King IV is coming, but why?

The final report, which will replace King III as the benchmark for good corporate governance in South Africa, is expected to be launched on 1 November.

While there have been concerns that this review will simply increase the burden of compliance on business, the Institute of Directors in Southern Africa (IoDSA) argues that the intention is quite the opposite. Speaking at a recent presentation at law firm Webber Wentzel, the project lead at IoDSA, Ansi Ramalho, explained that the new report and the code it contains do not completely re-imagine what is required.

“There is nothing to be apprehensive about when you think of King IV,” she said. “It is more a change in approach than a complete switch. Those organisations that have engaged with King III and have been serious about implementing and applying it will probably find that they are already applying King IV as it stands.”

The significance of the new report is therefore not that it introduces new standards, but that it sets them out in a different way. Specifically the task team responsible for the report had three aspirations for improving the corporate governance landscape, and it is these that set King IV apart.

Box-ticking

The first of them is that IoDSA wanted to shift the understanding of corporate governance from a box-ticking approach to one where there is “mindful application”.

“Too often organisations and companies have spreadsheets with all of the corporate governance requirements on them and simply go down the list checking if they comply,” said Ramalho. “But those mechanical things are just the quantitative aspects of corporate governance. It’s not that they aren’t important, but you can’t stop there.”

What King IV aims to do is introduce the qualitative aspect – for organisations to appreciate the intent behind the required practices.

Value add

This feeds into the second aspiration behind the creation of King IV, which is that King IV wants to lead organisations to see the value in what they are doing.

“If you focus on the practices without understanding the intent behind them, you follow box ticking,” said Ramalho. “But when you understand why you are implementing these practices, and understand the value that they can produce, then you move away from an attitude of grudge compliance to one of implementation to achieve a certain value.

“For instance, I might have a board charter, but what is the quality of it?” she explained. “Does it actually make a difference to the way my board operates? Does it make my board more effective?”

It is only worth having a board charter if it makes a qualitative difference, and it is this type of thinking that King IV seeks to introduce – that practices should be followed not simply because they are prescribed, but because the organisation sees the benefit in them.

Universally applicable

The third aspiration behind King IV is that it should be more practically applicable to all organisations in South Africa and not just big corporates.

“King III said that it was applicable to all organisations, but we found that many would get back to us and say I don’t have shareholders, so how does this apply to me,” Ramalho said. “Or I’m a small business and I can’t afford to have a majority of independent or non-executive directors on my board, so it’s not applicable.”

The King committee therefore took responsibility for explaining how to interpret King IV in different contexts. The committee issued supplements for small and medium enterprises (SMEs), non-profit organisations, state-owned enterprises, retirement funds and municipalities to specifically guide how good corporate governance can be applied in these kinds of organisations.

The importance of this is that good corporate governance needs to be universal.

“Good corporate governance is essentially a system of checks and balances,” said Ramalho. “Management is accountable to the board and the board is accountable to shareholders. But if you have shareholders who are not understanding and following good corporate governance themselves, how can they hold the board to account?”

In this respect, it is critical that pension funds and asset managers take their own corporate governance seriously, as well and their responsibilities for ensuring good corporate governance at the companies they invest in.

“In the same way, if the SMEs that form part of the supply chain of a company affect the reputation of their customer by their unethical practices, that affects the whole corporate governance system,” Ramalho said. “And in the case of non-profit organisations, they can perform an advocacy role by holding businesses accountable for the impact they have on society and the environment. They need to understand the levers they can use to do that, but they also need to set the example themselves.”

The importance of this is that it is only when good corporate governance becomes pervasive that it becomes fully effective.

“You cannot just tweak things at one end and expect the whole system to work,” Ramalho said. “You have to address the whole system.”