The King Report on Corporate Governance

Corporate governance in South Africa was institutionalised by the first King Report on Governance published in November 1994. Unlike its counterparts in other countries, the King Report went beyond the financial and regulatory aspects of corporate governance in advocating an integrated approach to good governance in the interest of a wide range of stakeholders, including financial, social, ethical and environmental aspects. The King 1 report successfully formalised the need for companies to recognise that they no longer act independently from societies and the environment in which they operate.

For the purposes of this course, we will not delve deep into the details of the King Report, but rather focus on the seven characteristics of good corporate governance which summarises the intention and spirit of the reports.  they are:

Discipline: Corporate discipline is the commitment by a company’s senior managements to adhere to behaviour that is universally recognised and accepted to be correct and proper. This encompasses the company’s awareness of, and commitment to the underlying principles of good governance, particularly at senior management level.

Transparency is the ease with which an outsider is able to make meaningful analysis of the company’s actions, its economic fundamentals and the non-financial aspects pertinent to that business. This is a measure of how good management is at making necessary information available in a candid, accurate and timely manner – not only the audit data, but also general reports and press releases. It reflects whether or not investors obtain a true picture of what is happening inside the company.

Independence is the extent to which mechanisms have been put in place to minimise or avoid potential conflicts of interest that may exist, such as dominance by a strong chief executive officer or large stakeholder. These mechanisms range from the composition of the board, to appointments to committees of the board, and external parties such as the auditors. The decisions made, and the internal processes established, should be objective and not allow for undue influences.

Accountability: Individuals or groups in a company, who make decisions and take actions on specific issues, need to be accountable for their decisions and actions. Mechanisms must exist and be effective to allow for accountability. These provide investors with the means to query and assess the actions of the board and its committees.

Responsibility: With regard to management, responsibility pertains to behaviour that allows for corrective action and for penalising mismanagement. Responsible management would, when necessary, put in place what it would take to set the company on the right path. While the board is accountable to the company, it must act responsively to and with responsibility towards all stakeholders of the company.

Fairness: The system that exists within the company must be balanced in taking into account all those that have an interest in the company and its future. The rights of various groups have to be acknowledged and respected. For example, minority shareholder interests must receive equal consideration to those of the dominant shareowner(s).

Social responsibility: A well-managed company will be aware of, and respond to, social issues, placing a high priority on ethical standards. A good corporate citizen is increasingly seen as one that is non-discriminatory, non-exploitive, and responsible with regard to environmental and human rights issues. A good company is likely to experience indirect economic benefits such as improved productivity and corporate reputation by taking those factors into consideration.

The King report has a section on the commitment required from companies to their codes of ethics by:

• Creating systems and procedures to introduce, monitor and enforce its ethical code.
• Assigning high-level individuals to oversee compliance to the ethical code.
• Assessing the integrity of new appointees in the selection and promotion procedures.
• Exercising due care in delegating discretionary authority.
• Communicating with and training all regarding enterprise values, standards and compliance procedures.
• Providing, monitoring and auditing safe systems for reporting of unethical or risky behaviour.
• Enforcing appropriate discipline with consistency.
• Responding to offences and preventing re-occurrence.
• Disclosure should be made as to what extend the company directors belief in ethical criteria as well as how the standards will be met.
• Companies should further strongly reconsider dealings with entities not demonstrating sound commitment to integrity and ethics.

The King 3 report, which became applicable to companies in 2010 after the promulgation of the new Companies act, added the concept of ‘Business Rescue’, i.e. that companies should follow a proper (ethical) plan in place if economic circumstances threaten their existence.

Further to the guiding principles and ethical requirements, the King report also recognises that the governance of corporations can never be seen in isolation of the value system of the society in which it operates. King has therefore summarised the African context of corporate governance as follows:

• Spiritual collectiveness is prized over individualism. This determines the communal nature of life where households live as an interdependent neighbourhood.
• An inclination towards consensus rather than dissension helps to explain the loyalty of Africans to their leadership.
• Humility and helpfulness to others is more important than criticism of them.
• In the main, African culture is non-discriminatory and does not promote prejudice. This explains the readiness with which African embrace the reconciliation at political and business levels.
• Co-existence with other people is highly valued. The essence of ubuntu (humanity) that cuts across Africa is based on the premise that you can be respected only because of your cordial co-existence with others.
• There is also an inherent trust and belief in fairness of all human beings. This manifests itself in the predisposition towards universal brotherhood, even shared by African-Americans.
• High standards of morality are based on historical precedent. These are bolstered by the close kinship observed through totem or clan names and the extended family system.
• A hierarchical political ideology is based on an inclusive system of consultation at various levels. The tradition of consultation as practiced by the chiefs since time immemorial should form the basis of modern labour relations and people management practices.
• Perpetual optimism is due to strong belief in the existence of omniscient, omnipotent and omnipresent superior being in the form of the creator of mankind.

Corporate governance is essentially about leadership:

• Leadership for efficiency in order for companies to compete effectively in the global economy and thereby create jobs.
• Leadership for probity because investors require confidence and assurance that the management of a company will behave honestly and with integrity in regard to their shareholders and others.
• Leadership with responsibility as companies are increasingly called upon to address legitimate social concerns relating to their activities.
• Leadership that is both transparent and accountable because otherwise business leaders cannot be trusted and this will lead to the decline of companies and the ultimate demise of a country’s economy.

In summary, the King report describes successful corporate governance in the world of the 21st century as an inclusive rather than an exclusive approach. Companies must be open to institutional activism and greater emphasis should be placed on sustainable or non-financial aspects its performance. Boards must apply the test of fairness, accountability, responsibility and transparency to all acts or omissions and be accountable to the company but also responsive and responsible towards the company’s identified stakeholders. The correct balance between the conformance with governance principles and performance in an entrepreneurial market economy must be found, but this will be specific to each company.