By Laura Light

THE KING IV REPORT.WHAT IS IT?
AND HOW DOES IT APPLY TO MY SMALL BUSINESS?

The King IV: Report on Corporate Governance for South Africa – 2016 (“the Code”) is a set of principles which were established to guide directors of companies to develop ethical and effective leadership which underpin the concept of good governance. The Code is intended to be a more practical guide and form of voluntary policy regulating good corporate governance in South Africa. Although its creation was in South Africa, its implementation has expanded to the United Kingdom and Canada.

The importance of good corporate governance has been amplified in the recent years with directors being held personally liable for their negligence of failing to become acquainted with the Code’s principles and implementing same within their business structures.

Whether a company is classified as a small, a medium or a large enterprise, the principles of the Code shall be applicable to them.  The latest version of the Code is aimed at being a more practical guide for directors, as the principles that previously totalled 76 now total 17.  Further, the Code now includes sectoral supplements, which are specific supplements aimed at providing further clarity and guidance to certain entities.  One such sectoral supplement is the Supplement for Small and Medium Enterprises (“the Supplement”) which outlines the relevant Code principles applicable to, amongst other things, small companies and attempts to provide practical guidance for the implementation of these principles.

The aim of this summary is to refer to the Code and to the Supplement and provide a short outlay of what directors need to consider in order to incorporate good corporate governance in their small companies.

PRINCIPLES OF CORPORATE GOVERNANCE

PRINCIPLE 1:  THE BOARD SHOULD LEAD ETHICALLY AND EFFECTIVELY

Directors should emanate integrity, competence, responsibility accountability, fairness and transparency.  Practically, this would mean directors need to uphold themselves as moral citizens and practice ethical leadership, consistently – in the workspace and outside of it.

Directors can implement this by ensuring their deliberations, decisions and actions are centred around the above ethical values which would result in ethical leadership and improved reputation.

PRINCIPLE 2:  THE BOARD SHOULD GOVERN THE ETHICS OF THE COMPANY IN A WAY THAT SUPPORTS THE ESTABLISHMENT OF AN ETHICAL CULTURE

The directors of a small company, have an obligation to ensure that the values and ethics that the company is founded upon, are relayed to the entire company.  Practically, this may look like a Code of Conduct for employees to adhere to and strict disciplinary measures put in place should an employee default in terms thereof.  When drafting such a Code of Conduct, it may be advisable to look at the specific code of the Industry and adapt the company’s code of conduct in line with it.

It may be pertinent to publish the company’s code of conduct for both internal and external stakeholders and the broader society, as the company grows.

PRINCIPLE 3:  THE GOVERNING BODY SHOULD ENSURE THAT THE ORGANISATION IS AND IS SEEN TO BE A RESPONSIBLE CORPORATE CITIZEN

The directors assume responsibility for ensuring that the company presents itself as a responsible corporate citizen.  Being a responsible corporate citizen largely influences the reputation of a company, which can make or break a company.  In larger companies, specialised committees are created solely for this purpose.

The Supplement emphasises the critical role played by small and medium company’s in this regard as such companies form part of the supply chain of other organisations and are held accountable by their customers for their responsible corporate citizenship and ethical practices.

In respect of the workplace, this would entail employment equity, fair remuneration, and the safety health, dignity and development of employees.

In respect of the economy, this would practically mean measures to prevent, detect and report fraud or corruption and having a transparent tax policy.

In respect of larger society, this would mean having regard to public health and safety,  consumer protection, uplifting the community in which the company operates in, and protection of human rights.

Lastly, in respect of the environment,  this would mean monitoring the company’s carbon footprint and having environmentally safe waste disposal measures.

PRINCIPLE 4:  THE BOARD SHOULD APPRECIATE THAT THE COMPANY’S CORE PURPOSE, ITS RISKS AND OPPORTUNITIES, STRATEGY, BUSINESS MODEL, PERFORMANCE AND SUSTAINABLE DEVELOPMENT ARE ALL INSEPARABLE ELEMENTS OF THE VALUE CREATION PROCESS

The Supplement emphases that if a small company understands the connection between sustainability and business, it has the power to measure business performance, identify areas for improvement and manage change effectively.  This will drive performance and innovation within the company.

Practically, this principle is implemented by establishing the short, medium and long term goals in line with the company values and realistic and achievable strategies on how to achieve the goals with incorporation of all the role-players of the company.

PRINCIPLE 5: THE GOVERNING BODY SHOULD ENSURE THAT REPORTS ISSUED BY THE COMPANY ENABLE STAKEHOLDERS TO MAKE INFORMED ASSESSMENTS OF THE COMPANY’S PERFORMANCE, AND ITS SHORT, MEDIUM, AND LONG-TERM PROSPECTS

The directors have the responsibility of ensuring that the company meaningfully engages with its stakeholders, this may take the form of reports which present the integrated thinking and present the company information about the resources and relationships on which the company relies upon, its activities, outputs and outcomes.

The reports may take the form of annual financial statements, integrated reports.  The directors are tasked with ensuring that the reports are up to standard, in the line with the values of the company, and are in line with the relevant legal principles.

PRINCIPLE 6:  THE GOVERNING BODY SHOULD SERVE AS THE FOCAL POINT AND CUSTODIAN OF CORPORATE GOVERNANCE IN THE COMPANY

The board of directors assume this role as a result of their fiduciary duties towards the company.  The Supplement outlines the primary leadership role of any governing body are the following:

(a) steering the company and setting its strategic direction;

(b) approving policy and planning that give effect to direction;

(c) overseeing and monitoring of implementation and execution by management; and

(d) ensuring accountability for organisational performance by  means of reporting and disclosure,

Practically, the Supplement recommends that formal processes are put in place to differentiate between one individual’s differing roles in the company, as this can be a source of conflict.  One individual may assume the role of a director, a shareholder and manager.  To prevent a conflict,  board meetings should be scheduled separately from management meetings.

It is also advisable for a small company to define the above roles, more formally, to ensure that the transition into a larger company is easier.  Formalising a description of each of the roles in writing will further assist individuals to identify in which capacity they should be acting.   It is recommended by the Supplement that shareholders sign an agreement with the board of directors and incorporate in such agreement a delegation of authority.

PRINCIPLE 7:  THE BOARD SHOULD COMPRISE THE APPROPRIATE BALANCE OF KNOWLEDGE, SKILLS, EXPERIENCE, DIVERSITY, AND INDEPENDENCE FOR IT TO DISCHARGE ITS GOVERNANCE ROLE AND RESPONSIBILITIES OBJECTIVELY AND EFFECTIVELY

The directors of the company should exercise independent judgment in the best interests of the company, the Supplement suggests that if the company has the means to, it should appoint an independent director.

Further, for the company to act in line with this principle, the board of directors should encourage professional development, for example training courses on duties and responsibilities of directors.

To achieve a balance of power,  the board of directors needs to ensure that non-executive directors are rotated on a regular basis as to maintain objectivity.  In smaller companies, regular rotation is not feasible and therefore the term served may be longer.

Emergency plans and role filling must be planned for, for key person positions to ensure the continuity of the company should an unfortunate situation arise.

PRINCIPLE 8:  THE BOARD SHOULD ENSURE THAT ITS ARRANGEMENTS FOR DELEGATION WITHIN ITS OWN STRUCTURES PROMOTE INDEPENDENT JUDGMENT AND ASSIST WITH BALANCE OF POWER AND EFFECTIVE DISCHARGE OF ITS DUTIES

The board of directors, by default, assume all the duties and responsibilities for all board committees it does not establish as a result of resource constraints, for example a social and ethics committee.

The Supplement recommends that agendas should properly be structured or if necessary, meetings convened to ensure focus on a particular area, for example, audit, risk, and ethics.

PRINCIPLE 9:  THE BOARD SHOULD ENSURE THAT THE EVALUATION OF ITS OWN PERFORMANCE AND THAT OF ITS COMMITTEES, ITS CHAIR AND ITS INDIVIDUAL MEMBERS, SUPPORT CONTINUED IMPROVEMENT IN ITS PERFORMANCE AND EFFECTIVENESS.

Practically,  the board of directors needs to ensure that performance is regularly overseen, measured and action is taken where improvement is needed.

PRINCIPLE 10:  THE BOARD SHOULD ENSURE THAT THE APPOINTMENT OF AND DELEGATION TO MANAGEMENT CONTRIBUTE TO ROLE CLARITY AND THE EFFECTIVE EXERCISE OF AUTHORITY AND RESPONSIBILITIES

The board of directors should appoint the CEO and ensure the duties and powers delegated are clearly defined.

Emphasis is placed on the role and the importance of a company secretary,  the Supplement recommends, even for a small company, that a company secretary is appointed who will oversee governance and legal compliance of the company.

PRINCIPLE 11:  THE BOARD SHOULD GOVERN RISK IN A WAY THAT SUPPORTS THE COMPANY IN SETTING AND ACHIEVING ITS STRATEGIC OBJECTIVES

The implementation and guidance in terms of this principle has been discussed hereinbefore, dealing with the goals and strategies of the company.  Principle 11 places emphasis on the risk analysis that should take place when making the board of directors take decisions.

PRINCIPLE 12:  THE BOARD SHOULD GOVERN TECHNOLOGY INFORMATION IN A WAY THAT SUPPORTS THE COMPANY SETTING AND ACHIEVING ITS STRATEGIC OBJECTIVES

The technological environment is growing at a rapid pace, many businesses who do not take this into account, seem to fall short of success at some point.

The importance of secure technological systems is particularly important as there has been a rise in malware and ransomware attacks on companies, even small companies.  It is imperative for the board of directors to familiarise themselves with the company’s technological systems and how to protect them efficiently, this would include making use of updated and licensed programmes, have a secure cyber security system (strong passwords, firewalls, encryption, intrusion detection devices and alike) and ensure that the company is electronically trading compliant in terms of the relevant laws.

PRINCIPLE 13: THE BOARD SHOULD GOVERN COMPLIANCE WITH APPLICABLE LAWS AND ADOPTED, NON-BINDING RULES, CODES AND STANDARDS IN A WAY THAT SUPPORTS THE COMPANY BEING ETHICAL AND A GOOD CORPORATE CITIZEN

The board of directors are responsible for the implementation of the above principle, which can be done by receiving periodic reviews of their code of conduct which should be complaint with the above, and the effectiveness thereof.

Where the company is penalised for a contravention of any law or rule, same should be disclosed and effective measures put in place to prevent a further contravention.

PRINCIPLE 14:  THE BOARD SHOULD ENSURE THAT THE COMPANY CONDUCTS IT BUSINESS FAIRLY, RESPONSIBLY AND TRANSPARENTLY SO AS TO PROMOTE THE ACHIEVEMENT OF STRATEGIC OBJECTIVES AND POSITIVE OUTCOMES IN THE SHORT, MEDIUM, AND LONG TERM

The board of directors needs to ensure that they have a clear remuneration policy that is approved by themselves, which is in line with the company’s values and which is in accordance with the relevant laws.

The Code suggests that in line with transparency, that the remuneration report is disclosed to the stakeholders and role-players in the company to enhance performance.

PRINCIPLE 15:  THE BOARD SHOULD 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 COMPANY’S EXTERNAL REPORTS

The board of directors should assume responsibility for assurance by setting the direction concerning the arrangements for assurance services and functions.  The board should ensure that audit requirements are met and procedures in terms thereof are effectively managed and executed in line with the values of the company.

The board should also assume responsibility for the integrity of external reports issued by the company by setting the direction for how assurance of these should be approached and addressed.

PRINCIPLE 16:  IN THE EXECUTION OF ITS GOVERNANCE AND RESPONSIBILITIES, THE BOARD SHOULD ADOPT A STAKEHOLDER-INCLUSIVE APPROACH THAT BALANCES THE NEEDS, INTERESTS AND EXPECTATIONS OF MATERIAL STAKEHOLDERS IN THE BEST INTERESTS OF THE COMPANY OVER TIME

In smaller companies, stakeholders play a more active role in the company, the Supplement recommends that more formal procedures are put into place, for example, a formal forum where shareholders may raise questions to the board of directives regarding the return of investment, acquisitions and disposals and so forth.

The company and its shareholders should also agree on policies for future equity ownership in the company.  Such policies should deal with the transfer, acquisition and disposal of shares and include a method of valuating the shares equitably.

(The content hereof does not constitute legal advice but rather information of a general nature.  Should you want more information on any of the issues discussed herein, please do not hesitate to contact our office.)