ACC2018S

Corporate Governance I

Guidance and Summary Notes – King IV

0
King IV – Guidance
The King IV report is 122 pages long. In terms of how to go about reading the King IV report,
please follow the guidance below:
It is recommended that the whole King IV report be read. However, the following sections are
examinable in this course and is an area of focus

• Part 1 - The glossary of terms (Pages 9 -18)

• Part 2 - The fundamental concepts of King (Pages 20 – 27)
• Part 3 – Application and disclosure (35 – 38)
• Part 5 – The whole of part 5 is examinable (Pages 43 – 73)
Please note that the page numbers refer to the page numbers of the actual hardcopy document
–you will need to look at the page number on the bottom right of the page when using the PDF.

1
King IV - Summary
King IV is a report that sets out principles and practices that entities can put in place for good corporate
governance.

Corporate governance is a method of governing the company, by instating its own customs, policies and
laws to its employees from the highest to the lowest levels

Corporate governance is intended to increase the accountability of your company

Layout of King IV:

• Glossary
• Fundamental Concepts
• Application and Disclosure
• King IV on a Page
• The King Code
• Sector Supplements

Glossary

Helpful to understand certain terms mentioned in the report

Fundamental Concepts

Definition of corporate governance as per King IV:

The exercise of ethical and effective leadership by the governing body towards the achievement of:

- Ethical culture

- Good performance

- Effective control

- Legitimacy

Ethical leadership and effective leadership should complement and enforce one another

Concepts used in King IV:

Application and Disclosure

2
Who is King IV applicable to?

▪ King IV is required to be applied by all listed entities

▪ For all other businesses King IV is optional
▪ King IV can also apply to:
o Municipalities
o SME's
o State-owned entities and
o Non-profit organisations.

What is a Governing body of Directors?

▪ A group of individuals appointed to manage the strategy and day-to-day activities of the
organisation

Why is a Governing body needed?

▪ Shareholders are owners

▪ However, it is impractical for them to participate in day-to-day activities of company
▪ Thus, a group of individuals are appointed to manage the strategy and day-to-day activities of
the organisation

What are the RISKS associated with the Governing body?

▪ Directors putting their interests above those of shareholders

▪ Conflicts of interest and misuse of company assets
▪ Inappropriate remuneration schemes

King IV takes on an “apply and explain” approach

This means that entities should apply the principles provided in King IV, and explain how those
principles are applied using practices the entity conducts.

3
Part 5.1-5.5: King IV Code on Corporate Governance
This lists the principles and recommended practices

Part 5.1: Leadership, Ethics, and Corporate Citizenship (Contains the first 3 principles
which relate to ethics)

“The governing body should …

1. … lead ethically and effectively”

directors should individual and collective cultivate and exhibit certain characteristics
2. … govern the ethics of the organisation in a way that supports the establishment of an ethical
culture”
The organisation should have effective codes of conduct and ethics policies, that the
management of ethics is overseen well
3. …ensure that the organisation is and is seen to be a responsible corporate citizen”
The organisation should obey the law, having values, strategies and conduct that is congruent
with being a responsible corporate citizen.

Policies and
procedures

must be
Good farth they -

Best interest -
lying/deceiving
impact or company
reputation loss
-

Using the above diagram, apply the first 3 principles using the guidelines below:
financial
-
from
Principle 1: When someone on the governing body does something wrong, then there is a potential
that a characteristic (ICRAFT) in Principle 1 are not being complied with. fines .

Individual and collective characteristics (ICRAFT):

• Integrity (act in good faith, avoid conflicts of interest, act beyond legal compliance)
• Competence (have required skills & knowledge)
• Responsibility (for ethics generally, and specifically for exercising courage in the organisation’s
best interests, anticipating and dealing with negative outcomes, and devoting sufficient time)

4
 • Accountability (be willing to answer for the execution of responsibilities, even when delegated)
• Fairness (adopt a stakeholder-inclusive approach, and avoid harming natural environment,

shoul as
society or future generations)

Hidingsomething
• Transparency (in respect of governance role) >-
that

Principle 2: When there is a concern regarding the ethical policies and procedures that a company
has/ should have in place

Codes of conduct and ethics policies should:

• Deal with internal & external stakeholders, plus broader society

• Address the key ethical risks
• Be published in appropriate media
• Be referred to in supplier & employee contracts
• Be included in employee induction & training

Effective management of ethics requires:

• Ethical standards to be applied in recruiting, evaluating and rewarding employees

• Having sanctions & remedies in place for breaches
• Protected disclosure or whistle-blowing mechanisms
• Monitoring of adherence to ethical standards

Principle 3: When there is a concern regarding the organisation as a whole,

Over and above obeying the law, organisations should oversee and monitor the consequences of its
activities and outputs against the following measures and targets:

• Workplace (including employment equity; fair remuneration; and safety, health, dignity &
development of employees)
• Economy (including economic transformation; prevention, detection and response to fraud &
corruption; responsible & transparent tax policy)
• Society (including public health & safety; consumer protection; community development;
protection of human rights)
• Environment (including pollution & waste disposal; biodiversity)

5
Part 5.2: Strategy, Performance and Reporting
Principle 4:
The governing body 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 governing body should steer and set the direction for the realisation of the company’s core
purpose and values through its strategy.
• The governing body should delegate to management the formulation and development of the
company’s strategy.
• The governing body should exercise ongoing oversight of the implementation of the strategy
by management.

So the Governing body directs and oversees he strategy that is executed by management.

Principle 5:
The Governing body should ensure that reports issued by the company enable stakeholders to make
informed assessments of the company’s performance, and its short, medium, and long-term prospects.

The governing body should:

• Oversee that the company issues an integrated report at least annually.
• Should ensure the integrity of external reports as provided for in Part 5.4.
• Oversee that certain information (corporate governance disclosures, integrated reports, annual
financial statements and other external reports)

Principle 6:
The governing body should serve as the focal point and custodian of the corporate governance of the
company.

The governing body should exercise its leadership role by

• Steering the company and setting its strategic direction
• Approving policy and planning that give effect to the direction
• Overseeing and monitoring of implementation and execution by management
• Ensuring accountability for the company’s performance by means of, among others, reporting
and disclosure.
6
Principle 7:
The governing body should comprise the appropriate balance of knowledge, skills, experience,
diversity and independence for it to discharge its governance role and responsibilities objectively and
effectively

Composition:

• Governing body should comprise a majority of non-executive directors, majority of whom are
independent
o Independent and non-executive governing body members provide a more objective
perspective to the governing body
• The CEO and at least one other executive(could be the CFO or another executive) should be
appointed to the governing body
o Their function is to provide the governing body with insight into the day-to-day
operations of the company
• The governing body should promote diversity in its membership in areas such as field of
knowledge, skills, experience, age, culture, race and gender
o Diverse groups are more effective at carrying out their functions than non-diverse
groups

7
 • Governing body should set targets for race and gender representation in its membership
o This is to drive transformation across companies
• Governing body should establish arrangements for periodic, staggered rotation of its members.
o To invigorate governing body’s capabilities with new expertise and perspectives
• Governing body should establish a succession plan for its membership
o To ensure the appropriate identification, mentorship, and development of future
candidates

Nomination, election, and appointment:

Entire process of nomination, election and appointment should be formal and transparent

PRIOR TO NOMINATION

• Governing body should consider:

o The collective knowledge, skills and experience required

o The diversity of the governing body

o Whether candidate meets the appropriate fit and criteria

• Candidate’s background should be independently investigated

• Nomination for re-election should be based on member’s performance including attendance at
meetings
• Nomination should be approved by the governing body as a whole

UPON ELECTION

• The terms and conditions for servings as a director should be formalised in a letter of
appointment

AFTER ELECTION

• Incoming members should undergo induction

• Members with no or limited governance experience should undergo mentorship and

encouraged to undergo training

• A programme of professional development and regular briefings on corporate governance and

other matters should be provided to all directors

8
Independence and conflicts
Definition of Independence

Non-executive directors may be categorised as independent by the governing body if it concludes that
there is no interest, position, association, or relationship which, when judged from the perspective of a
reasonable and informed third party, is likely to influence unduly or cause bias in decision making in the
best interests of the company

Indicators for Non-Independence

A member may not be independent if that member

o Is, or is a representative a significant provider of capital

o Participates in the company’s share-based incentive scheme

o Owns securities in the company, value of which is material to them

o Has been an executive manager during the preceding three years

o Has been the designated external auditor or a key member of the audit team during
the preceding three years

o Is a significant or ongoing professional advisor

o Is a member of the governing body or the executive management of a significant

customer or supplier

o Is a member of the governing body or the executive management of a related party

[See glossary for definition] to the organisation

o Is entitled to remuneration contingent on the company’s performance

• Annually (or whenever there are significant changes):

Each member should submit to the governing body a declaration of all financial, economic and
other interests held by them or a related party
• At the beginning of each meeting:
Each member should declare whether any of them has any conflict of interest with respect to a
matter on the agenda
• Independent non-executives serving longer than 9 years need to undergo an assessment for
objectivity every year after 9 years

9
Chair
The governing body should appoint an independent non-executive as the chair of the governing body
The chair, with the governing body, should determine the number of outside professional positions the
chair can take up
Governing body should appoint an independent non-executive as the lead independent who’s function
is to:
a. Lead in the absence of the chair
b. Serve as a sounding governing body for the chair
c. Act as an intermediary between chair and other governing body members
d. Deal with shareholders’ concerns where other channels have failed
e. Strengthen independence of the governing body
f. Chair discussions of the governing body if the chair has a conflict of interest
g. Lead the performance appraisal of the chair

The governing body should ensure that there is a succession plan in place for the chair position

CEO becoming chair

The CEO should not also chair the governing body

A retired CEO should not become chair of the governing body until three complete years have passed

Chair being a member and chairing committees:

Committee Be a member? Chair the committee?

Audit No No
Remuneration Yes No
Nominations Yes Yes
Risk Yes Yes
Social & Ethics Yes No

Committees
Principle 8: Committees of the governing body
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.

General
• Each committee should have a minimum of three members
• Every member of the governing body is entitled to attend any committee meeting as an
observer but the member is not entitled to
Participate (unless the chair gives consent)
A vote
Fees for attendance (unless payment is agreed by governing body and shareholders.)
• The governing body should ensure that each committee, as a whole, has the necessary
knowledge, skills, experience and capacity to execute its duties effectively.

10
 Audit Committee
iNED – Independent Non-Executive
Director
Chair in diagram refers to chair
of the particular committee NED - Non-Executive Director

ED - Executive Director

• All members
should be iNEDs
• Chair of audit committee should be an iNED
• Chair of the governing body should not be a member
• Audit committee should provide oversight of:
o The effectiveness of company’s assurance functions and services
o The integrity of the annual financial statements
• Members should collectively have the necessary financial literacy, skills and experience to
execute duties effectively.
• Committee should meet annually with the internal and external auditors, respectively, without
management.
• If the governing body delegates risk governance to the audit committee, the audit committee
should satisfy itself that it dedicates sufficient time to this responsibility.

Nominations Committee

• All members should be NEDs

• Majority should be iNEDs
• Chair of the governing body should be a member
• Nominations committee should be responsible for:

a. The process of nominating, electing, and appointing members of the governing body

b. Succession planning in respect of members of the governing body

c. Evaluation of the performance of the governing body

11
Risk Committee

• Risk Committee should have both NEDs and EDs

• Majority should be NEDs

Remuneration Committee

• All members should be NEDs

• Majority should be iNEDs
• Committee should be chaired by an iNED
• Chair of governing body should not chair committee

Social & Ethics Committee

• All members should be NEDs

• Majority should be iNEDs
• Committee should be chaired by an iNED
• Chair of governing body should not chair committee

12
Principle 9:
Performance evaluation

The governing body should ensure that the evaluation of its own performance and that of its own
committees, its chair, and its individual members, support continued improvement in its performance
and effectiveness

• The LID or another iNED should lead the evaluation of the chair
• A formal, external process should be followed for evaluating the governing body’s
performance.
• The performance evaluation should be performed at least every two years.

Principle 10:
The governing body should ensure that the appointment of, and delegation to, management contribute
to role clarity and the effective exercise of authority and responsibilities.

CEO

• The governing body should appoint the CEO

• The CEO should be responsible for leading the implementation and execution of strategy
• The CEO should serve as the chief link between the management and the governing body
• The CEO, with the governing body, should determine the number of outside professional
positions the CEO can take up
• The governing body should ensure that there is a succession plan in place for the CEO position

Delegation

The governing body should decide which powers are reserved for itself and which are delegated to
management

The governing body should ensure that key management positions are

a. headed by an individual with the necessary competence and authority

b. Adequately resourced

The governing body should ensure there is succession planning for executive management and other
key positions

Company Secretary

The role of a company secretary is to advice and guide the governing body on the execution of their
duties with reference to legislation affecting the company.

The governing body should appoint a company secretary

The governing body should have the primary responsibility of removing the company secretary

NB The company secretary is not a member of the governing body

13
Principle 11
The governing body should govern risk in a way that supports the organization in setting and achieving
its strategic objectives

Principle 12
The governing body should govern technology and information in a way that supports the company
setting and achieving its strategic objectives

Principle 13
The governing body should govern compliance with applicable laws and adopted, non-binding rules,
codes and standards in a way that supports the company being ethical and a good corporate citizen

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

Remuneration Governance

• The governing body should approve policy that articulates and effect to its direction of fair,
responsible and transparent remuneration.
• The remuneration policy should address organisation-wide remuneration and include provision
for:

o Arrangements towards ensuring that remuneration of executive management is fair

and responsible in the context of overall remuneration

o The use of performance measures that support positive outcomes across the
economic, social and environmental context

o The voting by shareholders on remuneration policy

14
VOTING ON REMUNERATION

• Fees for non-executive directors must be submitted for approval by special resolution by
shareholders with the two years preceding payment.

• The remuneration policy should be tabled every year for separate non-binding advisory votes
by the shareholders at the AGM

• If more than 25% of the votes are against the remuneration policy, the following measures
should be taken at minimum:

• An engagement process to ascertain the reasons for the dissenting votes

• Appropriately addressing legitimate and reasonable objections and concerns raised

Principle 15:
The governing body should ensure that assurance services and functions enable an effective control
environment, and that these support the integrity of information for internal decision-making and of
the organization’s external reports.

Assurance of external reports

• The governing body should assume responsibility for the integrity of external reports

Internal Audit

• ROLE OF INTERNAL AUDIT

o Evaluate the company’s governance processes

o Objective assessment of the adequacy and effectiveness of risk management and

internal controls

o Analysing and evaluating business processes and associated controls

o Providing information in relation to fraud, corruption, irregularities and unethical

behaviour.

• The governing body should assume responsibility for internal audit by setting the direction for
internal audit arrangements
• The governing body should delegate oversight of the internal audit to the audit committee
• The governing body should ensure that the internal audit function has the necessary skills and
resources to address the risks
• The position of chief audit executive (CAE) should be set up separately from that of
management who designs and implements controls
• The CAE should not be a member of executive management, but should attend executive
meetings by invitation

15
 • The governing body should approve the appointment of and have the primary responsibility
of removing the CAE
• The governing body should monitor on an ongoing basis that internal audit:

o Follows an approved risk-based internal audit plan; and

o Reviews the organisational risk profile regularly, and proposes adaptations to the
internal audit plan accordingly

Principle 16:
In the execution of its governance role and responsibilities, the governing body should adopt a
stakeholder-inclusive approach that balances the needs, interests and expectations of material
stakeholders in the best interests of the company over time.

Stakeholder Relationship

All directors should be available at the AGM

The governing body should ensure that the designated audit partner attends the AGM

The governing body should ensure that shareholders are equitably treated

The governing body of a holding company should assume responsibility for governance across the
group

16
Answering a Question
EVERY ANSWER SHOULD HAVE TWO PARTS

1. PRINCIPLE: State the principle

This is the principle/practice contained in the King Code

2. APPLICATION: Apply the principle to the scenario

State how the principle has not been applied in the scenario

EXAMPLE

(Principle)

All governing body committees should have a minimum of three members

(Application)

The remuneration committee only has 2 members

KING IV TERMINOLOGY

“Must” is used specifically to indicate a legal obligation.

“Should”, with reference to a principle indicates an aspiration or ideal state.

“Should”, with reference to a recommendation indicates a recommended course of action that is

particularly suitable, without mentioning or excluding other possibilities.

“May” describes a recommendation that is permissible but not considered essential.

17