King III reaffirms SA's prominence in global corporate governance

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Johannesburg, Wednesday, 25 February 2009 - www.saica.co.za

King III reaffirms South Africa's pride of place as a world leader in corporate governance, says Ewald Müller, senior executive: standards at the South African Institute of Chartered Accountants (SAICA).

Müller pinpointed the principal areas of difference between King II and King III, noting that the changes invariably enhanced the role and importance of corporate governance, reflecting as they did the "new reality" occasioned by recent corporate and financial upheavals.

In particular, he highlighted the following:

The new code applies to all entities, whereas King II applied only to listed companies, financial institutions and public companies;
King III lays particular emphasis on integrated sustainability performance over and above simply reporting;
A minimum of two executive directors - the CEO and the director responsible for finance - should be appointed to the board; previously, the recommendation was for a balance of executive and non-executive directors;
King III urges companies to adopt shareholder-approved remuneration policies, stressing that factors outside the influence of executive should not be taken into account when assessing the remuneration;
The board should determine the remuneration of executive directors without the need for shareholder approval;
Non-executive directors should be precluded from receiving share options;
Internal audit should follow a risk based approach and be strategically positioned and remain independent to achieve its objectives.
Risk management should be intrusive and should not be viewed only as a reporting process to satisfy governance expectations.

The IoD has compiled a detailed table reflecting the key changes from King II to King III.

King II	King III
Application of the Code
The Code applies to the following business affected companies: Listed companies Financial institutions Public companies	The Code applies to all entities, regardless of their nature, size or form of incorporation.
Code implemented on a "comply" or "explain" basis	Code implemented on an "apply" or "explain" basis
Examples of charters etc. provided in the report	Detail practices and examples provided in separate Practice notes and not in the main report.
Corporate citizenship: leadership, integrity and responsibility
Ethical practices and organisational integrity discussed as part of integrated sustainability reporting.	Emphasis on leadership and values The notion of ethics of governance in addition to the governance of ethics Emphasis on integrated sustainability performance over and above reporting Emphasis on integration of strategy, sustainability and control
Boards and directors
Roll of the Board
Boards should recognise that companies do not act independently from the societies in which they operate.	Ensure that the company acts as and is seen to be a responsible corporate citizen
Determine the strategy to achieve its purpose and to implement its values in order to ensure that it survives and thrives	The board should cultivate and promote an ethical corporate culture
The board should identify and monitor the non-financial aspects relevant to the business of the company	The board should appreciate that strategy, risk, performance and sustainability are inseparable
The board must identify key risk areas and key performance indicators of the business enterprise.	The board should consider sustainability as a business opportunity
	The board is responsible for the process of risk management
	The board and its directors should act in the best interest of the company
	The board and its directors should manage conflicts of interest
	The board should ensure that there is an effective risk based internal audit
	The board should ensure the integrity of financial reporting
	The board should ensure that the company makes full and timely disclosure of material matters concerning the company
Ensure that the company complies with relevant laws, regulations and codes of best business practice	The board should ensure that the company implements an effective compliance framework and processes
	The board should commence business rescue proceedings as soon as the company is financially distressed
Composition of the board
The Board should consist of a balance of executive and non-executive directors, preferably with a majority of non-executive directors of whom sufficient should be independent.	The majority of the board should be non-executive directors The majority of the non-executive directors should be independent.
	As a minimum two executive directors should be appointed to the board being the CEO and the director responsible for finance
	At least on third of the non-executive directors should retire by rotation at the company's AGM or other general meetings
	The MOI should allow the board to remove the CEO as an executive director on the board. Shareholder approval is not deemed necessary for these decisions.
The chairperson should preferably be an independent non-executive director	The board should be led by an independent non-executive chairman.
Where the roles of the chairperson and chief executive officer are combined, there should be either an independent non-executive director serving as deputy chairperson, or a string independent non-executive director element.	The chairman of the board should be independent and free of conflicts of interest on appointment.Failing which, the board should consider appointing a lead independent non-executive director
	The duration of tenure of chairmen should be determined and disclosed
	The chairman should consider the number of additional chairmanships that he holds. Intellectual honesty should be applied in this regard
	Additional duties of the chairman: Setting the ethical tone for the board and the company Being aware of the individual responsibility of board members Being collegiate with board members and senior management while maintaining an arm's length relationship Monitoring how the board functions collectively, how individual directors perform and how they interact at meetings. The chairman should meet with individual directors once per year to discuss their performance Mentoring to enhance directors' confidence Knowing the strengths and weaknesses of individual members Ensuring that a formal programme of continuing professional education if adopted at board level Building and maintain stakeholders' trust and confidence in the company
	Additional responsibilities for the CEO: Monitoring and reporting performance and conformance with strategic imperatives to the board Organising the structure of the company to achieve the strategic plans Setting the tone from the top in providing ethical leadership and creating an ethical environment Ensuring that the company complies with all relevant laws and regulations
Board appointment process
	Background checks should be performed before the appointment of directors
Director development
	Directors should receive regular briefings on matters relevant to the business and applicable laws and regulations
	Incompetent or unsuitable directors should be removed
Company secretary
	The company secretary should elicit appropriate responses, feedback and input to specific agenda items in the board and board committee deliberations
Performance assessment
Performance evaluations should be conducted by means of a self-evaluation	Consider if assessments should be done in-house of conducted by independent service providers
	Individual assessments should be performed on directors and performance measured against the director's duties
Board committees
All companies should have, at a minimum, audit and remuneration committees	The board should appoint audit, risk, remuneration and nomination committees
Group boards
	The relationship between subsidiary and holding company and their boards is dealt with
Remuneration of directors
	Companies should adopt remuneration policies, which should be approved by the shareholders.
	Factors outside the influence of executives should not be taken into account when assessing the remuneration.
	The board should determine the remuneration of executive directors and no shareholders approval is necessary
Performance-related elements of remuneration should constitute a substantial portion of the total remuneration of executives	The remuneration committee should ensure an appropriate mix of pay and that incentives are based on stretch, verifiable targets
	An annual remuneration report should be issued
	Unjustified windfalls and inappropriate gains arising from the operation of share-based and other incentives should be guarded against
	A policy to pay salaries above the median requires special justification
	Overriding conditions for the award of bonuses may be necessary
	Multiple performance measures should be used to avoid manipulation of results of poor business decisions
	Balloon payments on termination do not meet the requirements of a fair remuneration policy
	Shareholders should approve incentive schemes and long term share based payments in advance.
	The chairman and non-executive directors should not receive incentive awards geared to the share price.
The allocation of share options to non-executive directors should be left to the shareowner's discretion and approval.	Non-executive directors should not receive share options
	Vesting of rights on share based incentives should be based on performance conditions measured over an appropriate period The price at which shares are issued should not be less that the midmarket price immediately preceding the grant of shares
	No re-pricing or surrender and re-grant of awards are permitted.
	The rules of the scheme should provide that share or options awards are not permitted in a close period
	No backdating of awards should be allowed
	Definition of non-executive director extended to include additional criteria: Does not have or represent a shareholding material to the director of company. A holding of more than 5% is considered material. Does not receive remuneration contingent upon the performance of the company
Disqualification of directors dealt with	Not included as this matter is addressed in the Companies Act
Business judgement rule suggested in South African company law	Business judgement rule incorporated in the Companies Act
Audit committees
	The concept of combined assurance introduced including internal assurance providers, external assurance providers and management
	Integrated reporting (financial and integrated sustainability reporting combined) introduced
The board should appoint the audit committee	In line with the Act, the shareholders should appoint the audit committee. Guidance provided on the criteria for audit committee members.
	Duties of the audit committee brought in line with the Companies Bill to include the duties of: Nominate the external auditor for appointment Set the fees and the scope of the appointment Ensure that the appointment complies with the act Determine the nature and extent of non-audit services Pre-approve any contract for non-audit services Insert a statement in the integrates report Ensure that the company implements whistleblowing and fraud procedures
	The board may also delegate aspects of risk and sustainability issues to the audit committee
	The review of the financial report should include the integrated report, annual financial statements, interim reports, preliminary or provision announcement, summarised financial information and prospectuses.
Companies should avoid opinion shopping	The audit committee should discourage opinion shopping and act as arbiter between management and the external auditors
	The audit committee should annually evaluate the resources and expertise in the financial function. For listed companies the audit committee should evaluate the FD
	Summarised information should be published and the audit committee should engage the external auditors to provide assurance on summarised financial information
	The board may delegate the review of integrated sustainability reporting to the audit committee
	The audit committee should consider and recommend to the board the need to engage external assurance providers to provide assurance on the accuracy and completeness of integrated sustainability reporting
	The audit committee's role for financial risk and reporting described to include specifically: Financial risks and reporting Review of internal financial controls Fraud risks IT risks
Non-audit services described in detail	Non-audit services covered in the Companies Bill and the IRBA code. Not addressed in the report
Legal backing for, and the monitoring of compliance with accounting standards	Legal backing for and monitoring of compliance with accounting standards addressed in the Companies Bill
Information technology: the implications of It broadly discussed on how it impacts companies. IT governance not addressed	The concept of IT governance addressed under audit committees (IT risk) and risk management (IT governance)
Risk management
	Introduce the concept that risk management is inseparable from the company's strategic and business processes
	Risk management should be intrusive and should not be viewed only as a reporting process to satisfy governance expectations
	More detailed guidance on 'how' risk management should be performed
	Risk management should be applied by all companies.
	The CEO should be at the forefront of the adoption or upgrading of the risk management plan
	The three lines of defence for risk management introduced namely: line management, risk experts and then assurance functions.
	The concept of a CRO introduced and discussed
	The board should approve the company's chosen risk philosophy
	The board should ensure that key risks are quantified and are responded to appropriately
	Internal audit should provide independent assurance on the risk management process
	Key risks facing the modern company discussed: Reputational risk Sustainability risks IT risks Risk of uncertainty
Assimilating risk to the control environment including: Control environment Risk assessment Control activities Information and communication Monitoring
Internal audit
Where the board decides not to appoint an internal audit function, full reasons must be disclosed in the annual report	Companies should establish and maintain an effective internal audit function
The scope of internal audit is: Risk management Control Governance	The role of internal audit to: Perform reviews on the company's governance processes and ethics Perform an objective evaluation of the risk management and internal control framework Systematically analyse and evaluate the business processes and associated controls Provide a source of information on fraud, corruption, unethical behaviour and irregularities
	Where internal audit is outsourced, a senior executive should assume the role of the CAE
	Internal audit should provide a written assessment of the effectiveness of the company's system of internal control performance and risk management
	Internal audit should follow a risk based approach
Internal audit should report at a level within the company that allows it fully to accomplish responsibilities	Internal audit should be strategically positioned to achieve its objectives.Internal audit should report at a level within the company that allows it to remain independent and to fully accomplish its responsibilities.
	Internal audit, through the CAE, should have a direct relationship with the audit committee, corporate governance committee and risk committee
	The internal audit should be staffed with a competent, independent team
	Consideration should be given to the CAE becoming a member of the company's executive committee
Integrated sustainability reporting and disclosure
The definitions and concepts of sustainability and corporate citizenship discussed	Emphasis placed on the reporting and disclosure of sustainability
	Sustainability reporting should be: Material Relevant Accessible Understandable Comparable Formalised as part of the company's reporting processes Should take place on a regular basis
	Sustainability reporting and disclosure should have independent assurance
Detailed recommendations on SHE, social and transformation issues and human capital included in integrated sustainability reporting.	Detailed recommendations and practices to be included in the practice notes.
Compliance with laws, regulations, rules and standards
Compliance with laws and regulations dealt with as duty of the board and as an element of the risk management process	Compliance with laws, regulations, rules and standards dealt with in detail in separate chapter
	Compliance separated in: Laws and regulations that are mandatory Rules and standards for which compliance should be considered
	The board and its directors must be aware of laws, rules and standards applicable to the company
	The board is responsible for the company's compliance
	Compliance should be part of the culture and values
	Compliance is part of the risk management process
Managing stakeholder relationships
Stakeholder relations addressed as part of integrated sustainability reporting	Managing of stakeholder relationships addressed in separate chapter
	Key principles introduced: The company should proactively manage the relationships with its stakeholders The company should promote constructive stakeholder engagement The board should strive to achieve the correct balance between stakeholder groupings Companies should ensure equitable treatment of shareholders The board should promote mutual respect between the company and its stakeholders
	The concept of dispute resolution addressed: Companies should establish formal processes for internal and external disputes The board should ensure disputes are resolved as effectively, efficiently and expeditiously as possible
Fundamental and affected transactions
	New topic introduced as a result of changes in the Companies Bill.
Compliance and enforcement
The value of compliance and enforcement mechanisms of the Code discussed in detail	Elements of the Code enforced through law and regulations.

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