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The 4 Kings of King IV: a new era of corporate governance

INTRODUCTION
The month of April starts on an uncertain note with the reshuffling of cabinet ministers resulting in several new ministers taking office.  The beginning of April also signals the payment of social grants as promised by the Minister of Social Development.  But April also presents an interesting development  and that is the disclosure on the application of the King IV Code is effective in respect of financial years starting on or after 1 April 2017.

I would like to commend the Institute of Directors for the development and release of the King IV Report on Corporate Governance for South Africa.   The Report once more highlights the importance of corporate governance in any organisation.  Moreover, the 4th version of the King Report affirms South Africa as a world leader regarding Corporate Governance from a policy, guidelines and advocacy perspective.  It is also important to recognise the fact that while the King Codes remain voluntary, elements of the code have become so useful that it managed to be enshrined into legislation such as the Companies Act. The inclusion of social and ethics committees as prescribed by the Companies Act is a good case in point.  Also, the corporate governance requirements and reporting of companies listed on the Johannesburg Stock Exchange has significantly improved as a result of subsequent King Reports.  After each release of an updated King Report, typically every eight years, significant improvements were implemented, and this process continues with King IV. In essence, the report sets out the philosophy, practices and outcomes of corporate governance and therefore serves as a benchmark for corporate governance for South Africa.

THE 4 KINGS of KING IV
What makes King IV special is the new definition of corporate governance. Moving forward from the previous edition of the King Reports that essentially defined corporate governance as the system in which an organisation is controlled, King IV provides a profound new definition:  Corporate governance is the exercise of ethical and effective leadership by the governing body towards the achievement of four governance outcomes:

  1. Ethical culture
  2. Good performance
  3. Effective control
  4. Legitimacy

STRENGTHS OF KING IV™
The following strengths are prevalent in the King IV Report:

  • The breakdown of the report into 9 parts and 5 chapters is logical and useful for the purpose of categorising the important aspects of corporate governance to be considered in the modern business environment.
  • The reduction of the 75 King III principles to 17 in King IV augurs well for a more focused and streamlined approach to sound corporate governance. The fact that the principles build on and reinforce one another is very useful and will make a big contribution to a more integrated approach to corporate governance.
  • Consistent and building on King III, I am glad to see the reaffirmation of the importance of the role of leadership in corporate governance.
  • The overarching, high level leadership responsibility depicted as a golden thread throughout the Report is very useful (Strategy, Policy, Oversight, Disclosure). The organising of the sub-sections under these responsibilities is very appropriate and will contribute to focused improvements in the role of governing bodies in driving good corporate governance (and not interfering in management roles).
  • The inclusion of sector supplements (SMEs, NPOs etc.) with different terminologies relevant to their environments provided evidence of the need for flexibility regarding application, without watering down the practices of sound corporate governance across industries and sectors.
  • There is a stronger focus on the role of corporate governance in value-creation and the achievement of strategic goals. This is a good development from King III to King IV, in fact, it may be argued that King III focused more on simply being a “good governance organisation” while not necessarily driving business value.
  • The importance of ethics is highlighted in King IV, and yet again it all starts with ethical leadership.
  • The overarching responsibilities of the board as governing body are outlined in King IV (i.e. providing strategic direction, approving policy to put strategy into effect, providing informed oversight of implementation and performance, and disclosing for the purpose of reporting). This ensures a more systematic approach to the governance value-chain.
  • King IV builds on the philosophy of good governance as discussed in King III, but now some of the key concepts such as ethical leadership and corporate citizenship are not only refined, but also better defined. In particular, the role of the governing body in developing and overseeing the core purpose of the organisation, including the driving of value, and stakeholder engagement is better articulated.
  • The same values underpinning governance, i.e. integrity, competence, responsibility, accountability, fairness and transparency as identified in King III, have been retained in King IV.
  • The role of the governing body in taking responsibility for the governance of ethics as well as the ethics of governance is sufficiently covered in the introductory session. Specifically, the creation of an ethical culture is highlighted, in addition to the need for values as expressed in a code of conduct, trust, character and building the reputation of the organisation.
  • While the notion of integrated reporting has been around for some time, King IV suggests that we need “integrated thinking” first. This is a very useful improvement from King III and will steer boards in realising the need to consider all interdependencies before making decisions.  Integrated thinking is a prerequisite for integrated decision-making, and therefore also a strong method for breaking down silos within organisations to enable the company to optimise its functioning. In fact, integrated thinking drives the value-creation process by taking cognisance of the external environment. It also appreciates the relationships amongst the six capitals, for example, the training of employees diminishes financial capital but increases the human capital of the organisation.
  • Once again, sustainable development is included, but this time organisations are encouraged to “expand its view of success in terms of long-term, positive outcomes for business, society and the environment.” While many organisations have done some good work in terms of environmental performance, it is evident that King IV includes corporate social responsibility as part of sustainable development thinking. Thus, sustainable development should be embedded in strategy and not be treated as a separate priority.
  • While King III highlighted the “triple context” of the economy, society and the environment, King IV goes further to suggest that these three components should not be seen as separate issues, but rather be combined to leverage its impact as an integrated whole or intertwined concept.
  • I am glad to see that King IV encourages organisations to ensure social transformation and to address social ills such as inequality, skills gaps and unemployment.
  • Although King III followed the traditional definition of risk as “the affect of uncertainty on the achievement of business objectives,” it is good to see that King IV has made the shift to a more balanced approach to business risk by also considering opportunity as part of the risk mindset.
  • Since integrated reporting was introduced in King III it has been adopted widely locally and internationally. King IV continues on this achievement.  Now, with King IV the three elements of the triple context within the value creation process are combined “by appreciating that strategy, risk and opportunity, performance and sustainable development are inseparable elements.”
  • While IT governance focussed on technology in King III, King IV takes this further by stating that technology and information are key building blocks in the digital business value chain that consists of people, technologies, information and processes and that delivers the organisation’s output.
  • King IV acknowledges an elevated focus on compliance by proposing that a holistic view is needed on how applicable laws, rules, codes and standards relate to one another. In essence, King IV recommends that organisations should be more proactive in engaging with regulators, legislators and industry associations. However, while the need for compliance is accepted, King IV proposes a balanced perspective by implying that this should not be done at the expense of value creation.
  • The King IV™ Report aims to foster enhanced accountability on remuneration. The better focus on remuneration and repositioning it as a “corporate citizenship matter” is a welcome development indeed.  The disclosure pertaining to the remuneration policy, as well as the actual remuneration of directors and prescribed officers are commendable.  In addition, and in a significant departure from measuring financial targets only, King IV recommends that “variable remuneration be measured in accordance with targets relating to sustainable value created across the whole of the economic, social and environmental context”.   Moreover, the increased disclosure pertaining to fairness of executive remuneration in the context of overall employee remuneration is a positive development, in particular the new practice of interaction between the social & ethics committee and the remuneration committee.
  • Making the transition from “defence” to creating an “adequate and effective control environment” as part of combined assurance is more proactive and meaningful in promoting sound governance. This shift is based on the assumption that combined assurance will play a more significant role to “strengthening the integrity of reports for better decision-making.”  Therefore, the role of the audit committee is now to oversee the implementation of the combined assurance model.  This will require audit committees to combine, co-ordinate and align assurance activities across the various lines of assurance, so that assurance has the appropriate depth and reach.  Assurance requires the imperative of consolidating inputs from internal auditors, risk and compliance managers and other line managers in contributing to an effective control environment and ensuring the integrity of reports.
  • The notion of shareholder activism is further expanded in King IV. Institutional investors should apply the principles of responsible investment towards long-term, sustainable results. While the governing body was at the centre of corporate governance under King III, now under King IV this perspective is broadened by requiring that “the governing body of the institutional investor to ensure that the organisation manages its rights, obligations, legitimate and reasonable needs, interests and expectations, as holder of beneficial interest in the securities of a company.”  The increased shareholder activism is encouraging to further promote the role of shareholders as custodians of good governance.
  • Given the fact that dispute resolution is once again included in the latest King report, this matter deserves attention. During the implementation period of King III (2009-2016), South Africa has seen some of the worst periods of labour conflict, unrest and violence.  The Marikana massacre, right in the middle of the King III cycle in 2012, is a stark reminder of the worst case scenario pertaining to the consequences of unresolved disputes.  It is therefore not surprising that King IV urges organisatons to resolve disputes “expeditiously, efficiently and effectively” especially in the light of labour strike action becoming protracted and hostile.
  • Although most governance strategists would prefer practices to follow principles, the King IV elements of practices, principles and governance outcomes are well defined and explained. It is indeed explained that the practice recommendations should give effect to the principles. It then follows logically that the achievement of principles lead to the realisation of the related governance outcomes.
  • While a tick box approach to corporate governance is discouraged, King IV warns against the mindless adoption of the practices as rules from a compliance perspective. It is therefore good to see the key consideration of adopting a “mindful way in considering the size, resources and complexity of strategic objectives and operations of an organisation.”
  • Regarding technology and information governance, the ethical and responsible use of technology and information is addressed. This section also acknowledges the integration of people, technologies, information and processes in the digital business value chain of the organisation. It also implies the integration of cyber-security risk into risk and opportunity management.  In essence, a culture needs to be created where employees are alert to cyber-security risk and being proactive in raising concerns.
  • Another important area to address is compliance governance. This section addresses compliance to laws (including labour laws), and non-binding rules, codes and standards and how these relate to one another in an integrated manner.  Management should decide on strategic relationships with regulators and professional bodies in order to understand the environment and trends.
  • A whole sub-section on remuneration governance has been included in King IV. The governing body should provide strategic direction for fair, responsible and transparent remuneration on an organisation-wide basis, including approving policy and attracting, rewarding and retaining high-quality talent.
  • King IV also covers the notion of stakeholder relationships. A stakeholder-inclusive approach is adopted, which takes into account and balances their legitimate and reasonable needs, interests and expectations.  The recommended practice of an integrated stakeholder communication plan is particularly useful.  Additionally, King IV proposes standards and processes for development of content and sharing of information on digital and other communication platforms. This includes assigning of decision-making authority on approval of content and manner of dissemination.  Skills development of employees will be key to drive innovation, growth and the leverage of technology for business and societal impact.

 
CONCLUSION
In the light of the above analysis of the King IV Report, it is evident that the King Commission and the IODSA have done an excellent job in drafting the fourth edition of this important corporate governance report and code for South Africa.  I identified the strengths of the Report and Code in this article.   However, achieving the four governance outcomes of an ethical culture, good performance, effective control and legitimacy requires a dedicated focus on the four roles and responsibilities of governing bodies, i.e. strategic direction, policy and planning, accountability, and lastly oversight and monitoring.

Despite the undisputed quality and potential impact of the King IV Code as a world-class blueprint for corporate governance, it appears as if organisations continue to experience challenges implementing the spirit and guidelines embedded in the King Reports.  This problem manifests itself in the strategy-execution gap experienced by many organisations.  While most boards would express a commitment to good governance, the reality is that boards and management teams often fail in practice to ensure good governance.  For instance, most organisations have clear policies on ethics, yet they fail to achieve ethics throughout an organisation.  The continuous prevalence of major corporate and government scandals is evidence that corporate governance is not equally well understood and implemented by all organisations.  Let us focus on the four “kings” of King IV and ensure improved corporate governance in our organisations, not only for the benefit of our companies, but also society as a whole.

The full King IV Report can be downloaded from www.iodsa.co.za
Marius Meyer is CEO of the SA Board for People Practices and a member of the Institute of Directors.

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