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In July 1993 the Institute of Directors in South Africa asked retired Supreme Court of South Africa judge Mervyn E. King to chair a committee on corporate governance. He viewed this as an opportunity to educate the newly democratic South African public on the working of a free economy. The committee's report was to be the first report of its kind in South Africa.
Committee members included Phillip Armstrong, Nigel Payne, and Richard Wilkinson.
The code is non-legislative and is based on principles and practices. It also espouses an apply or explain approach, unique to the Netherlands until King and now also found in the 2010 Combined Code from the United Kingdom.
The philosophy of the code consists of the three key elements of leadership, sustainability and good corporate citizenship. It views good governance as essentially being effective, ethical leadership. King believes that leaders should direct the company to achieve sustainable economic, social and environmental performance. It views sustainability as the primary moral and economic imperative of this century; the code's view on corporate citizenship flows from a company's standing as a juristic person under the South African constitution and should operate in a sustainable manner.
Now in its fourth iteration, the code provides valuable guidelines for South African organisations and helps shape an equitable platform for partnership and social investment.
Below is the essence of the principles contained in the King IV Report on good governance. This framing serves as a guide for disclosure and a statement of good governance by South African organisations.
Principle 1: The governing body should lead ethically and effectively.
The arrangements by which the members of the governing body are being held to account for ethical and effective leadership should be disclosed. These arrangements would include, but are not limited to, codes of conduct and performance evaluations of the governing body and its members.
Principle 2: The governing body should govern the ethics of the organisation in a way that supports the establishment of an ethical culture.
The following should be disclosed in relation to organisational ethics:
An overview of the arrangements for governing and managing ethics.
Key areas of focus during the reporting period.
Measures taken to monitor organisational ethics and how the outcomes were addressed.
Planned areas of future focus.
Principle 3: The governing body should ensure that the organisation is and is seen to be a responsible corporate citizen.
The following should be disclosed in relation to corporate citizenship:
An overview of the arrangements for governing and managing responsible corporate citizenship.
Key areas of focus during the reporting period.
Measures taken to monitor corporate citizenship and how the outcomes were addressed. d. Planned areas of future focus.
Principle 4: The governing body should appreciate that the organisation’s core purpose, its risks and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process.
In respect of disclosure on strategy and performance, refer to Reporting under Principle 5 below.
Principle 5: The governing body should ensure that reports issued by the organisation enable stakeholders to make informed assessments of the organisation’s performance, and its short, medium and long-term prospects.
The governing body should oversee that the following information is published on the organisation’s website, or on other platforms or through other media as is appropriate for access by stakeholders:
Corporate governance disclosures required in terms of the Code (Set out in Part 3 and which has been collectively set out in this Guidance Note).
Integrated reports.
Annual financial statements and other external reports.
Principle 6: The governing body should serve as the focal point and custodian of corporate governance in the organisation.
The following should be disclosed in relation to the primary role and responsibilities of the governing body:
The number of meetings held during the reporting period, and attendance at those meetings.
Whether the governing body is satisfied that it has fulfilled its responsibilities in accordance with its charter for the reporting period.
Principle 7: The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively.
The following should be disclosed with regards to the composition of the governing body:
Whether the governing body is satisfied that its composition reflects the appropriate mix of knowledge, skills, experience, diversity and independence.
The targets set for gender and race representation in the membership of the governing body, and progress made against these targets.
The categorisation of each member as executive or non-executive.
The categorisation of each non-executive member as independent or not and, when a non-executive member of the governing body has been serving for longer than nine years, a summary of the views of the governing body on the independence of the member.
The qualifications and experience of members.
Each member’s period of service on the governing body.
The age of each member.
Other governing body and professional positions held by each member.
The reasons why any members of the governing body have been removed, resigned or retired.
The following should be disclosed in relation to the chair:
a. Whether the chair is considered to be independent.
b. Whether or not an independent non-executive member of the governing body has been appointed as the lead independent, and the role and responsibilities assigned to the position.
Principle 8: The governing body should ensure that its arrangements for delegation within its own structures promote independent judgement, and assist with balance of power and the effective discharge of its duties.
The following should be disclosed in relation to each committee of the governing body:
Its overall role and associated responsibilities and functions.
Its composition, including each member’s qualifications and experience.
Any external advisers or invitees who regularly attend committee meetings.
Key areas of focus during the reporting period.
The number of meetings held during the reporting period and attendance at those meetings.
Whether the committee is satisfied that it has fulfilled its responsibilities in accordance with its terms of reference for the reporting period.
In addition to required statutory disclosure and the disclosures recommended above, “the following should also be disclosed in relation to the audit committee:
A statement as to whether the audit committee is satisfied that the external auditor is independent of the organisation. The statement should specifically address:
1) the policy and controls that address the provision of non-audit services by the external auditor, and the nature and extent of such services rendered during the financial year;
2) the tenure of the external audit firm and, in the event of the firm having been involved in a merger or acquisition, including the tenure of the predecessor firm
3) the rotation of the designated external audit partner
4) significant changes in the management of the organisation during the external audit firm’s tenure which may mitigate the attendant risk of familiarity between the external auditor and management.
Significant matters that the audit committee has considered in relation to the annual financial statements, and how these were addressed by the committee.
The audit committee’s views on the quality of the external audit, with reference to audit quality indicators such as those that may be included in inspection reports issued by external audit regulators.
The audit committee’s views on the effectiveness of the chief audit executive and the arrangements for internal audit.
The audit committee’s views on the effectiveness of the design and implementation of internal financial controls, and on the nature and extent of any significant weaknesses in the design, implementation or execution of internal financial controls that resulted in material financial loss, fraud, corruption or error.
The audit committee’s views on the effectiveness of the CFO and the finance function.
The arrangements in place for combined assurance and the committee’s views on its effectiveness.
Principle 9: The governing body should ensure that the evaluation of its own performance and that of its committees, its chair and its individual members, support continued improvement in its performance and effectiveness.
The following should be disclosed in relation to the evaluation of the performance of the governing body:
A description of the performance evaluations undertaken during the reporting period, including their scope, whether they were formal or informal, and whether they were externally facilitated or not.
An overview of the evaluation results and remedial actions taken.
Whether the governing body is satisfied that the evaluation process is improving its performance and effectiveness.
Principle 10: The governing body should ensure that the appointment of, and delegation to, management contribute to role clarity and the effective exercise of authority and responsibilities
The following should be disclosed in relation to the CEO:
The notice period stipulated in the CEO’s employment contract and the contractual conditions related to termination.
Other professional commitments of the CEO, including membership of governing bodies outside the organisation.
Whether succession planning is in place for the CEO position.
A statement by the governing body on whether it is satisfied that the delegation of authority framework contributes to role clarity and the effective exercise of authority and responsibilities should be disclosed.
The arrangements in place for accessing professional corporate governance services and a statement on whether the governing body believes those arrangements are effective should be disclosed.
Principle 11: The governing body should govern risk in a way that supports the organisation in setting and achieving its strategic objectives.
The nature and extent of the risks and opportunities the organisation is willing to take should be disclosed without compromising sensitive information.
In addition, the following should be disclosed in relation to risk:
An overview of the arrangements for governing and managing risk.
Key areas of focus during the reporting period, including objectives, the key risks that the organisation faces, as well as undue, unexpected or unusual risks and risks taken outside of risk tolerance levels.
Actions taken to monitor the effectiveness of risk management and how the outcomes were addressed.
Planned areas of future focus.
Principle 12: The governing body should govern technology and information in a way that supports the organisation setting and achieving its strategic objectives.
The following should be disclosed in relation to technology and information:
An overview of the arrangements for governing and managing technology and information.
Key areas of focus during the reporting period, including objectives, significant changes in policy, significant acquisitions and remedial actions taken as a result of major incidents.
Actions taken to monitor the effectiveness of technology and information management and how the outcomes were addressed.
Planned areas of future focus.
Principle 13: The governing body should govern compliance with applicable laws and adopted, non-binding rules, codes and standards in a way that supports the organisation being ethical and a good corporate citizen.
The following should be disclosed in relation to compliance:
An overview of the arrangements for governing and managing compliance.
Key areas of focus during the reporting period.
Actions taken to monitor the effectiveness of compliance management and how the outcomes were addressed.
Planned areas of future focus.
Material or repeated regulatory penalties, sanctions or fines for contraventions of, or non-compliance with, statutory obligations, whether imposed on the organisation or on members of the governing body or officers should be disclosed.
Details of monitoring and compliance inspections by environmental regulators, findings of non-compliance with environmental laws, or criminal sanctions and prosecutions for such non-compliance should be disclosed.
Principle 14: The governing body should ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.
All elements of remuneration that are offered in the organisation and the mix of these should be set out in the remuneration policy, including:
base salary, including financial and non-financial benefits;
variable remuneration, including short and long-term incentives and deferrals;
payments on termination of employment or office;
sign-on, retention and restraint payments;
the provisions, if any, for pre-vesting forfeiture (malus) and post-vesting forfeiture (claw-back) of remuneration;
any commissions and allowances; and
the fees of non-executive members of the governing body.
Remuneration report
The governing body should ensure that remuneration is disclosed by means of a remuneration report in three parts:
A background statement.
An overview of the main provisions of the remuneration policy.
An implementation report which contains details of all remuneration awarded to individual members of the governing body and executive management during the reporting period.
Background statement
The background statement should briefly provide context for remuneration considerations and decisions, with reference to:
internal and external factors that influenced remuneration;
the most recent results of voting on the remuneration policy and the implementation report and the measures taken in response thereto;
key areas of focus and key decisions taken by the remuneration committee during the reporting period,
including any substantial changes to the remuneration policy;
whether remuneration consultants have been used, and whether the remuneration committee is satisfied that they were independent and objective;
the views of the remuneration committee on whether the remuneration policy achieved its stated objectives; and
future areas of focus.
Overview of remuneration policy
The overview of the main provisions of the remuneration policy should address the objectives of the policy and the manner in which the policy seeks to accomplish these.
The overview should include the following:
The remuneration elements and design principles informing the remuneration arrangements for executive management and, at a high level, for other employees.
Details of any obligations in executive employment contracts which could give rise to payments on termination of employment or office.
A description of the framework and performance measures used to assess the achievement of strategic objectives and positive outcomes, including the relative weighting of each performance measure and the period of time over which it is measured.
An illustration of the potential consequences on the total remuneration for executive management, on a single, total figure basis, of applying the remuneration policy under minimum, on-target and maximum performance outcomes.
An explanation of how the policy addresses fair and responsible remuneration for executive management in the context of overall employee remuneration.
The use and justification of remuneration benchmarks.
The basis for the setting of fees for non-executive directors.
A reference to an electronic link to the full remuneration policy for public access.
Implementation report
The implementation report, which includes the remuneration disclosure in terms of the Companies Act, should reflect the following:
The remuneration of each member of executive management, which should include in separate tables:
a single, total figure of remuneration, received and receivable for the reporting period, and all the remuneration elements that it comprises, each disclosed at fair value
the details of all awards made under variable remuneration incentive schemes in the current and prior years that have not yet vested, including the number of awards; the values at date of grant; their award, vesting and expiry dates (where applicable); and the fair value at the end of the reporting period
the cash value of all awards made under variable remuneration incentive schemes that were settled during the reporting period.
An account of the performance measures used and the relative weighting of each, as a result of which awards under variable remuneration incentive schemes have been made, including: the targets set for the performance measures and the corresponding value of the award opportunity; and for each performance measure, how the organisation and executive managers, individually, performed against the set targets.
Separate disclosure of, and reasons for, any payments made on termination of employment or office.
A statement regarding compliance with, and any deviations from, the remuneration policy.
Principle 15: The governing body should ensure that assurance services and functions enable an effective control environment and that these support the integrity of information for internal decision-making and of the organisation’s external reports.
Assurance of external reports
External reports should disclose information about the type of assurance process applied to each report, in addition to the independent, external audit opinions provided in terms of legal requirements.
This information should include:
a brief description of the nature, scope and extent of the assurance functions, services and processes
underlying the preparation and presentation of the report; and
a statement by the governing body on the integrity of the report and the basis for this statement
reference to the assurance applied.
Principle 16: In the execution of its governance role and responsibilities, the governing body should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time.
Stakeholder relationships
The following should be disclosed in relation to stakeholder relationships:
An overview of the arrangements for governing and managing stakeholder relationships.
Key areas of focus during the reporting period.
Actions taken to monitor the effectiveness of stakeholder management and how the outcomes were addressed.
Future areas of focus.
Principle 17: The governing body of an institutional investor organisation should ensure that responsible investment is practiced by the organisation to promote the good governance and the creation of value by the companies in which it invests.
The responsible investment code adopted by the institutional investor and the application of its principles and practices should be disclosed.
Conclusion
With the significant corporate governance and regulatory developments, locally and internationally since King III was issued in 2009 a number of shifts have been taken into account with King IV. It is to be noted that whilst listed companies are generally applying King III, non-profit organisations, private companies and entities in the public sector have experienced challenges in interpreting and adapting King III to their particular circumstances. The enhancements in King IV has narrowed the gulf between non-profit organisations, private companies and entities in the public sector making it more accessible to all types of entities across sectors.
The Institute of Directors in Southern Africa (IoDSA) is the custodian of the King reports and the holder of their copyrights.
GROWZA assists the build of strategic partnerships guided by the principles of King IV in order to ensure ACCESS, TRANSPARENCY & AGENCY for underserved communities.
Download a practical KING IV disclosure checklist below to support your journey of corporate governance.
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