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Company Law: The importance of KING IV’S principles on Corporate Governance

In light of recent events and certain professions going under review by regulatory bodies, we once again are reminded to be cognisant of the importance of applying principles of governance in an organisation that are not only proper but also effective. Corporate governance is defined by King Code IV as the exercise of ethical and effective leadership by a governing body towards the achievement of the following governance outcomes: ethical culture, good performance, effective control, and legitimacy.

In this article, focus is given to the leading governance model entrenched in King Code IV which came into effect on 1st April 2017 and has been leading organisations to date. Particular attention shall be paid to the history of corporate governance and the applicability of the King IV principles in the present-day business environment.

Background to the history of corporate governance

In South Africa, the King Committee was formed in 1992 and the first King Report on Governance was published in November 1994.

King I aimed to assist companies and their directors by providing an extensive set of principles and guidelines to apply within a company. It established recommended standards of conduct for boards and directors of listed companies, banks and certain state-owned enterprises. It was applicable to all companies listed on the main board of the Johannesburg Stock Exchange, large public entities, banks, financial and insurance companies, and large unlisted companies. King Report I adopted an integrated approach and went further than the financial and regulatory aspects of corporate governance.

After high profile scandals causing the collapse of various large corporations, such as the fall of the Wall Street darling Enron, interest in corporate governance spiked. Such interest resulted in the Sarbanes-Oxley Act of 2002 in America which had in turn influenced many other countries to follow suit.

Focussing on South Africa, the failure of LeisureNet (aka as the Health and Racquet Club) was described by the courts as “the largest corporate collapse in South African history”.

In March 2002, the King Code II was released into the business industry.  King II extended the list of institutions to which the code applied in that it applied to private entities as well as organs of state.

In conjunction with the release and applicability of King Code II, legislation was also in the process of being amended or new legislation being promulgated to become prescriptive on certain matters pertaining to governance.

The economic crisis of 2008, had once again, highlighted the importance of corporate governance.

In 2009, King Code III was released which incorporated some of the growing global trends such as alternate dispute resolution. Principles of IT governance and business rescue were also introduced in the Code. King III also saw the Companies Act 71 of 2008 coming into existence which dedicates a chapter to governance as well as the Consumer Protection Act and National Credit Act.

King IV

King codes I, II and III focussed on ethical and effective leadership, which find universal application.  These King Codes applied to listed companies and suggested application to private, smaller companies and non-profit companies.

One of the critiques which the King Committee was continuously faced with was the notion that the principles of King cannot be applied throughout the various industries operating in the business environment. The King Committee was thus, tasked to make the Code easily applicable to all types of organisations.  Accordingly, King IV applies to all types of entities and provides sector supplements to assist entities in applying the principles of King IV.  The sector supplements include: municipalities, non-profit organisations, retirement funds, small and medium enterprises and state owned enterprises. However, King IV now applies to all entities, even if there is not a specific sector supplement that provides guidance to any other type of entity that is not covered by the sector supplements.  King IV further developed its terminology and refers to organisations and governing bodies instead of companies and boards of directors.

King IV also moved away from ‘apply or explain’ to ‘apply and explain’. King IV moved away from a tick-box approach and organisations are required to explain how the principles are being applied within the respective organisation.

There is a reduction of principles from 75 principles in King III to 16 principles + 1. The additional 17th principle pertains to institutional investors and is only applicable to a certain category of the business community. Although the principles have been reduced, each principle is supported by recommended practices which, if implemented by an organisation, should lead to achieving each principle.

16 of the principles can be applied by any organisation and requires the organisation to substantiate a claim that good governance is being practiced.

Some of the benefits[1] of applying the principles of King IV to an organisation include but are not limited to the following:

  • Enhancement on credibility and reputation;
  • The organisation shall greater access to capital and loans on favourable terms;
  • The introduction of skills into an organisation through employment;
  • Better positioning to capture business opportunities;
  • More effective fraud prevention due to improved controls;
  • Business continuity arrangements that permit the organisation to operate under conditions of volatility and to withstand and recover from acute shocks;
  • Leadership continuity through succession planning; and
  • Better management of the risk of conflict in family businesses and businesses where shareholders and directors are one and the same.

 The interplay between legislation and King IV

South African legislation has embarked upon setting out the minimum governance requirements. King IV is a mere enhancement of legislative governance requirements. Should a conflict exist between King IV and any applicable legislation, the legislation shall always prevail.  Where there is no conflict but King IV sets a higher standard, then King IV should be applied.

In our South African courts, there has been significant recognition to the application of the practice of good corporate governance and the King Code.

In the case of Minister of Water Affairs and Forestry v Stilfontein Gold Mining Co Ltd and Others[2], the judge confirmed that the “practising sound governance is essential for the wellbeing of a company and is in the best interests of the growth of this country’s economy especially in attracting new investments”.

More significantly in the case of South African Broadcasting Corporation Ltd v Mpofu and Another[3], “companies and their boards are required to measure up to the principles set out in the Code…. The Code regulates directors and their conduct not only with a view to complying with the minimum statutory standard but also seek to adhere to the best available practice that may be relevant to the company in its particular circumstances… the board has a collective responsibility to provide effective corporate governance and should exercise leadership, enterprise, integrity and judgment in directing the company”.

Applying King IV

In terms of King IV, the governing body’s primary governance roles and responsibilities are to:

  • Steer and set strategic direction;
  • Approve policy and planning;
  • Oversee and monitor; and
  • Ensure accountability.

The governing body strives to achieve its governance roles and responsibilities by applying the principles and their supporting practices. This is more often than not, done through legislative compliance review and thereafter updating policies and procedures to ensure legislative and King IV compliance.

The application of the principles and their supporting practices should result in:

  • Ethical culture;
  • Good performance;
  • Effective control; and
  • Legitimacy

Conclusion

King IV has provided sector supplements to provide guidance to a variety of organisational types.  After considering the ruling regulatory framework including the KING IV principles and practices, proportional application may be applicable depending on the organisation’s size, financial and other resources as well as the complexity of its activities. Where the code requires formalised policies, this should be given effect to.  The King code emphasises the importance of devoting time and effort into formalised policies as it clarifies intention and alignment in respect of the nature and extent of responsibilities and authority delegated.  Proportional application should still give effect to the principles.  King IV is a useful guide to enhancing corporate governance and with intentional application, organisations could reap the benefits thereof.

References:

Institute of Directors Southern Africa King IV Report on Corporate Governance for South Africa 2016 available at https://c.ymcdn.com/sites/iodsa.site-ym.com/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf accessed on 13 March 2018.

Institute of Directors Southern Africa King III Report on Corporate Governance for South Africa 2009 available at http://c.ymcdn.com/sites/www.iodsa.co.za/resource/resmgr/king_iii/King_Report_on_Governance_fo.pdf accessed on 2 May 2018.

Skae, O ‘Steinhoff is a dubious tangle of boards, bosses and big bucks’ (2018) BusinessDay Online available at https://www.businesslive.co.za/bd/opinion/2018-01-15-steinhoff-is-a-dubious-tangle-of–boards-bosses-and-big-bucks/, accessed on 13 March 2018.

Rossouw, J ‘Warning: Steinhoff scandal is ‘tip of iceberg’. KPMG and friends hide many more sins’ (2017) Biznews available at https://www.biznews.com/sa-investing/2017/12/18/steinhoff-scandal-kpmg-friends/ accessed on 13 March 2018.

Mervyn E King SC available at https://www.mervynking.co.za/ accessed on 13 March 2018.

Minister of Water Affairs and Forestry v Stilfontein Gold Mining Co Ltd and Others 2006 (5) SA 333 (W).

South African Broadcasting Corporation Ltd v Mpofu and Another 2009 (4) ALL SA 169 (GSJ)

[1] “King IV Report on Corporate Governance for South Africa 2016”. (2016) Institute of Directors Southern Africa p. 87. https://c.ymcdn.com/sites/iodsa.site-ym.com/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf . (Accessed: 13 March 2018).

[2] 2006 (5) SA 333 (W).

[3] 2009 (4) ALL SA 169 (GSJ).

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