While a number of organisations have dragged their feet and are still getting to grips with the implications of the King III Report and the Companies Act, the Institute of Directors South Africa (IODSA) recently launched the King IV Report, which is open for public comment.
In this article the writer attempts to summarise some of the important points arising out of the IODSA’s recent launch of the King IV Report in Cape Town.
Why King IV?
The need for a change was prompted by local and International developments that occurred post King III, some of which have led to the King Report being out of step with good practice.
The aspirations and areas of importance
King IV realises that there are various forms of capital, including financial, manufacturing, intellectual, social and human capital, and that there is a need to ensure that these are properly addressed.
King IV takes a stake-holder-inclusive approach, which broadens the vision of corporate governance in South Africa.
The report highlights capitals that require attention:
- Organisation in society
- Sustainable development
- Shareholder inclusivity
- Integrated reporting
King IV echoes King III and is not a new report. What remains relevant in King III is incorporated in King IV.
King IV’s aspirations are to move:
- from box ticking (with no appreciation of the value the Report’s recommendations add) to mindful application
- from grudge compliance to an appreciation of the value add
- from listed companies to all organisations (e.g. PIC, civil society). This is because corporate governance is a small system within a bigger system. Corporate governance in one affects the other’s corporate governance (e.g. SME in Nike supply chain)
The benefits of sound corporate governance
Sound corporate governance leads to healthy organisations and is about ethical and effective leadership.
Corporate governance involves:
- Strategy and direction
- Approving policy for putting strategy into effect
- Oversight and implementation
- Disclosure, by being accountable and by reporting
The Report allows for situations where it does not deal with a specific situation. This allowance then gives the organisation the ability to not conclude a tick box exercise, but to have the Report find practical application to the organisation’s practical circumstances.
Sound Corporate Governance has the following Critical Governance outcomes:
- Ethical culture
- Performance across the triple context and value creation
- Effective and adequate control
- Trust, good reputation and legitimacy
King IV sets out normative statements of what organisations want to achieve. Once this is done, practices are set in place. This takes the process up a level and is fundamentally different from King III.
What sets King IV apart?
- is outcomes- and norms-driven
- caters for all organisations
- has been reduced from 75 principles to 16 + 1
- is less prescriptive but more transparent
- Different strokes for different folks
Supplements will be issued shortly and will deal with how to adapt practices in specific organisations. They will be between six and eight pages long.By introducing these supplements, King IV provides for proportionality, i.e. how to scale the practices to the size of the organisation.
Apply AND Explain
The Commission’s view is that there is no explanation for non-adherence with the Report because the normative statements can be applied to everyone, whereas the practices fall within the discretion of the company.A controversial point of discussion and comment is the involvement of the social and ethics committee on remuneration.
The chapters captured
Diagram 1: Ethics and corporate governance (King III Chapter 1 carried over to King )
Chapter 2: Performance and Reporting. Performance must enhance each of the capitals.
2.1 The governing body should head the value creation process.
Chapter 3: Governing body structures and delegation
Chapter 4: Governance functionality
This chapter deals with a number of issues linking King III succinctly.
King IV still talks about the combined assurance model, but unpacks it a bit more. The Commission now refers to five lines of assurance and moves away from the three lines of defence.
|King III||King IV|
|Own and manage, e.g. management controls||Own and manage|
|Oversees risk, e.g. risk management, financial controller, compliance||Oversees risk|
|Independent assurance, e.g. internal audit & external audit||Internal objective assurance|
|External assurance providers|
One of the most fundamental changes is regarding the governance of remuneration.
The Commission has attempted to keep matters at a principle level and as such it appears less detailed, however the change is no less fundamental.
The Remuneration Committee should oversee that executive remuneration is responsible in terms of overall employee remuneration (i.e. remuneration must talk to the wage gap).
There are a number of comments suggesting that the social and ethics committee be given a role in remuneration decision making. A comment received was that the social and ethics committee does not have the skillset to deal with this and that it does not make sense to have both the REMCO and the social and ethics committee involved.
A further important change is that executive remuneration should take into account performance across the triple context or capitals (and not only shareholder value).Remuneration also controversially requires disclosure. The following should be disclosed:
- The context and factors taken into account in arriving at the remuneration
- The remuneration policy of the company
- The actual numbers
It is important to note that the role of the social and ethics committee in general does not change. The committee’s role is to monitor and report .
With regard to remuneration, it has been suggested in some of the comments to date that the social and ethics committee looks only at whether the executive pay versus other employees’ pay is proportionate. The committee then provides a view/input, but does not make a decision.
Chapter 5: Stakeholder relationships
As critically important as good stakeholder relationships are, they also pose a large risk to organisations. In this particular part of King IV, there is a view expressed in the submissions received to date that it is believed that the use of social media and the interactions with stakeholders thereon could prove particularly relevant and challenging.
Conclusion: The process to follow
King IV is currently open for comment and it is expected that it will be launched on 1 November 2016. After launching, there will be a transition period, as it was with King III. It will be good to see whether the aim of practicality and moving to apply and explain will lead to the achievement of the Commission’s objectives.