On 1 November of this year, the King Committee published the King IV Report on Corporate Governance for South Africa 2016(King IV). This will be effective from 1 April 2017. Here are the main points you need to know.
King IV replaces King III in its entirety
This means that you will need not refer to anything in King III – King IV replaces it completely. Also, the approach of ‘apply or explain’ of King III is replaced with ‘apply and explain’.
So, what’s new in King IV?
- King IV applies a principle-and-outcomes based approach, and moves away form a tick-box approach. The 75 King III principles have been consolidated into 16 principles, each aimed at achieving one or more very distinct governance outcomes. The focus in King IV is clearly on ensuring that the application of the principles achieves specifically identified outcomes, including:
- ethical culture
- good performance
- effective control, and/or
Each principle is supported by a limited number of recommended practices, and requires specific disclosures.
- In line with international developments, remuneration has received far greater prominence in King IV. While King III required the remuneration policy to be tabled for a non-binding advisory vote of shareholders, King IV recommends that both the remuneration policy and an implementation report (stipulating the various aspects of remuneration together with a link to performance) be tabled for a non-binding advisory vote.
The remuneration policy should set out the measures that the board commits to take in the event that:
- either the remuneration policy or the implementation report, or
- both have been voted against by 25% or more of the voting rights exercised.
Such measures should provide pro-active engagement with shareholders to address their concerns.
- King IV has deliberately separated technology and information.
- King IV recommends establishing a Social & Ethics Committee (SEC) as a prescribed Board committee as best practice for all organisations.
- King IV emphasises the critical role of stakeholders in the governance process. Not only must the Board consider the legitimate and reasonable needs, interests and expectations of stakeholders as intrinsically valuable, but King IV now specifically recognises the role responsibilities of stakeholders – active stakeholders are required to hold the Board and the company accountable for their actions and disclosures.
- King IV has a strong focus on opportunity management in addition to risk management, and as such the Risk Committee should identify opportunities linked to certain risks.
- King IV has acknowledged the need to assess and confirm the external auditor’s independence, but does not specifically address audit firm rotation.
- Where King III included a separate principle in which a governance framework should be agreed upon between the group Board and its subsidiary Boards, King IV deals with group governance differently by allocating responsibility for implementing a group governance framework to the holding company Board.
And, what’s different?
- King IV has refined the concept and requirements of combined assurance. It no longer prescribes the three lines of defence model. Instead it requires that the Board ensures that it designs and implements a combined assurance model to cover an organisation’s significant risks and material matters adequately. This should be done through a combination of a number of assurance services and functions, including:
- the organisation’s line functions that own and manage risks
- the organisation’s specialist functions that facilitate and oversee risk management and compliance
- internal auditors, internal forensic fraud examiners and auditors, safety and process assessors and statutory actuaries
- independent external assurance service providers, such as external auditors
- other external assurance providers, such as sustainability and environmental auditors or external actuaries
- external forensic fraud examiners and auditors, and
- regulatory inspectors.
- The concept of independence has evolved from King III, where a list of disqualifications from independence was provided. King IV takes a more practical approach and focuses on the perception of independence by an informed third party, rather than factual independence or a tick-box approach.
- King IV further emphasises the fact that independence is predominantly a state of mind, which is a moral characteristic and legal duty of all directors (executive, non-executive, as well as independent non-executive directors).
- From a strategy and performance point of view, King III encouraged the Board to play a prominent role in the strategy-development process. This has been controversial in that many Board members felt that management should develop the strategy, with the Board providing oversight to the process. King IV clarifies this position and specifically requires the Board to approve the formal strategy and then provide oversight over the policies and plans that are developed from the approved strategy.
- King III introduced the concept of the triple bottom-line reporting. This takes profit, planet and people into consideration when reporting on performance. Since the release of the King III, there have been significant global developments in corporate reporting, notably the release of the Integrated Reporting Framework by the International Integrated Reporting Council (IIRC) in 2013. While there is no formal requirement to apply the IIRC’s Integrated Reporting Framework, the concepts and principles introduced by the IIRC have been reaffirmed in the King IV Code and the philosophy of integrated thinking has been incorporated into the Code.
In the spirit of transparency, King IV emphasises the role of disclosure in managing stakeholder relationships. The disclosure requirements in the Code are far more onerous than previous requirements.