The King IV Report on Corporate Governance for South Africa 2016 is an update of King III, aligning it with international governance codes, best practice and shifts towards inclusive and integrated capitalism. It takes into account increased compliance requirements for effective governing bodies, new governance structures, such as Social and Ethics Committees, emerging risks and opportunities from new technologies, as well as new reporting and disclosure requirements, such as integrated reporting.
The Report was released on 1 November 2016 and is effective for financial years commencing from 1 April 2017. It includes a Code with supplements for small and medium-sized enterprises, non-profit organisations, state-owned entities, municipalities and retirement funds.
Internationally recognised expert on corporate governance and sustainability, and chair of the King Committee, Prof Mervyn King, explains how King IV reinforces good corporate governance as a lever for value creation.
How would you define good governance?
Good governance is about quality and not about a mindless quantitative checklist exercise. It becomes mindful when practitioners are striving to achieve principles which will result in the four good governance outcomes of ethical and effective leadership required by King IV: adequate and effective controls and oversight; value creation in a sustainable manner; trust and confidence in the entity; and legitimacy of operations. An organisation which achieves those outcomes must have been practising quality governance.
What is the primary objective of King IV, and how does it differ from previous versions of the Code?
King IV moves away from a compliance mindset about governance, to being a value-add in the business model, shifting from ‘apply or explain’, to ‘apply and explain’. It has reduced the 75 principles in King III to 17 basic principles, one of which applies to institutional investors only. Sixteen of these principles can be applied by any organisation, and all are required to substantiate a claim that good governance is being practised. The required explanation allows stakeholders to make an informed decision as to whether or not the organisation is achieving the four good governance outcomes of ethical and effective leadership required by King IV. Notwithstanding, complete flexibility is given to the organisation to choose practices which are apposite for its business, while striving to achieve the principles.
How does the King IV Code impact corporate social investment practitioners?
Corporate social investment has, erroneously, been practised as a tick-box exercise based on the belief that once an investment has made, the company has discharged its duty to all three dimensions in which it operates, namely: economic, social and environmental.
Following the principles of integrated thinking and reporting, corporate social responsibility should be built into the business strategy of that organisation. For example, if the organisation is a beverage manufacturer, it should build the conservation of water into its business strategy, in order to ensure the long-term health of that organisation.
What key recommendations does the King IV supplement for non-profit organisations contain?
Basic premise is that the principles in the fourth iteration apply equally to non-profit organisations. However, the principle of proportionality applies to non-profit companies.
What governance advice would you offer business and non-profit executives?
The best advice is to ensure that you approach governance as a mindful value-add, by constantly asking yourself whether how you are making decisions or managing the business will impact adversely or positively on effective controls within the business, sustainable value creation, trust and confidence in the entity, and legitimacy of operations.