King IV

Nkuhlu Department of Accounting

Introduction

There have been • A growing social inequality

fundamental changes • Climate change
in both business and • Over-consumption of natural resources
society resulting in an
• Geological tensions
increased need for
good corporate • Stakeholder expectations and
governance to ensure transparency
that organisations • Rapid advancements in technology
achieve prosperity for • Less stable financial systems
itself and the broader • Increased corruption
society.
3
 What is Corporate Governance?

Corporate Governance is the system or process whereby companies

(and other organisations) are directed or controlled. It is about companies
being good corporate citizens which, in effect, recognises that a company
has rights but also obligations and responsibilities to society.

Formally defined in King IV:

Corporate governance is defined as the exercise of ethical and effective
leadership by the governing body towards the achievement of the
following governance outcomes:
- Ethical Culture
- Good performance (in terms of the 6 capitals)
- Effective control
- Legitimacy (obeying laws)
Applicability

King IV is voluntary except for all companies listed

on the JSE (JSE listing requirement). Although it is
voluntary, King IV is applicable to all organisations.

The extent to which King IV is applied in

organisations will depend on the nature, size and
complexity of the organisation.

King IV was released on 1 November 2016. It was

effective for financial years commencing from 1
April 2017.
Applicability continued…

King IV uses an “apply and explain” format.

Assumes the voluntary application of the

Code’s principles and recommended
practices, and requires an explanation of
how the organisation is doing in respect of
achieving the principles laid out in the Code.
 Practices, principles and governance outcomes
Principles are an embodiment of good corporate governance. They act
as a guide to the company as to what it should achieve by implementing
the recommended practices. There are 17 principles which build on and
reinforce one another.
Practices are the actions (leading practice) which King IV recommends
should be applied by a company so that they support and give effect to
what the principle is intended to achieve, taking into account
proportionality (the size, resources and complexity of the company).
Each recommended practice relates to a principle.
Governance outcomes are the benefits which could be realised by the
company if the related principles are achieved. There are 4 governance
outcomes; ethical culture, good performance, effective control and
legitimacy.
Board’s primary governance role and responsibilities

Steers and sets strategic direction.

Approves policy and plans to effect the strategy.

Oversees and monitors implementation and execution

of the plan by management.

Ensures accountability for organisational performance

by means of, inter alia, reporting and disclosing.
Philosophical underpinnings of corporate governance
(“foundation stones”)

1. Ethical leadership:
• Ethical leadership embodies the following ethical
values:
i. Responsibility
ii. Accountability
iii. Fairness
iv. Transparency
v. Integrity
vi. Competence
• Effective leadership is about achieving strategic
objectives and positive outcomes in an ethical
manner. Goal orientated and ethical.
Philosophical underpinnings of corporate governance
(“foundation stones”)

2. Societal context: The company affects and is

affected by society.
3. Corporate Citizen: The company has rights but
also obligations and responsibilities to society
and the natural environment on which society
depends.
4. Sustainable development: Regarded as
development that meets the needs of the
present without compromising the ability of
future generations to meet their needs.
Philosophical underpinnings of corporate governance
(“foundation stones”)

5. Stakeholder inclusivity: It is the duty of the

board to take account of the legitimate and
reasonable needs, interests and expectations
of all the company’s material stakeholders.
6. Integrated thinking: Takes account of the
connectivity and interdependencies between
the range of factors that affect the company’s
ability to create value overtime. (six capitals).
Philosophical underpinnings of corporate governance
(“foundation stones”)

7. Integrated reporting:
oShould explain the performance of the company and
should have sufficient information on how the
organisation has positively and negatively affected the
economy, society and the environment.
oThe report should show what value the company has
created (or not created), through the increase or
decrease of each of the six capitals.
oAn integrated report should also look to the future
enabling stakeholders to judge whether the company
can sustain delivery of value.
A closer look at Integrated Reporting

Economic Social Environmental

Reporting Reporting Reporting

Triple Bottom Line Reporting

Integrated Reporting continued…

• Financial capital
• Manufactured capital
The six • Intellectual capital
• Human capital
capitals: • Social and relationship capital
• Natural capital
17 principles and recommended practice
Principles
1: Leadership
2: Organisational ethics
3: Responsible corporate citizen
4: Strategy and performance
5: Reporting
6: Primary role and responsibility of the
Board
7: Composition of the Board
8: Committees of the Board
9: Evaluation of the performance of the
Board
10: Appointment and delegation to
management
11: Risk governance
12: Technology and Information
governance
13: Compliance governance
14: Remuneration governance
15: Assurance
16: Stakeholder relationships
17: Responsibilities of institutional
investors
LEADERSHIP
Principle 1. The board should lead ethically and
effectively.
Recommended practices:
Characteristics that directors should cultivate and exhibit in
their conduct:
- Integrity
- Competence
- Responsibility
- Accountability
- Fairness
- Transparency
- Disclosure
ORGANISATIONAL ETHICS
Principle 2. The board should govern the ethics of the company in
a way that supports the establishment of an ethical culture.
Recommended practices:
Set the direction for ethics in the organisation.
Approve codes of conduct and ethics policies as well as ensure that
they include all stakeholders and key ethical risks.
Ensure that there are ways for stakeholders to be made familiar with
the codes of conduct and ethics policies.
Delegate implementation of codes of conduct and ethics policies to
management and provide ongoing oversight of this management,
including results in such matters as recruitment, employee
remuneration, supplier selection, breach management, whistleblowing
and independent assessments.
RESPONSIBLE CORPORATE CITIZENSHIP
Principle 3. The board should ensure that the company is and is
seen to be, a responsible corporate citizen.
Recommended practices:
Set the direction for good corporate citizenship, including compliance
with the Constitution, laws, standards and own policies and
procedures, as well as congruence with the organisation’s purpose,
strategy and conduct.
Oversee and monitor (using agreed performance indicators and
targets) the organisations status as a good corporate citizen in such
areas as the workplace, economic behaviours and results, societal and
environmental impacts.
STRATEGY AND PERFORMANCE
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 term “value creation process” describes the process that results in
increases, decreases or transformation of the (company’s) capitals
caused by the company’s business activities and outcomes.

Recommended practices:
Strategy and delegate implementation.
REPORTING
Principle 5. The board should ensure that reports issued by the
company enable stakeholders to make informed assessments of
the performance of the company and its short, medium and long
term prospects.
Recommended practices:
Set the direction, approach and conduct for the organisation’s reporting.
Approve the reporting frameworks to be used.
Oversee that the various reports are compliant with legal reporting
requirements and meet the reasonable and legitimate needs of material
stakeholders.
Ensure that an annual integrated report is issued (either as a stand-alone
report or as part of another report).
Approve the bases for determining materiality for the purposes of including
in reports.
Ensure the integrity of external reports.
PRIMARY ROLE AND RESPONSIBILITIES OF
THE BOARD
Principle 6. The board should serve as the focal point and
custodian of corporate governance in the company.
Recommended practices:
Exercise its leadership role; have a charter; approve a protocol for it, its
committees and members to get professional advice; approve a
protocol for non-executive members to get documentation and
meetings with management.
Disclose the number of its meetings and attendance thereof, whether it
is satisfied that it has discharged its responsibilities in relation to its
charter.
COMPOSITION OF THE BOARD
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.
Recommended practices:
1. Composition
Consider an appropriate size for itself, with reference to the optimal mix
of knowledge, skills, experience, diversity, independence (i.e.
executive, non-executive and independent non-executive members),
sufficiency in numbers for its committees, quorum requirements,
regulatory requirements and diversity targets.
COMPOSITION OF THE BOARD
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.
Recommended practices:
2. Nomination, election and appointment
Approve nominations as a whole and ensure that the process for
nomination, election and appointment is formal and transparent.
Consider the collective attributes and diversity needed, as well as whether
the candidate is ‘fit and proper’ prior to potential member nomination.
Consider the past performance of a member prior to nomination for re-
election, and for potential nonexecutive directors request information of
other commitments and whether he/she has sufficient time.
Investigate and verify potential members backgrounds and qualifications.
COMPOSITION OF THE BOARD
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.
Recommended practices:
2. Nomination, election and appointment
Disclose potential candidates profile and commitments, as well as
governing body’s endorsement, with annual general meeting notices.
After election of an incoming member, issue a letter of appointment,
provide induction and for inexperienced members a mentor and training.
Obtain ongoing professional development.
COMPOSITION OF THE BOARD
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.
Recommended practices:
3. Independence and conflicts
Obtain annually (or whenever there is significant change) from each
member a declaration of all interests and related parties.
Obtain declarations from each member prior to any meeting of the
governing body or its committees, any conflict of interest and proactively
manage them.
Categorise non-executive members as independent if when judged by a
reasonable and informed third-party they would conclude that there are no
factors which could cause undue influence or biased decision-making.
COMPOSITION OF THE BOARD
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.
Recommended practices:
3. Independence and conflicts
The following suggest that a non-executive director should not be
classified as independent:
Provider of funding or capital to the company, or an employee, officer
or a representative of such provider of financial capital or funding.
Share incentive scheme participant of the company.
Owns shares in the company which is material to the member.
Employed as an executive in preceding 3 years (or is a related party
to such executive) e.g. spouse.
COMPOSITION OF THE BOARD
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.
Recommended practices:
3. Independence and conflicts
Was the auditor (or key audit team member) in preceding 3 years.
An advisor to the company.
Board member or executive of a significant customer or supplier to
the company.
Board member or executive of another company which is a related
party to the company.
 Entitled to remuneration that is linked to the organisation’s
performance.
COMPOSITION OF THE BOARD
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.
Recommended practices:
3. Independence and conflicts
Assess a member for independence every year after 9 years of serving
as a member, and allow continuance as an independent member if the
same would be judged by a reasonable and informed third party.
COMPOSITION OF THE BOARD
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.
Recommended practices:
4. Chairperson of the board
Elect an independent non-executive member as chair
The board should appoint a independent non-executive as lead
independent director to:
• Lead in the absence of the chair
• Serve as a sounding board to the chair
• Act as an intermediary between chair and other members
• Deal with shareholder concern when normal channels fail
• Strengthen independence if chairman is not independent
• Chair discussions, where chair may have a conflict of interest
• Lead performance appraisal of chairman
COMPOSITION OF THE BOARD
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.
Recommended practices:
4. Chairperson of the board
Document the role, responsibilities and term of the chair and lead
independent non-executive member.
Not allow the CEO to be the chair of the board, nor allow (until after 3
years) a retired CEO to become the chair of the board.
Determine with the chair the number of other outside professional
appointments that he/she can hold.
COMPOSITION OF THE BOARD
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.
Recommended practices:
4. Chairperson of the board
The chairperson:
• should not be a member of the audit committee.
• should not chair the remuneration committee (but may be a member).
• should be a member of the nominations committee and may also be
the chair.
• may be a member of the risk committee and may also be its chair.
• may be a member of the social and ethics committee but should not be
its chair.
Ensure succession planning for the chairperson.
COMMITTEES OF THE BOARD
Principle 8. The board 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.

Recommended Practices:
Board Committees:
• Audit committee (compulsory for public and state owned)
• Nominations committee
• Risk governance committee
• Remuneration committee
• Social and ethics committee (compulsory for Listed companies)
Must have terms of reference and minimum of 3 members.
Board is still ultimately accountable.
Summary of Board Committees
Social &
Practice Audit Nominations Risk Remuneration ethics
# of members Minimum of 3 members
Composition Independent Non- Executive and Non- Executive and
non-executive executive, non-executive, executive, non-executive,
members only majority must majority non- majority must majority non-
be executive be executive
independent independent

Chairman of Should not be Should be a May be a May be a May be a

Board’s a member member member member member
involvement
Chairman of Independent Board Board Cannot be Cannot be
committee non-executive chairman may chairman my chaired by chaired by
chair chair Board Board
chairman chairman
Skills Financially
literate
AUDIT COMMITTEE :
Composition:
all members of the audit committee should be independent
non-executive directors
the audit committee should consist of at least three
members
the board should appoint an independent non-executive
director as the chairperson
the members of the audit committee should as a whole
have the necessary financial literacy, skills and experience
to execute their duties effectively.
AUDIT COMMITTEE continued…
Responsibilities and function:
In terms of King IV, the role of the audit committee is to provide
independent oversight of
the effectiveness of the company’s assurance functions and services,
with particular focus on the combined assurance arrangements
including external assurance providers, internal audit and the finance
function.
the integrity of the financial statements and to the extent delegated by
the board, other external reports issued by the company.
the audit committee carries ultimate decision making power and
accountability for its statutory duties. However, if the audit committee is
assigned responsibilities beyond its statutory duties by the board, the
board will be ultimately accountable for such delegated responsibilities.
AUDIT COMMITTEE continued…

The management of financial and other risks that

affect integrity of external reports issued by the
organisation.
the audit committee should meet annually with the
external auditor and internal auditor without
management being present (this creates an
opportunity for opinions/concerns to be raised
“privately”).
NOMINATIONS COMMITTEE
The board should consider establishing a nominations
committee to oversee
The process for nominating, electing and appointing directors.
Succession planning in respect of directors.
Evaluation of performance of the board.
Composition:
All members of the nominations committee should be non-
executive directors.
The majority of members should be independent non-executive
directors.
In terms of King IV, the chairperson of the board (assumed to be
an independent nonexecutive director) should be a member of
the committee and may be elected as chair.
RISK GOVERNANCE COMMITTEE
The board should consider allocating the oversight of risk governance
to a dedicated committee, or adding it to the responsibilities of another
committee e.g. the audit committee.
Composition:
The committee should include at least three directors.
The committee should be made up of executive and non-executive
directors the majority of whom are non-executive.
The chairperson of the board may be a member of the risk committee
and may be the chairperson.
If the audit and risk committees are separate there should be an
overlap of membership, i.e. certain individuals serving on both
committees.
REMUNERATION COMMITTEE
The board should consider allocating the oversight of
remuneration to a dedicated committee or adding it to the
responsibilities of another committee.
Composition:
All members of the committee should be non-executive
directors.
The majority of members should be independent non-
executive directors.
The chairperson of the committee should be a non-
executive director.
The chairperson of the board should not be the chairperson
of the remuneration committee.
SOCIAL AND ETHICS COMMITTEE
For companies that are not required in terms of the statute, to appoint a social
and ethics committee, the board should consider allocating the oversight of,
and reporting on:
-organisational ethics,
-responsible corporate citizenship,
-sustainable development and
-stakeholder relationships
to a dedicated committee or adding them to the responsibilities of another
committee.
Composition:
The committee should include executive and non-executive directors.
The majority should be non-executive directors.
The committee should consist of no less than three directors.
The chairperson of the board may be a member of the committee but
should not be its chairperson.