WHAT WILL KING IV MEAN FOR
SOUTH AFRICAN INVESTORS?
There have been mixed reactions to the announcement
that the King Report on Governance for South
Africa (2009) (King III) is about to be updated,
some welcoming it in light of recent corporate
governance developments that have outpaced King
III and others bemoaning “more regulation”.
Consider the following realities of the South African governance
landscape: municipalities struggle to meet service delivery
demands amid allegations of corruption or incompetence,
or both. Questions are being raised regarding perceived
irregularities with the appointment of senior officials at our
public institutions, and a number of these officials being on
what is seemingly a protracted suspension on full pay.
Claims of anti-competitive and collusive practices in the
private sector surface with regularity, and as predictable is
the controversy around the quantum of executive pay and the
wage gap. The governance failures in these instances are
patently obvious: deficient executive appointment processes;
an inability to deal effectively with management oversight
and disciplinary issues; lack of clarity on accountability and
reporting lines; and the absence of constructive engagement
between the company and its shareholders and other
Many more examples can be cited. What these realities
demonstrate is that things go wrong as a result of a lack of
proper governance. Organisations that regard corporate
governance as a matter of grudge compliance do so at their
peril. Difficult economic conditions, depressed business and
a potential ratings agency downgrade are just some of the
challenges facing business leaders today. Business leadership
has become as much about navigating the external environment as it is about a focus on the organisation itself. Good corporate
governance (and particularly the way that it is understood in
the King tradition as going beyond structures, processes and
procedures to encompass leadership in the context of the
economy, society and the environment) is indispensable.
Good corporate governance ensures that the necessary
arrangements are in place so that those charged with
governance duties are poised to capture new opportunities
and are more resilient to face risks in an ever-increasing
complex and unpredictable environment. Seeing corporate
governance in this light, it is not a barrier to enterprise but the
way to successful enterprise.
AN OUTCOMES-BASED APPROACH
King IV will not constitute a significant departure from the solid
foundations and philosophy set by King III and organisations
need not prepare for a host of additional principles and
To the contrary, in the draft King IV the number of principles are
reduced from the 75 principles in King III to a mere 16 (with an
additional 17th principle, which is applicable to institutional
investors such as retirement funds and insurance companies).
Reducing the number of principles is a consequence of a
different approach to corporate governance principles. In the
draft King IV, principles are stated as aspirations and ideals that
are fundamental and basic to good governance. Principles are
also clearly differentiated from practice recommendations in that
the practices are about what needs to be done to give effect to
these aspirations and ideals. Achieving these aspirations and
ideals will, according to the philosophy followed in the draft
of King IV, lead to corporate governance outcomes, which
include: an ethical organisational culture; performance and
value creation; adequate and effective control; and trust, a
good reputation and legitimacy.
This outcomes-based approach addresses box-ticking
compliance, which is one of the major stumbling blocks towards
achieving governance that adds value to an organisation. It is
said that inflexibility is evidence of a lack of understanding.
This is indeed true as far as the implementation of governance
practices in a box-ticking fashion is concerned. Understanding
and insight assists with mindful and judicious application,
which is the opposite of taking the easier route of box-ticking.
As the principle serves as the guide for what the practices
should achieve, it is easier to apply judgement to what and
how practices should be implemented. Simply put: practices
are the means and the principles the end.
The notion of 'commander’s intent' developed by the US army
illustrates the thinking behind this approach well. Chip and
Dan Heath explain in their book Made to Stick that plans for
military operations are very thorough, detailing the scheme
of manoeuvres, equipment required, how munitions will be
replaced and so forth. Despite these having become a marvel
of communication and planning there is still one catch: no
plan survives contact with the enemy. The unpredictable and
unexpected happen, such as weather changes or a surprise
move by the enemy. Articulating the commander’s intent has
been devised as a way to deal with these eventualities. The
idea is that generals, officers and soldiers should all understand
what the intended outcome is so that they are able to improvise
accordingly when plans go awry.
The principles and outcomes in King IV are meant to depict
the intent, so that organisations and those charged with their
governance are able to adapt practices. This way the emphasis
shifts from a compliance mindset to corporate governance that
achieves the intended outcomes and benefits.
APPLY AND EXPLAIN
As principles are stated as aspirations and ideals that are
fundamental and basic to good governance, application
thereof is assumed. For this reason, the application regime
that is advocated in the draft of King IV is that of 'apply and
explain', which is a departure from 'apply or explain' in King
III. The rationale of assuming application becomes evident
when one has regard to how the principles are phrased. There
is, for instance, the principle that the governing body should set
the tone and lead ethically and effectively. Another principle
says that the governing body should serve as the focal point and
custodian of corporate governance in the organisation. And still
another that the governing body should govern technology and
information in a way that supports the organisation in defining
core purpose and to set and achieve strategic objectives. Due
to the way, and the level at which, these principles are stated,
it is difficult to contemplate a reasonable explanation of why
these principles are not applied.
The 'explain' part of the application regime is an explanation
in the form of a narrative of the practices that have been
implemented and the progress made towards giving effect to
VOLUNTARY CODE OR LEGISLATION?
Following an 'apply and explain' and outcomes-based regime
means that the flexibility of a voluntary code of corporate
governance is leveraged to the full. The question is whether this
flexibility will affect the efficacy of King IV. There are many who
deem voluntary codes of corporate governance as not being a
sufficiently strong intervention and especially one that provides
for flexibility around implementation to the extent that King IV
Using regulation to address the cause of corporate failure and to
restore confidence is not new and can, in fact, be traced back
to the 17th century. A more recent example is the draconian
and infamous Sarbanes-Oxley legislation that was signed
into law a mere nine months after Enron had collapsed and
which served as the catalyst for stricter governance regulatory
measures around the world. The truth is that, notwithstanding
its popularity, legislation has proved not to be the cure of bad
governance. The fact that the boom-bust-regulate cycle has
been repeating itself for centuries is enough reason to question
its value, not to mention its cost. A case in point is the swift
and decisive action taken after Enron in 2002, which did not
prevent the global financial crisis in 2008.
It would be a mistake to conclude that voluntary codes
of governance carry no sanction when contravened. The
principles and practices that are recommended in these codes
become the norm for behaviour as soon as they are generally
and widely adopted. These adopted norms are then enforced
by social and market forces and sanctions. A prerequisite for
these forces and sanctions to work, though, is transparency.
Society and the market can only respond to what is known to
them. It is for this reason that King IV places so much emphasis
on meaningful disclosure that enables stakeholders to assess
the quality of corporate governance, rather than a binary
account of which recommended practices have been followed
and which not. More flexibility and judgement are allowed for
in the implementation of King IV but in exchange the onus is on
organisations to be more transparent on how that judgement
has been exercised.
Another prerequisite for social and market forces to work is that
shareholders and other stakeholders should be active in holding
organisations accountable for good corporate governance.
Institutional investors in particular have an important role to fulfil
in this regard. This is addressed in King IV by virtue of the
17th principle that requires institutional investors to exercise
their rights as holders of beneficial interest in the securities of
companies responsibly. This includes being active owners.
GOOD CORPORATE GOVERNANCE FOR ALL
Institutional investors are addressed in King IV, but so are
other organisations beyond the traditional listed company
audience. Listed companies are dependent on the infrastructure
provided by the public sector. Listed companies are being held
accountable by civil society for the impact of their operations
on society and the natural environment.
Small and medium enterprises (SMEs) form part of the supply
chain of listed companies. Retirement funds invest directly or
indirectly in equities and have an interest in holding investee
companies accountable for good governance. To be able to
do so effectively and with credibility those retirement funds
should in turn be well governed.
It should be clear that it cannot be expected of listed companies
alone to follow good governance. Listed companies are part of
a bigger system of interdependent relationships. For corporate
governance to truly work, all of the participants in the system
should adhere to good corporate governance.
Another way in which the applicability of King IV to a wide
range of organisations and entities is addressed is to provide for
proportionate application. Implementing corporate governance
practices is not an end in itself but should be harnessed for
the creation of value. This means that implementation should
be appropriate to the size, nature and complexity of the
organisation. Some guidance on this has been included in the
King IV Report.
Our corporate governance code should not belong only to the
King Committee or the Institute of Directors in Southern Africa
but to all South Africans, corporations and individuals to whom
good corporate governance matters. To this end, the drafting
process has been widely consultative and subjecting the draft
report to the rigour of public comment is a further step in this
process. The launch of the final King IV Report is planned for
1 November 2016.
Should King IV be welcomed as making the application of
corporate governance accessible and understandable beyond
the circle of consultants, technicians and academics, the King
Committee will be able to take a bow for a job well done.
Should King IV be adopted by all organisations across all
sectors in a way that does not add a compliance burden but,
instead, helps organisations to flourish, we can all take a bow.