King update promises better rules, not more
12 November 2014
THERE has been mixed reaction to the announcement that the 2009 King Report on governance is about to be updated. Some have welcomed this revision in light of recent corporate governance developments that have outpaced King III — but others bemoan "more regulation”.
Contemplating these competing reactions, it might be helpful to consider why it is that cars have brakes.
Consider the following realities of the South African governance landscape: a fair number of public sector entities have come to a virtual standstill and acting chief executives are holding the fort.
In some cases, this is a consequence of protracted disciplinary proceedings against the incumbent CEO. In others, the reasons for allowing an acting chief executive to remain in charge for extended periods are vaguer.
Either way, the governance failures in these instances are patently obvious: deficient executive appointment processes, an inability to deal effectively with management oversight and disciplinary issues, a lack of clarity in terms of accountability and reporting lines and a lack of succession planning.
Another area of governance in which no brakes have been applied is that of excessive executive remuneration. Now, admittedly, there are underlying systemic issues that exacerbate the problem. But there is no denying that boards and remuneration committees have to acknowledge their contribution to the escalation of executive pay over the past 20 years.
You can cite any number of examples that only underscore how governance is an indispensable prerequisite for flourishing corporations. This brings me back to the original question of why cars have brakes. The somewhat surprising answer is that cars have brakes so that they can go faster.
Similarly, the purpose of the update to King III is not to present a compliance hurdle, but rather to allow directors and other officials charged with governance duties to become more nimble in an ever more complex and unpredictable environment.
South Africa and the King committee have received many accolades both locally and abroad for the progressive thinking and philosophies behind King III.
But from the vantage point of the Institute of Directors in Southern Africa, as the professional body, it has also become clear that not everyone is partaking and benefiting from this achievement.
For example, public entities have a "protocol on governance” that is based on an earlier version of the King report — testimony to the lacklustre reception of King III. Equally, some nonprofit entities also deem King III wholly unachievable owing to a lack of resources to meet what they believe are requirements for expensive and complicated structures. Even some small and medium-sized firms share the view that corporate governance is simply not applicable to them.
I have clever (and valid) responses ready for each of these contentions, but that would be missing the point — namely, that the very fact that these arguments are put forward is indicative of a void that needs to be filled.
The King committee has recognised this problem, which helped to clinch its decision to rewrite the code.
It is not about putting in place more rules — we need better regulation, not more. As such, there will not be a significant departure from the solid foundations and philosophy set by King III and companies therefore need not fret about a host of additional principles and practice recommendations.
To the contrary, we believe that many of the existing principles will fall away in light of the different approach that we plan to adopt, whereby the "principles” will be clearly differentiated from "practice recommendations”.
If, for example, the principle is that the board should be constituted so that power is balanced and decision-making is objective, then there are various practices whereby this can be achieved.
One way to do it, of course, is to have a majority of independent directors on the board. Although this is an appropriate response for a listed company, it may be prohibitively expensive for smaller entities, so they can look at different practices to achieve the same result. This approach puts the emphasis on the outcome envisaged by the principle and allows flexibility.
We want the drafting process to be as widely consultative as possible so that the product is truly "for South Africans, by South Africans”.
Consider this an invitation for every company and corporation to participate in helping us reconfigure the brakes so that the economy can accelerate.