Published and draft legislation - South Africa

Draft Report on Corporate Governance 2016

King IV

In March, the Institute of Directors in Southern Africa  published the draft of the new 2016 edition of for South Africa’s corporate governance code (known as King IV), which replaces the 2009 code (King III), and includes the latest international corporate governance standards.

The new code reduces the number of principles to 17, from the previous code’s 75. Principles that may be applied by the companies listed on the Johannesburg Stock Exchange, on a voluntary basis (taking into consideration their resources, size, turnover, complexity of their operations and strategic goals), and that are complemented with good practices that must be implemented if they are to be introduced in the organisations.  

King IV follows the  “apply and explain” principle. Thus, the annual reports of companies that apply the principles must explain in detail the practices they have implemented to make them effective. To report on this, companies will complete a form which will be formally approved by the board of directors, reviewed at least once a year and published on the communication platforms where the institution has a presence (webpages, general media, etc).

The key issues addressed in the new code are as follows:

1. Values, ethics and culture

The board will exercise its functions in an ethical manner, and must approve a corporate strategy that gives priority to value creation that is economically, socially and environmentally sustainable.

2. Performance and information reporting

  • The board must approve the company’s strategy, defining its key purpose and actions in the short, medium and long term, with a focus on value creation that is sustainable over time.
  • It should ensure that the different stakeholders receive all the information about the organisation that will enable them to shape their criteria on its performance, activity and capacity to create sustainable value.

3. Governance structures and delegation of functions

  • The board is responsible for ensuring that good practice in corporate governance extends throughout the organisation.
  • It must ensure that its members have the range of profiles (talent, experience, independence, nationality, age, race and gender) needed to carry out their functions.
  • The board will be made up of a majority of non-executive directors; most of these will be independent.
  • As a general rule, independent members may not serve for longer than 9 years.
  • The Chair of the board will be a non-executive director and there must be a clear division of roles between this post and that of the company CEO.
  • The procedure for appointing new board directors must be formal and transparent. When they join the company, new board directors will receive induction sessions.
  • The board must approve a succession plan for all directors, the CEO and other members of senior management, to include the identification, mentorship and development of future candidates.
  • The board may appoint committees to support its work, particularly to cover the areas of auditing, risk, remuneration, appointments and ethics.
  • The committees will be chaired by an independent director, and will be made up as follows::
    • Audit: at least 3 independent directors;
    • Risk: at least 3 directors, with a majority of non-executives;
    • Appointment/Remuneration: non-executive directors with a majority of independents;
    • Ethics and social: at least 3 directors, of whom at least one must be non-executive.
  • The board must ensure that their activity and that of their members is assessed at least once every three years.
  • The CEO and the Company Secretary must be evaluated every year.
  • The evaluation of Chair of the board will be overseen by an independent board director.

4. Areas of governance

o Risk. The board must approve the nature and scope of the risk that the company is prepared to assume in order to achieve its strategic goals and may delegate to senior management the responsibility for applying risk management policy.

o Technology and information. The board must approve policies to correctly apply technology around the company and to manage information.

o Compliance. The board must approve policies that guarantee compliance with the law and with the adoption of other non-binding rules, codes, norms and standards.

o Remuneration. The board must make sure that the company pays its employees in a fair, responsible and transparent manner, one which fosters value creation within a sustainable model. Employee remuneration policy must be designed in such a way so as to encourage the attraction, motivation and retention of talent, taking into account the strategy set and avoiding taking on undue risk.

o Control systems. The board must ensure that there is an appropriate control framework and accurate information to optimise decision taking. It will delegate to the audit committee oversight of:

  • The existence of an effective and appropriate internal control framework, and
  • The accuracy, clarity and transparency of information disclosed

Similarly, the audit committee will be responsible for ensuring that the internal audit function serves to support the company in achieving its strategic goals, and must decide whether it is necessary to appoint a senior executive to be responsible for this function. If the decision is taken to hire, the person in charge of the audit function must have an independent brief and will report directly to the audit committee.

5. Shareholders and interest groups

  • The board must make sure that it takes into account the interests, needs and expectations of shareholders, investors and other stakeholders, when taking decisions and approving corporate policy.
  • It should also ensure that company employees receive training sessions so that they keep their knowledge base and skillset up to date.

 

King IV also includes a specific chapter with recommendations for particular sectors such as state-owned companies, non-governmental organisations, small and medium-sized companies and pension funds, among others. The chapter was published a month after the rest of the report, but is now available on its  website.

The Institute of Directors in Southern Africa plans to publish the document  in November 2016. Meanwhile, it is currently open to public consultation.

 

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