King III - Applicable to you?

In comparison with the King II Code, King III is far-reaching in its proposed application. While King II applied to affected companies such as all listed companies, financial institutions and public sector enterprises, the King Committee proposes that King III should be applied to all entities, regardless of their manner or form of incorporation. What this means is that no matter the size of an entity, the corporation should start to adopt good governance principles and consider broader stakeholder interests to the extent that they are applicable.

Despite the King Committee’s wishes of a universal application, there is no general sanction for non-compliance in the Code itself but there will be sanctions to the extent that the principles of King III overlap our current law. For instance, since the JSE Listing Requirements require compliance with the King Code, it will remain mandatory for listed companies.

King III moves away from the ‘comply or else’ philosophy adopted in King II to an ‘apply or explain’ philosophy. The King Committee moved away from the word ‘comply’ in order to prevent a “mindless” application of the principles of corporate governance. In terms of King III, if the directors of an entity believe a practice is not applicable or not in the best interests of the company, they can adopt a different practice, but must be able to explain the reasons for doing so. This approach will require more discretion and consideration of the principles in King III.

In considering the principles in King III and explaining any different practices implemented, the entity concerned will be applying its mind to the principles of King III and will be seen to apply them. King III does not take a “one size fits all” approach and as such not every principle of the Code will be applicable to every business. For example some of the obligations to stakeholders may not be relevant to single shareholder companies formed for a very limited purpose. King III is flexible enough to appropriately accommodate a diverse range of businesses. Businesses will need to be familiar with the principles of King III in order to determine what should and what should not be applied.

In determining which principles to apply, the size and complexity of each entity and whether the application makes economic sense need to be taken into account. Although the main interest of the entity will continue to be maximising profits, it will need to look beyond the interests of its directors and shareholders and identify the interested stakeholders such as creditors, employees, suppliers and the environment. There will need to be a balancing act between social and economic considerations. The principles should not be rigidly applied in a manner that would be detrimental to the economic progress of the entity.

The directors of an entity will be required, in a statement to stakeholders, to explain either if they did or did not apply a specific principle or recommendation of King III and if not, why not. This disclosure will allow stakeholders to comment on the corporate governance strategies of the business and to challenge the directors to improve the level of governance of an entity.

King III recommends, among other things, integrated sustainability reporting where entities are required to undertake triple bottom line reporting, disclosing more than the financials of the entity in order for stakeholders to measure the impact of the business on social, economic and environmental aspects. The emphasis in King III is for entities to be seen to be responsible corporate citizens. Non-economic issues will need to be considered as directors take the sustainability of a business into regard.

Directors will also find that, with the general acceptance of King III, their duties as directors are defined in relation to the requirements of the Code.

Entities should identify their stakeholders and which principles of King III will be applied, devise a corporate governance plan and put that plan into practice. King III is applicable from 1 March 2010 and we expect to see more entities appointing compliance officers and engaging professional assistance in order to successfully apply its principles.