code and what is expected of them. The Code determines, for example, that employees may not pursue personal interests or those of relatives in any way. Breaches of the Code are taken seriously and could lead to disciplinary action.
The Code guides the implementation of business principles, policies and behaviour. Employees can use our online declaration system to declare conflicts of interest and gifts received. The interest and gifts registers are monitored continuously.
We used industrial theatre in December 2014 to encourage employees to make the “right decisions” and expose corruption, fraud or bribery. Our Corporate Secretariat tested employees’ views about the meaning and context of ethics and how the organisation should respond to transgressions. The intervention was well received and rated by employees as educational, thought-provoking and easy to understand.
By embracing the Code, we live our values in striving to achieve our vision to be “the primary driving force of commercially sustainable industrial development and innovation to the benefit of South Africa and the rest of the African continent”.
Abuse of staff loans by employees
Notwithstanding fraud and ethics awareness training and our efforts in communicating the Code of Ethics to all stakeholders, our system of internal controls and procedures uncovered a fraudulent scheme in which some employees submitted false claims against the IDC’s housing loan scheme, computer loan scheme, and solar heating and subsidy scheme.
Disciplinary hearings were instituted against all employees who submitted false claims in this matter and appropriate sanctions, relative to the circumstances and merits of each case, were imposed on those found guilty of misconduct. The sanctions ranged from dismissal, final written warnings and written warnings. In addition, individuals who were found guilty and not dismissed were required to undergo financial fitness training, fraud, corruption and code of ethics training and were not eligible to participate in the annual salary review and incentive scheme for 2015.
Misuse of funds
Litigation against clients who misuse IDC funding is on the increase. The practice of corporate governance by the Boards of such clients often leaves much to be desired. In many cases, a company’s executive management withholds important information from the IDC and Non-Executive Directors nominated to its board, sometimes with disastrous consequences. It has been found that one of the most commonly used methods to obtain benefits in a fraudulent manner, is the use of related party transactions. An example is provided in this case study.
A number of measures have been introduced to deal with this problem. Our standard funding agreements, for example, have been amended to incorporate provisions to encourage clients to practice responsible governance. Another example is the work undertaken by our Internal Audit Department, referred to below.
Our Internal Audit Department’s Forensic Audit team investigates fraud, corruption and related irregular behaviour, reports transgressions to management and makes recommendations to the EXCO and Board Audit Committee.
During the reporting period, Internal Audit investigated at least 83 (2014: 64) cases through internal audit reviews and forensic investigations. Based on the results, it was concluded that our control environment is adequate and operating effectively, with the exception of our external fraud risk controls and particularly the misappropriation of funds we advance to clients.
Bold steps have been taken to strengthen the control environment, mainly through enhanced diligence during the due diligence investigation and post-investment management stages, and to review activities to mitigate external fraud risk.
Information regarding risks managed by the Internal Audit Department is available in Section 5 online.
Our increased efforts during the review period to train employees in fraud and corruption prevention have made them more vigilant and diligent in reporting transgressions.
We introduced new training methods and awareness creation materials with a focus on making clients and stakeholders aware of the impact of fraud and corruption.
Despite our well-communicated zero-tolerance approach to fraud and corruption, some clients continue to test our preventative controls to seek irregular gains.
Risk: Subsidiary delivery and performance risk
Effective subsidiary delivery and performance was identified as a top risk during our annual Risk Assessment workshop. Unmitigated, this risk could result in financial loss for the IDC. The risk is mitigated by, inter alia, appointing directors to investee companies and using our Post-Investment Monitoring Department to monitor performance of these companies.
Nomination of directors
The IDC nominates professionally qualified employees to the boards of companies in which we have a major investment. These directors are critical to ensuring that we achieve our investment objectives in strategic industries.
The right to nominate and appoint directors to the relevant investee company boards is contained in the loan covenants and shareholders’ agreements entered into between the IDC and some of its clients. Our rationale for the nominations is twofold: firstly to exercise oversight over our investment by enabling well-trained, competent, high-calibre people to help embed sound corporate governance in a business environment; and secondly, to provide our nominee directors with opportunities and Board experience. In this way, the IDC contributes to the development of directors for the benefit of South Africa as a whole.
An identified shortcoming in our director nominations process has been insufficient IDC support to nominee directors. This has been due, partly, to the fact that as a shareholder and lender, the IDC is occasionally perceived as an entity with vested interests that would not necessarily consider the best interests of the investee company or its shareholders but rather look after its own interests first.
This perception is without substance, as our nominee directors do not take instructions from the IDC. They are expected to act in the best interests of the companies on whose Boards they serve and comply with their fiduciary duties at all times. This perception, coupled with the non-disclosure of relevant information by the executive management of investee companies referred to above sometimes meant that our nominee directors were the last to find out about important operational and strategic developments in those companies.
We believe that the risk of loss through fraud could, in many instances, have been mitigated or completely avoided had our communication with investee company boards and our nominee directors been better.
We therefore undertook a number of important initiatives to improve communication with our nominee directors and provide them with a support structure that promotes independent decision-making in the best interests of the companies on whose boards they serve.
The remedial initiatives include a revised Corporate Governance Case study Framework for investee companies to replace the first draft which was adopted in the 2013 financial year, as well as our first comprehensive Director Nominations Policy, both of which were approved by the IDC Board in November 2014.
The revised Corporate Governance Framework improves the way that we deal with our investee companies by:
- Recognising that the IDC takes on higher levels of risk due to its unique role as development financier
- Providing investee companies with sound corporate governance principles and processes
- Ensuring accountability, facilitating the flow of information between the IDC and investee companies and reducing potential exposure to investment and reputational risks
- Establishing a Centre for Corporate Governance Particulars of the Centre for Corporate Governance are provided in Section 5 online.
Director nominations policy for investee companies
The IDC Director Nominations Policy for Investee Companies is central to the way we deal with our investee companies and nominee directors.
Highlights of the policy include:
- A panel of professional directors consisting of IDC employees and external nominations
- A governance approach that takes into account the risk profile and specific circumstances of each individual company
- Guidelines for IDC interaction with investee company boards and nominee directors
- Guidelines to address real or perceived conflicts of interest for nominee directors and their oversight role
Implementation of the Corporate Governance Framework and Director Nominations Policy commenced during the reporting period. Currently, we are training nominee directors on the principles set out in the policy and providing them with refresher courses in corporate governance.
We support our subsidiaries in a number of ways, from shared services to the secondment of skilled employees. Our subsidiary sefa has an important impact on small business development and our support helps to maximise its growth through the optimal application of its resources.
The areas in which we contributed to sefa’s success include:
- Seconding experienced employees to assist with postinvestment monitoring, often for extended periods, to ensure that funds are timeously and correctly released for the benefit of small, medium and micro enterprises
- Seconding a senior legal manager to establish relevant systems and processes to enhance sefa’s legal capacity and ensure the desired levels of accuracy in drafting legal agreements
- Seconding an experienced internal auditor to help establish appropriate standards and related disciplines
- Seconding a dedicated person to assist with corporate strategy, business planning, performance monitoring and reporting, stakeholder interventions and guidance on business development initiatives
- Supporting sefa in several other areas on an ad hoc basis, such as with information technology, financial management, risk management, procurement, asset evaluations and human capital management
- Assisting sefa’s regional offices with appropriate transaction referrals, complementing sefa offerings and collaborating in some business development initiatives
The risk of the IDC not meeting its legal and regulatory requirements across various industries and countries of operation is regarded as material and a potential source of litigation. Key controls in place to mitigate this risk include the systems and procedures employed by the Legal and International Finance Department and those set out in our Compliance Manual and Policies.
The IDC is subject to various pieces of legislation in conducting its business operations. We remain committed to the letter and spirit of the law. Our compliance philosophy recognises the importance of ensuring continual adherence to the regulatory requirements as a critical part of effective regulatory compliance risk management. We ensure that our business activities comply with all the relevant regulatory requirements applicable to the Corporation. Some of the important pieces of legislation that influences IDC’s business activities include the Public Finance Management Act, IDC Act, Financial Intelligence Centre Act, Promotion of Access to Information Act and others.
The Corporation recognises its accountability to its clients and is committed to protecting the confidentiality of their information as required by relevant applicable regulatory requirements.
Whilst the IDC Board remains ultimately responsible for ensuring that we comply with regulatory requirements, the Compliance Function assists the IDC Board in mitigating the risk of non-compliance with regulatory requirements and assists business units/departments with identifying regulatory risks, developing compliance risk management plans and monitoring compliance within the IDC.
In the financial year under review, the Compliance Function has ensured that regulatory compliance risks associated with the IDC’s business activities were identified, assessed, challenged and reported. There were no contraventions, penalties, sanctions or fines imposed on the IDC due to non-compliance with regulatory requirements.
During the last quarter of the year under review we embarked on a new journey, to position the IDC as a leader in industrial development through the Project Evolve initiative. As a result, we established a new Compliance and Regulatory Affairs Department to ensure that we conduct business activities proactively and effectively. We will provide a report on progress made in this regard in our 2016 Integrated Report.
Additional governance-related information is available in Section 5 online.