KING IV Report On Corporate Governance In South Africa Part I

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The KING IV CODE on Corporate Governance In South Africa Part I Introduction - Introductory Presentation on the draft KING IV Code deals with the Philosophy Underpinning the new KING IV CODE. Further presentations are to follow
  • 1. CORPORATE GOVERNANCE THE KING IV CODE ON PART ONE INTRODUCTION Presented by: Myron D. B. Betshanger Corporate Governance, Legal & Regulatory Compliance Specialist
  • 2. WHAT IS CORPORATE GOVENANCE ? Corporate Governance is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community). CORPORATE GOVERNANCE FRAMEWORK A corporate governance framework consists of: 1. explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards ; 2. procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, AND 3. procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.
  • 3. THE KING IV DEFINITION OF CORPORATE GOVERNANCE Corporate Governance is defined in The King IV Code as the exercise of ethical and effective leadership by the governing body. Such exercise of ethical and effective leadership includes 4 overarching responsibilities of the governing body, namely: 1. Providing Strategic Direction 2. Approving Policies to effectuate strategy 3. Providing informed oversight for strategy implementation and performance, and 4. Corporate Disclosures. Such exercise of ethical and effective leadership should result in the following beneficial governance outcomes for the organization: (i) An Ethical Culture; (ii) Sustainable performance and value creation; (iii) Adequate and effective control by the governing body, and; (iv) Protecting and building of trust in the organization, its reputation and legitimacy.
  • 4. THE OBJECTIVES OF KING IV The objectives of the King IV Code are to: - • Promote Good Corporate Governance as integral to running businesses. • Broaden the Acceptance of Good Corporate Governance through enhanced accessibility and fit for application by organizations of various sizes, resources and complexity of strategic objectives and operations. • Reinforce good corporate governance as a holistic and inter-related set of arrangements that is to be understood and implemented in an integral manner, and, • Present good corporate governance as an ethical consciousness concerned not only with corporate structure and process, but with corporate behaviour as well.
  • 6. KING IV – THE UNDERLYING PHILOSOPHY  Ethical and Effective Leadership – the essence of corporate governance  The Organization as Integral Part of Society – the context  Corporate Citizenship – the status of the organization  Sustainable Development – the response  Stakeholder Inclusivity and Responsiveness  Integrated Thinking  Integrated Corporate Reporting  3 Shifts in Future Trajectory  From Financial Capitalism to Inclusive Capitalism  From Short-term Capital Markets to Long-term Sustainable Capital Markets  From Silo Reporting to Integrated Reporting
  • 7. KING IV – THE UNDERLYING PHILOSOPHY 1. Ethical and Effective Leadership  Ethics of Governance Good Corporate Governance is founded on ethical and effective leadership: • Ethical Leadership is exemplified by integrity, responsibility, accountability, honesty, fairness, and transparency. • Effective Leadership is about directing corporate performance and is result driven. Ethical Leadership and Effective Leadership should reinforce each other. The governing body as a collective should be unified on matters such as the core purpose of the organization, its culture, the drivers of value, its key stakeholder groupings and their legitimate and reasonable needs, interests and expectations.
  • 8. Responsibility, Accountability, Fairness and Transparency has the following meaning in relation to Ethical Leadership: • Responsibility – the governing body assumes ultimate responsibility for the organization, including the protection of its resources – financial, manufactured, human, social and relational, and intellectual and natural capitals. • Accountability - the governing body should be held responsible for its decisions and actions by stakeholders. Accountability follows from the assumption or designated or responsibility and cannot be delegated or abdicated. Governance structures and arrangements must connect responsibility and accountability. • Fairness - the governing body should ensure that it balances in its decisions the legitimate and reasonable needs, interests and expectations of material stakeholders of the organization in the best interests of the organization. • Transparency - the governing body should ensure that all reports and disclosures enable all stakeholders to make an informed assessment of the performance, including the impact of the organization’s activities and its ability to sustain the creation of value. Governing Ethically includes adherence to the following statutory (legal) duties:  the duty to act with due care, skill and diligence, and  a fiduciary duty to act in good faith in the best interests of the organization KING IV – THE UNDERLYING PHILOSOPHY
  • 9. KING IV – THE UNDERLYING PHILOSOPHY 1. Ethical and Effective Leadership (continue)  Governance of Ethics  The governance of ethics refers to role of governing body in ensuring that management of ethics results in an ethical culture.  The governance of ethics in an organization is the manner in which values are given expression and implemented.  Good ethics is the foundation of good business 2. The Organization as Integral Part of Society – The Context  The organization operates in a societal context – they affect and are affected  Existence of an interdependency between organizations and society – their fate are intertwined.  Organizations has their own societies made up of its stakeholders.  Organizations dependent on broader society to provide a conducive operating environment, a customer base and talent.  Organizations contribute to wider society as creators of wealth, providers of goods, services and employment, sources of taxes and developers of skills.  Organizational and Societal Interdependency supported by African concept of Ubuntu, captured in expression “uMuntu ngumuntu ngabantu” – “I am because you are; you are because we are”
  • 10. KING IV – THE UNDERLYING PHILOSOPHY 3. Corporate Citizenship – the status of the organization in society  Corporate Citizenship – about organization status in the broader society.  Corporate Citizenship an inevitable consequence of being an integral part of society.  As a Corporate Citizen organization has rights, obligations and responsibilities towards society.  Corporate Citizenship involve how an organization uses its resources and how it balances its needs with the needs of society to achieve positive lasting outcomes for itself, society and the environment.  Responsible Corporate Citizenship means organization responds to changing societal demands.  Status of organization in society requires that it be accountable not only for financial performance and isolated corporate social initiatives, but also for outcomes in the “Triple Context” (i.e. economic, social and environmental context).  Corporate strategies and policies to achieve responsible corporate citizenship should be planned and integrated across the organization.
  • 11. KING IV – THE UNDERLYING PHILOSOPHY 4. Sustainable Development – The Response  Sustainable Development is understood as “conducting business operations in a manner that meets the existing needs without compromising the ability of future generations to meet their needs”.  KING IV refers to the “triple context” or “combined economic, social and environmental context “ denoting the fact that these three dimensions are intertwined and should be viewed as an integrated whole.  Sustainable Development, being an integrated response, is not about environmental matters in isolation, or is it concerned only with the sustainability of the organization. It is also not about corporate social responsibility in isolation from the overall business strategy. Rather, it is about developing strategies so that the success of the organization can be measured in te economic, social and environmental context.  This “triple context” within which organizations operates is portrayed by the forms of capital it uses and affects. KING IV refers to the “Six Capitals Model ” which identifies - (i) financial, (ii) manufactured, (iii) intellectual, (iv) human, (v) social and relational, and (vi) natural capital
  • 12. KING IV – THE UNDERLYING PHILOSOPHY 5. Stakeholder Inclusivity & Responsiveness  A key duty of the governing body is balancing the legitimate and reasonable needs, interests and expectations off all the organization’s material stakeholders.  Governing body decision-making should always be in the best interests of the organization considering the issues at hand and the surrounding circumstances at the time of the decision.  By responding to the legitimate and reasonable needs, interests and expectations of material stakeholders and by establishing relationships an organization becomes attuned to opportunities and challenges.  Each of the forms of capital (Six Capital Forms Model) has one or more stakeholders with an interest in it.  A stakeholder-inclusive approach to corporate decision-making supports the enhancement of the capitals and therefore also sustainable development. TO WHOM IS THE GOVERNING BODY ACCOUNTABLE ?  KING IV intentionally requires a stakeholder-inclusive model in terms of which the governing body is encouraged to consider, weigh and balance the legitimate and reasonable needs, interests and expectations of all material stakeholders when making decisions in the best interest of the organization.
  • 13. 5. Stakeholder Inclusivity & Responsiveness (continues) KING IV – THE UNDERLYING PHILOSOPHY The Stakeholder-Inclusive Model The Enlightened Shareholder Model • Stakeholders other than shareholders are seen as having an intrinsic value for decision-making by the governing body in the best interests of the organization.  Stakeholders other than shareholders only have an instrumental value. • The best interests of the company are not necessarily equated to the best interests of the shareholders.  Other stakeholders’ legitimate needs, interests and expectations only considered if it is in the interests of the shareholders to do so. • Shareholders do not have predetermined precedence over other stakeholders.  The interest of shareholders have a predetermined precedence over that of all other stakeholders. • The interests of shareholders or any other stakeholder grouping may be afforded precedence based on what is believed to serve the best interests of the organization at a point in time and depending on the circumstances  Other stakeholders are merely seen as instruments to serve the interests of the organization’s shareholders • Value to shareholders derived from the effective and responsible use of resources as well as from good relationships with all material stakeholders  Best interests of organization often equated to what is in the best interests of its shareholders.
  • 14. KING IV – THE UNDERLYING PHILOSOPHY 6. Integrated Thinking  Integrated Thinking is defined as “ consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects. Integrated thinking leads to integrated decision-making and actions that consider the creation of value over the short, medium and long term. Integrated thinking takes into account the connectivity and interdependencies between the range of factors that affect an organization’s ability to create value overt time…” Integrated Thinking – o more than elimination of silos o presupposes that the governing body gives regular consideration to how responsive the business model and activities are to changes in the external environment and expectations of all material stakeholders. o should be embedded through the integration of strategy, risk and opportunity, sustainable development, performance and outcomes. o has particular relevance to the capital that an organization uses and affects – results in an appreciation of the relationships among the capitals. o helps with establishing a holistic view of the value-creation process of the organization. o assists with integrated reporting which in turn encourages integrated strategy formulation and implementation.
  • 15. KING IV – THE UNDERLYING PHILOSOPHY 7. Integrated Annual Reports What is Integrated Annual Reporting ?  KING III defines Integrated Annual Reporting as “ a holistic and integrated representation of the company’s performance in terms of both its finances and sustainability” .  KING III replaced the “triple bottom-line” (and its depiction of the three separate bottom lines of the economic, social and environment) with the intertwined economic, social and environmental “ triple context”.  An Integrated Annual Report explain the performance of an organization, should have sufficient information on how the organization has positively and negatively affected the economy, society and the environment.  Integrated Annual Reporting encourages those charged with governance to apply their minds to deciding what information in material. Understanding materiality – i.e. those matters that could substantive affect the ability of an organization to create value over time – is fundamental to the execution of fiduciary duties.  Integrated Annual Reporting should show what value the organization has created (or not) through the enhancement or diminution of each of the different forms of capital.  Integrated Annual Reporting should be future orientated to enable stakeholders to judge whether an organization can sustain delivery of value.  Integrated Annual Reporting therefore enables all material stakeholders to make informed decisions about the organization, its financial performance and its future value creating prospects.
  • 16. KING IV – THE UNDERLYING PHILOSOPHY 8. The Future Trajectory: The Three Shifts  The concepts dealt with thus far – i.e. Leadership, The Organization in Society, Corporate Citizenship, Sustainable Development, Stakeholder Inclusivity, Integrated Thinking, and Integrated Reporting – are relevant to three connected paradigm shifts in corporate thinking 8.1. From Financial Capitalism to Inclusive Capitalism  A general acceptance that a singular focus on the employment, transformation and provision of financial capital represents only a fraction of corporate decision-making and activities.  Instead, Inclusive Capitalism takes account of employment, transformation and provision of ALL forms of capitals.  Capitalism should be inclusive because it’s the engine of shared prosperity.  Financial Performance alone can no longer serve as proxy for holistic value creation.  Long-term Financial Performance dependent on efficient and productive management of resources, i.e. human, intellectual, social and relationship and natural capitals, not currently measured by traditional accounting methodologies.
  • 17. KING IV – THE UNDERLYING PHILOSOPHY 8.2. From Short-term Capital Markets to Long-term Sustainable Capital Markets  Performance in terms of all-inclusive value should be assessed over the longer term. Therefore, the capital market system must reward long-term decision-making.  Period for long-term and longer-term dependent on strategic objectives of an organization and the risks and opportunities presented by its external environment, including its material stakeholders 8. The Future Trajectory: The Three Shifts (continues) 8.3. From Silo Reporting to Integrated Reporting  Modern era of globalisation and radical transparency leading to a rethink on corporate reporting in the light of challenges, risks and opportunities.  Globalisation and increased competition require organizations to be innovative to retain competitive advantage and to attract and retain investors, shareholders, employees and customers.  Ever increasing and more complex legislation and regulatory requirements have encouraged the move away from the more traditional reporting methodologies (e.g. audited financial statements).  While fully compliant and duly audited financial statements remain critical, it is now accepted that they are by themselves insufficient to discharge the duty of accountability by governing bodies.  The move from silo reporting to integrated reporting consistent with concept of an inclusive, sustainable capital market system which has been given impetus by the acceptance of the triple context and the evolution of integrated thinking.  KING IV takes cognisance of all these shifts
  • 18. KING IV CODE – PART I – THE END THANK YOU MYRON D. B. BETSHANGER Corporate Governance, Legal & Regulatory Compliance Specialist 16 Verveen Street Westenburg Polokwane, South Africa Mobile: +27 74 780 3862 e-mail: LinkedIn: Twitter: @betshangermyron
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