“The consequences of companies not being good corporate citizens are too horrible to contemplate.
There will be no sustainable development and the outraged conscience of society against poor corporate citizenship will continue.”
– Judge Professor Mervyn King, Chairman of the Council,
International Integrated Reporting Council (IIRC), 2018
Poor governance practices, poor oversight and a lack of accountability lie at the heart of state capture and the large-scale corporate fraud that has dominated newspaper headlines in South Africa over the last three years. It is precisely due to the weaknesses in the governance structures and systems that dishonest and unethical leaders have been able to plunder state resources and commit fraud.
In South Africa, a hybrid system of governance has developed, as legislation alone has been insufficient to enforce governance, according to Parmi Natesan, CEO of the Institute of Directors South Africa (IoDSA). This hybrid system comprises hard law (legislation) and soft law (the King IV Report on Corporate GovernanceTM (King IVTM)).
The first King Report on Corporate Governance was published on November 29, 1994 after the IoDSA established the King Committee on Corporate Governance in July 1993. The committee was headed by Judge Mervyn King, an internationally recognised expert on corporate governance and sustainability. Now in its fourth iteration, the King Report has become the global standard in corporate governance.
What Is Corporate Governance?
King IVTM defines corporate governance as ‘the exercise of ethical and effective leadership by the governing body towards the achievement of the following governance outcomes: Ethical Culture; Good Performance; Effective Control; and Legitimacy’.
King IVTM describes Ethical leadership as ‘exemplified by integrity, competence, responsibility, accountability, fairness and transparency’.
History of the King Report
King I
After it was published on 29 November 1994, King I was recognised internationally for its comprehensive and inclusive approach to corporate governance.
King II
The King II Report was published by the IoDSA on March 26, 2002 and was a significant departure from its earlier edition that focused mostly on shareholders and their protection. Amongst the many new and firmer governance principles being introduced, integrated sustainability reporting was notably an area that would garner much attention.
King III
The IoDSA introduced the King Code of Governance Principles and the King Report on Governance (King III) in September 2009. King III came into effect on March 1, 2010. The new Code and Report fell in line with the Companies Act no 71 of 2008, which became effective on May 1, 2011. Like its 56 commonwealth peers, King III was written following the ‘apply or explain’ principle-based approach of governance.
King IVTM
The King IV ReportTM was released on November 1, 2016. It is the first corporate governance report and code that advocates an outcomes-based approach to good governance.
Michael Judin, a partner at Judin Combrinck Inc. and a member of the task team responsible for writing King IVTM, says the creators of King IVTM considered the question: If you govern correctly, what should be the outcome of good governance? They came up with the four outcomes – ethical culture, good performance, effective control, and legitimacy.
“The beauty of the outcomes-based code,” says Judin, “is that it’s not the board of an entity that decides whether it governs correctly, but rather all of the stakeholders who so decide. With King IVTM, it’s all about what your stakeholders believe the position to be. You strive to govern well so that your stakeholders believe and trust that you are achieving the King IVTM outcomes. Then you know you are on the path to governing correctly and strive to do better all the time.”
The King IV CodeTM differentiates between principles and practices. Principles are achieved by mindful consideration and application of the recommended practices. “The principles and outcomes are cast in stone, but the practices – which is how you get to the outcomes – can be tinkered with. For example, different companies or countries may have different practices depending on their culture.”
To reinforce the qualitative application of its principles and practices, King IVTM proposes an ‘apply and explain’ regime, in contrast to ‘apply or explain’ in King III.
According to Natesan, many companies saw the ‘apply or explain’ regime of King III as a tick-box exercise. “They reduced governance to a set of mechanical actions, with little regard for the goal and whether it was achieved.”
“When we came to writing for an outcomes-based approach in King IVTM,” says Judin, “we took away that discretion. We said that these are the principles of good corporate governance and you have to apply them and explain how you are applying them. So, in a company’s integrated report, it must set out each principle and then explain how it is applying that principle. It is important that the explanation is comprehensive and authentic and that it gives the stakeholders confidence that you are continuously striving to achieve the outcomes.”
David Loxton, CEO of Africa Forensics & Cyber, says that changing King IVTM to apply and explain was certainly a step in the right direction. “This in essence means that application of principles is assumed, as opposed to simply explaining why the principles are not used. When one considers that compliance with King III was a condition of listing on the JSE, many organisations simply saw it as cost of doing business.”
Natesan adds that King IVTM encourages companies to take a more proactive approach to corporate governance. “The ‘apply and explain’ disclosure regime forces governing bodies to come to grips with how the actions they took were intended to help the organisation achieve its goals. It decisively moves away from a compliance-based approach in which companies can fail to engage with the spirit of the code.”
Loxton describe how corrupt leaders eventually have to show their hand.
If one considers the corporate failures in South Africa notwithstanding King IVTM, it makes one remember how charismatic and powerful leaders can play poker with their roles. In poker, as we know, bluff can take you very far, but sooner or later you have to show your hand. Disclosure is accordingly the ultimate test: are you doing what you said you were doing and are you getting the desired results? As such, disclosure is a very significant element of corporate governance,” he says.
Terry Booysen, CEO of CGF Research Institute (CGF) says the UK Corporate Governance Code (formerly known as the Combined Code), which is the UK’s counterpart to South Africa’s King Code has greater appeal than King IVTM and would generally work better in an African context than King IVTM does, and especially for smaller or start-up businesses. “The UK Corporate Governance Code still adopts a philosophy of ‘apply or explain’, which has a less draconian approach to its implementation, as compared with King IVTM. In the case of South Africa, all organisations, irrespective of their size or operation, are required to comply with King IVTM using an ‘apply and explain’ regime. Essentially this means that small companies are expected to adopt King IVTM in the same way as much larger organisations need to comply and this does seem rather at odds, especially considering that smaller companies do not have the same resources at their disposal. Also, many boards of directors in South Africa are very concerned that over-regulation in South Africa is killing entrepreneurial business start-ups and business in general, which is so desperately required for developing and improving the local economy.”
Loxton disagrees that the UK Corporate Governance Code is more suited to less developed countries such as South Africa because, he says, the underlying principles of the two codes are identical. He is also not a supporter of over-regulation. “We do not want over-regulated businesses in South Africa as this will result in the cost of compliance becoming astronomical, which also results in organisations seeking ways to circumvent the regulations. South Africa is already perceived as investor unfriendly because of the perception of overregulation.”
Judin says King IVTM is a people’s code. “Many South Africans from all walks of life contributed to the development of the code as it was being written. All of the comments received during the comment period were taken into account and many amendments were made to the draft as a result thereof. It is absolutely a code for South Africa and something for South Africans to be very proud of.”
Legal status of King IVTM
“The legal status of King IVTM, as with its predecessors,” says Natesan, “is that of a set of voluntary principles and leading practices. Corporate governance can apply on a statutory basis as rules, as a voluntary code of principles and practices, or as a combination of the two. In South Africa, over time, a hybrid system of corporate governance has developed as some practices of good governance have been legislated in parallel with the voluntary King Codes of Governance. Where there is a conflict between legislation and King IVTM, the law always prevails.”
Natesan adds that good governance doesn’t exist separately from the law and a corporate governance code such as King IVTM that applies on a voluntary basis can trigger legal consequences.
“The more widely certain recommended practices in codes of governance are adopted, the more likely it is that a court would regard conduct that conforms to these practices as meeting the required standard of care. In this way, the provisions of voluntary codes of governance find their way into jurisprudence to become part of the common law. Consequently, failure to meet an established corporate governance practice, albeit not legislated, may, therefore, invoke liability,” she explains.
Judin agrees that King IVTM is part of the common law and says there are many instances where our courts have relied on King. He believes a breach of King IVTM is, therefore, a breach of the law. “Another school of thought says the Code is only aspirational and only binding in instances such as the requirement that publicly traded companies on the Johannesburg Stock Exchange are obliged to report on their application of King IVTM, or where King IVTM, in part or in whole, is made part of a binding contract and a breach of King IVTM would be a breach of the contract.”
He adds that its now common practice, and accords with good corporate governance, for supply-chain contracts to make the King IV CodeTM part of the contract to provide that a breach of the Code is a breach of the contract. “This is very important to ensure sustainability and to prevent the disrupting of supply chains to the detriment of the entity and all of its stakeholders.
Loxton says the fact that King IVTM is not legally binding does not necessarily imply that there are no legal consequences flowing from non-compliance. “Courts of competent jurisdiction will certainly consider King IVTM when evaluating what is regarded as good practice in particular situations, especially where governance and governance obligations are involved. Accordingly, failure to meet corporate governance practices and the principles set down in King IVTM may result in liability of the board in certain circumstances.
Will there be a King V?
The CGF Research Institute’s Terry Booysen…
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