In the Introduction King III states that “All entities should apply the Principles in the Code and consider the best practice recommendations in the Report.

Rules and principles

A report and code of governance practices, such as King III, are principle-based and not rule-based. Legislation is rule-based and therefore one would refer to complying with the provisions of legislation. However, one does not “comply” with a principle but rather “apply” a principle. This is the reason why the King III Committee decided to follow the “apply or explain” approach as opposed to “comply and explain” as in King II.

Beyond a box-ticking exercise

“Comply or explain” could encourage a box-ticking mind-set as comply denotes a definitive yes or no answer. Apply or explain requires a much more considered approach. It is often not a question of whether to apply or not but rather how to apply the principle. The practice recommendations in King III provide guidance regarding how these Principles could potentially find application. An organisation could therefore, apply a principle by implementing the practice recommendations or it could decide to implement a different practice that still results in achieving the objective of the Principle. Explaining how the principle and best practice recommendations were applied, or if not applied, the reasons therefor, results in compliance.
When applying a principle it is no longer possible to hide behind the letter thereof in order to escape that which the principle sets out to bring about. Appliance goes beyond compliance.

Flexibility

The benefit of having sound governance practices in a voluntary code rather than legislation is that it provides for flexibility that takes account of the nature, size and complexity of the organisation. The manner of application will be different for each organisation. This is different from legislation where one size needs to fit all. 

What guides the manner of application?

In their consideration of how these Principles apply directors should have regard to firstly, the best interest of the company and secondly, the overarching principles of sound governance, namely Responsibility, Accountability, Fairness and Transparency (RAFT). These are not separate considerations but are connected.
Directors have a fiduciary duty towards the organisation that they serve. When application of the Principles in King III is considered, the best interest of the organisation will be guiding directors in how the Principles are to be applied. It means that the board needs to apply its mind to each of the principles in King III in order to arrive at an answer of how the substance of the principle could be achieved talking into account the nature, size and complexity of the organisation.

For directors to appreciate the substance or spirit of the detailed Principles contained in King III, these should be understood in the context of RAFT. Each of the specific Principles in King III aims at attaining some or all of these overarching principles as expressed in RAFT and boards should interpret it as such.

An example of how to apply and explain

The disclosure of remuneration could be used as an example of how to apply or explain: The relevant King III Principle states that companies should disclose the remuneration of each individual director and certain senior executives. The best practice recommendation under this Principle mentions that the salaries of the three highest employees who are not directors should be disclosed. This recommendation is clearly made with a larger company in mind. For a small company it may be against the best interest to apply the practice recommendation of disclosing the three highest paid employees’ remuneration who are not directors due to the controversy that it may cause within the organisation. The three highest employees who are not directors may not fall within the range of “senior executives” but could be administrative staff. A small company with 20 odd employees cannot be compared to, for instance, a bank where there a quite a number of senior employees that are very high salary earners. The substance of the Principle is that there should be transparency and all that the practice recommendation is trying to achieve is to prevent limited disclosure through hiding behind the form or letter thereof.