Edition: Dec 2014 - Feb 2015


King IV aims to hit target

Special invitation from Ansie Ramalho* for trustees to particpate in consultations on new draft.

As South Africans we have become spectators of ongoing sagas in corporate governance having gone wrong. Examples abound: ineffective boards that are unable to hold management appropriately to account; dysfunctional relationships between the board, management and shareholders; inadequate board-appointment and vetting processes; lack of succession planning; passive investors. Reflecting on this mayhem it is probably justifiable to question whether the King Code for Governance is serving its purpose.

Recent media coverage of respected PSG Group chairman Jannie Mouton, opining that "the King Code got it wrong", echoes some of this sentiment. He compared the failure of African Bank to the success of Capitec despite them being in the same industries and following similar business models. Mouton concluded that the board of African Bank was "too independent" to make a meaningful contribution.

This is a view with which I have much sympathy. Abounding instances show that we are often sacrificing industry knowledge and experience on the altar of board members’ independence. However, I would attribute this not to the King Code getting it wrong but rather to how we think about (and deal with) governance codes and recommendations.

Governance codes typically address the values of governance: accountability, fairness, responsibility and transparency. They also contain principles and recommend practices that would support these principles. The trick is for boards and directors to harness the creative tension between that which sets the context and purpose of governance implementation: the values and principles on the one hand, the practices on the other.

Often, however, the values and principles are all but ignored in favour of an inordinate focus on implementation of practices. Once practices are elevated to a status independent from the governance objective, we arrive at what is generally known as box-ticking. The trouble here is that we tap ourselves on the shoulder for having achieved good governance merely because the recommended practices are followed. This is tantamount to throwing a dart and then painting the target around where the dart has landed.

Independence is indeed a typical example of where application of practice without consideration for contextual purpose could lead. The primary role of the board is to direct the company by setting an effective strategy, then to oversee sound implementation. Appointment of a board that is independent but without the skills, experience and industry knowledge to fulfil this role competently leads to the kind of disasters we saw at African Bank and during the global financial crisis.

Ramalho . . . qualitative approach

A main reason why the King committee has decided to embark on the drafting of King IV is because it believes that the formatting and styling of the code could go a long way in fostering a more qualitative approach towards corporate governance. An example of the stylistic change that we have in mind is clearly to differentiate between principles and practices.

The idea is that principles should be higherorder objectives that are the same for all sectors and entities but that the practices will vary depending on whether these are recommended for a listed company, SME, non-profit organisation, public sector entity or pension fund.

If, for instance, the principle is that the board should be constituted so that there is a balance of power then one of the practices by which this can be achieved is to have a majority of directors who are independent of management. This is appropriate for listed companies. But due to the associated cost or regulated representation requirements, it may be prohibitive for other entities. So different practices need to be employed on a fit-for-purpose basis. This approach puts the emphasis on the outcome envisaged by the principle and allows for flexibility of application.

Another format change that can be expected towards the same end – a focus on qualitative governance – is to present the code in more concise and succinct language and style. As such, many of the existing principles and practice recommendations may fall away. There will also not be a significant departure from the solid foundations and philosophy set by King III. But corporate governance developments locally and internationally, which have to be catered for, will lead to some changes.

The intent is for the King IV drafting process to be widely consultative so that the resultant product is truly by South Africans and for South Africans. Asset owners such as pension funds wield significant power in ensuring that practices are not employed in a mindless fashion in investee companies. Our invitation, therefore, goes to trustees of pension funds especially to participate in this endeavour to move us faster towards our goals as a nation.

*Ansie Ramalho is the King IV project lead at the Institute of Directors in Southern Africa.