King IV Report – The Importance of Corporate Governance

I attended a Corporate Governance conference in September 2016. Judge Mervyn King was one of the speakers presenting on the King IV report which replaces King III and was officially released on 1 November 2016. It is effective for financial years commencing 1 April 2017.

The report contains both principles (16 in total, with a 17th principle for institutional investors) and best practices (208 with an additional 6 for institutional investors). The report is also divided into five sector supplements being a) Municipalities, b) Non-Profit Organisations, c) Retirement Funds, d) Small and Medium Enterprises and e) State-Owned Enterprises.

The main differences between King III and King IV can be summarised as follows:

King IV is outcomes based with accountability lying with the governing body that should encourage an ethical culture, good performance and effective control. It replaces the “tick box” approach to complying with corporate governance. In the case of a company, the governing body is the board of directors.

King IV also requires an “apply and explain” approach to disclosure whereas King III supported an “apply or explain”. This means that it is now assumed that you have applied the principles and an explanation of how you did this is disclosed in an integrated report.

The 16 principles of the King IV report require a governing body to:

  1. Lead ethically and effectively
  2. Govern the ethics of the organisation in a way that supports the establishment of an ethical culture
  3. Ensure that the organisation is seen to be a responsible corporate citizen
  4. Appreciate that the organisation’s core purpose, its risks and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process
  5. Ensure that reports issued by the organisation enable stakeholders to make an informed assessment of the organisation’s performance, and it’s short, medium and long-term prospects
  6. Serve as the focal point and custodian of corporate governance in the organisation
  7. Comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively
  8. Ensure that its arrangements for delegation within its own structures promote independent judgement, and assist with balance of power and the effective discharge of its duties
  9. Ensure that the evaluation of its own performance and that of its committees, its chair and its individual members, supports continued improvement in its performance and effectiveness
  10. Ensure that the appointment of, and delegation to, management contribute to role clarity and effective exercise of authority and responsibilities
  11. Govern risk in a way that supports the organisation in setting and achieving its strategic objectives
  12. Govern technology and information in a way that supports the organisation setting and achieving its strategic objectives
  13. Govern compliance with applicable laws and adopted, non-binding rules, codes and standards in a way that it supports the organisation being ethical and a good corporate citizen
  14. Ensure that the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term
  15. Ensure that assurance services and functions enable an effective control environment, and that these support the integrity of information for internal decision-making and of the organisation’s external reports
  16. In the execution of its governance role and responsibilities the governing body should adopt a stakeholder–inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time
  17. The governing body of an institutional investor organisation should ensure that responsible investment is practiced by the organisation to promote the good governance and the creation of value by the companies in which it invests.

Conclusion

In a world where there is ever increasing focus on good corporate governance, it is important for all of us to understand and apply the basic principles of King IV. If applied correctly, this will lead to improved stake holder relations, with a governing body that has effective control, legitimacy and is performing well.

Beth Gaylard

Company Secretarial Officer, Cape Town

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