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Corporate Governance in South Africa

I. INTRODUCTION:

The term ‘Corporate Governance’ refers to the manner in which an organization should be governed or managed. The concept is more relevant in the case of companies which have germinated or grown based on equity capital taken from investors. Stocks of many such companies are listed in stock exchanges, which exposes them to the public and automatically brings them under closer regulatory scrutiny.

As per the principles enshrined in essence of corporate governance, the affairs of any organization should at all times be managed as per the relevant regulatory framework where the interests of shareholders/stakeholders are supreme. Here, corporate governance refers to the spirit of the statute rather than its letter alone. Thus morality, ethics etc. come into play in a big way.

Though these ideas may seem irrelevant on the capitalistic turf, past experience has shown that similar philosophies could have prevented fraud & mismanagement, therefore ceasing the erosion of shareholder wealth.

Responsible corporate citizenship implies an ethical relationship between the company and the society in which it operates.”

South Africa maintains a leading role in setting the agenda and standards for good practice in governance through the King reports developed for the past 20 years. King III is due to be succeeded in 2016 with King IV – an updated code is currently in development, and expected to become effective mid-2017.

The King Committee published the draft King IV Report on Corporate Governance for South Africa on 15th March, 2016.

King IV is bolder than ever before. Firstly, the Code is principle-based and follows an outcome-based rather than rule-based approach. This is in line with current international sentiment which promotes greater accountability and transparency.

It speaks to the expressed view that the application of the Code should contribute to the performance and health (sustainability) of the company. In this regard it is clear that King IV aims to establish a balance between conformance and performance.

The Code is further bold in its relentless effort to reinforce corporate governance as a holistic set of arrangements that concerns itself with ethical leadership, attitude, mind-set and behavior. This echoes global developments in the conduct risk arena and also seeks to address and prevent recent examples of corporate failure.

II. OBJECTIVES OF KING IV:

The objectives of King IV are:

  • Promote good corporate governance as integral to running a business or enterprise and delivering benefits such as
    1. An ethical culture
    2. Enhancing performance and value creation by the organization
    3. Enabling the governing body to exercise adequate and effective control
    4. Building and protecting trust in the organization and its reputation and legitimacy
  • Broaden the acceptance of good corporate governance by making it accessible for application by organizations of a variety of sizes, resources and complexities
  • Reinforce good corporate governance as a holistic and inter related set of arrangements to be understood and implemented in an integrated manner and
  • Present good corporate governance as concerned with not only structure and process but also an ethical consciousness and behaviour

III. PHILOSOPHY OF KING IV:

The philosophy of King IV is focused around:

  • Ethical and effective leadership
  • Company’s role and responsibility in society
  • Corporate citizenship
  • Sustainable development
  • Stakeholder inclusivity and responsiveness
  • Integrated reporting and integrated thinking.

This philosophy is centered on three paradigm shifts in corporate governance:

  • From financial capitalism to inclusive capitalism
  • From short term to long term sustainability
  • From solo reporting to integrated reporting

IV. CONTENT ELEMENTS AND DEVELOPMENT:

CHAPTER AND CONTENT GOVERNANCE OUTCOME

Chapter 1- LEADERSHIP, ETHICS AND CORPORATE CITIZENSHIP

Ethical leadership; organisational values and culture; Responsible Corporate Citizenship

ETHICAL OUTCOME

Chapter 2- PERFORMANCE AND REPORTING

Strategy; implementation, performance; reports and disclosures

PERFORMANCE AND VALUE CREATION

Chapter 3- GOVERNING BODY STRUCTURES AND DELEGATION

Roles of the governing body; composition of the governing body; committees of the governing body; delegation to the management, performance evaluation

ADEQUATE AND EFFECTIVE CONTROL

Chapter 4- GOVERNANCE FUNCTIONAL AREAS

Risk and opportunity governance; technology and information governance; compliance governance; remuneration governance; assurance

ADEQUATE AND EFFECTIVE CONTROL

Chapter 5- STAKEHOLDER RELATIONSHIPS

Stakeholders, responsibilities of shareholders

TRUST, GOOD REPUTATION AND LEGITIMACY

V. WHAT'S DIFFERENT BETWEEN KING IV AND THE EARLIER CODES:

  1. COMBINED ASSURANCE MODEL

    King IV has refined the concept and requirements of combined assurance by introducing the five level Combined Assurance Model. The model introduces the concept of horizontal and vertical relationships with reference to the depth and reach of the assurance provider. The model activities are coordinated to allow the matrix of assurance providers to enable effective control environment and integrity of reports.

    King IV recommends that the audit committee should establish the combined assurance model, as well as oversee the implementation of the combined assurance. The audit committee should oversee the scope of the model is informed by the material risks and opportunities.

    The combined assurance model within the King III Code was introduced through the following principle ‘the audit committee should ensure that a combined assurance model is applied to provide a coordinated approach to all assurance activities’.

    King IV has refined the concept and requirements of combined assurance by introducing the five level integrated assurance model. The lines of defence are separated by the level of risk ownership as well as the level of independence of assurance provider. Internal audit for example has been separated from external audit in terms of the levels of independence to the management of risk and control.

    The integrated combined assurance model has been allocated specific objectives within the King IV Code, primarily to assist the Board in assessing the adequacy and effectiveness of the internal control environment and assessing the integrity of the information used for reporting and decision-making. The combined assurance model and the components therein will therefore need to not only align the internal risk and control components but will need to consider external stakeholder reporting.

    Through the combined assurance model greater emphasis will be placed on providing assurance of the reliability of external reporting, i.e. primarily the Integrated Report. King IV requires the Board to apply its mind to this. The ability of the combined assurance model to provide this level of assurance will greatly depend on the effectiveness of such a model.

  2. DEFINTION OF INDEPENENT DIRECTORS

    The concept of independence has evolved from the position in King III. Whereas King III provided a list of disqualification from independence, King IV takes a more practical approach and focuses on the perception of independence, rather than factual independence or a tick-box approach. King IV emphasizes the fact that independence is predominantly a state of mind which is a moral characteristic and legal duty of all directors.

  3. STATERGY PERFORMANCE:

    King III encouraged the Board to play a prominent role in the strategy-development process and to approve both long-term and short-term strategies. This involvement in the strategy-development process has been controversial in that many Boards felt that management should develop the strategy with the Board providing oversight of the process.

  4. INTEGRATED THINKING AND INTEGRATED APPROACH

    King III introduced the concept of the triple bottom line reporting, where profit, planet and people were taken into consideration when reporting on performance. Financial performance in the short term needed to be balanced by the impacts and effects on the environment and society within which the organisation operated.

VI. Conclusion:

King IV very clearly focus on ethical leadership, transparency and sustainable growth is to be commended. It is our view that companies that strived to comply with the spirit of King III will adjust to King IV with relative ease.

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