Enforcing King 3: In the interests of stakeholders

With the release of King 3, South African directors have further guidance to bring a higher level of transparency and corporate governance best practice to their organisations. And while they remain recommendations, King 3 advances the work of previous iterations of the widely recognised standards with a link to new legislation introduced in the amended Companies Act. Together, these structures enhance the legal and fiduciary duties of care and skill expected of company directors.

According to Jayne Mammatt, associate director, Climate Change & Sustainability Services at Ernst & Young South Africa, there is a distinction between ‘must’ and ‘should’ in terms of what companies are expected to do. “The Companies Act proscribes the ‘must’; directors do not have a choice but to comply. King 3 provides the ‘should’; however, what is clear is that if directors are not doing what the recommendations advise, they ought to provide very good reasons for deviation. Failing to apply King 3 could be interpreted as a shortcoming in the execution of the duty of care of skill.”

Put more simply, she says the Act is the law, while King 3 provides something of a handbook on how to comply.

However, as recommendations, it remains possible for directors to merely pay lip service to King 3. As such, Mammatt believes enforcement is necessary but it can only come from shareholders at present. “It is in shareholder interest to ensure the ethical, sustainable and transparent operation of their investments. However, while there are pockets of shareholder activism, it is lacking,” she says.

Mammatt says it is evident that recommendations from King 2 have influenced changes to the Companies Act, as voluntary uptake was lacking, in terms of creating the necessary framework to enforce good governance practices. Given this precedent, it is likely that King 3 will influence future legislation specifically if the “apply and explain” principle is also seen not to be effective. “If companies do not voluntarily comply, the likelihood of King 3 becoming legislated is high. We’ve seen this, for example, in the changing positioning of King 2 where ‘box-ticking’ was employed as a lip service. Government responded by making it a duty for companies to comply with certain aspects. This is the direction in which we will continue to move if better enforcement of corporate governance, driven possibly by stakeholder interaction, is not achieved.”

Putting recommendations on paper into practice at work remains the challenge, Mammatt agrees. She believes the JSE is in a position to take meaningful action. “Some of King 2 was made necessary for new listings, including disclosure requirements. Arguably, the same approach could deliver results with King 3.”
However, Mammatt says that beyond untested disclosure, there should be strong review. “Without review, disclosure is not meaningful; it can become a simple restatement of vague verbiage to satisfy a casual glance. Instead, audit opinions should perhaps be sought on information submitted, with checks of facts and details; assurance should extend to an examination of the substance of corporate governance structures and initiatives.”

Again, Mammatt stresses the need to motivate stakeholders to do more. “Shareholders do pay a premium for companies which exhibit good governance. While some directors see is as an administrative burden, others see it as an opportunity to reduce risk and thereby add value tot he business. When introduced appropriately, King 3 delivers oversight through independent checks and balances that ensure sound and sustainable business practice.”