Corporate Governance

In 1994 the King Committee on Corporate Governance, headed by former High Court judge, Mervyn King S.C, published the King Report on Corporate Governance (known as King I), incorporating a Code of Corporate Practices and Conduct. This report was the first of its kind in the country and was aimed at promoting the highest standards of corporate governance in South Africa.

Over and above the financial and regulatory aspects of corporate governance, King I advocated an integrated approach to good governance in the interests of a wide range of stakeholders. Although groundbreaking at the time, the evolving global economic environment together with legislative developments necessitated that King I be updated. To this end, the King Committee on Corporate Governance developed the King Report on Corporate Governance for South Africa, (King II), in 2002.

King II acknowledges that there is a move away from the single bottom line (that is, profit for shareholders) to a triple bottom line, which embraces the economic, environmental and social aspects of a company's activities. In the words of the King Committee:

"...successful governance in the world in the 21st century requires companies to adopt an inclusive and not exclusive approach. The company must be open to institutional activism and there must be greater emphasis on the sustainable or non-financial aspects of its performance. Boards must apply the test of fairness, accountability, responsibility and transparency to all acts or omissions and be accountable to the company but also responsive and responsible towards the company's identified stakeholders. The correct balance between conformance with governance principles and performance in an entrepreneurial market economy must be found, but this will be specific to each company."

The third Report on Governance in South Africa (King III) became necessary because of the anticipated new Companies Act (hereinafter referred to as the new Companies Act) and changes in international governance trends. The governance of corporations can be on a statutory basis, as a code of principles and practices, or a combination of the two.

The cost of compliance can be burdensome, both in time and money. South Africa has, therefore, opted for a code of principles and practices in King III on a "comply or explain" basis in addition to certain governance issues that are legislated.

In the case of the King III code, there is flexibility, because this type of code is a recommendation for a course of conduct. Thus, if a board believes it to be in the best interests of the company, it can adopt a practice different from that recommended in the code, but must explain it. Explaining the different practice adopted and the acceptable reasons for it, results in compliance. In the real world, the ultimate compliance officer is not the company's compliance officer or a bureaucrat ensuring compliance with statutory provisions, but the marketplace. King III, therefore, is on an 'apply or explain' basis.

The JSE Limited (JSE) requires listed companies to comply with King III. However, there are examples in South Africa of companies listed on the JSE that have not followed practices recommended but have explained the practice adopted and have prospered. In these examples, the board ensured that acting in the best interests of the company was the overriding factor, subject always to proper consideration for the legitimate interests of all stakeholders, including actual and potential investors and creditors.

For all these reasons, the King Committee continues to believe that there should be a code of principles and practices on an 'apply or explain' basis. Boards have to comply with their duties such as acting in good faith and in doing so, have to apply their minds in the best interests of the company in regard to any recommended practice, subject to the above qualification.but the marketplace. King III, therefore, is on an 'apply or explain' basis.

South African listed companies are regarded by foreign institutional investors as being among the best governed in the world's emerging economies and we must strive to maintain that high ranking. South Africa has benefited enormously as a result of its listed companies following good governance principles and practices, as was evidenced by the significant capital inflows into South Africa prior to the global financial crisis of 2008.

In contrast to the King I and II codes, King III applies to all entities regardless of the manner and form of incorporation or establishment. The principles have been drafted on the basis that, if they are adhered to, any entity would have practised good governance. It is recommended that all entities disclose which principles and/or practices they have decided not to apply and explain why. This level of disclosure will allow stakeholders to comment on and challenge the board to improve the level of governance.

Effective dates: It is expected that the new Companies Act will become operative on 1 April 2011, while King III became effective on 1 March 2010.

Corporate Governance in your organization: Should you require assistance in instituting effective Corporate Governance in your organization please ask us for assistance.