MORAL COMPASS - JSE MAGAZINE

MORAL COMPASS

The fourth version of the King Report, outlining corporate governance codes, moves away from ‘ticking boxes’ and details outcomes of responsible and ethical business leadership

MORAL COMPASS

Companies across the country are getting to grips with the latest version of the King code on business governance, weaving it into their everyday practices and policies with the goal of becoming more open, ethical and accountable.

The King Committee published the King IV Report on Corporate Governance in South Africa (King IV) in November 2016. It sets out principles to strive for and achieve. It’s a pared-down, focused shift from its predecessor, King III, with principles ranging from ethical leadership to fair and transparent remuneration.

‘Following the launch of King IV, we are seeing a greater awareness of the value and outcomes of corporate governance. We hope that it will result in a move from a “grudge compliance” mentality towards governance, to a value-enhancing mentality,’ according to Parmi Natesan, executive director of the Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA).

Compared to King III, which was largely rules-based and focused on compliance, King IV embraces responsible and conscious leadership with a more outcomes-based approach.

Corli le Roux, Head of Sustainability at the JSE, says King III went a long way in establishing the governance of ethics, which was mirrored on board committees. However, King IV takes this a step further, as companies have to demonstrate what they are doing to be ethical.

‘King IV moves away from “ticking boxes” about the numbers of directors, board structures and attendance at meetings, and instead looks at the outcomes. It’s a qualitative way of thinking about governance,’ says Le Roux, who believes it will pay off in the long run. ‘It’s bound to attract interest from the kind of investors that appreciate the importance of good governance.’

With King IV, company secretaries and those tasked with corporate governance are drilling deeper into their organisations to show how they are upholding the governance codes. King IV proposes an ‘apply and explain’ regime, in contrast to the ‘apply or explain’ system in King III, says Natesan.

The shift has been timely. Corporate governance is even more pertinent in SA currently, particularly given the controversy surrounding state-owned entities and the recent credit downgrades, says Stephen Sadie, CEO of Chartered Secretaries Southern Africa (CSSA). ‘South Africa is highly respected for its corporate governance in certain sectors of the economy. Many of our international counterparts think King IV is one of the best corporate governance codes in the world, but we have been let down by the terrible lapses of corporate governance in some of our state-owned entities in particular. That’s why the King code is more important than ever. We need to see it applied across all sectors in South Africa,’ says Sadie.

Carla Clamp, advisory services director at accounting and advisory firm Grant Thornton, says it focuses on ethical leadership, corporate citizenship, stakeholder inclusivity and the performance of the governing bodies. Apart from advising clients in these key areas of governance, Grant Thornton also envisages these principles for itself. It has ensured that the firm’s leaders are well aware of the policy and procedures through board and management training about King IV and the way it applies to the current governance model.

Clamp says King IV is starting to have a positive impact on SA’s corporate leaders. ‘King IV is making corporate leaders pay more attention to the proper evaluation of the sustainability of their companies and to look at their companies differently, focusing more on reviewing their organisation through the perspective of their stakeholders.’

There’s been widespread support for the new sector supplements in the report. This has been introduced to help organisations across a wide variety of sectors and organisational types to interpret and implement King IV, according to their particular circumstances.

Sadie says this is an excellent move, as it tailors principles according to whether the organisation is, for example, a state-owned entity, a retirement fund, an NPO, an SME or a municipality. He adds that it’s encouraging that an increasing number of companies, NPOs, SMEs and retirement funds are applying King IV.

‘It’s a home-grown code – well-established, well-developed and well-respected over the years,’ says Sadie, who has served on the King Committee for the past nine years. As CEO of CSSA, which is a professional body for company secretaries and governance professionals, he has also highlighted the vital role that company secretaries play as the custodians of corporate governance, as corporate governance is in the DNA of company secretaries.

‘We have observed that should the mentality at the highest level of management not be 100% aligned with the corporate governance goals and guidelines of the organisation, and more importantly that these goals are constantly monitored and instilled into every level of management below them, inevitably the company secretary is merely performing corporate governance from a checkbox point of view,’ says Rhys Robinson, executive director: strategic partnerships and marketing at Infinitus Reporting Solutions.

‘The ideal world situation, however, is definitely one where a company secretary understands the business and is constantly interacting with various role-players within the organisation, taking active interest in their compliance, assisting where issues arise and being able to manage, advise and report to top-level management on corporate governance issues.’

While there is still much scope for more entities and companies to sign up to King IV, the way corporate governance has cascaded across sectors is very positive, says Le Roux. ‘It reinforces that governance is a core issue across the spectrum across business and industry, and should be at the centre of leadership.’

It’s largely up to governing bodies of companies to raise their level of corporate governance. They are also tasked with a hotly debated new principle on remuneration. In particular, companies will have to consider the wage gap between company executives and the general workforce.

The inclusion of remuneration in King IV has already deepened the debate on shareholder votes on remuneration, as well as the role of remuneration committees in linking value creation to pay.

While many companies and organisations digest the new principles, it may take a little longer to kick in for others, as King IV only comes into effect for years beginning on or after 1 April 2017.

The JSE provides training on King IV in partnership with the IoDSA. This is facilitated by some of the members of the King IV task team themselves, who have inside knowledge of the rationale and reasoning behind the changes. The IoDSA will also be issuing guidance documents to help ease the application of King IV, while individual gap analysis for organisations will be available. King IV is available for free to view, download and print from the IoDSA website, and via a mobile app.

Le Roux says the JSE ’s involvement in training is to equip its stakeholders to apply King IV efficiently. ‘It is in their best interests to understand what King IV entails, not only to meet listing requirements but also to run sustainable businesses. As with previous iterations of the King code, JSE-listed entities have to disclose in their annual reports the implementation of the code. This is despite the fact that application of the King code is generally voluntary. This approach underpins the commitment to ensure corporate South Africa displays excellence in governance.’

The change is effective for annual reports submitted to the JSE on or after 1 October 2017. All new listings as of 19 June 2017 must comply with King IV.

‘We warn our clients against overshooting in their corporate-governance reports,’ says Shantel Dartnall, head of governance services at Statucor. ‘Resist the urge to impress your stakeholders by trumpeting that you have achieved, say, fair remuneration, or responsible corporate citizenship. We should aim to report responsibly and with a fair amount of transparency to enable the uninformed reader to understand the company better.

‘Rather approach this as a journey. Map a plan of your company’s journey towards achieving these outcomes in the future. Communicate this clearly with your stakeholders and then year by year, report on your steady progress,’ she says. ‘Be transparent about saying, “We’re moving towards this, these are our goals. We haven’t got there yet, but this is the process we intend to follow”.’

From now on, organisations will need to do more to prove that they are actively pursuing corporate governance, but it is for the greater good. By playing their part, they will be plotting the course towards a more sustainable and equitable future for their own entities, as well as society.

By Kim Cloete
Image: Gareth van Nelson/HMimages