The first reports and disclosures in line with King IV principles are beginning to appear. King IV is effective in respect of financial years starting on or after 1 April 2017. It would appear that certain organisations still require a deeper understanding of the implications of King IV’s ‘apply and explain’ approach.
King III’s ‘apply or explain’ regime had the unintended consequence of allowing organisations to adopt something of a tick-box approach to reporting and compliance. The new approach signals a decisive departure from that way of doing things because it requires organisations to explain how they have applied the 17 principles of King IV. The idea is to give stakeholders a real idea of what the organisation is doing to embody the code and the quality of its governance – and how it is using the code to achieve all of this.
Requirement to explain
The key here is the requirement to explain. Explanation means that stakeholders can easily ascertain whether the organisation is making satisfactory progress towards good governance.
“encourage[s] organisations to see corporate governance not as an act of mindless compliance, but something that will yield results only if it is approached mindfully, with due consideration of the organisation’s circumstances.” – Professor Mervyn King, the convenor of the King Committee in his foreword to King IV
The approach should be welcomed because it provides a great deal of flexibility in line with the principle of proportionality. Organisations are now free to adapt how they give effect to the Principles of King IV in line with aspects such as their risk profiles, level of complexity, resources, impact on the triple context and other specific circumstances – provided they explain clearly what their thinking was.
Disclosure under King IV directs us away from a quantitative approach to compliance (‘We have implemented the following recommended practices’ or ‘We have implemented all recommended practices except’) to a qualitative one (‘In order to give effect to this Principle of good governance, we have taken the following actions’).
The Principles are generic and can be applied to any organisation, what’s unique is how each organisation crafts that application to achieve the goals or outcomes corporate governance: ethical culture, effective control, good performance and legitimacy.
The challenge that organisations now face is that they have to engage deeply with the spirit of corporate governance, rather than its letter. That engagement, and the actions that flow from it, need to be informed by an ethical framework.
In practical terms, governance reporting in terms of King IV cannot be done satisfactorily in tabular form. Rather, a narrative approach, guided by materiality, should be used to explain how the organisation understands the Principle in its specific context and what it seeks to achieve; and then what practices were implemented in order to achieve the necessary application of that Principle.
King IV allows organisations to deliver their governance reports in various ways as best suits their circumstances: either as a standalone report, or as part of the integrated report or some other report as they consider appropriate for their stakeholders.
According to Parmi Natesan, Executive: Centre for Corporate Governance, the IoDSA has recently published its own governance report which can be used as an example of the envisaged approach. A significant amount of time and thinking went into how we wanted to tell our governance story, to enable our stakeholders to make an informed assessment of the quality of the IoDSA’s governance.
Reporting under King IV is all about understanding corporate governance and then explaining how you have implemented it; it’s not about keeping a register of which rules you have followed. It’s highly flexible but it does require organisations truly to engage with what they are doing to improve governance, and what they hope to achieve.