In 1994 when the first King Report on Corporate Governance in South Africa was published, it was hailed as ground-breaking (see box). However, progress since the 2016 release of the report’s most recent iteration, King IV, has not lived up to expectations.
Now the King Committee, the body responsible for promoting and advancing corporate governance in South Africa, is working on a refresh to align the code with forthcoming amendments to the country’s Companies Act 2008 and to take account of global developments in areas such as sustainability reporting standards and artificial intelligence.
‘I don’t think the code has made the kind of inroads we were anticipating’
‘The King tradition has always been to push the boundaries of conventional views on governance,’ says Ansie Ramalho, chair of the King Committee, adding that the ambition of King IV was to shift corporate governance from a grudging compliance exercise towards judicious application by companies in a way that adds value to the company and its stakeholders.
Ramalho concedes, however, that many companies in South Africa have yet to incorporate the code’s principles. ‘We wanted boards and companies to really engage with governance and to reflect on it and to evaluate the value that it is actually delivering,’ she says. ‘I don’t think it has made the kind of inroads we were anticipating.’
A history of corporate governance
In 1994, Professor Mervyn King, a former Supreme Court judge in South Africa, published the groundbreaking first King Report on Corporate Governance, known as the King Code.
Since then, in response to local and international developments, there have been three further iterations: King II (2002), III (2009) and the most recent, IV (2016), which is based on 17 governance principles with recommended practices to achieve these principles.
The scope of corporate governance in the King Code has expanded from its initial focus on protecting shareholders, oversight of management, board committees, compliance and other internal concerns to also include organisations’ wider responsibilities to society.
The King Code is voluntary, and while some elements are included in the Johannesburg Stock Exchange’s listing requirements and some legislation, meaningful implementation comes down to a company’s culture, says Yaniv Kleitman, director of corporate and commercial practice at law firm Cliffe Dekker Hofmeyr.
Khaya Sithole, an accountant, academic and activist, says companies not only have a responsibility to their shareholders and employees but also to the ecosystem, meaning that poor governance at one company could expose other businesses to risk. He points out that while governance is all about accountability, directors themselves are barely accountable to shareholders because their board evaluations are not disclosed. Such disclosures would provide a credible reference point for performance on which future board appointments could be based, rather than the current, arbitrary model of alliances and networks.
Wake-up call
Since King IV was released, South Africa has endured accounting scandals at the retailer Steinhoff and sugar producer Tongaat Hulett, as well as the findings of the Zondo Commission, which revealed billions of dollars of corruption during Jacob Zuma’s presidency.
‘Fraud is typically committed by a few executives who can absolutely deceive the board and employees’
Courts are gradually ‘using King IV as a yardstick’, Kleitman says. ‘This trend needs to accelerate, with more companies suing delinquent or rogue directors who have not applied King IV or applying to the court for their delinquency – that is really the only way that there will be a wake-up call, and attitudes will change.’
A vital step forward, Ramalho says, would be for shareholders to take more responsibility: ‘We should say this is not what we expect, or withdraw our support, or sell our shares, or vote against resolutions,’ she says.
Kleitman, meanwhile, argues that auditors must do more. ‘Fraud is typically committed by a few executives, such as the CEO and CFO, who between them can absolutely deceive the board and employees’, he says. ‘It is disappointing to see that time and time again the auditors do not pick this up.’
Professionalising boards
King IV recommends that a majority of board members are non-executive directors. But with a relatively small pool of qualified people, this can lead to overstretching.
Ramalho calls for greater professionalisation of boards, which includes educating non-executive directors in the requirements of the role. ‘Does a director understand the power of internal audit? Do they understand what a good risk management system should look like? If they have the knowledge of how a governance system should work, it helps tremendously in exercising a governance role.’
‘We need directors who are prepared to be the one lone voice when everyone else is afraid to challenge’
King IV also recommends that majority of non-executive board members should be independent, in order to provide oversight. ‘But if you don’t know enough to challenge management then your independence becomes meaningless,’ Ramalho adds.
Boards have a vital role to play in holding the CEO to account; in the cases of Steinhoff and Tongaat Hulett, leaders were allegedly able to ride roughshod over their respective boards. ‘If a company has a longstanding CEO, it better make sure that the right people are on the board, people who are not afraid to challenge,’ Ramalho says.
‘We need directors with courage, who are prepared to be the one lone voice in asking the question, when everyone else is afraid to challenge or to say the unpopular thing.’
Key to this is understanding how the business works, Sithole says: ‘No one should call themselves a director if they haven’t gone through a crash course of knowing what the employees of a company do every single day and understanding what those processes are.’
Ultimately, good governance, according to Ramalho, goes beyond ethical leadership. ‘Governance includes being attuned to the operating environment and seeing the opportunities,’ she says. ‘It’s about strategic thinking; it’s about ensuring that the organisation thrives.’
Governance for growth
Avoiding the pitfalls of ‘groupthink’ on boards is also crucial. It’s one thing to enhance the race and gender profile of a board to introduce diversity but if those appointed have the same professional qualification, for example, or are trained in the same area of expertise, then that board will not represent a diversity of opinions, Sithole warns. ‘So we need to revisit what we mean when we talk about diversity on boards,’ he says.
Ultimately, says Kleitman, education is key. ‘You need dedicated and knowledgeable people to be on the board to truly understand what it means to act in the best interests of the company, to build something that will be there for generations of shareholders to come,’ he says. ‘It takes a very particular mindset to appreciate that.’
