TOPIC 1

CORPORATE GOVERNANCE AND STATUTORY

MATTERS
Topic overview

The aim of this topic is to explain and apply corporate governance in practical situations by
referring to statutory matters regarding company directors as contained in the Companies Act
71 of 2008, as well as the provisions of the King IV Report and Code on Governance for South
Africa.

This topic is divided into the following lessons:

Lesson Title Learning outcomes Level
1.1 Background of corporate Briefly describe the background of
governance in South Africa corporate governance in South
2
Africa.

1.2 Statutory matters

1.2.1 The board, directors and Give advice, discuss concerns and 2
prescribed officers, election, apply the requirements for directors’
ineligibility and appointment and removal, and
disqualification, and vacancies.
vacancies
The board, directors and
prescribed officers (sec 66) –
also refer to Regulation 38
Election and removal of
directors (sec 67–71)
1.2.2 Board committees, meetings Give advice, discuss concerns and 2
and directors acting other apply the requirements for board
than at meetings committees and their meetings.
Board committees (sec 72) –
also refer to Regulation 43(1)
Board meetings/directors’
meetings (sec 73)
Directors acting other than at
board meetings (sec 74)
1.2.3 Directors’ personal financial Give advice, discuss concerns and 2
interests apply the requirements for directors’
Directors’ personal financial personal financial interests.
interests (sec 75)
1.2.4 Standards of directors’ 2
conduct and prescribed
officers, indemnification and
directors’ insurance
 Standards of directors’ conduct
(sec 76)
Liability of directors and
prescribed officers (sec 77)
Indemnification and directors’
insurance (sec 78)
Audit committees (sec 94)
Give advice, discuss concerns and 2
apply the requirements for
• standards of directors’ conduct
• the liability of directors and prescribed
• officers
• indemnification and directors’
insurance
• audit committees

1.2.5 Application of and general Give advice, discuss concerns and 2

requirements regarding apply the requirements for
enhanced accountability and enhanced accountability and
transparency transparency, and vacancies.
Registration of secretaries and
auditors (sec 84 & 85) – also
refer to Regulations 26 to 28
1.2.6 Aspects concerning the Give advice, discuss concerns and 2
company secretary apply the requirements for
Company secretary (sec 86– the company secretary.
89)
1.3 King IV Report on Explain and apply the significant matters 2
Governance for South Africa covered by the King IV Report.
1.3.1 Leadership, ethics and
corporate citizenship
1.3.2 Strategy, performance and
reporting
1.3.3 Governing structures and
delegation
1.3.4 Governance function areas
1.3.4.1 Risk governance
1.3.4.2 Technology and information
governance
1.3.4.3 Compliance governance
1.3.4.4 Remuneration governance
1.3.4.5 Assurance
1.3.4.6 Stakeholder relationships

Icons included in the lessons

The following icons are included in this topic:

ICON DESCRIPTION
You need to consult your prescribed study material.

Attempt the self-reflective activity online to test your understanding of

the content covered.
Attempt the self-assessment activity online to assess your
understanding of the lesson before proceeding to the next lesson.
LESSON 1.1

BACKGROUND OF CORPORATE GOVERNANCE IN SOUTH

AFRICA

INTRODUCTION

The Industrial Revolution began in Britain in the 18th century from 1760 to 1840 and from there
spread to other parts of the world (https://www.britannica.com/). During the Industrial
Revolution businesses grew from entities owned and managed by the same person into large
organisations in which the owners (shareholders) and management (executive directors) were
separate parties. Currently in most countries, the shareholders appoint the directors in a
company to manage their investment in the company. This is also known as principal-agent
theory, where the shareholders are the principals and the directors are the agents. Accordingly,
it became necessary for the development of guidelines for how the directors and managers of
a company should act to protect and manage the interest of the shareholders and other
stakeholders. This led to the concept of corporate governance.

Statements like the following have been made regarding corporate governance:

“The King Commission describes Corporate Governance simply as ‘the system by which
companies are directed and controlled’.” (King 1994)

In this topic you will learn about corporate governance in South Africa, with specific reference
to the King IV Report on Governance.

King I, II and III had their foundation in ethical and effective leadership. King IV is also based
on these foundations but was drafted to make it more easily applicable to all organisations to
include public and private, large and small, for-profit and non-profit organisations (King IV
2016:6).

The fourth King Report on Corporate Governance in South Africa (King IV), issued by the
Institute of Directors in Southern Africa, is South Africa’s definitive corporate governance code.
King IV envisions good governance as the achievement of four outcomes: ethical culture, good
performance, effective control and legitimacy. These outcomes may be achieved by adherence
to King IV’s 16 governance principles and their accompanying recommended practices. While
compliance with King IV is voluntary, the listing requirements compel issuers to implement
certain of its recommendations, with the balance to be adopted in accordance with King IV’s
“apply and explain” disclosure regime.

You can find the King IV Code at this link:

https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-
E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf
What is agency theory?
Agency theory is used to understand the relationships between agents and principals. This
leads to the principal-agent problem. The principal-agent problem occurs when the interests of
a principal and agent come into conflict. Companies should seek to minimise these situations
through solid corporate policy. The different interests of principals and agents may become a
source of conflict, as some agents may not perfectly act in the principal's best interests. The
resulting miscommunication and disagreement may result in various problems and discord
within companies. Incompatible desires may drive a wedge between each stakeholder and
cause inefficiencies and financial losses. This leads to the principal-agent problem.

STUDY MATERIAL

• The King IV Report (2016:3–7, 20–38) [What does (2016:3-7) mean? – It means go to
King IV, pages 3 to 7].
• Richard, Roets, Adams & West (2021:4/2–4/16) [What does (2019:4/2) mean? – It
means go to chapter 4 of the prescribed textbook, page 2]

Note: Whenever this icon is displayed it means that you will have to go to study
references in the prescribed study material. This will include either one or both prescribed
textbooks Auditing notes for South African students and/or the SAICA student handbook (or the
electronic version). You then need to read the specific pages or paragraphs as indicated and
prepare your own summaries/study notes from this for further studying and revision at a later
stage.

Part 2 of the King IV Report (2016:20–38) contains the fundamental concepts and
philosophy on which King IV is based, the distinguishing features of King IV and how the
various developments in corporate governance, locally and internationally, since King III came
into effect in 2009, have influenced the principles and practices in the Code.

The philosophy of King IV is focused on

• companies’ role and responsibility in society
• corporate citizenship
• sustainable development
• stakeholder inclusivity and responsiveness
• integrated reporting and integrated thinking

This philosophy is centred on three paradigm shifts in corporate governance:

• from financial capitalism to inclusive capitalism
• from short termism to long-term sustainability
• from silo reporting to integrated reporting

You will notice that King IV brings a more refined focus in terms of the obligation of the
organisation (to be accountable and transparent) as well as the accountability of the company
as a broader stakeholder within the broader society. King IV deliberately talks about ubuntu, an
African concept that implies “I am because you are”. Therefore there should be common
purpose to all human endeavours (including corporate endeavours), based on service to
humanity.

5
To illustrate the philosophy of ubuntu: A successful businessman in Polokwane, South
Africa, showed ubuntu by buying 100 sewing machines at an auction, which he then made
available to men and women in the community who were interested in starting tailoring
businesses but did not have the necessary capital. He honoured their dignity by making a
simple verbal agreement that they would pay him for the machines once there were
sufficient profits to begin interest-free payments. This is typical of ubuntu consciousness
and still occurs widely both in rural South Africa and among African communities in urban
areas.

It is now time for your first activity to reflect on what you have learnt thus far. Try do this activity
on your own without consulting other learning material to assess whether you have mastered
this part of the lesson. On submission of your answer, the solution will be released to you to
reflect on.

ACTIVITY 1
Define good corporate governance and briefly explain in your own words why it is important to
society that companies operate within a framework of good corporate governance.

How did you find this activity? If your answer (which you provided from your own understanding)
did indeed capture the facts mentioned above, then you are ready to proceed to the next section
of this lesson. If, however, you notice that your answer did not fully capture the information
provided in the guidelines, then you need to go back to the discussion of the term “corporate
governance”.

ACTIVITY 2
The basis of any code on corporate governance can be legislated (a set of rules), or voluntary
(principles and practices), or a combination of both. The King IV Report identifies these two
bases as “comply or else” or “comply or explain” and describes a further variation of the latter,
i.e. “apply and explain” (Richard et al 2021:4/4).

Explain in your own words what the concept “apply and explain” means. Do you think that this
allows directors to avoid adhering to principles of good corporate governance?

ACTIVITY 3
Discuss in your own words what you understand by stakeholder inclusivity.

ACTIVITY 4
Describe what it means for an organisation to be an integral part of society.
Now that you are familiar with how you should study, remember to always compare your
answers with those provided in the feedback after you attempted them on your own first.

SUMMARY

In this lesson you learnt what good corporate governance in South Africa means, with specific
reference to the King IV Report and Code on Governance.

After having worked through the lesson and the references to the prescribed study material,
determine if you are able to
• describe the background of corporate governance in South Africa

Fantastic! If you studied all the content presented in this lesson and completed the self-
assessment questions dealing with this topic, you just finished studying lesson 1.1 and should
continue to lesson 1.2.

7
LESSON 1.2

STATUTORY MATTERS

INTRODUCTION

“There is always a link between good governance and compliance with law. Good
governance is not something that exists separately from the law and it is entirely
inappropriate to unhinge governance from the law.” (King [sa])

In the previous lesson you learnt what good corporate governance in South Africa means, with
specific reference to the King IV Report and Code on Governance.

The Companies Act 71 of 2008 provides that a company’s board of directors must manage the
business and affairs of that company. The board of directors of a company has the authority to
exercise all of the powers and perform any of the functions of the company (except to the extent
that the Act or the company’s Memorandum of Incorporation (MOI) provides otherwise). The
Act and MOI can restrict the powers of the board of directors and, for instance, ensure that

• for certain transactions, the directors cannot act alone

• certain matters are referred to the shareholders of a company for consideration and
approval

Some of you may already have studied sections of the Companies Act 71 of 2008. As directors
play a very important role in corporate governance, we want to ensure that you have sufficient
background knowledge of the sections of this Act specifically dealing with directors. Here is the
link to the Companies Act:

https://www.saica.co.za/Portals/0/Technical/LegalAndGovernance/Act%2071%202008%20Companies%20
Act.pdf

What is a director?
A director is a member of the body of people that manages a company.
Together, the directors of a company are called the board of directors
(Companies Act 71 of 2008).

Once you have acquired this knowledge, you will study the King IV Report in lesson 1.3.
1.2.1 The board, directors and prescribed officers, election,
ineligibility and disqualification, and vacancies

The board, directors and prescribed officers (sec 66) – also

refer to Regulation 38

This section deals with the board, directors and prescribed officers. In terms of the definition
in section 1 of the Companies Act, a director is a member of the board of a company or an
alternate director (person appointed to act on behalf of a director).

The minimum number of directors required for different types of companies is indicated in
table 1.2.1 below.

Table 1.2.1: Requirements for number of directors as per Companies Act

Type of company Minimum number

of directors
Private company (Proprietary Limited or (Pty) Ltd) 1
Limited Incorporated company (Incorporated or Inc) 1
Public company (Limited or Ltd) 3
State-owned company (SOC Limited or SOC Ltd) 3 (refer to sec 9(1))
Not-for-profit company (NPC) 3

In FAC1501 you learnt about the different categories of companies. Refer to the diagram
below to familiarise yourself with the different companies:

Profit companies [sec 8(2)]

- State-owned companies
- Public companies
- Private companies
- Personal liability companies

CHARACTERISTICS

State-owned Public companies Private companies Personal liability

companies [sec companies [sec
1] 8(2)(c)]

- Unrestricted - Fewer disclosure

- A state-owned transferability of and transparency - Meets criteria of
enterprise private
shares requirements than
company
those for public
9
 - A company companies
owned by a - Offers to public - MOI states that
municipality permissible - Transferability of it is a personal
securities liability
restricted company
- Minimum of one
incorporator
- Minimum of one
incorporator
- Minimum of three
directors (for
governance - Minimum of one
purposes) director
DIAGRAM 1.2.1: Categories of companies

The MOI of a company may specify a higher number of directors. The MOI of a profit company
(other than a state-owned company) requires the shareholders to elect at least 50% of the
directors (including alternates). Any other person stipulated in the MOI may appoint the
remaining directors.

What is a Memorandum of Incorporation?

The founding document of a company under the Companies Act is the Memorandum of
Incorporation (MOI) of a company (Companies Act 71 of 2008).

STUDY

• Section 66 of the Companies Act – as well as Regulation 38

• Richard et al (2021:3/34-3/35)

Election and removal of directors (sec 67–71)

Diagram 1.2.2 below illustrates the election and removal of directors. Persons who are
ineligible or disqualified from being directors may not be appointed. Note that the
shareholders may remove a director [sec 71(1)] and that certain steps must then be taken
[sec 72(a) & (b)]. In some circumstances, the board of directors may remove a director [sec
71(3)–(5)], for example if the director is found to be negligent.

STUDY

• Study sections 67 to 71 of the Companies Act

• Richard et al (2021:3/35-3/37)
 DIAGRAM 1.2.2: Election and removal of directors

ACTIVITY 5
1. List the persons that are ineligible from being appointed as a director in terms of the
Companies Act.

11
 2. List the persons that are disqualified from being appointed as a director in terms of the
Companies Act.

ACTIVITY 6
You are a chartered accountant (SA) and an expert on the Companies Act.

Document Exchange Ltd (Docex) specialises in the distribution of local and international mail
and parcels. Docex has branches countrywide to spread its service delivery footprint and its
customers range from individuals to large companies.

Docex holds a 70% interest in Carrier and Freight Company Ltd (CFC).

An extract of the minutes of the meeting of the board of directors of Docex is provided below:

Present:

Mr Fana Freight, chairman, independent non-executive director

Mr Clement Courier, non-executive director
Mr Tim Transport, sales and marketing director
Mr Lesley Logistics, managing director
Ms Patricia Post, financial director
Mr Mannie Mail, company secretary

Apologies:

Mr Rocky Road, executive director

Matters for discussion:

Dismissal of a director
Fana Freight presented to the board that allegations recently arose against Rocky Road
regarding his involvement in a fraudulent scheme where R3 million was stolen from Docex.
Fana Freight explained that Rocky Road has not been found guilty yet; however, it is in the
best interest of the company to dismiss Rocky Road immediately.

The board agreed and approved the decision to remove Rocky Road as director of Docex.

Appointment of director
The board resolved that Rocky Road will be replaced as director. Clement Courier presented a
list of recommended candidates to be considered for the position to replace Rocky Road as
director.
The following candidates appeared on the list:
• Mr Air Mail, Patricia Post’s 17-year-old son who obtains high marks for Accounting
• Container Incorporated, a personal liability company
• Ms Delores Stamp, chartered accountant (SA), the court declared her as a rehabilitated
insolvent
• Mr Louis Letter was convicted and imprisoned due to his involvement in fraudulent
activities at his previous company

The board resolved that the appointment of the new director from the list of recommended
candidates will be made at the next board meeting.
REQUIRED:

Explain to the board which of the candidates listed under “Appointment of director” will be
permissible and which of the candidates will not be permissible in terms of the requirements of
the Companies Act to be appointed as the new director of Docex.

Discuss whether it was legal in terms of the Companies Act for the board to dismiss the director.

1.2.2 Board committees, meetings and directors acting other

than at meetings
This lesson deals with board committees and board/directors’ meetings.

What is a board committee?

A board committee is a committee formed to perform specific functions of the board
(Companies Act 71 of 2008).

Board committees (sec 72) – also refer to Regulation 43(1)

Section 72 of the Companies Act provides that, except when the MOI provides otherwise, the
board of directors may appoint any number of committees and may delegate any of the
authority of the board to a committee. The board is responsible for performing its duties
properly, and a director or the board cannot use the appointment of a committee as a shield
against their own responsibility [sec 72(3)].

The audit committee is one of the possible committees that can be formed, and it has an
important function to fulfil. In terms of section 94 of the Companies Act, it is compulsory for a
public company and a state-owned company to have an audit committee. The King IV Report
recommends that all other companies that issue audited financial statements consider
appointing an audit committee and define its composition, purpose and duties in the MOI.

13
 History of the social and ethics committee
During the public hearings on the Companies Bill conducted by the Portfolio Committee on
Trade and Industry in 2007, a proposal was made to include a requirement in the new Act
to oblige certain companies to appoint a member of a trade union as a board member
(director). The Portfolio Committee rejected this proposal but presented a compromise. It
was argued that there is a definite need in the South African context to encourage large
companies (especially those companies that have a significant impact on the public
interest) to not only act responsibly, but also to be seen to be doing so and to account from
the public interest perspective for their decision-making processes and the results thereof.

In essence, it was argued that these companies should be obliged to develop a social
conscience and behave like responsible corporate citizens. As such, the Companies Act
now provides the Minister of Trade and Industry with the authority to require certain
companies to have a social and ethics committee, having regard to the impact such
companies have on the public interest. However, regardless of the requirement to appoint
a social and ethics committee, the directors and prescribed officers of all companies are
bound to act in accordance with an acceptable standard of conduct.

In terms of section 72 of the Act (read with Regulation 43 of the Companies Act), the following
companies should have appointed a social and ethics committee within one year after the Act
became effective (i.e. by 30 April 2012):
• every state-owned company
• every listed public company
• any other company that has, in any two of the previous five years, had a public interest
score of at least 500 points
In terms of Regulation 43, a social and ethics committee has to monitor the company’s
activities with regard to matters relating to social and economic development, including the
company’s standing in terms of the goals and purposes of
• the 10 principles set out in the United Nations Global Company Principles and the
Organisation for Economic Co-operation and Development (OECD) recommendations
regarding corruption (refer to the OECD website for further details (www.oecd.org))
• the Employment Equity Act 55 of 1998
• the Broad-based Black Economic Empowerment Act 53 of 2003
• good corporate citizenship, including the company’s
o promotion of equality, prevention of unfair discrimination and measures to address
corruption
o contribution to development of the communities in which its activities are
predominantly conducted or within which its products or services are predominantly
marketed
o record of sponsorship, donations and charitable giving
• corporate citizenship (will be discussed in more detail in learning unit 1.3)
• the environment, health and public safety, including the impact of the company’s activities
and of its products or services
• consumer relationships, including the company’s policies and record relating to
advertising
• public relations and compliance with consumer protection laws
• labour and employment matters

STUDY
• Study section 72 of the Companies Act as well as Regulation 43(1)
• Richard et al (2021:3/37)

Board meetings/directors’ meetings (sec 73)

Section 73 of the Companies Act as discussed in your textbook by Richard et al (2021:3/37-

3/38) deals with the requirements of board meetings. The company’s board may determine the
form of and time for giving notice (of a meeting) as long as these comply with any requirements
included in the company’s MOI or rules.

Except to the extent that the company’s MOI provides otherwise, section 73(5) (a–d) provides
certain requirements that have to be met at board meetings, including the voting rights of
each director.

Section 73 also provides for the keeping of the minutes of meetings.

Why do you think minutes to a meeting are so important?

Directors should keep a written record of how and why they voted for matters at board
meetings. This requirement flows from their duties and possible liabilities in terms of sections
76 and 77, respectively.

STUDY
• section 73 of the Companies Act.
• Richard et al (2021:3/37-3/38)

ACTIVITY 7
15
1. Is the following statement true or false? A resolution at a directors’ meeting will be
approved if 50% of the directors vote in favour of the resolution.

2. What is the quorum for a directors’ meeting where the company has the following
number of directors?
(i) two directors
(ii) three directors
(iii) nine directors
(iv) twelve directors

3. When the directors of a public company have a meeting, the following individuals cannot
be included in determining the quorum for that meeting. Indicate “true” or “false” AND
give a reason for your choice.
(i) company secretary
(ii) independent non-executive chairperson
(iii) other non-executive directors
(iv) the chief audit executive (head of internal audit)

Directors acting other than at board meetings (sec 74)

Except where the MOI of a company provides otherwise, section 74 provides that a decision,
which could be voted on at a board meeting, may instead be adopted by the written consent
of a majority of the directors, given in person, or by electronic communication, provided that
each director received notice of the matter to be decided. A decision taken in this way has
the same effect as if it had been approved by voting at a meeting.

STUDY
• Section 74 of the Companies Act
• Richard et al (2021:3/38)

1.2.3 Directors’ personal financial interests

INTRODUCTION

Section 75 of the Companies Act specifically deals with a director’s personal financial
interests. This section provides that if a director’s personal interests are in conflict with those
of the company, the director should disclose the conflict of interest in the manner described
in section 75.
Directors’ personal financial interests (sec 75)

Section 75 of the Act makes clear provision for dealing with a director’s use of company
information and conflict of interest. The Companies Act sets out procedures that a director
should follow in order to disclose their personal financial interest or that of a person related
to them, in respect of any matter the board must consider. The procedures are discussed and
outlined in your textbook by Richard et al (2021:3/38-3/39). Study the definition of the term
“personal financial interest” in section 1 of the Companies Act.

One of the fundamental duties of a director is to avoid any possible conflict of interests with
the company. It is an accepted principle in South African law that, as a result of the trust
placed in the director, they are bound to put the interests of the company before their
own personal interests.

The conflict of interest provisions apply equally to persons related to the

director, not just the director themselves.
In this regard, note that for purposes of section 75 the definition of a related person, when used
in reference to a director, not only has the ordinary meaning as set out in the Act, but also
includes a second company of which the director or a related person is also a director, or a
close corporation of which the director or a related person is a member. This extension of the
meaning of the term “related” may cause difficulty in instances of cross-directorships. Thus,
where a person is a director of a subsidiary, and also serves as director of the holding company,
the holding company is regarded as related to the director. This may require the director to
recuse themselves in instances where there may be a conflict between the interests of the
subsidiary and the holding company (Companies Act 71 of 2008).

What does “personal financial interest” mean?

It refers to any material interests of a person of a financial, monetary or economic nature, or to
which a monetary value may be attributed. An interest is material if it is significant in the
circumstances of a particular matter to a degree that is of consequence in determining the
matter or if it might reasonably affect a person’s judgement or decision-making in the matter
(Companies Act 71 of 2008).

What if the company only has one director?

17
The conflict of interest provision does not apply to a company or its director if the company has
only one director and that director holds all the beneficial interest in all the issued securities of
the company. However, where that one director does not hold all the beneficial interest in the
issued securities, he/she may not approve or enter into an agreement, or determine any other
matter, in terms of which a person related to him/her may have a personal financial interest. In
these instances, the director has to obtain shareholder approval by ordinary resolution
(Companies Act 71 of 2008).

STUDY
• Section 75 of the Companies Act
• Richard et al (2021:3/38-3/39)

ACTIVITY 8

You are the auditor of Craft (Pty) Ltd, a manufacturing company in the marine engineering
sector. The MOI contains, inter alia, the following clause:

Any director or prescribed officer of the company who has a personal financial interest
in a contract into which this company has entered or will enter, either directly or
indirectly, shall comply with the Companies Act, 2008. The contract will be binding,
provided that the authority of the company in general meetings is obtained by poll for
the contract, prior to the contract being entered into.

Your scrutiny of the minutes of directors’ meetings reveals that the company entered into a
contract with Marine (Pty) Ltd for the purchase of 10 highly sophisticated and expensive radar
systems valued at approximately R1 million each. Tony Teak is a director of Craft (Pty) Ltd
and his brother Terry is the majority shareholder of Marine (Pty) Ltd.

REQUIRED

Discuss the requirements of the Companies Act of 2008 relating to the contract that Craft
(Pty) Ltd entered into with Marine (Pty) Ltd, particularly in view of the relationship between
Tony and Terry Teak.
1.2.4 Standards of directors’ conduct, prescribed officers,
indemnification and directors’ insurance

Standards of directors’ conduct (sec 76)

This section deals with certain duties of directors. Note these as you make your study notes
and keep them in mind when attempting to answer the activities.

STUDY

• Companies Act 71 of 2008: section 76

• Richard et al (2021:3/39–3/40)

Liability of directors and prescribed officers (sec 77)

This section deals with instances where a director and prescribed officer may be held liable for
losses suffered by the company.

Section 77 of the Companies Act makes it clear that a person is not, solely by reason of being
an incorporator, shareholder or director of a company, liable for any liabilities or obligations of
the company, unless where the Act or the company’s MOI provides otherwise. The directors of
a company may only incur liability in specific instances. In terms of the Act, a director of a
company may be held liable for any loss, damages or costs sustained by the company as a
consequence of any breach by the director of a duty contemplated in the standard of directors’
conduct, failure to disclose a personal financial interest in a particular matter, or any breach by
the director of a provision of the Act or the company’s MOI.

STUDY
• Companies Act 71 of 2008: section 77
• Richard et al (2021:3/40–3/41)

Indemnification and directors' insurance (sec 78)

As stated in section 78(2), any provision of an agreement, the MOI or rules of a company, or a
resolution adopted by a company is void if it directly or indirectly seeks to relieve a director of
any of that director’s duties. Section 78 does, however, allow certain “protection” of directors
through indemnification and directors' insurance.

STUDY
• Companies Act 71 of 2008: section 78
• Richard et al (2021:3/41)
19
 ACTIVITY 9
The King IV Report states that the governing body should lead ethically and effectively. It states
that members of the governing body should individually and collectively cultivate the following
characteristics and exhibit them in their conduct: integrity, competence, responsibility,
accountability, fairness and transparency.

Briefly discuss how these values and duties tie up with sections 76 to 78 of the Companies Act.

Audit committees (sec 94)

Section 94 states that a public company, state-owned company or other company that is
required by its MOI to have an audit committee must elect an audit committee at each annual
general meeting.

STUDY
• Companies Act 71 of 2008: section 94
• Richard et al (2021:3/46-3/47)

ACTIVITY 10
1. Briefly list the membership requirements for the audit committee according to section 94
by referring to what a member must and must not be.
2. Briefly describe the main duties of the audit committee according to section 94.

Note that the requirements for audit committees according to the King IV Report are explained
further in 1.3.4 below.
1.2.5 Application of and general requirements regarding
enhanced accountability and transparency

INTRODUCTION

This lesson deals with the requirements for appointing a company secretary and an auditor.

Registration of secretaries and auditors (sec 84 & 85) – also refer

to Regulations 26 to 28

Sections 84 and 85 of the Companies Act apply to

• every public and state-owned company
• a private, non-profit and personal liability company
- if required by the Companies Act or the Regulations to be audited, but where the
appointment of a company secretary and an audit committee are not required, or
- to the extent that the company’s MOI stipulates that the company comply with
this requirement

Regulation 28 of the Companies Act requires the following in respect of the categories of
companies that have to be audited:
(1) This Regulation applies to a company unless the company is exempt from having its
annual financial statements either audited or independently reviewed in terms of section
30(2).
(2) In addition to public companies and state-owned companies, any company that falls
within any of the following categories in any particular financial year must have its annual
financial statements for that financial year audited:
(a) any profit or non-profit company if, in the ordinary course of its primary activities, it
holds assets in a fiduciary capacity for persons who are not related to the company,
and the aggregate value of such assets held at any time during the financial year
exceeds R5 million

(b) any non-profit company, if it was incorporated

(i) directly or indirectly by the state, an organ of state, a state-owned company, an

international entity, a foreign state entity or a foreign company, or
(ii) primarily to perform a statutory or regulatory function in terms of any legislation,
or to carry out a public function at the direct or indirect initiation or direction of an
organ of the state, a state owned company, an international entity, or a foreign
state entity, or for a purpose ancillary to any such function

(c) any other company whose public interest score in that financial year, as calculated in
accordance with Regulation 26(2)
(i) is 350 or more, or
(ii) is at least 100, if its annual financial statements for that year were internally
compiled

Diagram 1.2.5.1 below summarises the requirement for companies to appoint a company
secretary and an auditor.
21
DIAGRAM 1.2.5.1: Appointment of company secretary and auditor

STUDY
• Sections 84 and 85 of the Companies Act, as well as Regulations 26 to 28
• Richard et al (2021:3/42 & 3/5 - 3/7)

1.2.6 Aspects concerning the company secretary

INTRODUCTION

Public companies and state-owned enterprises must appoint a company secretary in terms
of sec 86(1) of the Companies Act. The company secretary acts as a chief administrative
officer of the company. This lesson deals specifically with the duties of the company secretary
and with the appointment and removal of the company secretary.

Company secretary (sec 86 – 89)

The board of directors appoints the secretary and they must be satisfied that the person is
suitably qualified with necessary experience to perform the duties of a company secretary.
The secretary is accountable to the board of directors. The secretary’s duties are listed below.
Study section 88 in this regard. Your textbook by Richard et al (2021:3/43) sets out the duties
of the company secretary.

STUDY
• Sections 86 to 89 of the Companies Act
• Richard et al (2021:3/42–3/43)

23
In diagram 1.2.6.1 below the requirements concerning the appointment and resignation or
removal of the company secretary in terms of the Companies Act are summarised.

DIAGRAM 1.2.6.1: Company secretary

SUMMARY

In this lesson, you learnt about board committees, meetings and directors acting other than
at meetings. We explained directors’ personal financial interests, standards of directors’
conduct, liability of directors and prescribed officers, indemnification and directors’ insurance,
and audit committees. We also discussed the company secretary.

After having worked through the lesson and the references to the prescribed study material,
you should be able to give advice, discuss concerns and apply the requirements regarding

• board committees, meetings and directors acting other than at meetings

 • directors’ personal financial interests
• the registration of the company secretary and auditors

Fantastic! If you studied all the content presented in this lesson and completed the activities
dealing with this topic, you just finished studying lesson 1.2 and should continue to lesson
1.3. Keep your answers and notes in a notebook that you know won't get lost so that you are
able to refer to them again when you do your revision.

25
LESSON 1.3

KING IV REPORT ON GOVERNANCE FOR SOUTH

AFRICA

INTRODUCTION
King IV consists of a Report on Governance, which provides
recommendations for best practice for each of the principles. King IV applies
to all sectors of business. It includes sector supplements to King IV for specific
categories:

• companies (listed and SME)

• non-profit organisations
• government and local government
• pension and retirement funds
• universities

Why is the King a code and not law?

King IV is a set of guiding principles. Firstly, you need to understand how a

code is different from laws or rules. The King Code is not law, therefore it
is not binding on anyone. As a result, it is voluntary, which means it does
not prescribe methods that have to be applied in order to achieve corporate
governance. Instead it gives us recommended practices or simply
suggestions (IoD 2016).

Although the King IV Report has adopted a voluntary basis for the application
of the principles of good governance, application of these principles is
compulsory for public companies listed on the JSE (previously the JSE
Securities Exchange and the Johannesburg Stock Exchange).

Paragraph 8.63 of the JSE listing requirements states that issuers of annual
financial statements or annual reports should disclose, among other things, the
following information (JSE listing requirements):

(a)(i) a narrative statement of how it has applied the principles set out in
the King Code, providing explanations that enable its shareholders to
evaluate how the principles have been applied; and

1
(a)(ii) a statement addressing the extent of its application of the principles
of the King Code and the reasons for each and every instance of
non-application during the accounting period. The statement must
also specify whether or not the company has applied throughout the
accounting period all the provisions of the King Code and indicate for
what part of the period any non-application occurred.

The following are significant matters covered by the King IV Report:

• leadership, ethics and corporate citizenship

• strategy, performance and reporting
• governance structures and delegation
• the governance functional areas
o risk governance
o the governance of information technology
o compliance governance
o the governance of remuneration
o assurance
o the governance of stakeholder relationships

Please revise lesson 1.1 before you continue with lesson 1.3.

1.3.1 Leadership, ethics and corporate citizenship

Principles 1, 2 and 3 of King IV deal with leadership, ethics and corporate
citizenship.
LEADERSHIP, ETHICS AND
CORPORATE CITIZENSHIP

Governing body should lead

Principle 1 ethically and effectively

Govern the ethics of the

organisation in a way that
Principle 2
supports the establishment of an
ethical culture

Ensure that the organisation is

Principle 3 and is seen to be a responsible
corporate citizen

Principle 1 of King IV prescribes that the governing board should lead ethically
and effectively. The King IV Report (2016:20) states that effective leadership
is results-driven. It is about achieving strategic objectives and positive
2
outcomes. Effective leadership includes an internal focus on effective and
efficient execution. This can be achieved by the governing board individually
and collectively cultivating the following six ethical characteristics and
exhibiting them in their conduct:

• integrity
• competence
• responsibility
• accountability
• fairness
• transparency

King IV recommends that the above six ethical characteristics be embodied by

the governing board in order to offer effective leadership that results in an
organisation achieving its strategic objectives and positive outcomes over time.

King IV has further established recommended practices on the six ethical

characteristics to assist the governing board in setting the tone to lead an
organisation ethically and effectively.

King IV advocates that arrangements by which members of a governing body

are being held to account for ethical and effective leadership should be
disclosed. These arrangements would generally include the code of conduct
and a performance evaluation of the governing board and its members.

STUDY

• King IV Report (2016:43–44)

• Richard et al (2021:4/16–4/18)

ACTIVITY 11
Principle 1 states that the governing body should lead ethically and effectively.
List the six ethical values which, in terms of King IV, are embodied in ethical
leadership.

ACTIVITY 12
Explain what ethical value integrity means.

3
 Did you notice that the recommended practice integrity has
been partially legislated for by the Companies Act in sections 75 and 76?

You should be able to discuss all the ethical values.

Principle 2
This prescribes that the governing board should govern the ethics of the
organisation in a way that supports the establishment of an ethical culture. This
can be achieved by the governing board assuming responsibility for the
governance of ethics of an organisation.

STUDY

• King IV Report (2016:44–45)

• Richard et al (2021:4/18–4/19)

ACTIVITY 13
Principle 2 states that the governing body should govern the ethics of the
organisation in a way that supports the establishment of an ethical culture.
Name the recommended practices on how the governing body should govern
ethically.

Principle 3
Corporate citizenship
Responsible corporate citizenship is closely related to ethical leadership. As a
responsible corporate, the board has to ensure that the company has regard
to not only the financial aspects of the business of the company, but also the
impact that business operations have on the environment and the society within
which it operates.

King IV (2016:45) promotes a stakeholder-inclusive approach. This approach

recognises companies as corporate citizens, with duties to act with economic,
social and environmental responsibility, and appreciates the
interdependent relationship between a company, its stakeholders and the
ability to create value sustainably. As such, King IV recommends that boards
take into account the legitimate and reasonable needs, interests and
4
expectations of all material stakeholders (e.g. shareholders, employees,
consumers and even the community at large) when acting in the best interests
of their companies.

Find examples of corporate citizenship in companies.

Go to the JSE website at https://www.jse.co.za/ and click on Client Portal,

Listed Companies. Select any company and go to their website. Search for
their integrated report and identify what the company has done to be seen as
a corporate citizen.

Here are some international examples:

1. Lego: The toy company has invested millions of dollars into

addressing climate change and reducing waste. Lego's
environmentally conscious efforts include reduced packaging, using
sustainable materials and investing in alternative energy.

2. Johnson & Johnson: The brand focuses on reducing its

environmental impact by investing in various alternative energy
sources. Globally, Johnson & Johnson also works to provide clean,
safe water to communities.

3. Starbucks: The global coffee chain has implemented a socially

responsible hiring process to diversify their workforce. Their efforts are
focused on hiring more veterans, young people looking to start their
careers, and refugees.

4. Google: Google has demonstrated its commitment to the environment

by investing in renewable energy sources and sustainable offices. The
company’s CEO, Sundar Pichai, is also known to take stands on
certain social issues.

5. Pfizer: The pharmaceutical company's focus on corporate citizenship

is reflected in its healthcare initiatives. Some of the company's
initiatives include spreading awareness about non-infectious diseases
and providing accessible health services to women and children in
need.

5
 STUDY

• King IV Report (2016:45–46)

• Richard et al (2021:4/19–4/21)

ACTIVITY 14

Principle 3 states that the governing body should ensure that the organisation
is and is seen to be a responsible corporate citizen. Explain in your own words
what it means to be a responsible corporate citizen.

ACTIVITY 15
Name the companies according to section 72 and Regulation 43 of the
Companies Act that should appoint a social and ethics committee.

ACTIVITY 16

List the legal requirements of the social and ethics committee.

ACTIVITY 17

List the recommended practices of King IV for the social and ethics committee.

6
1.3.2 Strategy, performance and reporting

Principles 4 and 5 of King IV deal with strategy, performance and reporting.

STRATEGY, PERFORMANCE
AND REPORTING

Elements of the value

Principle 4
creation process

Reporting and
Principle 5
disclosure

Principle 4 of the King IV Report prescribes that the governing board should
appreciate that an organisation’s core purpose, its risks and opportunities,
strategy, business model, performance and sustainable development are all
inseparable elements of the value creation process.

Principle 5 deals with the reporting and disclosure of the strategy and
performance. It prescribes that a governing board should ensure that reports
issued by the organisation must enable stakeholders to make informed
assessments of the organisation’s performance, and its short-, medium- and
long-term prospects.

STUDY

• King IV Report (2016:47–48)

• Richard et al (2021:4/12-4/16 & 4/21–4/23)

What is an integrated report?

7
Go to the JSE website at https://www.jse.co.za/ and click on Client Portal,
Listed Companies. Select any company and go to their website. Search for
their integrated report. Identify the companies’ capitals.

All companies’ integrated reports look different. Even Unisa has an annual
report. Follow this link to the 2019 annual report:
https://www.unisa.ac.za/sites/corporate/default/News-&-
Media/Publications/Annual-reports

You will notice on page 16 Unisa outlines its capitals. List the capitals.

What is the value creation process?

ACTIVITY 18
Discuss how frequently a company should report to its stakeholders and what
information should be reported to them.

ACTIVITY 19
Describe in terms of King IV the term “value creation process”.

ACTIVITY 20
Explain what an integrated report is.

ACTIVITY 21
Describe the primary purpose of an integrated report.

1.3.3 Governing structures and delegation

8
Principles 6, 7, 8, 9 and 10 of King IV deal with governing structures and
delegation.

As the governing body is responsible for the corporate governance of

businesses, this is an important section of the King IV Report. Familiarise
yourself with the different principles that apply to the governing body as stated
in the King IV Report.

Board as custodian of good

Principle 6
governance
GOVERNING STRUCTURES
AND DELEGATION

Principle 7 Board composition

Effective board structures

Principle 8
and delegation of authority

Board performance
Principle 9
evaluation

Board/management
Principle 10
relationships

STUDY

• King IV Report (2016:49–60)

• Richard et al (2021:4/23–4/34)

Section 66(1) of the Companies Act 71 of 2008 requires the business and
affairs of companies to be managed by or under the direction of a board of
directors and section 84(4)(c) provides that every public company and state-
owned company must, in addition, appoint an audit committee. The King IV
Report also recommends that an audit committee be appointed for companies
other than public and state-owned companies.

Section 72 of the Companies Act allows the board of directors to appoint any
number of committees (sub-committees), with the King IV Report and JSE
listing requirements specifying at least a remuneration committee and, if
required, a nomination committee, a risk committee, as well as a social
and ethics committee.

9
As mentioned before, section 72 allows for any number of board committees
to be appointed, depending on the requirements of the company.

Take note of the tables below, which contain a summary of some of the
recommended compositions and functions of the governing body and its main
board committees (cf. King IV Report 2016). The composition and functions of
the audit committee will be explained further in 1.3.4.

Principle 7 deals with the composition of the governing body.

You should be able to discuss the composition requirements of the governing

body.

Chairman • Independent non-executive director (principle 7.31).

• CEO of the company should not also fulfil the role of chair of
the board (principle 7.34).
• The role of the chair should be formalised (principle 7.32–
7.33).
• Every alternate year, the governing body should evaluate the
performance of the chair to support continued improvement
in their performance and effectiveness (principle 9.73–9.74).
Member- • The governing body should attain the appropriate balance of
ship knowledge, skills, experience, diversity and independence
(principle 7).
• The governing body should comprise a majority of non-
executive members, most of whom should be independent
(principle 7.8).
• The governing body, through its nomination committee,
should recommend the eligibility of prospective members
(principle 7.14–7.16).
Members • There should be a minimum of two executive members: one
should be the CEO and the other may be the chief finance
officer or other executive as is appropriate (principle 7.9).
• Periodic, staggered rotation of members should be
established (principle 7.12).
Functions • The board should have a charter setting out its role,
responsibilities, membership requirements and procedural
conduct (principle 6.2). The functions of the board are listed
under principle 6.1 of the King IV Report.

ACTIVITY 22
Explain the difference between an executive director and non-executive
director.

10
 ACTIVITY 23
Describe, in terms of King IV, when a conflict of interest occurs.

ACTIVITY 24
Explain the functions of the lead independent director.

ACTIVITY 25
List the factors the governing body should consider when assessing the
independence of a member of the governing body.

Principle 8 states that the governing body should ensure that its arrangements
for delegation within its own structures promote independent judgement, and
assist with balance of power and the effective discharge of its duties. This
means that the governing body may delegate some of its responsibilities to
various committees as needed to ensure that the best interest of the
organisations is achieved.

Audit committee

As mentioned in 1.2.4, section 94 of the Companies Act 71 of 2008 requires of

a public or state-owned company to appoint an audit committee as well as a
board of directors. The King IV Report also recommends that an audit
committee be appointed for companies other than public and state-owned
companies.

STUDY
• King IV Report (2016:55–56)
• Richard et al (2021: 4/28–4/34)

ACTIVITY 26
In a table, illustrate the composition requirements and functions of an audit
committee.

11
 ACTIVITY 27
The following is a summary of the composition and certain functions of the audit
committee of Mineco Ltd, a JSE listed company in the South African mining
sector.

Audit Committee

Violet Mguni – Operations director

William Smith – Government official (only attends board meetings)
Bob Cilliers – Finance director

The audit committee meets annually and evaluates the board's performance.
During the recent meeting of the audit committee, it was decided that Mineco
Ltd would acquire shares in Africa Coal, a coal-mining company listed on the
JSE. A detailed analysis of the coal-mining sector supported this decision.

REQUIRED

Comment on the information presented in terms of the requirements of the King

IV Report.

ACTIVITY 28
The governing body should elect a chair who is an independent non-executive
member. Explain what an independent non-executive member is.

ACTIVITY 29
The collective responsibilities of management vest in the chief executive officer
(CEO). List the CEO's main functions.

ACTIVITY 30
Why should the CEO not fulfil the role of the chair of the governing body?

12
 ACTIVITY 31
The governing body should delegate certain functions to well-structured
committees. Are the chair of the governing body and the CEO allowed to be
members of the following committees in terms of the principles of the King IV
Report?

1. Audit committee
2. Remuneration committee
3. Nomination committee
4. Risk committee
5. Social and ethics committee

ACTIVITY 32
Recently while scanning through the annual report of Stadium Ltd, a company
listed on the JSE, you came across the company's schedule of directors and
committees.

These appeared as follows:

1. Board of directors (governing body)

Chief executive officer – Donald Winthrop

Managing director – Administration – Charles Tree
Finance director – Monty Mann
Operations director – Christo Wells
Human resources director – Jerry German
Marketing director – Koos Katswinkel
Non-executive director – Caz Kallim
Independent non-executive director – Mary Maswai

The company has not appointed a chair. The most senior director who
arrives at the directors' meeting acts as chair.

2. Committees

2.1 Nomination committee – Donald Winthrop

(chairman)
– Charles Tree

This committee makes recommendations to the shareholders regarding

who should be appointed as directors. If the two directors on the
committee disagree, Donald Winthrop has the casting vote.

13
 2.2 Remuneration committee
2.3 Audit committee
– Donald Winthrop (chair)
– Monty Mann
– Koos Katswinkel
– Monty Mann (chair)
– Christo Wells

– Mitchell Street (internal audit

manager)
– External Audit
– Fred Carver (finance manager)

All committees meet as and when required. The board meets every six
months.

3. Risk committee

The risk committee was disbanded at the beginning of the year. The
directors know the business and the risks involved.

REQUIRED

Comment on the information presented above in relation to the requirements

of the King IV Report.

14
1.3.4 Governance function areas

1.3.4.1 Risk governance

According to the King IV Report (2016:61), the essential focus of the

governance of risk is that the governing body should govern risk in a way that
supports the organisation in setting and achieving its strategic objectives. Risk
is positioned as a cornerstone of corporate governance and it is emphasised
that it is the board’s responsibility to ensure that it is satisfied with the
management of risk.

STUDY

• King IV Report (2016:61–62)

• Richard et al (2021:4/35–4/38)

ACTIVITY 33
15
Illustrate in a table who in the organisation is responsible for the following
functions:

WHAT WHO
Governance of risk
Implement and execute the risk
management plan
Monitor the risk management
process
Perform an objective assessment of
the effectiveness of risk
management

ACTIVITY 34
List the functions that the governing body should implement that will result in
effective risk management.

1.3.4.2 Technology and information governance

The governance of information technology is dealt with in detail in the King IV

Report. In light of the prevalence of the Fourth Industrial Revolution, King IV
recognises information separate from technology as a corporate asset that is
part of the company’s stock of intellectual capital and confirms the need for
governance structures to protect and enhance this asset (IoD 2016).

Technology is described in the Code as a way in which to access, protect and

manage information, but it is also much more than an information management
system. The Code also focuses on the disruptive nature of technology on long-
term business models and highlights the significant risk this poses to
companies.

Did you know?

Cybersecurity has become a pressing challenge for South African companies.
Boards are responsible for information and technology management: this
includes ensuring that a robust information architecture is in place that supports
the integrity, confidentiality and availability of information. Furthermore, under
the Protection of Personal Information Act 4 of 2013 (South Africa’s first
comprehensive data protection statute), companies are subject to a host of
cybersecurity obligations, including taking reasonable, appropriate technical
and organisational measures to prevent unlawful access to personal
information.

16
 STUDY
• King IV Report (2016:62–63)
• Richard et al (2021:4/38–4/40)

ACTIVITY 35
Part 5.4 of the King IV Report deals with the governance of functional areas.
Explain what should be achieved by technology and information management,
under the control of the governing body.

1.3.4.3 Compliance governance

The governing body should ensure that the company complies with applicable
laws, rules, codes and standards. The governing body should delegate the
responsibility for implementation and execution of effective compliance
governance to management. The governing body should monitor and oversee
compliance (King IV 2016:63–64).

STUDY

• King IV Report (2016:63–64)

• Richard et al (2021:4/41)

ACTIVITY 36
List what should be disclosed by the governing body in relation to compliance
according to the King IV Report.

1.3.4.4 Remuneration governance

Principle 14 states that the governing body should ensure that the organisation
remunerates fairly, responsibly and transparently so as to promote the
achievement of strategic objectives and positive outcomes in the short,
medium and long term.

17
 STUDY
• King IV Report (2016:64–67)
• Richard et al (2021:4/41–4/44)

ACTIVITY 37
Voting on the remuneration policy is only applicable to companies. Discuss
who may vote and approve the remuneration policy, as well as what should
happen if the remuneration policy and/or its implementation was voted against
by 25% or more of the voting rights exercised.

1.3.4.5 Assurance

The assurance principle in the King IV Report is dealt with in three sections:

• Combined assurance
• Assurance of external reports
• Internal audit

Combined assurance

King IV has refined the concept and requirements of combined assurance by

introducing the five-level combined assurance model (IoD 2016). The model
introduces the concept of horizontal and vertical relationships with reference to
the depth and reach of the assurance provider. The model activities are
coordinated to allow the matrix of assurance providers to enable an effective
control environment and integrity of reports. King IV recommends that the audit
committee establish the combined assurance model, as well as oversee the
implementation of the combined assurance. The audit committee should
oversee the scope of the model as informed by the material risks and
opportunities.

The lines of defence are separated by the level of risk ownership as well as the
level of independence of the assurance provider. Internal audit, for example,
has been separated from external audit in terms of the levels of independence
to the management of risk and control (IoD 2016).

STUDY

• King IV Report (2016:68–70)

18
• Richard et al (2021:4/44–4/48)

ACTIVITY 38
Explain in your own words what the term “combined assurance model” means
in the context of the King IV requirements.

ACTIVITY 39
According to principle 15.58a, internal audit should follow an approved risk-
based internal audit plan. Explain in your own words what the term “risk-based
audit plan” means in the context of the King IV requirements for internal audit.

ACTIVITY 40
Speed (Pty) Ltd, a large retailer of sporting goods with outlets in all major towns
and cities in South Africa, has recently established an audit committee and
internal audit department. The internal audit department is headed up by Sipho
Mbali, a chartered accountant, and staffed by three suitably qualified internal
auditors. The department reports to the audit committee. Sipho has received
numerous requests for his department’s services, which are listed below:

1. The manager of the company's largest retail outlet requested that one of
the internal auditors be seconded to the outlet for a period of three months,
as the outlet’s accountant was to be away on maternity leave.

2. The finance director has requested internal audit to install the software for
a new wage application, and control the conversion to the new system.
Internal audit has the necessary expertise.

3. The warehousing manager has requested that internal audit evaluate the
operational efficiency of the company's distribution system for the dispatch
of goods from the central warehouse to the outlets.

4. The head office finance manager has requested internal audit to perform a
surprise physical verification of the existence of fixed assets at two other
large retail outlets, e.g. shop fittings, tills, furniture, office equipment
including computer hardware.

5. The finance director has requested that internal audit perform an in-depth
analysis of the monthly trading returns submitted by the outlets to head
office.
19
6. The managing director has requested that Sipho make a presentation to the
board on the laws and regulations that govern the company and its
operations, highlighting any areas where laws or regulations are not being
complied with.

7. The external auditors have requested that the members of the internal audit
department attend the financial year-end inventory counts on their behalf at
four of the company’s retail outlets. The external auditors will have their own
teams at the other outlets.

8. The human resources manager has requested that Sipho be present at the
annual wage negotiations to ensure that company policy and labour law
requirements are adhered to.

9. The finance manager has requested that in future, Sipho authorise the write-
off of bad debts at the end of each month after investigation of the debtors'
circumstances.

10. The chairman of the social and ethics committee has asked Sipho if his
three qualified internal auditors could assist the local college by lecturing on
the college’s evening auditing courses.

REQUIRED
Indicate, giving reasons, how Sipho Mbali should respond to each of these
requests.

1.3.4.6 Stakeholder relationships

The King IV Report emphasises a stakeholder-inclusive approach to corporate

governance.

STUDY

• King IV Report (2016:71–73)

• Richard et al (2021:4/48–4/53)

ACTIVITY 41
1 Define the term “stakeholder” according to the King IV Report.

20
2 Do you regard yourself as a stakeholder of your local municipality? Do you
think that they should adhere to the principles of the King IV Report with
regard to stakeholder management? If so, how do your local municipality’s
operations affect you?

ACTIVITY 42
Treelines Ltd is a large forestry company which grows and harvests trees and
transports them to its mills, where the timber is pulped (an operation which
uses a great deal of water and produces unusable waste) for the manufacture
of pulp-based products. Demand for pulp-based products is declining world-
wide, but demand for other timber products is stable.

The company's forests are spread over numerous regions of the country and
the majority are in remote areas. A key element of the location of forests for
both replanting and new forests is the level of local rainfall as forests are not
irrigated.

Treelines Ltd employs a reasonably large workforce at its forest locations,

ranging from unskilled to skilled logging machine operators, all of whom are
vital to the operation. It also has a large administrative, financial, marketing and
support staff of mixed gender and race at its head office.

The board of Treelines Ltd follows sound corporate governance practices

regarding the way it conducts its business and reports to its stakeholders.
Integrated sustainability reporting and disclosure are regarded as important.

REQUIRED
Identify the main stakeholders, other than shareholders, with whom Treelines
Ltd should be building relationships and promoting respect, and indicate briefly
for each why you consider them to be stakeholders.

SUMMARY
In this lesson we explained and applied the provisions of the King IV Report of
Governance for South Africa.

You should be able to explain and apply corporate governance in practical

situations by referring to statutory matters and the provisions of the King IV
Report and Code on Governance for South Africa.

21
Fantastic! If you studied all the content presented in this lesson and completed
the self-assessment questions dealing with this topic, you just finished studying
lesson 1.3.

CONCLUSION

In this topic on corporate governance and statutory matters, we explained

and applied corporate governance principles by referring to the background of
corporate governance and statutory matters regarding company directors, as
well as the provisions of the King Report on Governance.

22