When governance is optional, failure is inevitable – Part I

I jumped the turnstiles, evading reception and security at Business Day’s gleaming new Rosebank offices in 1997 and slapped an unsolicited article on the editor’s desk, turned tail and left with the curt instruction: “Use it, or don’t.”

Some days later, the piece was published with the title “Corporate Governance Must Be Prescribed”. I argued that the first King Committee report, published in 1994, adopted a non-prescriptive approach and was not merely short-sighted – it was wrong.

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In the 29 years since, the core argument has not been meaningfully challenged, and subsequent developments suggest a different path may have been warranted.

South Africa has seen a passing parade of corporate collapses, both immediately pre-King and post-King – such as Fundstrust (1991), Tollgate Holdings (1992), Macmed Healthcare (1999), LeisureNet (2000), Regal Treasury Bank (2001/2002), Saambou Bank (2002), Fidentia (2007), Sharemax (2010), African Bank (2014), Steinhoff International (2017), VBS Mutual Bank (2018), EOH Holdings (2019) and Tongaat Hulett (2019-2022).

The cumulative corporate value destroyed is estimated at R400 billion-plus.

This excludes investment fraud and Ponzi schemes, to which you can add R50 billion to R70 billion-plus.

It also excludes state-owned enterprises with R1.03 trillion in Special Investigating Unit (SIU) Directorate for Priority Crime Investigation (DPCI) investigations.

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And it excludes small and medium-sized enterprises (SMEs), which account for 98% to 99% of registered businesses and, together with unlisted and informal enterprises, contribute 50% to 60% of GDP.

‘Essential’ … yet lacking

The non-prescriptive model championed by Judge Mervyn King – largely borrowed and adapted from the UK Cadbury Report and the US Treadway Commission – was presented as essential for a young democracy navigating post-apartheid southern Africa.

Prescription, it was argued, would have a “possible braking effect” on businesses’ ability to compete and would “potentially serve to perpetuate and entrench past inequalities”.

I found the statement deeply concerning at the time. The data has since made it difficult to defend.

The key limitation in King I was obvious: it was explicitly a participative model that delegated interpretation and implementation to the very people best placed to cause the most significant damage – those with the greatest financial control.

I countered with hard data from the 1996 Wells Report, then the largest-known private study of fraud in the world.

It showed median losses of $60 000 caused by non-managerial employees, $250 000 by managers, and $1 million by owner/executives. The loss differential was almost entirely attributable to the level of financial control exercised.

I argued that “the buy-in suggested by the King report allows too much leeway in the practical interpretation and implementation of its recommendation … to have any meaningful effect as even a partial response to the prevailing climate of economic lawlessness”.

I also argued that “nonprescriptive corporate governance may serve to ensure the perception that corporate governance itself is the perpetuation and entrenchment of past inequalities”.

Confict and chasm

The reports were commissioned by the Institute of Directors; King himself had resigned from the bench in 1980 as an “act of conscience” and later held executive roles in major companies – an arrangement I viewed as inherently conflicted.

Elements of the King philosophy found their way into the Companies Act 71 of 2008 – most notably the codification of directors’ fiduciary duties (sections 76 and 77), audit committees for public interest entities (Section 94), enhanced financial reporting, and the “apply or explain” governance framework.

The act also introduced director disqualification provisions, personal liability under Section 77, reckless trading under Section 22, and civil remedies under Section 218(2).

In theory, very strong. In practice, enforcement is limited, cases are rare, and deterrence modest.

South Africa does not lack corporate governance law; it lacks mandatory consequences rather than optional ones.

While the country possesses a world-class legislative and guiding framework, a ‘chasm’ exists because the most comprehensive standards are not always legally binding.

The auditing profession’s original sin and its tragic consequences

The Masterbond collapse and the Nel Commission of Inquiry into the Affairs of the Masterbond Group and Investor Protection in South Africa of 1997-98 proved the point at tragic human cost.

The Nel Report exposed “serious deficiencies in the South African supervisory system and in those sections of the Companies Act which were designed to protect investors”.

It also exposed “a significant degree of dishonesty, inefficiency, lack of professional integrity and lack of independence on the part of some of the auditors involved”.

It investigated not only Masterbond but a string of similar collapses – Owen Wiggins Group, Cape Investment Bank, Supreme Group, Alpha Bank, Prima Bank and others – all built on opaque participation bond schemes and phantom investments.

Twenty-two thousand investors lost R650 million.

Sixteen pensioners committed suicide after discovering their life savings had vanished.

Clearly, at some point the question I posed in the closing paragraph of my Business Day article of November 1997 must be asked: “[W]hether we can afford not to legislate corporate governance and whether such legislation would have the effect of hampering the economy any more than nonprescriptive corporate governance clearly does.”

Oversight: The audit profession as a cultural signal

This is a key point often overlooked. Auditors don’t just detect fraud – they signal what is acceptable.

In the Masterbond saga, Ernst & Young, Judge Hennie Nel found (and with few exceptions, auditors in the other cases demonstrated) that they appeared to believe their function was “to assist and protect the management of such company as far as possible” and that “the end justifies the means”.

I drew a direct parallel with the R400 million fraud I helped uncover at the Johannesburg Fresh Produce Market in the 1990s – again with Ernst & Young as the historical auditors, and again with evidence disappearing and reports compromised.

In the market scandal, the Auditor-General’s investigation was compromised from the outset: the client set the terms of reference, the historical auditor was recommended, key evidence (over 200 items) disappeared, and the final report contained impossible references to transactions dated after the investigation period.

On 16 January 1998, I wrote in Business Day that current trends in auditing practice were contributing to “a serious erosion of business ethics and standards”.

The profession’s subscription to the Statement on Auditing Standards Article 5.3.2 – allowing one firm to provide the annual attest function, internal audit and forensic audit to the same client because it was “economical in terms of skill and effort” – was a serious lapse in responsibility.

We didn’t ban the conflict; we asked auditors to manage it. Predictably, some went on to monetise it.

Despite Independent Regulatory Board for Auditors (Irba) independence rules, international standards, JSE listing requirements, King IV and the Companies Act 2008, we still relied on disclosure, judgement, and “independence in appearance” rather than hard prohibitions and behavioural change.

We regulated the structure but never reset the mindset.

Fraud lives here, not in spreadsheets, audit files, or compliance frameworks, but in rationalisation, pressure, and perceived acceptability.

If leadership sees auditors managing conflicts rather than eliminating them, why would anyone else behave differently?

The system-wide consequence?

Auditors tolerate grey areas, executives push boundaries, employees rationalise behaviour, fraud becomes culturally permissible; when fraud is no longer a control failure, it’s a permission structure.

We keep trying to solve fraud with better rules, better audits, and better oversight, but fraud was never a technical problem to begin with.

You can rotate auditors, tighten regulations, and increase disclosures.

But if the system quietly signals that conflicts are manageable instead of unacceptable, fraud doesn’t decrease – it evolves.

What the system really says is that conflicts are acceptable, ethics are negotiable, and compliance is enough. It is a system where the outcome – fraud – is a permission structure.

It is one where culture eats control for breakfast.

This is the first article in a three-part series.

* Bart Henderson is a veteran fraud risk specialist and forensic investigator with nearly three decades of experience at the highest levels of financial crime detection, investigation, and litigation support across South Africa and beyond.

An original official research partner for the New Partnership for Africa’s Development (Nepad) African Peer Review Mechanism, Henderson spent over two decades advancing fraud risk methodologies across South Africa and the broader African continent. During this time, he developed and refined what became a pioneering 72 Red Flag/400 Rule forensic audit and investigation model – a system that broke decisively from traditional silo-based methodologies and anticipated what is now widely recognised as Enterprise-Wide Fraud Risk Management.

As a lecturer, Henderson has presented on the subject at multiple white-collar crime symposia and summits as a main speaker alongside Judge Willem Heath, Advocate Willie Hofmeyr, Peter Goss, Martin Welz, and others of his generation. He also serves on contract to the Institute of Internal Auditors (SA), the Institute of Chartered Accountants (ZW), AusAID, the Central Bank of Kenya, the Central Bank of Nigeria, and a host of state-owned enterprises throughout Africa.

In both prosecution and defence environments, he has been advisor, and represented high-net-worth individuals, senior executives, government officials, cabinet ministers, and a former head of state.