An evaluation of corporate governance practices at PPC Limited Faith N. Kobo

Abstract This article evaluates corporate governance practices at Pretoria Portland Cement (PPC) Limited to determine whether it is a good, responsible corporate citizen, in terms of the requirements of the King Report on Governance for South Africa 2009 (King III) and ISO 26000 Guidance on Social Responsibility (ISO 26000). Pretoria Portland Cement (PPC) Limited received top award out of 57 companies who participated in the 2011 Nkonki/Financial Mail survey on compliance with integrated reporting requirements of the King Report on Governance for South Africa 2009 (King III) and the Global Reporting Initiative (GRI) guidelines. The survey, entitled South African Insights into Integrated Reporting, is an analysis of companies listed on the Johannesburg Stock Exchange (JSE) and the JSE Socially Responsible Investment (SRI) index in terms of their level of sustainability disclosure. The purpose of this paper is to provide an analysis of corporate governance practices at PPC Limited to determine whether the company is a good corporate citizen based on a consideration of principles outlined in the King Code of Governance Principles for South Africa 2009 (King Code) and ISO 26000 Guidance on Social Responsibility (ISO 26000). This analysis will be solely based on information reported in the PPC Limited integrated annual report for the period 01 October 2010 to 30 September 2011 and evaluated based on the characteristics of a good corporate citizen outlined in both the King III and ISO 26000. Introduction

Corporate governance refers to the way in which a company is led and operates. Regenesys emphasises that corporate governance needs to be defined according to the experience

within the company, (Regenesys, 2012). This means that the perception of governance within a company should not be a theoretical view but based on the culture and practices of the various governance elements. There are many aspects of governance addressed in the King III report, the main focus of this paper is Integrated Sustainability Reporting and Corporate Citizenship, Social Responsibility and Ethical Leadership. It is on this basis that the corporate governance practices of PPC Limited will be analysed. In the following sections, background information on PPC Limited will be presented, followed by an overview of corporate governance, corporate citizenship, integrated reporting, an evaluation of PPC Limited and concluding remarks. Background on Pretoria Portland Cement Limited

PPC Limited is the leading supplier of cement in Southern Africa through eight cement manufacturing facilities and three milling depots in South Africa, Botswana and Zimbabwe that can produce eight million tonnes of cement products each year. PPC Limited also produces millions of tonnes of aggregates, metallurgical grade lime, burnt dolomite and limestone, (PPC, 2011). According to its Focused Integrated Report 2011, PPC Limited has the following strategic priorities: • Focus on core business: Remain focused on core business, the manufacture and supply of cement, lime and aggregate products in our current operating areas. • Expand geographic footprint: Exploit growth opportunities in other emerging markets that will enhance shareholder value by diversifying the geographic footprint of the group’s income. • Generate sustainable cash flow returns: Ensure cash flow returns that allow for sustainable investment in current and new markets. • Achieve global competitiveness: Ensure operating efficiencies, overhead costs and environmental performances are in line with regional and international benchmarks. • Develop globally competitive people: People are a key sustainable competitive advantage and PPC Limited will continually prioritise the development of its people. • Practise sound corporate, social and environmental

Governance: We are committed to applying best practices in corporate governance and caring for the communities and environment in which we operate. Nkonki/Financial Mail Survey on Integrated Reporting

The Nkonki survey on Integrated Reporting focused on compliance with King III recommendations. “The purpose of this research is to acknowledge those Top 40 and SRI companies that have applied the true spirit of King III in corporate governance, sustainability and integrated reporting, even before it became a mandatory requirement”, (Nkonki Incorporated, 2011). “Integrated reporting for this year’s analysis was regarded as the strict application of the definition of integrated reporting by King III, meaning the production and publication of one rather lengthy report, containing the annual financial statements, the other parts of the annual report as well as the sustainability report. According to the analysis of the reports, this was clearly the perception of what application of King III should be”, (Nkonki Incorporated, 2011). The Nkonki survey identified companies that best applied the recommendations on integrated reporting and PPC Limited received the highest points, (PPC, 2011). “The factors considered in this research were not limited to sustainability or integration. The panel developed a grading plan and criteria to evaluate the Top 40 and SRI companies on the JSE. This was partly done to determine how well the largest companies were applying the recommendations of King III and which companies applied the recommendations better, those listed on the SRI -or Top 40 index”, (Nkonki Incorporated, 2011). An overview of corporate governance

Corporate governance refers to the internal systems of control within a company which ensure that companies are effectively protected and ethically directed and controlled by the human controllers, (Regenesys, 2012). (Regenesys, 2012) argues that since the company is regarded in law as separate from the shareholders and directors, corporate governance essentially aims to protect the profits and assets of the company from the abuse of these controllers i.e. directors and managers, to ensure that the best interests of the company and its stakeholders are protected.

Good governance therefore is essentially about effective leadership. The King Committee provides guidelines for the meaning of ‘effective leadership’ and states that, ‘Leaders should rise to the challenges of modern governance. Such leadership is characterised by the ethical values of responsibility, accountability, fairness and transparency, and based on moral duties that find expression in the concept of Ubuntu, (King Committee on Governance, 2009). In order to assess the corporate citizenship status of a company one needs to get an understanding of the corporate governance practices of such a company, therefore this section presents a brief overview of corporate governance and the key corporate governance principles. Corporate governance principles

There are generally recognised principles that underpin good corporate governance in South Africa and internationally and these are the core pillars on which the governance principles recommended by King III stand. These are: • Responsibility: The responsibilities of directors and officers and the duty of care. • Accountability: Directors and officers to be held accountable for decisions made and actions taken on behalf of the company. • Fairness: Balancing rights and expectations of stakeholders (e.g. protection of minority shareholder rights). • Transparency: Communicating in a clear, accurate, non-ambiguous manner and not only report the good news but to keep all stakeholders aware of the developments in the company. Corporate governance and legislation

King III states that there is always a link between good governance and compliance with legislation as good governance does not exist separately from the law, (King Committee on Governance, 2009). Legislation makes provision for the duty of directors and officers to discharge their legal duties, (The Companies Act, 2008) and corporate governance involves the establishment of structures and processes with appropriate checks and balances that enable directors to discharge their legal responsibilities and oversee compliance with legislation, (King Code of Governance

Principles for South Africa, 2009). The duties of directors and officers are grouped into two categories as follows: • The duty of care, skill and diligence: Directors are required to act in good faith and in the interests of the company, (Davis, D. and Mangalo, T., 2007). Wixley states that the director is in a position of trust therefore is obliged to act in the interests of the company and not in his or her own interests (Wixley, 2010). This duty requires directors to: • Avoid a conflict of interests; • Maintain an infettered discretion; and • Act with care and skill • Fiduciary duties: Flowing from the fiduciary relationship between directors and the company, directors have the following fiduciary duties towards the company they serve: • Disclosure of interest: Disclosure of any interest held directly or indirectly in a contract with the company, (Wixley, 2010). Wixley states that it is very important to provide these disclosures due to possible liability risks in terms of the Companies Act. • Insider trading: The Companies Act makes provisions for restrictions of trade where a director who has access to sensitive price information is restricted from trading on the basis of such access to information, (Wixley, 2010). • Prohibition on loans: Directors are prohibited from obtaining loans from the company they serve, (The Companies Act, 2008) to ensure that the directors act independently. Corporate citizenship

Many scholars has noted and recorded that globally corporate citizenship includes contemporary issues such as environmental and corporate social responsibility integrated triple bottom line reporting to ensure sustainability. According to the King Committee, responsible corporate citizenship implies an ethical relationship of responsibility between the company and the society in which it operates. King III emphasises that as responsible corporate citizens of the societies in which they do business, companies have, apart from rights, also legal and moral obligations in respect of their economic, social and natural environments. As a responsible

corporate citizen, the company should protect, enhance and invest in the wellbeing of the economy, society and natural environment. A good corporate citizen is characterised by being socially responsible and one manifestation of corporate responsibility is its social responsibility investment, (King Code of Governance Principles for South Africa, 2009). King III insists that in order for a company to be and be seen as a responsible corporate citizen, it should possess the following characteristics: • Consider not only financial performance but also the impact of its operations on society and the environment; • Protect, enhance and invest in the well-being of the economy, society and the environment; • The company’s performance and interaction with its stakeholders is guided by the Constitution and the Bill of Rights; • Ensures that collaborative efforts with stakeholders are embarked upon to promote ethical conduct and good corporate citizenship. Corporate social responsibility

According to King III, corporate social responsibility (CSR) is an important and critical component of the broader notion of corporate citizenship. One is a good corporate citizen, inter alia, by being socially responsible. Corporate responsibility is the responsibility of the company for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour that: contributes to sustainable development, including health and the welfare of society; takes into account the legitimate interests and expectations of stakeholders; is in compliance with applicable law and consistent with international norms of behaviour; and is integrated throughout the company and practiced in its relationships, (King Code of Governance Principles for South Africa, 2009). ISO 26000 provides guidance on how businesses and organizations can operate in a socially responsible way. This means acting in an ethical and transparent way that contributes to the health and welfare of society. ISO emphasises that companies’ relationship to the society and environment in which they operate is a critical factor in their ability to continue to operate effectively, (ISO 26000 Guidance on social responsibility, 2010).

According to (Ward, H., 2012), ISO 26000 helps companies to clarify what social responsibility is, helps businesses and organizations translate principles into effective actions and shares best practices relating to social responsibility, globally. It is aimed at all types of organizations regardless of their activity, size or location. The ISO 26000 standard specifically provides guidance on: • Concepts, terms and definitions; • The background, trends and characteristics of social responsibility; • Principles and practices relating to social responsibility; • The core subjects and issues of social responsibility; • Integrating, implementing and promoting socially responsible behaviour throughout the organization and, through its policies and practices, within its sphere of influence; • Identifying and engaging with stakeholders; and • Communicating commitments, performance and other information related to social responsibility. Corporate social investment

According to King III, corporate social investment (CSI) is one manifestation of corporate responsibility. In the narrow sense it refers to donations and other kinds of financial assistance (made for an altruistic purpose), and in the broader sense, includes other kinds of contributions beyond just financial assistance. Whilst Responsible Investment is an important aspect of corporate responsibility, it should be an integral component of a broader economic, social and environmental (sustainability) strategy, (King Code of Governance Principles for South Africa, 2009). Integrated reporting

One aspect of King III used in this analysis is that of Integrated Reporting due to its complexity and the high interest it has attracted since the launch of the King III report. It also proved to be a key element in the evaluation of PPC Limited as a result of the Nkonki/Financial Mail survey report on integrated reporting issued in July 2011. Integrated reporting refers to a holistic and integrated representation of the company’s performance in terms of both

its finance and its sustainability. An integrated report is expected to be focused on substance over form and should disclose information that is Complete, Timely, Relevant, Accurate, Honest, Accessible and Comparable with the past performance of the company, and should also contain forward-looking information, (Integrated Reporting, 2010). According to King III, the integrated report should contain adequate information on the operations of the company, the sustainability issues pertinent to its business, the financial results, and the results of its operations and cash flows. King III further states that integrated reporting should be focused on substance over form and should disclose information that is complete, timely, relevant, accurate, honest and accessible and comparable with past performance of the company. It should also contain forward-looking information. “In order to report in an integrated manner, companies will have to have implemented an integrated strategy. It will require a holistic process and will result in a report that explains how sustainability is connected to the company’s strategy, how sustainability performance, risks and targets are measured and monitored and the financial impact of sustainability”, (Massie, 2010). Integrated reporting and social responsibility

In clause 7.5, ISO 26000 provides a global context for reporting on social responsibility and states that “an organisation should, at appropriate intervals, report about its performance on social responsibility to the stakeholders affected”. It further states that, “in reporting to its stakeholders, an organisation should include information about its objectives and performance on the core subjects and relevant issues of social responsibility. It should describe how and when stakeholders have been involved in the organisation’s reporting on social responsibility”, (Ward, H., 2012). According to ISO 26000, an organisation should provide a fair and complete picture of its performance on social responsibility, including achievements and shortfalls and the way in which the shortfalls will be addressed, (Ward, H., 2012).

Evaluation of PPC Limited

The evaluation of corporate governance practices at PPC Limited focused on corporate citizenship and involved the 7 core subjects outlined in ISO 26000. Key observations can be summarised as follows: 1. Organisational governance

• • • •

High progress in implementing King III requirements; Robust compliance function is in place; Retained OHSAS 18001 health and safety certifications. “Our first integrated annual report received the highest ranking at the inaugural Nkonki Financial Mail Integrated Reporting Awards in 2011. Companies in this year’s survey were recognised for their pioneering spirit in producing integrated annual reports a year before becoming mandatory”, (PPC, 2011).

2. Human rights

• No specific observations 3. Labour practices

• 350 employees have benefited from various PPC academy offerings since 2007. 4. The environment

• PPC energy policy approved with defined targets for reducing energy and carbon footprint. • “As a leader in this industry, PPC has actively invested in technology to reduce air emissions, minimise waste production, recycle and recover raw materials, enhance energy efficiency and conserve natural resources – while producing a reliable and affordable supply of building materials to support the economies of countries where we operate”, (PPC, 2011). 5. Fair operational practices

• 84% of total procurement (R2,8 billion) spent with BBBEE suppliers. • PPC has maintained its level 2 status for broad-based black economic empowerment. This ranking is independently verified each year and is an important reflection of our focus on transformation and empowerment, (PPC, 2011). 6. Consumer issues

No specific observations 7. Community involvement and development

• 14 projects have been handed over to communities; • PPC uses an all-inclusive stakeholder engagement process. While engaging with such diverse stakeholder groups is challenging, PPC uses many avenues to facilitate this engagement and one of the most successful means has been through formal stakeholder forums at both corporate and operational level. “Accordingly, we exercise due diligence in all areas of operation and promote sustainable development in our business, among our employees, and in the communities and environment in which we operate”, (PPC, 2011). • During the 2011 reporting year, PPC was recognised for support for the arts – reflecting a group focused on every aspect of its role in society and its responsibility to stakeholders, (PPC, 2011). • BASA award for Increasing Access to the Arts, for our contribution to Hip Kulumakahle (FTHK) theatre company, and its education programme that aims to empower deaf performing artists in South Africa, (PPC, 2011). Focus area

2011 Targets

Actual performance

2012 Targets

People development

Maintain steady progress against PPC and mining charter targets.

5% of payroll on training.

Ongoing.

Organisational and succession plan

Further appointments in line with the One additional executive director three-year senior management plan appointment formulated in 2009.

Successful CEO succession

Corporate social investment

R8,5 million for South Africa.

R9,0 million invested

Over R9 million planned for 2012

Extend formal CSI initiatives to Botswana and Zimbabwe.

Five projects in Zimbabwe and Botswana completed

Continue projects in South Africa, Zimbabwe and Botswana

Zero fatalities. Long-term target: zero injuries. 2011 target: LTIFR