KING III Governance Principles apply to all organisations, including privately-owned companies

The King III Code on Corporate Governance has far-reaching application. While compliance remains essentially voluntary, its application is no longer limited to listed companies that fall within the confines of JSE-listing rules. Its adoption is recommended for all businesses, and this extends to public sector entities, private companies and even non-profit organisations and sporting associations.

“In contrast to King I and King II, King III applies to all entities” says Andries Brink, PricewaterhouseCoopers SA Private Company Services Leader. “This means that all entities big and small should now start to adopt good governance principles and consider broader stakeholder interests.

“Historically, the focus of private companies has been narrowly on finances and profits. These will now have to determine who their stakeholders are and what these interested parties expect from the company, and management will have to start engaging and communicating with such stakeholder groups. Private companies will also have to begin putting greater emphasis on social and environmental issues than before. There will be quite a shift, and non-financial issues will now also have to receive detailed consideration as these entities consider the sustainability of their operations.”

Brink says that the integrated report will need to deal with matters regarding sustainability, as well as the adequacy of the internal control environment. These issues will also be key considerations for private companies and most likely require that they seek external professional assistance in applying these governance principles.

Brink additionally says the first reaction of private companies to the release of King III, effective 1 March 2010, would understandably be concerns over the cost implications of implementing its various recommendations. “However, this does not necessarily have to be a costly exercise. The Code is very clear on what would be required, and is sufficiently flexible and scalable to accommodate all sized businesses appropriately.

“The framework recommended by King III is principles-based and there is no ‘one size fits all’ solution. While the principles will apply to all organisations, the practices will differ accordingly. Entities are encouraged to tailor the principles of the Code as appropriate to the size, nature and complexity of the business. Also, compliance should not become overly burdensome, should not detract from the true performance of the business, and should always make economic sense.”

One specific item that Brink highlights is the composition of the board of directors. “King III recommends a majority of non-executive directors, with the majority of these directors being independent. This will be a first for private companies, especially family-owned operations, and many will have to revisit the composition of their boards.”

Brink recommends that private companies rise to the applicability of King III rather than resist it. “Private companies should develop formal and documented governance strategies. This means becoming completely familiar with King III requirements. It also involves identifying all company stakeholders and each of these groups’ expectations. This will probably be a first for private businesses and the focus will now have to expand to include lenders, customers, employees and the environment, and not simply management and owners. Companies should then identify which sections of The Code will be applied, devise action plans and begin implementation.”

Brink says that where sections of The Code are not to be applied by the business, it will be required to document and disclose why not (in line with the ‘apply or explain’ foundation of The Code), and should also get board approval and sign off on what is and is not being implemented, and why so.

The challenge for private companies will be to determine exactly when and how The Code requirements should be applied. Brink says this determination will be based on the size and complexity of each particular business and whether it makes economic sense to implement a certain recommendation. “Cost/benefit analyses will be required, and the costs of implementation weighed against stakeholder and legislative expectations. Implementation also needs to be appropriate, reasonable, relevant and balanced and it might be more practical to follow a phased approach.”

Brink highlights the close relationship between good governance principles, legislative requirements and directors’ duties of care and possible personal liability. “If directors can demonstrate that they have followed good governance, they would be in a better position to then demonstrate compliance with their fiduciary duties and those of due care, skill and diligence, when it comes to legislative compliance.”

Brink advises private companies to embrace the relevant principles of King III, and see this as an opportunity to become a responsible and ethical corporate citizen, and to review corporate values. “In the longer term, good governance benefits the entire economy and individual companies will eventually see specific benefits from this, both monetary and nonmonetary. Private companies should see this as a time in which they can begin to understand and unlock the benefits of sound corporate governance.”