In July 1993 the Institute of Directors in South Africa asked retired Supreme Court of South Africa, judge Mervyn E. King to chair a committee on corporate governance. The committee’s report, aptly named, was to be the first of its kind in South Africa – an opportunity to educate the newly democratic South African public on the working of a free economy.
Three reports were issued in 1994 (King I), 2002 (King II), 2009 (King III) and the fourth revision, the King IV Report on Corporate Governance for South Africa 2016, prepared by the Institute of Directors in Southern Africa NPC, the custodians of the King Reports, came into effect on 1 April 2017.
Here is a quick look at some of the more interesting amendments to the report-
BIGGEST REPORTING CHANGE
Apply or explain to apply and explain
Arguably, the most important shift in King IV relates to the discretion afforded to companies. Under King III, companies were able to get around a certain principle if they could explain why they should not be required to adhere thereto. However, King IV presumes that the principles set out have been applied and companies are required to explain how they were applied, rather than using the ‘explain’ mechanism to avoid adherence.
Companies would be able to use defences for not complying with King III by, for example, stating that the company is in the process of establishing compliance, or justifications based on company maturity or size. However, under King IV, a company would have to conform and explain how compliance is ensured.
GREATEST ALIGNMENT WITH INTERNATIONAL TRENDS
Recognition of Information Technology
The Deloitte Global Trends in Corporate Governance (2015) identified the governance of Information Technology as an emerging issue in Corporate Governance. Although the Financial Intelligence Centre Act (FICA) has opened the door for better management of information, providing further guidelines to Directors would amplify companies’ understanding.
Seven years have passed since King III became effective so the old practices are no longer in line with the way that technology is used.
Understandably, the new Corporate Governance guidelines had to consider the development and importance of technology in the modern corporate landscape. Principle 12 sets out guidelines, emphasising the need for responsibility and policies to ensure information security and management.
BIGGEST THEORETICAL SHIFT
The roles and responsibilities of stakeholders
Although there is a new emphasis on the roles and responsibilities of stakeholders, it is submitted that other legislation, such as the Companies Act 71 of 2008 and Labour Laws, has moved South Africa to a stakeholder-inclusive approach already.
As such, it is suggested that the new emphasis on outcomes will result in a shift in how companies approach Corporate Governance. The Code sets out the ultimate desired results, being Ethical Culture, Good Performance, Effective Control and Legitimacy, and thereafter outlines principles that could assist in its achievement.
By way of example, the desired outcome of Effective Control is supported by, inter alia, the following Principles:
Principle 6: The governing body should serve as the focal point and custodian of corporate governance in the organisation.
Principle 7: The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively effectively.
Principle 8: The governing body should ensure that its arrangements for delegation within its own structures promote independent judgement, and assist with balance of power and effective discharge of its duties.
Principle 10: The governing body should ensure that the appointment of, and delegation to, management contribute to role clarity and effective exercise of authority and responsibilities.
These principles are then, in turn, supported by practices that would ensure compliance with the Code. King IV’s emphasis on consequences and principles seems to conform to the overall effort to make Directors more accountable.
Although King IV remains mostly voluntary, it would benefit companies to apply King IV as far as possible so as to ensure adherence to international standards and best practices.
Regardless, the philosophy of the code remains the same, that of leadership, sustainability and good corporate citizenship.
Author: Grethe Carr – Candidate Attorney, Commercial Litigation