South Africa is a highly regulated society and compliance with the myriad of laws can be daunting for any business. Some of the laws are generic to all businesses, such as Broad-Based Black Economic Empowerment, tax, VAT, environmental and competition law. Other laws may apply to a corporation’s specific sector, like the banking or mining industries.
The key governance documents that have dominated the South African business community are the various King reports on corporate governance, starting with King I, published in 1994. It is no coincidence that King I coincided with the first democratic election held for all South African citizens. All of the King reports have their foundations in ethical and effective leadership.
The King IV Report on Corporate Governance for South Africa 2016 (King IV) is the most recent version. It considers best practice in corporate governance based on global trends and experience.
“The King code is premised on 16 principles having universal applicability, with only the implementation being different ”
There are differences between versions, as with King III and King IV and the move from ‘apply or explain’ to ‘apply and explain’. This is premised on 16 principles having universal applicability, with only the implementation being different, depending on the size and complexity of the organisation. This allows for stakeholders to make informed choices on whether or not their organisation is achieving the four good governance ‘outcomes’ (see below). Explanation helps organisations to see results rather than being forced to comply with corporate governance as a mindless task.
There are actually 17 principles in total, but the 17th only applies to institutional investors. Although listed companies are still required to report on it, even if the comment is just that principle 17 is not applicable.
King IV is based on ‘outcomes’. The organisation’s governing body must demonstrate ethical leadership through its strategy, policy, oversight and accountability roles by putting in place structures, processes and practices to achieve the following four outcomes: an ethical culture, good performance, effective control and legitimacy.
Unlike its predecessors, King IV applies to all juristic persons and compliance has been incorporated in the Johannesburg Stock Exchange (JSE) Limited Listings Requirements. It has been created to be more accessible to users and to reinforce compliance to governance as an integrated set of rules.
As King IV is principles based, there are no legal penalties for non-compliance. However, corporate governance is a ‘hot’ topic, partly due to recent high-level corporate failures in the private and public sectors. Public opinion is active in censoring corporations that transgress ethical and/or legal boundaries. For listed companies, such as retail firm Steinhoff International Holdings and IT services management company EOH, their share prices fell dramatically on publication of alleged corporate governance breaches.
South African governance does not give shareholders pre-eminence. Corporations need to adopt a stakeholder-inclusive approach. This means they must create value over time for the corporation and create value for its other stakeholders.
This is premised on the fact there is an interdependent relationship between a corporation and society, with their actions and decisions impacting one another. Because of this, an integrated approach should be adopted. This starts with integrated thinking between the different parts of an organisation, and should lead to more effective decision-making and integrated reporting which is more user-friendly to stakeholders.
Corporations also need a social license to operate legitimately. This means corporations must acknowledge they have rights, responsibilities and obligations to society and the natural environment. In many cases, this is supported by legislation such as the Companies Act No 71 of 2008 and other specific environmental legislation. The objects of the Companies Act include promoting compliance with the Bill of Rights, encouraging entrepreneurship and promoting investment in South Africa.
The approach to risk management has been expanded to include risk and opportunity. This requires the positive and negative consequences of decisions to be considered and evaluated.
Due to the rapid advances in technology, King IV views information and technology as connected but also separate sources of value creation – and of risk and opportunity. Accordingly, ‘information technology’ is now ‘technology and information’ governance, which should support the organisation setting and achieving its strategic objectives. With these advances, security and technology governance should be a key part of the agenda.
“It can take years to establish a good brand and a second to destroy it ”
Transparency and disclosure are key to effective corporate governance. This can be done through a variety of channels such as a corporation’s website, emails or social media. It is important for corporations to establish a stakeholder-relations programme and a crisis-management programme to enable it to respond promptly to matters that impact it – positively and negatively. It can take years to establish a good brand and reputation and a second to destroy it.
In any business, those who are charged with governance should make sure they understand compliance, not only as an obligation but as a way to ensure rights and protection. All of the laws and rules relate to one another so there is complete compliance. Mindful application of the implementation of codes of corporate governance helps to add value to an organisation rather than taking it away. It is important to monitor the regulatory environment as compliance with corporate governance is always changing.
In a new series, Governance and Compliance and TMF Group are looking at the differing international governance frameworks and their impact on business.
We are currently running a survey, asking for your views on international jurisdictions’ governance requirements.
On 26 July, TMF Group will host a webinar on the latest regulatory developments affecting EMEA subsidiaries. Visit the ICSA website for more information.