Corporate governance is the combination of rules, processes, and laws by which businesses are operated, regulated and controlled. The term encompasses the internal and external factors of an organisation that affect the interests of the organisation’s stakeholders, including shareholders, customers, employees, suppliers, government regulators, and other.
The purpose of corporate governance is to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, therefore supporting stronger growth and more inclusive organisations and societies. Corporate law dictates the formation and the activities of corporations, while governance regulates the balancing of interests among an organisation’s different stakeholders. Corporate law and governance therefore directly shape what businesses do and how they do it.
History and Present
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 exciting opportunity to share his passion and experience in corporate leadership, and to educate the newly democratic South African public on the working of a free economy.
In 1994 the first King report on corporate governance (King I) was published, this was the first corporate governance code for South Africa. It established recommended standards of conduct for boards and directors of listed companies, banks, and certain state-owned enterprises.
King IV is the fourth set of codes created for the purpose of ensuring effective governance within organisations, and sets out the philosophy, principles, practices, and outcomes which serve as the benchmark for corporate governance in South Africa. King IV was released on 1 November 2016 and became effective for financial years commencing from 1 April 2017.
One of the significant advances in the King Commission, and the King IV Code, is the responsibility of the entire governing body to apply and explain the organisation’s governance outcomes, as opposed to earlier King Codes where the governing bodies where required merely to apply or explain variances in intentions and outcomes.
King IV is applicable to all organisations be they companies, trusts, NGOs, state enterprises, local authorities, university councils, pension, and retirement funds, and any other commercial or serving entities. Boards in the King IV Code are referred to as governing bodies, and people appointed to governing bodies are responsible for ethical and effectiveness leadership of the organisation in which they serve, and are measured in terms of four clearly defined outcomes which are clarified in the Code.
The King IV Code is a voluntary set of principles, and although not statutory law as per the directing requirements in the Companies Act, it can have legal consequences for a governing body in them being held liable for poor governance compliance through case law and its direct linkage to common law.
South Africa as a Governance Pioneer
South Africa through the King Commission and Integrated Reporting Council has been a leading authority on governance and organisational reporting throughout the world. Many countries have adopted the King Codes to better manage and ensure accurate reporting, responsibility and outcomes of governing bodies.
The Nuts and Bolts
King IV is an outcome-based governance code. The rational being that if the internal and external outputs of an organisation are measured and managed within clearly defined parameters, it is likely that the organisation has been led effectively, and will achieve positive outcomes and maintain quality governance standards. The outcome-based approach is centred around ethical and effective leadership, and has four distinct areas of measurement which the governing body is required to meet, comply with, and explain how organisational practices helped it to meet the Code’s defined principles and outcomes. The four outcome measurements include:
- Building an ethical and engaged culture within the organisation
- Ensuring good performance of the organisation, and meeting organisational and stakeholder expectations
- Ensuring adequate and effective controls / oversight within the organisation
- Ensuring legitimacy, trust, and confidence in the organisation
To reach the four intended positive governance outcomes, governing bodies are required to show how the application of 17 principles within the Code has led to positive and anticipated outcomes. Each of the 17 principles must be achieved, and practices must be put in place to support the governing body and operational teams in meeting the defined principles and outcomes.
Practices to reach the 17 principles may change from organisation to organisation depending on the size of the entity, or in which industry the entity operates. Although no direct guidance is given to the practices that governing bodies and organisations are expected to implement, there does need to be sight of significant thought and consideration induced to ensure that the practices chosen support to the 17 principles being achieved.
The 17 principles are divided into the following groups of focus areas and are linked by common themes and concepts. These themes and concepts can be broadly grouped into the following headings:
- Leadership, ethics and corporate citizenship
- Strategy, performance and reporting
- Governing structures and delegation
- Governance functional areas
- Stakeholder relationships
- Integrated Reporting
The 17 principles flow from the common themes and concepts and help to define the activities that will result in the organisation likely being successful. It is critical that the governing body is aware that it is their responsibility to, as Professor Mervin King says, be aware that the organisation is lifeless without the courage, commitment, confidence, creativity, and communication from the governing body – and that the role of the directors on the governing body is to be the organisation’s heart, mind and soul. The 17 principles are:
- Leading ethically and effectively
- Supports an ethical culture
- Responsible corporate citizenship
- Appreciate that corporate governance, including sustainable development, is an inseparable element of the value creation process
- Ensure the validity or reporting and informed assessments
- Governing body as custodian of good governance
- Governing body composition
- Effective governing body structures and delegation of authority
- Performance evaluation
- Governing body / management relationships
- Risk governance
- Technology and information governance
- Compliance governance
- Remuneration governance
- Stakeholder-inclusive approach
- Responsible investment
The Code encourages a holistic approach and consideration to governance, referred to as Integrated Reporting, and suggests that six capitals be considered. These important areas of focus directly impact stakeholder relationships and include:
Integrated reporting helps to define a clear and understandable way to show stakeholders how the governing body applied their minds to the sustainability and value creation of the organisation. Integrated reporting helps to answer questions as, has the organisation developed a strategy to ensure sustainable performance in the short, medium, and long terms? An integrated report assists stakeholders and investors in sharing a common understanding of the organisation, which is not easily possible from only reading through the financial report, or an ESG focused sustainability report.
Integrated reporting also helps to explain how the operations of the organisation have already, and will in the future, impact on society, the environment, and the economy. This is critical in defining positive and negative impacts, and opportunities and risks, which need to be enhanced or corrected respectively as the organisation moves forward in its endeavours.
The integrated report is not about disclosing confidential information, but rather to share relevant information about the organisation that will make it easier for associated people and stakeholders to understand and support the organisation. This in turn assist funders in approving, for example, financial loans and lower interest rates. The comprehensive report will also help to attract higher quality people to work in and supply goods to the organisation, and help to focus measures to alleviate social, environmental, and economic challenges.
Corporate governance and its integrated reporting methodologies is a positive step forward in governance for both developing and mature organisations, in that it provides a well thought through framework to reduce organisational risk, to support ethical and effective leadership, to align initiatives to sustainability endeavours, and to better inform stakeholders of the organisation’s pending challenges, opportunities and expectations.
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