An audience with the GRI's Mervyn King
In 1992, as South Africa was embarking on the path to real democracy, the private sector saw that it, too, needed a new system of governance. Mervyn King, a veteran corporate lawyer and a former Supreme Court judge (he resigned after a row with then prime minister PW Botha in 1980), was tapped for the job.
King was chairman of the Frame Group, a textile giant, and executive chairman of First National Bank’s corporate and investment banking group, as well as being involved in a range of charitable endeavors.
‘I’m too busy,’ he demurred – but then the phone rang and he heard Nelson Mandela’s gruff voice: ‘How’s my favorite judge?’ That was when King knew he would help remake South Africa’s corporate governance. He formed what duly became the King Committee, authoring the King I report (1994), King II (2002) and King III (2009).
Earlier this year, as chairman of the Global Reporting Initiative (GRI), King visited New York, where he sat down with IR magazine’s Neil Stewart.
I remember landing in South Africa on April 27, 2004 and hearing on the radio the celebrations of ten years of democracy. Your country had become an example to the world. As for corporate governance, this small economy was punching way above its weight. How did South Africa go from pariah to a model of best practice?
I formed the King Committee just when the majority of our citizens needed guidance on how to operate in the economy because they’d never been in the economy. We couldn’t just cookie-cut what the UK or America had done. Instead we developed an inclusive approach to governance, taking account of the legitimate interests and expectations of the stakeholders in the decision-making process. That was the basis of King I in 1994, and the concept went around the world like wildfire.
Since then the corporate world has joined the sustainability movement, and so have you. Is Mervyn King the personification of the convergence of environmental, social and governance factors?
Going back to the Earth Summit in Rio de Janeiro in 1992, we realized the planet was going into crisis. The penny dropped and I suddenly saw that corporations had a huge role to play in making life on earth sustainable. I became passionate about it, and by 2002, when the Earth Summit took place in Johannesburg, we knew we had to rewrite the King Code. However, we made a mistake: we wrote a separate chapter on sustainability reporting and in consequence, companies started reporting on sustainability in a silo, rather than integrating it.
In King III, we corrected that mistake. I directed my committee on the basis that the cornerstone has got to be that governance, strategy and sustainability are inseparable; companies have to integrate them into the very fabric, the very rhythm or DNA of their business.
Did the financial crisis set back or advance the sustainability movement?
The financial crisis absolutely brought sustainability forward. It reinforced the idea that corporations are the greatest pool of human and monetary capital, and when a corporation fails, there’s a huge impact on society. On the other side of the coin, when you have a great corporate success, it impacts positively on society.
Look at the Coca-Cola Company, which operates in more than 150 countries. Around 10 years ago, when it opened a new bottling plant in the Indian state of Kerala, the water ran dry and Kerala sued Coke. Back in the boardroom in Atlanta, Coke’s directors realized that water was a risk factor in their business. To their credit, they started a long-term strategic plan summarized by the three Rs: reuse, replenish and recycle water. Now Coke recycles millions of liters of water around the world. Not only does it show that Coke is a good corporate citizen, so we keep drinking the product because of the company’s brand and reputation, but it also shows Warren Buffett and other investors that Coke has a long-term, sustainable business.
For hundreds of years, we had a ‘take, make and waste’ economy based on two false assumptions: that the planet has infinite resources, and that it has an infinite capacity to absorb waste. Wrong!
Another example: Procter & Gamble. There are 800 mn to 900 mn babies in the world, each using six to eight disposable diapers a day. Diapers covered in a chemical that’s toxic to water are going into landfills. So P&G – whose tagline is that they touch the lives of people around the world, 3 bn times a day – is spending millions on R&D to make a disposable diaper with less harmful chemicals. If that moves to the biodegradable disposable diaper, they’ll knock their competitors right out of the market.
What are investors doing to help shoulder these responsibilities?
Capital markets today are electronic and borderless. With the click of a mouse capital flows in, or it flows out. Institutional investors can make or destroy a market. Today major shareholders have more obligations than rights. A pension fund has to think about its beneficiaries and its responsibility to them when they retire in 25 or 30 years. They have to look at every company they invest in and ask, ‘Is this business sustainable?’
It’s a whole new way of thinking. Around the world, stewardship codes are being developed to guide the way financial institutions should act. Look at the UK, where stewardship is being incorporated into the Combined Code, or South Africa, which has just finalized the latest draft of a responsible investing code.
Can South Africa teach the rest of the world a lesson in corporate citizenship?
I’ll say this not as chairman of the King Committee, but rather repeating the words of Adrian Cadbury: King III is at the forefront of governance. In fact, King III is being referred to in reformulating the Combined Code in the UK.
South Africa may have a current account deficit, but capital keeps flowing into the country. Every working day the JSE securities exchange does about $2.5 bn in equity trades. A large part of that is foreign institutional money coming in. Why? CalPERS, Hermes, Templeton – they all say they invest in South African firms because they regard our listed companies as among the best governed in the world. And they are.
One last thing I have to know: how did you come to be Mandela’s favorite judge?
I think he used that phrase as a motivational tool! In the late 50s and early 60s, when I was a clerk and a young attorney, Mandela and Oliver Tambo practiced as attorneys in a little building opposite our lower court in Johannesburg. In the courts in those days, whites and blacks were separated by a divider. We were ‘learned friends’, but as a young white attorney, I could not have practiced in the same place as Mandela. This wicked absurdity amused him.
Later, after Mandela went to jail, I became chairman of Operation Hunger. The foreign press was reporting on what was happening because of apartheid in the urban areas, but the real suffering was in the rural areas, where children were starving. Through a businessmen’s ‘executive club’, we raised R10 mn ($1.4 mn) a year and fed 2.5 mn children every day for years. Mandela’s daughter Zindzi worked with me in Operation Hunger, so he knew of our work through his family. To this day we have a great relationship.
Over the last several months King has addressed the European parliament on the possibility of one set of integrated reporting across Europe; he is also one of the World Bank’s private sector advisers on corporate governance and chairman of the committee reviewing the UN’s governance after the food for oil scandal. He is the author of Transient Caretakers (with Teodorina Lessidrenska) and The Corporate Citizen.