KING IV: SIMPLE BUT FEARLESS

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Aimed at promoting the highest standards of corporate governance in South Africa, the King Report on Corporate Governance (King I) was published by the King Committee on Corporate Governance in 1994.

Integrating a Code of Corporate Practices and Conduct. The report was the first of its kind in the country. Fast forward 22 years later, King IV was released yesterday, on the 1st of November 2016.

As innovative as King I was, changing local and economic environments necessitated that King I be updated. And in 2002, King II was launched. Moving away from the concept of a single bottom-line, King II proposed that organisations move toward a triple bottom line foundation, focusing on the economic, environmental and social impact that a company had. 7 years later, King III became essential because of the highly anticipated new Companies Act, the evolution of trends in international governance, and a big focus on the reporting of large corporates and their impact.

Challenges

Fast forward to today, there have been significant corporate governance and regulatory developments, locally and internationally, since King III was issued, rendering a little out of date. Since King III was launched, it has also come to light that non-profit organisations, private companies and entities in the public sector have experienced challenges in understanding and the application of the recommendations outlined in King III, thus a more inclusive document is needed.

Refining concepts

What companies need to understand is that King IV doesn’t represent a significant difference in the philosophical thread of its predecessor, but has refined the concepts of King III. Simplification and ease of interpretation and access will be a key tenet of King IV. One of the ways that this will be achieved is by clearly differentiating principles from practice recommendations: Principles that are said to be stated as higher order objectives.

Apply and explain

The new code is practical and simpler with a robust approach to ethical corporate governance. Most noteworthy is how King III’s ‘apply or explain’ has become ‘apply and explain’ in King IV. Reporting on the application of King IV’s principles and application is imperative, making it both a code of corporate governance and a business tool, where organisations can access their business strategy and practices.

Forward thinking

Each principle is linked to a specific outcome. These are ethical culture, performance and value creation, adequate control by leadership, trust, good reputation and legitimacy. King IV encourages companies not only to use historic data to formulate strategy but be forward thinking and holistic in its approach to business and governance.

The below points outline some of the biggest concepts in King IV:

  1. Risk and Opportunity governance is a new concept in King IV and is based on the belief that risks can be seen from different perspectives. It encourages organisations to recognise the opportunities that can arise from uncertainty.
  2. There will be a huge focus on stakeholder inclusivity and responsiveness. Organisations must take into account the legimate and reasonable needs, interests and expectations of its stakeholders. Shareholders don’t leave the responsibility of good corporate governance on the company alone; they must ensure that organisations comply with the code and report on it.
  3. Technology and information are recognised as the building blocks of a business in King IV. Companies will need to report on how they are leveraging and protecting these assets.
  4. The board is ultimately responsible and accountable for ethical governance, which includes the protection of resources. Board members must be more active in ensuring excellence in corporate governance.
  5. Dispute resolutions don’t end at the point of resolution. It goes further to address potential relational challenges; and this must be reported on.
  6. Auditing committees must take into account the audit firm – client relationship, significant management and audit partner rotation and non-audit services rendered to the client when overseeing auditor independence.
  7. Reports from internal audit, external audit and the board are no longer enough and must now include reports from line managers and specialists (governance departments) thus enforcing greater transparency in corporate governance monitoring.

Demonstrate

The new code forces organisations to demonstrate how they apply the principles set out in the code and the effect it has on its macro-environment. Companies have to be mindful of how they use resources and demonstrate how they are being good corporate citizens.

Applying the principles need not be difficult because information is at hand.

  • Because the code seeks to be accessible and fit for broad application, it recognises that it has to be flexible. While the principles are set at an optimum level, the application of principles is at the organisations’ discretion. The organisation has to report on its judgement and how it improved the company’s situation through their way of applying the principals.
  • How principles are applied is measured against factors such as size, complexity and goals of a business. This will help smaller organisations because the success of application is measured by its qualitative and not quantitative value.
  • Seven sector supplements focused on Small and medium-sized enterprises (SMEs), municipalities and Non-profit Organisations (NPOs) will be made available to help these organisations to exercise the principles. This encourages broader participation in good cooperative governance.

King IV promises to integrate business in a way that uplifts and empowers organisations and their stakeholders. Only time will tell if this rings true.


Shantel Dartnall
Head of Governance Services, BDO Statucor
http://statucor.co.za/
Shantel@statucor.co.za


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