King Report Corporate Governance

8/6/2019 King Report Corporate Governance

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King Report on CorporateGovernance for South Africa

W h a t i t m e a n s t o y o u

2002


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2002

King Report on CorporateGovernance for South Africa


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w w w . c l i f f e d e k k e r . c o m


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Introdu

Directors and their Responsib

Risk Manage

Internal A

Integrated Sustainability Repo

Accounting and Aud


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Introduction

In 1994 the King Report on Corporate Governance (King I)

King Committee on Corporate Governance, headed by form

Mervyn King S.C. King I, incorporating a Code of Corporat

Conduct, was the first of its kind in the country and was aim

highest standards of corporate governance in South Africa

Over and above the financial and regulatory aspects of cor

King I advocated an integrated approach to good governanc

wide range of stakeholders. Although groundbreaking at t

global economic environment together with recent legis

have necessitated that King I be updated. To this end, the

Corporate Governance developed the King Report on Corpo

South Africa, 2002 (King II).

King II acknowledges that there is a move away from the s

is, profit for shareholders) to a triple bottom line, which emb

environmental and social aspects of a companys activities

King Committee:

...successful governance in the world in the 21st century

adopt an inclusive and not exclusive approach. The comp

institutional activism and there must be greater emphasis o

non-financial aspects of its performance. Boards must apply

accountability, responsibility and transparency to all acts o

accountable to the company but also responsive and resp

companys identified stakeholders. The correct balance b

with governance principles and performance in an entrepren

must be found, but this will be specific to each company.


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1. Who should be o

It is recommended that South African companies have a unitary

This should comprise executive and non-executive directors, pre

majority of non-executive directors, of whom a sufficient numb

independent of management in order to ensure the protection

shareholders interests.

2. Functions

2.1 The board must retain full and effective control over the

responsible for monitoring management in respect of imboard plans and strategies. The board, with the guidance

secretary, has the duty of ensuring that the company com

relevant laws, regulations and codes of business pract

2.2 The board is ultimately responsible for the affairs of the c

delegation of authority to any committee does not discharge

of the board in respect of the actions and decisions of a

2.3 The board must give strategic direction to the company.2.4 The board is responsible for the appointment of the chief e

and the succession process.

2.5 It is recommended that the board has an agreed procedur

directors are able to seek independent professional adv

need arise. The professional services procured should

companys expense.

2.6 The board should develop a corporate code of conduct thissues that relate, inter alia, to conflicts of interest, partic

to directors and management.

2.7 Insofar as it is practical, the board is responsible for a

rectifying issues in respect of the size, diversity and demo

Directors anRespons


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3. Is there a distinction betwee

and Chief

3.1 The chairperson is responsible for the effective fun

and the chief executive officer is responsible for the rubusiness. There should be a clear distinction betw

3.2 The chairpersons primary function is to preside over

and ensure the smooth functioning of the board. Th

presides over the company shareholders meetings

performed by the chairperson include, inter alia:

the overall leadership of the board; participating in the selection of board members;

monitoring and evaluating board and director app

formulating an annual work plan for the board;

acting as the main informal link between the boa

maintaining relations with the companys shareho

3.3 The chief executive officers task is to run the businthe policies and strategies adopted by the board.

3.4 Where the roles of the chairperson and the chief e

combined, there should be an independent non-exe

as the deputy chairperson. Alternatively, there s

independent non-executive director element on the

to combine roles must be justified each year in the com3.5 The chairperson or sub-committee appointed by the

the performance of the chief executive officer. Suc

performed on an annual basis.

Directors and theirResponsibilities


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Independent Director: A non-executive director who is no

of a shareholder, has not been employed by the compan

capacity for the preceding three financial years and h

contractual relationship or interest in the company or

4.2 Shadow directors are discouraged.4.3 A formal orientation program is recommended to familiar

with the companys structure, operations and policies.

4.4 Directors should be regularly updated on any new or pen

regulations and codes of best business practice.

4.5 New directors must receive developmental and educatio

respect of their duties and responsibilities to the compa4.6 An executive directors fixed term service contract shoul

three years. Should it exceed such period, full disclosure o

pertaining to such decision must be provided to the sha

the shareholders consent must be obtained.

4.7 A formal and transparent remuneration policy must be d

company in respect of director remuneration. A StatemeRemuneration Philosophy published in the annual report m

this policy.

5. Remunerati

5.1 The company should appoint a remuneration committee.

should consist mainly of independent non-executive dire

5.2 The function of this committee should be to make recom

the board in respect of remuneration packages for execu

5 3 Membership of the remuneration committee must be d

Directors anRespons


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6. Allocation

6.1 A vesting period should be applied in respect of the allo

to non-executive directors in order to dissuade short-te

6.2 Boards should have regard to the possibilities andof the removal or resignation of directors prior to the m

period. The impact on a directors independence mu

6.3 Any re-pricing of share options must be subject to s

The shareholders must be provided with all necessary d

directors, executive or non-executive, that stand

proposal.

6.4 In the event that share options are issued at a disco

price, a separate vote must be cast by the sharehol

clause in the trust deed creating the share schem

proposed to the trust deed that would authorise all

options at discounts must be approved by the shar

6.5 Full disclosure by directors on an individual basis

respect of all share schemes and incentive sche

7.1 Board committees should be established to aid the b

in giving detailed attention to specific areas of the d

responsibilities. The board of directors is solely resp

and decisions of these committees.



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7.5 Board committees should be empowered to take independ

advice where circumstances dictate, at the companys ex

policy must be agreed to at board level.

7.6 The composition of the committees (especially the remu

and nomination committees) should be detailed in the atogether with information containing a description of the c

responsibilities, the number of meetings held and any othe

may be of relevance to shareholders.

7.7 It is recommended that these committees be subject to r

and monitoring by the board in order to ensure that the

duties and responsibilities are being effectively carried o

8. Evaluation of

The nomination committee or a committee appointed for the fu

similar purpose should regularly review and assess the board, tand the individual directors in order to assess the effectivenes

and committees as a whole and to evaluate performance on a

individual level. It is recommended that these evaluations take

annual basis.

9. Dealing

9.1 A listed company must have a policy and practice restric

officers and other employees from dealing in the compa

Directors anRespons


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10. Annual Reports and

10.1 Every board should have a charter that sets out the res

of the board. The charter should be disclosed in the co

10.2 The board must ensure that each item of special bunotice of the annual general meeting or any shareh

accompanied by a full explanation of the justificatio

of the proposed resolution.

10.3 Shareholders should be encouraged by the board to

meetings. All directors should be present at the an

and particularly the chairpersons of the various com

11. Who is the Co

11.1 In terms of section 268A of the Companies Act, the app

secretary in public companies with a share capital

11.2 The Companies Act makes provision for the appoin

duties of the company secretary. The board is respons

of the company secretary and should ensure that t

is empowered to enable him or her to perform the du

11.3The company secretary must guide the board in resresponsibilities and update the board on all new an

and regulations that may have an effect on the oper

11.4 The company secretary should play a role in the i

inexperienced directors



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1. What is Risk

1.1 Risk management is the identification and evaluation of actareas of risk as they pertain to a company, followed of termination, transfer, acceptance (tolerance) or mitigat

1.2 Risk management is therefore a process that utilises intas a measure to mitigate and control risk.

2. Who is responsible for Risk

2.1 The board is responsible for ensuring that the company an effective ongoing process to identify risk, measure itimpact against a set of assumptions, and then activate wnecessary to proactively manage these risks.

2.2 The board should therefore decide on what risk the cprepared to take and what risks it will not take in pugoals and objectives.

2.3 The risk management process requires an inclusive teamwhich is effective across the company. A committee comp

directors and members of senior management, who are the board, are best placed to evaluate risk in the compato the board.

3. What should Risk Assessm

Risk assessment should address the companys exposure to the

physical and operational risks; human resource risks;

technical risks;

business continuity and disaster recovery;

credit and market risks;

Risk Mana


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5. Assimilating Risk to the Co

5.1 The board should implement a comprehensive syste

that risks are mitigated and that the companys object

5.2 The control environment should set the tone of th

ethical values, managements philosophy and the com

5.3 Five essential aspects of control are identified, nam

control environment;

risk assessment;

control activities;

information and communications;

monitoring.5.4 Any vulnerability in the achievement of the company

caused by internal or external risk factors, should b

time, reported by the systems of control in place

appropriate inter vention. Not only will this improve

profile, thereby enhancing the companys attractio

investment, but it will also enhance the positive influences5.5 The company should also consider the need for a c

process (whistle-blowing) covering fraud and other r

6. How is Risk Man

6.1 The board is responsible for setting risk tolerance a

and policies. It is also the boards responsibility to re

of these policies on a regular basis and in a manner

are clearly defined for the benefit of management to

out their responsibilities.

6 2 I i i h i k d i

Risk Management


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7. Where should a Companys Policy on Risk Managemen

7.1 The board should disclose how the company has dealt wit

in its annual report.

7.2 At a minimum, the board should disclose:

that it is accountable for the process of risk managemen

of internal control, which is regularly reviewed for effec

establishing appropriate risk and control policies and

these throughout the company;

that there is an ongoing process for identifying, evaluati

the significant risks faced by the company, which has

the year under review and up to the date of approval o

report and financial statements;

that there is an adequate and effective system of in

place to mitigate the significant risks faced by the c

acceptable level;

that there is a documented and tested process in plac

the company to continue its critical business proces

of a disastrous incident impacting on its activities; where material joint ventures and associates have

with as par t of the group for the purposes of a

recommendations;

any additional information in the annual report to a

understanding of the companys risk management pr

system of internal control.

7.3 Where the board cannot make any of the disclosures seit should state this fact and provide a suitable explanati

8. Summary of Risk

Risk Mana


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4. Can Internal Auditors be Employees of t

4.1 King II recognises that the fact that internal auditors maof the company does not of itself impair their objectivity.

4.2 The internal audit activity should be independent of the

and internal auditors should be objective in performing t

5. What is the role and function of I

5.1 The objective of internal audit is to assist members of exemanagement in the effective discharge of their duties anTo this end, internal audit furnishes them with analysrecommendations, counsel and information regarding the a

5.2 An effective internal audit function should provide: assurance that the management processes are adequa

monitor significant risks; confirmation of the effective operation of the establish

control systems; credible processes for feedback on risk management a

objective confirmation that the board receives the right quand information from management and that this inform

5.3 Adherence to the standards proposed will ensure a comand understanding of the requirements for internal audit

6. What should the scope of Inte

6.1 Internal audit should consider relevant strategic, busoperational risks and their significance, taking accountsenior managements and its own professional judgem

6.2 The internal audit plan, which should be approved by the should be based on risk assessment as well as issues h

Interna


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1. What is Integrated Sustain

1.1 The concept of sustainability has recently been reco

in a business context to mean the achievement of ba

economic, social and environmental performance (

1.2 King II seeks to provide indicative, aspirational guidecompanies who are seeking to improve on their dis

recognise the importance of the relationship betwe

the community in which it exists.

2. How is Integrated Sustainability Re

2.1 Every company should report at least annually on th

of its social, transformation, ethical, safety, health

management policies and practices.

2.2 The board of directors should, in determining what is

take into account the environment in which the com

2.3 A South African board should disclose:

the HIV/Aids strategy plan and policies the comp

address and manage the potential impact of HIV/

the companys formal procurement policies that ta

economic empowerment;

whether it has developed and implemented a defi

and practices in the company based on a clearly art

2.4 Principles of reliability, relevance, clarity, compa

and verifiability should govern a companys public disc

information.

3. What is meant by Organisational Integrit

3 1 A company should demonstrate its commitment to o

Integrated SustainabilityReporting


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consistently enforcing appropriate discipline;

responding to offences and preventing reoccurrences.

3.3 The disclosure of the code of ethics should include a st

extent to which the directors believe the ethical standard

criteria are being met.

4. W

SHE stands for Safety, Health and Environment. King II has r

companies should have, as part of their objectives, the integrati

issues into their sustainability policies and procedures. This assist

achieving the triple bottom line goals.

5. Society and Transformation

5.1 Companies should value the diversity of approach, va

contribution which women and black people bring to the t

should develop mechanisms positively to reinforce the richnes

5.2 Companies should disclose the nature of policies and pplace to promote equal opportunities for the previously dis

terms of realising their full potential and reaching execut

the company.

6. Human Capital and what is requir

6.1 Human capital indicates the latent or potential value thaat all levels represent for a company. It has been recogn

development of human capital serves not only the ec

interests of the company itself, but also the requirements

within which the company operates.

Integrated SustaiRe


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1. How important is

In addition to being a statutory requirement, an external

independent and objective check on the way in which the

have been prepared and presented by the directors. An a

essential part of the checks and balances required and is on

of corporate governance.

2. What qualities should the Extern

The external auditors should: observe the highest level of business and profes

particular, their independence should not be imp

be objective and consciously aware of their accountab

3. Can the External Auditors also perform

3.1 The audit committee should set the principles for re

of the accounting firm of the external auditors for no

as management consultancy and corporate finance

3.2Audit committees should have the necessary businaddress external auditor independence on a case-b

preserving the companys ability to select its extern

services if that is in the best interests of the comp

3 3 In considering the external auditors independence

Accounting and Auditing


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4. Must Interim Reports be independe

4.1 This is not mandatory, although the audit committee sho

whether an independent review of the interim reports i

interests of the company.

4.2 King II recommends that, at a minimum, the audit comm

request that an independent review of the interim report

the auditors have qualified or disclaimed their opinion, o

adverse opinion, in the latest annual financial statement

4.3 Where an independent review is conducted, the audit co

report commenting on the independent report, together wreview report, should be tabled at the board meeting to adopt

4.4 Where an independent review was not conducted, a compreh

of the reasons why the audit committee concluded that

required should be tabled at the board meeting.

4.5 Where an independent review was not conducted, any p

interim results should be labelled unaudited.

5. What is the Boards responsib

Going Concern

5.1 South African Statements of Generally Accepted Account

(GAAP) state that, when preparing financial statements,

should make an assessment of the companys ability to

going concern. In addition, these statements of GAAP r

assessing going concern, management should take into

Accounting and A


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5.3 When the financial statements are not prepared on a

that fact should be disclosed, together with the basis

statements are prepared and the reason why th

considered to be a going concern.

5.4Directors should consider the position at the prevdetermine whether any of the significant factors ide

have changed in a way that affects the going concer

interim reporting stage.

6. Who should be on the

6.1 King II does not specify the size of the audit committe

appoint an audit committee that has a majority of inde

directors. The majority of the members of the audit

financially literate.

6.2 The chairperson should be an independent non-exec

the chairperson of the board. The chairperson sho

business, financial and leadership skills and s

communicator. King II recommends that the boa

not be a member of the audit committee and that t

consider if it is desirable for the chief executive offic

to attend only by invitation.6.3 Membership of the audit committee should be disc

report and the chairperson of the committee shoul

answer questions at the annual general meeting.

Accounting and Auditing


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reviewed every year. Companies should disclose in the

whether or not the audit committee has adopted formal te

and, if so, whether or not the committee has satisfied it

for the year, in compliance with its terms of reference.

7.3 The audit committee should review: the functioning of the internal control system;

the functioning of the internal audit department;

the risk areas of the companys operations to be cove

of the external and internal audits;

the reliability and accuracy of the financial informat

management and other users of financial information,

company should continue to use the services of the cu

external auditors;

any accounting or auditing concerns identified as a res

or external audits;

the companys compliance with legal and regulatory provisassociation, code of conduct, by-laws and the rules establi

7.4 The audit committee should, inter alia, also:

encourage communication between members of the board

management, the internal audit department and the e

confirm the internal audit departments charter and in

develop a direct, strong and candid relationship with the

review the scope and results of the external audit, its c

and the independence and objectivity of the external au

doing should review the nature and extent of any non-

Accounting and A


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1. How will Ki

1.1 The legal mechanisms to be relied on for enforcem

Code of Corporate Practices and Conduct (the Code

existing legal remedies, principally under the Comsection 424, dealing with liability of directors and o

or reckless conduct of a companys business) an

the provisions of the amended listing requirem

1.2 In order to prevent the Code from becoming too burd

King II is largely non-prescriptive in nature, complian

treated as a matter between boards and the stake

King II encourages greater activism by shareholders

financial press and relies heavily on disclosure as a

1.3 In this regard it is important to note that King II reco

changes and developments to existing legislation a

processes so as to ensure that role-players do not

to the Code and the provisions of King II. Boards sho

measures to achieve compliance with the Code an

King II and should monitor corporate governance is

to ensure that they are not caught unawares by chang

2. To whom

2.1 King II, including the Code, applies to the following

all companies with securities listed on the JSE;

Compliance and Enforcem


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King Report Corporate Governance

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