GOVERNANCE ETHICS

QUESTION 1

In the contemporary business environment, the importance of effectively managing

personality risks in corporate governance cannot be overstated. The case of Tongaat
Hulett, a prominent agribusiness company in South Africa, provides a stark
illustration of the consequences when such risks are not adequately addressed. The
company's downfall, precipitated by the accounting fraud scandal involving its former
Chief Financial Officer (CFO), Murray Munro, highlights the critical need for robust
mechanisms to manage the influence of individual personalities on corporate
governance. This essay aims to identify and discuss five key ways in which
personality risks in corporate governance should have been managed at Tongaat. It
will then evaluate how at least three of these methods were demonstrated (or
lacked) in the Tongaat case, supported by specific examples and evidence from the
case study. This analysis is crucial for understanding how similar risks can be
mitigated in other organizations to prevent such corporate governance failures.

1. Robust Internal Controls and Oversight: Effective internal controls are

crucial in managing the risks associated with individual personalities in
corporate governance. These controls should include stringent financial
reporting procedures, regular audits, and oversight mechanisms to detect and
prevent fraud or misstatements. In the Tongaat case, such controls might
have identified discrepancies in financial reporting earlier.

2. Transparent and Ethical Leadership: Corporate culture is often a reflection

of its leadership. Promoting a culture of transparency and ethics, especially at
the executive level, is vital. This involves setting clear ethical standards and
holding all members, including high-ranking officers like CFOs, accountable to
these standards. At Tongaat, a culture where ethical behavior is valued and
demanded might have discouraged fraudulent activities.

3. Diverse and Independent Board: A diverse and independent board can

provide a range of perspectives and is less likely to be influenced by dominant
personalities, like a CFO. This diversity includes not just demographic aspects
 but also diversity in skills and experience. Had Tongaat's board been more
independent and diverse, they might have been more questioning of the
CFO's actions and financial reports.

4. Regular Training and Development: Regular training for all employees,

particularly those in governance and financial roles, on ethics, corporate
governance, and risk management can help mitigate personality risks. This
training helps in building a common understanding of the company's values
and the importance of ethical behavior.

5. Whistleblower Policies and Protection: Encouraging employees to report

unethical behavior without fear of retaliation is another important aspect. An
effective whistleblower policy could have provided a channel for employees at
Tongaat to report any suspicious activities they observed.

Evaluating Ways Demonstrated in the Case Study:

1. Pursuit of Accountability: The case study shows that Tongaat and

regulatory bodies like the JSE are holding individuals accountable for their
actions. The fine imposed on the former CFO and the barring from holding
director positions demonstrate a clear attempt to enforce accountability. This
is an example of post-issue management, where actions are taken to address
the consequences of personality risks materializing.

2. Legal and Regulatory Actions: The initiation of civil claims and criminal
charges against key individuals, including the former CFO, is another way of
managing personality risks. This shows that Tongaat is actively seeking to
rectify the wrongdoings and recover losses. It also serves as a deterrent for
future misconduct by highlighting the serious consequences of unethical
behavior.

3. Public Disclosure and Transparency: The JSE's public censure of the

former CFO and the disclosure of the ongoing investigations promote
transparency. This is critical in restoring investor and public confidence. It
demonstrates a commitment to addressing governance failures and being
transparent about the steps being taken.
In conclusion, while the measures taken by Tongaat and the JSE post-scandal are
steps in the right direction, the case also highlights a failure in preemptively
managing personality risks. The absence of robust internal controls, a lack of a
proactive ethical culture, and possibly inadequate board oversight allowed the
personality risks associated with the former CFO’s actions to go unchecked for an
extended period. This case underscores the importance of comprehensive risk
management strategies that include preventive measures against personality risks in
corporate governance.

QUESTION 2

In his 2015 research, Okoye pinpointed three significant challenges that have
sparked a heightened interest in risk management within organizations. These
challenges are particularly pertinent in the context of the Tongaat Hulett case.

1. Complexity of Financial Transactions and Reporting: The Tongaat case

highlights the complexity of financial transactions and reporting. The
company's financial misstatements and the intricate accounting fraud that took
place under Munro's tenure are indicative of this complexity. These
complexities can obscure financial realities, making it difficult for stakeholders
to discern the true financial health of the company.

2. Globalization of Business Operations: While the Tongaat Hulett case is

predominantly local, the principles of globalization in business operations are
still relevant. Global standards for financial reporting and risk management
are increasingly important as companies, even those operating primarily in
one country, must often engage with global markets and stakeholders.

3. Increased Regulatory Scrutiny and Compliance Requirements: The

Tongaat Hulett scandal resulted in significant regulatory scrutiny, as
evidenced by the JSE's investigation and the subsequent actions taken
against Munro. This scenario underscores the importance of compliance with
regulatory standards and the consequences of failing to meet these
requirements.

Relevance of Caplan et al.'s Recommendations:

In examining the failure of Lehman Brothers, Caplan et al. (2010) provided several
recommendations that are highly relevant to the Tongaat Hulett case. Of these, the
most pertinent recommendation is the need for robust risk management frameworks
that are integrated into the organization's culture.

1. Integration of Risk Management into Corporate Culture:

 The importance of a risk-aware culture is paramount. At Tongaat

Hulett, a culture that perhaps overly prioritized financial performance
without adequate regard for risk management and ethical standards
contributed to the scandal. The CFO’s ability to manipulate financial
statements for years suggests a systemic failure in incorporating risk
management into the company's core values and operations.

 Caplan et al. emphasize the need for a culture where risk management
is not just a compliance exercise but is embedded in the daily activities
of all employees. This approach would involve regular risk
assessments, transparent communication about risks, and continuous
education and training for employees.

 In Tongaat’s case, a stronger risk management culture might have

encouraged more skepticism and vigilance, possibly leading to an
earlier detection of the financial irregularities.

2. Other Relevant Recommendations:

 Enhanced Board Oversight and Independence: The Tongaat case

also illustrates the need for boards to be more actively involved in
overseeing risk management and to maintain independence to provide
effective checks and balances.

 Improved Transparency and Reporting: Greater transparency in

financial reporting and a commitment to adhering to international
financial reporting standards are essential. This aligns with Caplan et
al.’s recommendation for more accurate and transparent reporting of
financial and risk information.
In conclusion, the challenges identified by Okoye are highly relevant to the Tongaat
Hulett case and underscore the importance of effective risk management in
organizations. The recommendation by Caplan et al. to integrate risk management
into the corporate culture is particularly pertinent. This, along with enhanced board
oversight and improved transparency, could have potentially mitigated the risks that
led to the downfall of Tongaat Hulett. The case serves as a cautionary tale for other
organizations to heed these recommendations to prevent similar failures.