King 3 sets the bar for worldwide corporate governance good practice

With the 1 September release of its third iteration the King Report on corporate governance introduces new concepts and builds on existing ones with the net result that it is perhaps the world’s leading code of good practice for business. That’s the opinion of Jayne Mammatt Associate Director, Governance & Sustainability at Ernst & Young South Africa.

The major changes introduced in the update to the draft report released in February 2009 are a complete rewrite of the risk management section, the dedication of a new chapter to IT governance, the refinement of the concept of integrated reporting and a more thorough treatment on the question of independent directors.

“Overall, King 3 has also delivered what has been expected; a major criticism of the risk management chapter in the draft was that it was too prescriptive. The final report moves back to an approach of providing principles for implementation rather than frameworks themselves,” says Mammatt, adding that she anticipates widespread positive reception of this development.

In its treatment of risk management, Mammatt says there was no opportunity for debate before the chapter’s inclusion in the final report. “While this may attract some concern, the right people were involved which provides for a sound high-level treatment of risk management and its role in governance. The reception of it is likely to be positive in the main.”

In acknowledgement of the increasingly important role which is played by information technology in business, for the first time this topic receives extended treatment with a dedicated chapter. “The governance of IT comes to the forefront; there is a move away from a specific focus on security of information to a more general approach to how IT is governed and managed as a critical resource. While, again, there was little opportunity for public debate on the topic, the concepts are sound,” Mammatt says.

Iterative advancement of the King Report means a myriad of changes are introduced which take into account the ever-evolving discipline of corporate governance. As an example of the improvements, Mammatt says the Report is substantially clearer on issues such as the independence of non-executive directors. “The Report provides a recommendation that the independence of directors be assessed after a period of 9 years; it’s not a cutoff, but allows for an assessment of independence, since any director working with a company for any length of time may lose independence as a consequence of association.”

The focus on remuneration remains strong, with disclosure of salaries recommended not only for directors but also for the top three employees of every company, indicative of a drive towards further transparency.

Without a doubt, Mammatt says, King 3 reflects a strengthening and expansion of the concept of corporate governance into new areas and topics which other countries have not yet even considered. “King 3 sets the worldwide bar on governance and sustainable development. It moves away from a mere focus on the board and into the burning issues of leadership, ethics, sustainable development, integrated reporting and the principle of keeping communication honest and open. But in order to make it work we all have to take individual responsibility, not only as company directors, but also as consumers, employees and investors as we can and do have a role to play in shaping the behaviour and actions of corporations.”