New King IV Report will boost corporate governance in South Africa

Introduction

An updated version of governance codes and best practice became necessary because of a number of international and local corporate governance and regulatory developments since King III was issued in 2009.  The King IV Report^TM (King IV) was officially launched on 1 November 2016.  It replaces King III in its entirety and is effective for financial years commencing from 1 April 2017.

King IV builds on the content of King III, setting out the philosophy, principles, practices and outcomes which serve as the benchmark for corporate governance.

The objective of King IV is to broaden acceptance of corporate governance across various industry sectors.  The Report has been simplified for easier interpretation, access and implementation by all types of organisations across various industry sectors such as: municipalities; non-profit organisations; retirement funds; small and medium enterprises; and state-owned entities.  Sector supplements are included that provide specific guidance to these organisations on how to apply the recommended practices proportionally in line with its size and resources, and the extent and complexity of its activities.

Key concepts of King IV

• King IV strengthens the position in the Companies Act, 2008 that the governing body of an organisation is ultimately responsible for the organisation and needs to be held accountable for its actions.

• King IV promotes good corporate governance as “the exercise of ethical and effective leadership by the governing body that results in the achievement of the following governance outcomes: an ethical culture; performance and value creation; effective control; and legitimacy.”

• King IV emphasizes that organisations are not only responsible for the economic bottom line but are integral part of societies and should critically consider the impacts and outcomes of their actions and operations on the society and the environment.

• King IV widened integrated reporting and extends integrated thinking beyond only financial capital to all forms of capital, including human, intellectual, manufactured, social and environmental capital.

Key differences between King III and King IV 

Outcomes-based approach

King IV is outcomes-based orientated and aspires mindful application as opposed to the rule-based, “tick-box” approach followed by King III.

Principles and recommended practices

King IV consolidates the 75 principles that applied under King III into 16 succinct principles, with an additional 17^th principle exclusively applicable to institutional investors. Each principle is supported by recommended practices.

“Apply and explain” versus “apply or explain”

They “apply or explain” principle in King III has been replaced with an “apply and explain” approach.  King IV assumes application of all principles which are basic and fundamental to good corporate governance and requires entities to explain how the principles are applied by way of a narrative explanation of the practices demonstrated in the application.

Independence of directors

The test for the independence of directors has been widened.

Social and Ethics Committee

King IV expands the role of the Social and Ethics Committee beyond the prescribed functions set out in the Companies Act, 2008 and the Companies Regulations, 2011 by including matters relating to ethical behaviour and ethics management.

Combined assurance

King IV expands on combined assurance, by introducing the five level Combined Assurance Model.

Risk governance

King IV introduces the term “risk and opportunity governance” and provides a different perspective on risk.

Remuneration 

King IV tightens the accountability on the remuneration of executive management and includes more onerous disclosure requirements.

Technology and Information

The terminology used in King III has deliberately been changed and King IV refers to technology and information governance.  Information is isolated as a separate corporate asset that needs to be protected through governance structures.

Terms of reference / charter of board and committee

King IV is more prescriptive on the content of charters and framework documents.

Disclosure requirements

King IV is more prescriptive on disclosure requirements and includes specific disclosure recommendations under each principle of the Code.

Conclusion

For further information please contact Suzette Janse van Rensburg at Inlexso (Pty) Ltd.  Tel: +27 12 307 3337 or email: Suzette.Jansevanrensburg@eoh.co.za.