King IV Sector Supplements - Public Commenting

Transcription

1 King IV Sector Supplements - Public Commenting Filled Monday, July 11, 2016 Page 1 Welcome to the official King IV Sector Supplement public commenting platform. After you have downloaded and reviewed the draft King IV Sector Supplements here [if this link does not open, please copy and paste the following into your browser: [ you will be able to enter your comments using this platform. This is the second phase of the public commentary process. Phase one invited comment on the whole of the King IV Report, bar the Sector Supplements. This platform will remain open in respect of phase 2 for two months from 11 May 2016 to 11 July 2016 Commenting terms and conditionsplease note that this process is open and transparent. All comments submitted will be available for public view at and NO anonymous comments are permitted. Comments received are added to the library for public viewing weekly together with the identity of the individual or organisation on behalf of whom the submission is made. Only comments submitted through this platform will be considered for the finalisation of the King IV Report. Do you agree to the King IV commenting terms and conditions? Yes

2 Page 2 Personal Details Section: *Title: Mrs *First Name: Joanne *Last Name: Henstock *I am commenting on behalf of: An organisation *Name of organisation: Ernst & Young *Capacity within organisation: Executive Director

3 Page 3 INTRODUCTION TO SUPPLEMENTS INTRODUCTION TO SUPPLEMENTS Add your comments on the Introduction to Supplements here: 11 July 2016 Judge Professor Mervyn King Ms Ansie Ramalho Chairman King IV Project Lead King Committee Institute of Directors of Southern Africa Institute of Directors of Southern Africa By Ansie Ramalho AnsieR@iodsa.co.za Submitted via online portal Dear Members of the King Committee, Comment Letter on the draft Sector Supplements for Part 6 of the draft King IV Report on Corporate Governance for South Africa 2016 (Draft King IV Code) EY South Africa is pleased to offer its views on the draft Part 6 Sector Supplements released for public comment on 11th May 2016 (King IV Sector Supplements). We support the King Committee s objectives in developing the draft King IV for application across all economic sectors.

4 In formulating our comments presented in this submission, we have consulted a wide range of clients to obtain client perspectives to supplement our own presented in this submission. We ask that our comments on the Sector Supplements provided in this submission be read and understood in context of our earlier comments provided on the draft King IV Code. Except for the areas of specific concern reflected in our earlier submission of 16th May 2016 highlighted again below, this submission does not repeat all our comments provided in our earlier submission on the draft King IV Code as relevant to the application and implementation of the sector supplements. We are submitting our comments below both as a written submission to the King Committee, and as an electronic submission via the King IV Comment electronic submissions portal on the website of the Institute of Directors in Southern Africa General Comments In general we welcome the revised, principles-based and outcomes-focused design of draft King IV, structured as the main Code and sector-specific supplements. In principles, this relatively simple and logical structure ought to encourage fairly intuitive application of King IV by a wider variety of entities, including smaller and less complex entities. We recognise that this stream-lined version of the King Code focused on achieving governance outcomes, through applying a given set of 17 governance principles and appropriate governance practices designed to achieve each principle, may require adjustments by some entities. The new challenge posed by King IV requires every entity applying King IV to actively consider, evaluate and select the set of governance practices that will both have a good fit with the entity s size, complexity and governance philosophy and will also achieve the King IV governance outcomes. We believe this approach will serve to drive a more active approach to governance across a wider range of entities. However some entities for example in the public sector, where governance practices are still developing in some instances and in other instances are relatively mature and legislated (and hence perceived as less judgemental) may consider there is need for more guidance to assist their implementation of King IV, including via the sector supplements that will provide sector-specific guidance.

5 In our view, the key question that needs to be considered in relation to the draft sectorsupplements is whether, as drafted, they can be expected to achieve their stated intended purpose sufficiently well, i.e. to provide guidance and direction on how the King IV Code should be interpreted and applied by the various categories and sectors of organisations. Our detailed comments below reflect our view on this question, including as relate to our specific areas of concern. Specific Areas of Concern - draft Sector Supplements Supplements addressing implementation of the King IV Code by state-owned entities (SOEs) and municipalities A key concern, specific to the sector supplements for state-owned entities (SOEs) and for municipalities, is whether the guidance provided in these supplements is sufficient to encourage wide adoption and implementation of the King IV Code by public sector entities in these sectors. Preliminary feedback from canvassing the views of a range of public sector entities is that it is not sufficient. Specifically, there is a view that these sector supplements do not contain sufficient content including examples and illustrations that would serve to guide state-owned entities and municipalities through the process of building a governance model specific to their organisation that would satisfy both extant applicable laws and regulations that comprise the legal governance framework that the organisation needs to comply with, and also enable their implementation of King IV on the apply and explain basis. Supplement addressing implementation of the King IV Code by small-and medium-sized entities (SMEs) We consider that the relevance and usefulness of the SME Sector Supplement would be considerably enhanced if its content were to address more fully the business case for implementation of good governance practices and governance structures for SMEs. This includes

6 addressing the implications of introducing governance structures for SMEs, and the unique benefits to be derived from implementing them. Main challenges for SMEs are developing an understanding of the business case for adopting an appropriate, proportional SME governance structure, and also overcoming a perception that views corporate governance practices as not relevant to smaller businesses or too costly weighed against the expected benefits. Among the most significant hurdles for wider adoption of corporate governance practices in the SME sector are: (a) Perceived obstacles and practical challenges of implementing corporate governance in smaller entities. For example: large business. and only appropriate for -placed to frame their need to resolve particular types of business problems they may face from time to time in terms of identifying and implementing appropriate governance solutions to help overcome particular problems. company may be less relevant or appropriate for an SME, or family-owned business. Notwithstanding the lack of standardisation of the components of good corporate governance for SMEs, this ought not to discourage development of healthy governance structures for SMEs to realise the unique benefits of governance structures for SMEs for example to enhance the longevity of the business through business succession planning. impact of changes an SME needs to make may involve bringing outsiders into the business, for example as independent NEDs. Experiencing such changes may be quite challenging for family insiders and business founders can find this quite challenging. orporate governance measures from being adopted or that impede their effectiveness, for example a lack of understanding of how company boards and independent NEDs are supposed to work; or a desire for guarantees (which cannot be made) that the SME will benefit from cost savings as a result of raising corporate governance standards in the business, for example, by appointing NEDs

7 issues, such as managing cash flow. (b) Building awareness about the range of benefits SMEs may realise from establishing appropriate governance structures. Some of these include: business and those who are not; expertise/experience; financial costs due to poor internal controls; and -term performance of the business, including through addressing business succession challenges. As currently drafted the SME Sector Supplement explains how the Principles and Recommended Practices might be applied by SMEs. However the most significant hurdle to overcome and a first base consideration is why an SME ought to consider implementing the King IV Code at all. We believe the SME Sector Supplement needs to pinpoint and tackle some of these areas, in order to resonate with SMEs as a first order priority. Generic point for the sector supplements (SOEs, municipalities, not-for-profit entities, retirement funds) concerning design of effective governance practices to achieve the proposed King IV Principles and the outcome of ensuring an Ethical Culture Additional, more specific guidance is needed addressing governance of ethics and the ethics of governance in some of the sector supplements. In light of the high significance of the fiduciary role and responsibilities assumed by the governing bodies/trustees of not for profit entities, retirement funds, SOEs and municipalities specifically the high level of fiduciary responsibility associated with being entrusted with governance oversight of the proper application of other peoples money to authorised objective/purposes in context of typical activities of entities within each of these sectors, we believe the sector supplements need to go a lot further to illustrated how each of

8 the proposed King IV Principles is effectively implemented and applied by entities in each of these sectors. Specific Areas of concern in relation to the draft King IV Code We expressed the following specific areas of concern in relation to the draft King IV Code in our submission dated 16th May 2016, also relevant in context of entities seeking to apply and implement the draft sector supplements: Design of board structures and relationships between board committees We do not support the proposed recommended practice set out in paragraph 34 under Principle 4.4 of the draft King IV Code. Composition of audit committees requisite financial knowledge, skills and experience In consideration of the expanded responsibilities of audit committees under draft King IV, including with respect to oversight of the relationship with the external auditor to enhance audit quality and having oversight of the entity s reports and disclosures and the arrangements for assurance thereof, we recommend that a further recommended practice is warranted to address the composition of the audit committee. Specifically, in line with international best practice, membership of this committee should include one or more members that are financially literate in the sense of having recent and relevant financial experience, and understanding of the industry in which the entity operates. We believe that this recommended practice is essential to ensure the audit committee is able to perform its functions effectively, including as relates to the statutory functions of the committee. Governance of Remuneration

9 While we believe the draft King IV Code proposals to improve shareholder participation in governance of remuneration (paragraphs under Principle 4.4) both in relation to remuneration policy and its implementation will prove beneficial, we consider that a more reasonable approach is needed to introduce the proposed required threshold for the non-binding shareholder vote. We believe there is a greater prospect of introducing these recommended practices with success if they are introduced over a defined period of time to enhance the prospect that entities will be able to align their governance practices and relationships in a manner that would ensure better ability to apply these recommended practices. The concept of proportionality is highly relevant for implementation of the recommended practices for this area in the sector context. We believe that better illustrations are needed to guide entities in these sectors about how the King IV recommended practices for proposed King IV Principle 4.4 and related governance outcomes might best be achieved in relation to governance of remuneration for SMEs, not-for-profit entities, entities in the public sector (including SOEs and municipalities) and retirement funds. Proposed Expanded Combined Assurance Model In our earlier submission on the draft King IV Code we provided detailed comments and our suggestions to improve application of the 3 lines of defence model in the recommended practices contained in draft King IV, in order to enhance the integrity of information for decision-making by management, the executive team and the governing body. We are concerned that, as currently formulated, there is significant scope for the combined assurance model to potentially mask shortcomings in the information systems and processes, and in the related oversight and compliance monitoring systems, with the result that the level of comfort that executive leadership and the boards may place on the actual results of applying the combined assurance model may be lower than anticipated. Our key concern is that this factor may not be sufficiently appreciated either by executive management or by governing boards. Further to this observation we do not support an expanded application of this model to encompass 5 lines of assurance. In our view this proposal adds nothing further, and may merely serve to add confusion, when what is more important is to introduce much greater clarity and transparency

10 about use of this model, and what it actually achieves in the best and worst case scenarios including when the responsible management takes the view that its application in practice is able to be truncated (in some cases with what is thought to be appropriate safeguards ). Our Key Recommendations 1. With the above perspectives in mind, we consider that the immediate usefulness of the Sector Supplements -- all 5 of the currently issued supplements -- may be significantly improved by including a brief set of key considerations for developing the organisation s implementation roadmap within each of the sector supplements. This would require the King IV Project team to put themselves in the shoes of the management teams and governing bodies of the type of entity being targeted in each of the supplements. For example each of the public sector supplements would need to consider what an implementation roadmap would look like for a typical SOE, and a typical municipality in order to consider and document the key considerations and key steps that the organisation would need to follow in implementing a decision (voluntary or mandatory) to implement King IV in their particular organisation. 2. Particularly for public sector entities, it may be anticipated that such an exercise would likely involve some complexities, particularly in context of developing an approach to map the application of the King IV Principles and Recommended Practices against the extant legal framework, and figuring whether and how the governance outcomes are being achieved on an adequate basis. In their current form, the Supplements may appear to understate the complexity of mapping the governance structures and practices envisaged by King IV to the extant legislative structures, particularly in the case of a municipality. The dual legislative and executive powers of the Municipal Council, the unique political process that drives its composition, the various types of council structures and sub-committees envisaged by legislation, the unique governance role of the Accounting Officer (the Municipal Manager), and several other aspects need to, in our view, be further unpacked in order to achieve the aforementioned objectives of the Draft King IV Code and its Supplements. We recommend, therefore, that the King IV Project Team ensure the availability of some illustrative examples of a public sector entity s implementation of King IV for example in a complex SOE, a

11 smaller/simpler SOE, a municipality and perhaps also for an entity that is a government or provincial department (government departments are notable in their exclusion from the two public sector supplements). Such examples could be made available separately to the sector supplements to maintain the relatively more streamlined design of the revised King IV Code. We consider that the availability of such examples would greatly assist public sector entities in undertaking their individual King IV implementation journey and therefore also support achievement of the King Committee s objective in relation to promoting wider implementation of the King IV Code in its finalised form. 3. The SME Sector Supplement needs to contain more content that establishes the relevance of corporate governance for SMEs as a first order of priority. If an SME is not persuaded about the need to embrace corporate governance, the relevance and general utility of this supplement will likely be under-realised. 4. Significantly greater emphasis is needed to underline the importance of designing and implementing effective governance practices to address the governance outcome of ensuring an ethical culture in the types of entities represented within the sectors covered. The discussion and illustration of practices designed to addressing specific fiduciary responsibilities of governing bodies charged with oversight of an entity s activities involving the ethical application of public monies, and other peoples money is an issue of paramount important. In our view, the draft King IV Code and its sector supplements ought not miss an important opportunity to highlight the significance of this issue. Responses to the Poll Questions (online submission portal) Do the Sector Supplements provide adequate guidance and explanation of how the recommended practices in the Code could be customised to meet the situational specifics of the various sectors? Our response:

12 We do not believe the Sector Supplements provide adequate guidance and explanation. We consider that the sector supplements should contain more practically useful information, geared to promoting implementation of the King IV Code by entities in the covered sectors. In the case of SMEs, as a first order priority the content of this sector supplement should have stronger focus on promoting SME understanding of the benefits to be gained from implementing corporate governance, and on recognizing and overcoming the key challenges they are likely to face in considering implementation of corporate governance in a proportional manner, i.e. suited to the size, complexity and ownership characteristics of the individual entity. Do the supplements illustrate the general approach to the application and interpretation of the Code in such a way that it enables users to formulate their own sound solutions to corporate governance challenges? Our response: We do not believe the supplements are sufficiently illustrative of the general approach to the application and interpretation of the Code. See our detailed comments above for our suggestions to optimise achievement of this result. Do the King IV Sector Supplements connect and reconcile the King IV Code and legislation applicable in the particular sectors? Our response: We do not believe the supplements connect and reconcile the King IV Code and legislation applicable in the case of the retirement savings sector and the public sector supplements. See our detailed comments above. We believe illustrative examples/case studies will be needed to assist entities/funds in the retirement savings sector and in the public sector will be important to assist entities in these sectors to implement the Code. Other Comments

13 We are cognisant that the King Committee s consultation process does not address the question of how the King IV Code and Sector Supplements (when finalised) may be expected to be applied in mandatory settings. Conceivably, implementation of the King IV Code may become mandatory for certain types of public sector entities or those with more significant public interest and service delivery mandates. Our expectation is that in such cases the relevant regulator(s) would undertake a separate public consultation to solicit views on aspects of the King IV Code that are proposed for mandatory application, for which the relevant regulator(s) would seek views from both such regulated entities and their stakeholders. Conclusion We trust that our comments and responses provided in this submission will assist the King Committee in its ongoing work to finalise the King IV Code for issuance this year. We are available to elaborate further on our views and perspectives contained in this submission, including for verbal submissions/representations if desired. In the event any clarification is needed kindly contact either Mike Bourne (mike.bourne@za.ey.com) or Joanne Henstock (joanne.henstock@za.ey.com). Yours Sincerely, Lance Tomlinson Partner EY Africa Assurance Leader

14 SUPPLEMENT FOR MUNICIPALITIES SUPPLEMENT FOR MUNICIPALITIES Add your comments on the Supplement for Municipalities here: General Comments In general we welcome the revised, principles-based and outcomes-focused design of draft King IV, structured as the main Code and sector-specific supplements. In principles, this relatively simple and logical structure ought to encourage fairly intuitive application of King IV by a wider variety of entities, including smaller and less complex entities. We recognise that this stream-lined version of the King Code focused on achieving governance outcomes, through applying a given set of 17 governance principles and appropriate governance practices designed to achieve each principle, may require adjustments by some entities. The new challenge posed by King IV requires every entity applying King IV to actively consider, evaluate and select the set of governance practices that will both have a good fit with the entity s size, complexity and governance philosophy and will also achieve the King IV governance outcomes. We believe this approach will serve to drive a more active approach to governance across a wider range of entities. However some entities for example in the public sector, where governance practices are still developing in some instances and in other instances are relatively mature and legislated (and hence perceived as less judgemental) may consider there is need for more guidance to assist their implementation of King IV, including via the sector supplements that will provide sector-specific guidance. In our view, the key question that needs to be considered in relation to the draft sectorsupplements is whether, as drafted, they can be expected to achieve their stated intended purpose sufficiently well, i.e. to provide guidance and direction on how the King IV Code should be interpreted and applied by the various categories and sectors of organisations. Our detailed comments below reflect our view on this question, including as relate to our specific areas of concern.

15 Specific Areas of Concern - draft Sector Supplements Supplements addressing implementation of the King IV Code by state-owned entities (SOEs) and municipalities A key concern, specific to the sector supplements for state-owned entities (SOEs) and for municipalities, is whether the guidance provided in these supplements is sufficient to encourage wide adoption and implementation of the King IV Code by public sector entities in these sectors. Preliminary feedback from canvassing the views of a range of public sector entities is that it is not sufficient. Specifically, there is a view that these sector supplements do not contain sufficient content including examples and illustrations that would serve to guide state-owned entities and municipalities through the process of building a governance model specific to their organisation that would satisfy both extant applicable laws and regulations that comprise the legal governance framework that the organisation needs to comply with, and also enable their implementation of King IV on the apply and explain basis. Generic point for the sector supplements (SOEs, municipalities, not-for-profit entities, retirement funds) concerning design of effective governance practices to achieve the proposed King IV Principles and the outcome of ensuring an Ethical Culture Additional, more specific guidance is needed addressing governance of ethics and the ethics of governance in some of the sector supplements. In light of the high significance of the fiduciary role and responsibilities assumed by the governing bodies/trustees of not for profit entities, retirement funds, SOEs and municipalities specifically the high level of fiduciary responsibility associated with being entrusted with governance oversight of the proper application of other peoples money to authorised objective/purposes in context of typical activities of entities within each of these sectors, we believe the sector supplements need to go a lot further to illustrated how each of the proposed King IV Principles is effectively implemented and applied by entities in each of these sectors. Specific Areas of concern in relation to the draft King IV Code

16 We expressed the following specific areas of concern in relation to the draft King IV Code in our submission dated 16th May 2016, also relevant in context of entities seeking to apply and implement the draft sector supplements. Design of board structures and relationships between board committees We do not support the proposed recommended practice set out in paragraph 34 under Principle 4.4 of the draft King IV Code. Composition of audit committees requisite financial knowledge, skills and experience In consideration of the expanded responsibilities of audit committees under draft King IV, including with respect to oversight of the relationship with the external auditor to enhance audit quality and having oversight of the entity s reports and disclosures and the arrangements for assurance thereof, we recommend that a further recommended practice is warranted to address the composition of the audit committee. Specifically, in line with international best practice, membership of this committee should include one or more members that are financially literate in the sense of having recent and relevant financial experience, and understanding of the industry in which the entity operates. We believe that this recommended practice is essential to ensure the audit committee is able to perform its functions effectively, including as relates to the statutory functions of the committee. Governance of Remuneration While we believe the draft King IV Code proposals to improve shareholder participation in governance of remuneration (paragraphs under Principle 4.4) both in relation to remuneration policy and its implementation will prove beneficial, we consider that a more reasonable approach is needed to introduce the proposed required threshold for the non-binding shareholder vote.

17 We believe there is a greater prospect of introducing these recommended practices with success if they are introduced over a defined period of time to enhance the prospect that entities will be able to align their governance practices and relationships in a manner that would ensure better ability to apply these recommended practices. The concept of proportionality is highly relevant for implementation of the recommended practices for this area in the sector context. We believe that better illustrations are needed to guide entities in these sectors about how the King IV recommended practices for proposed King IV Principle 4.4 and related governance outcomes might best be achieved in relation to governance of remuneration for SMEs, not-for-profit entities, entities in the public sector (including SOEs and municipalities) and retirement funds. Proposed Expanded Combined Assurance Model In our earlier submission on the draft King IV Code we provided detailed comments and our suggestions to improve application of the 3 lines of defence model in the recommended practices contained in draft King IV, in order to enhance the integrity of information for decision-making by management, the executive team and the governing body. We are concerned that, as currently formulated, there is significant scope for the combined assurance model to potentially mask shortcomings in the information systems and processes, and in the related oversight and compliance monitoring systems, with the result that the level of comfort that executive leadership and the boards may place on the actual results of applying the combined assurance model may be lower than anticipated. Our key concern is that this factor may not be sufficiently appreciated either by executive management or by governing boards. Further to this observation we do not support an expanded application of this model to encompass 5 lines of assurance. In our view this proposal adds nothing further, and may merely serve to add confusion, when what is more important is to introduce much greater clarity and transparency about use of this model, and what it actually achieves in the best and worst case scenarios including when the responsible management takes the view that its application in practice is able to be truncated (in some cases with what is thought to be appropriate safeguards ).

18 Our Key Recommendations 1. With the above perspectives in mind, we consider that the immediate usefulness of the Sector Supplements -- all 5 of the currently issued supplements -- may be significantly improved by including a brief set of key considerations for developing the organisation s implementation roadmap within each of the sector supplements. This would require the King IV Project team to put themselves in the shoes of the management teams and governing bodies of the type of entity being targeted in each of the supplements. For example each of the public sector supplements would need to consider what an implementation roadmap would look like for a typical SOE, and a typical municipality in order to consider and document the key considerations and key steps that the organisation would need to follow in implementing a decision (voluntary or mandatory) to implement King IV in their particular organisation. 2. Particularly for public sector entities, it may be anticipated that such an exercise would likely involve some complexities, particularly in context of developing an approach to map the application of the King IV Principles and Recommended Practices against the extant legal framework, and figuring whether and how the governance outcomes are being achieved on an adequate basis. In their current form, the Supplements may appear to understate the complexity of mapping the governance structures and practices envisaged by King IV to the extant legislative structures, particularly in the case of a municipality. The dual legislative and executive powers of the Municipal Council, the unique political process that drives its composition, the various types of council structures and sub-committees envisaged by legislation, the unique governance role of the Accounting Officer (the Municipal Manager), and several other aspects need to, in our view, be further unpacked in order to achieve the aforementioned objectives of the Draft King IV Code and its Supplements. We recommend, therefore, that the King IV Project Team ensure the availability of some illustrative examples of a public sector entity s implementation of King IV for example in a complex SOE, a smaller/simpler SOE, a municipality and perhaps also for an entity that is a government or

19 provincial department (government departments are notable in their exclusion from the two public sector supplements). Such examples could be made available separately to the sector supplements to maintain the relatively more streamlined design of the revised King IV Code. We consider that the availability of such examples would greatly assist public sector entities in undertaking their individual King IV implementation journey and therefore also support achievement of the King Committee s objective in relation to promoting wider implementation of the King IV Code in its finalised form. 3. (SME Sector Supplement - see SME sector supplement response) 4. Significantly greater emphasis is needed to underline the importance of designing and implementing effective governance practices to address the governance outcome of ensuring an ethical culture in the types of entities represented within the sectors covered. The discussion and illustration of practices designed to addressing specific fiduciary responsibilities of governing bodies charged with oversight of an entity s activities involving the ethical application of public monies, and other peoples money is an issue of paramount important. In our view, the draft King IV Code and its sector supplements ought to not miss an important opportunity to highlight the significance of this issue. Responses to the Poll Questions (online submission portal) Do the Sector Supplements provide adequate guidance and explanation of how the recommended practices in the Code could be customised to meet the situational specifics of the various sectors? Our response: We do not believe the Sector Supplements provide adequate guidance and explanation.

20 We consider that the sector supplements should contain more practically useful information, geared to promoting implementation of the King IV Code by entities in the covered sectors. In the case of SMEs, as a first order priority the content of this sector supplement should have stronger focus on promoting SME understanding of the benefits to be gained from implementing corporate governance, and on recognizing and overcoming the key challenges they are likely to face in considering implementation of corporate governance in a proportional manner, i.e. suited to the size, complexity and ownership characteristics of the individual entity. Do the supplements illustrate the general approach to the application and interpretation of the Code in such a way that it enables users to formulate their own sound solutions to corporate governance challenges? Our response: We do not believe the supplements are sufficiently illustrative of the general approach to the application and interpretation of the Code. See our detailed comments above for our suggestions to optimise achievement of this result. Do the King IV Sector Supplements connect and reconcile the King IV Code and legislation applicable in the particular sectors? Our response: We do not believe the supplements connect and reconcile the King IV Code and legislation applicable in the case of the retirement savings sector and the public sector supplements. See our detailed comments above. We believe illustrative examples/case studies will be needed to assist entities/funds in the retirement savings sector and in the public sector will be important to assist entities in these sectors to implement the Code. Other Comments

21 We are cognisant that the King Committee s consultation process does not address the question of how the King IV Code and Sector Supplements (when finalised) may be expected to be applied in mandatory settings. Conceivably, implementation of the King IV Code may become mandatory for certain types of public sector entities or those with more significant public interest and service delivery mandates. Our expectation is that in such cases the relevant regulator(s) would undertake a separate public consultation to solicit views on aspects of the King IV Code that are proposed for mandatory application, for which the relevant regulator(s) would seek views from both such regulated entities and their stakeholders. SUPPLEMENT FOR NON-PROFIT ORGANISATIONS SUPPLEMENT FOR NON-PROFIT ORGANISATIONS Add your comments on the Supplement for Non-Profit Organisations here: General Comments In general we welcome the revised, principles-based and outcomes-focused design of draft King IV, structured as the main Code and sector-specific supplements. In principles, this relatively simple and logical structure ought to encourage fairly intuitive application of King IV by a wider variety of entities, including smaller and less complex entities. We recognise that this stream-lined version of the King Code focused on achieving governance outcomes, through applying a given set of 17 governance principles and appropriate governance practices designed to achieve each principle, may require adjustments by some entities. The new challenge posed by King IV requires every entity applying King IV to actively consider, evaluate and select the set of governance practices that will both have a good fit with the entity s size, complexity and governance philosophy and will also achieve the King IV governance outcomes. We believe this approach will serve to drive a more active approach to governance across a wider range of entities.

22 However some entities for example in the public sector, where governance practices are still developing in some instances and in other instances are relatively mature and legislated (and hence perceived as less judgemental) may consider there is need for more guidance to assist their implementation of King IV, including via the sector supplements that will provide sector-specific guidance. In our view, the key question that needs to be considered in relation to the draft sectorsupplements is whether, as drafted, they can be expected to achieve their stated intended purpose sufficiently well, i.e. to provide guidance and direction on how the King IV Code should be interpreted and applied by the various categories and sectors of organisations. Our detailed comments below reflect our view on this question, including as relate to our specific areas of concern. Specific Areas of Concern - draft Sector Supplements Generic point for the sector supplements (SOEs, municipalities, not-for-profit entities, retirement funds) concerning design of effective governance practices to achieve the proposed King IV Principles and the outcome of ensuring an Ethical Culture Additional, more specific guidance is needed addressing governance of ethics and the ethics of governance in some of the sector supplements. In light of the high significance of the fiduciary role and responsibilities assumed by the governing bodies/trustees of not for profit entities, retirement funds, SOEs and municipalities specifically the high level of fiduciary responsibility associated with being entrusted with governance oversight of the proper application of other peoples money to authorised objective/purposes in context of typical activities of entities within each of these sectors, we believe the sector supplements need to go a lot further to illustrated how each of the proposed King IV Principles is effectively implemented and applied by entities in each of these sectors. Specific Areas of concern in relation to the draft King IV Code

23 We expressed the following specific areas of concern in relation to the draft King IV Code in our submission dated 16th May 2016, also relevant in context of entities seeking to apply and implement the draft sector supplements. Design of board structures and relationships between board committees We do not support the proposed recommended practice set out in paragraph 34 under Principle 4.4 of the draft King IV Code. Composition of audit committees requisite financial knowledge, skills and experience In consideration of the expanded responsibilities of audit committees under draft King IV, including with respect to oversight of the relationship with the external auditor to enhance audit quality and having oversight of the entity s reports and disclosures and the arrangements for assurance thereof, we recommend that a further recommended practice is warranted to address the composition of the audit committee. Specifically, in line with international best practice, membership of this committee should include one or more members that are financially literate in the sense of having recent and relevant financial experience, and understanding of the industry in which the entity operates. We believe that this recommended practice is essential to ensure the audit committee is able to perform its functions effectively, including as relates to the statutory functions of the committee. Governance of Remuneration While we believe the draft King IV Code proposals to improve shareholder participation in governance of remuneration (paragraphs under Principle 4.4) both in relation to remuneration policy and its implementation will prove beneficial, we consider that a more reasonable approach is needed to introduce the proposed required threshold for the non-binding shareholder vote.

24 We believe there is a greater prospect of introducing these recommended practices with success if they are introduced over a defined period of time to enhance the prospect that entities will be able to align their governance practices and relationships in a manner that would ensure better ability to apply these recommended practices. The concept of proportionality is highly relevant for implementation of the recommended practices for this area in the sector context. We believe that better illustrations are needed to guide entities in these sectors about how the King IV recommended practices for proposed King IV Principle 4.4 and related governance outcomes might best be achieved in relation to governance of remuneration for SMEs, not-for-profit entities, entities in the public sector (including SOEs and municipalities) and retirement funds. Proposed Expanded Combined Assurance Model In our earlier submission on the draft King IV Code we provided detailed comments and our suggestions to improve application of the 3 lines of defence model in the recommended practices contained in draft King IV, in order to enhance the integrity of information for decision-making by management, the executive team and the governing body. We are concerned that, as currently formulated, there is significant scope for the combined assurance model to potentially mask shortcomings in the information systems and processes, and in the related oversight and compliance monitoring systems, with the result that the level of comfort that executive leadership and the boards may place on the actual results of applying the combined assurance model may be lower than anticipated. Our key concern is that this factor may not be sufficiently appreciated either by executive management or by governing boards. Further to this observation we do not support an expanded application of this model to encompass 5 lines of assurance. In our view this proposal adds nothing further, and may merely serve to add confusion, when what is more important is to introduce much greater clarity and transparency about use of this model, and what it actually achieves in the best and worst case scenarios including when the responsible management takes the view that its application in practice is able to be truncated (in some cases with what is thought to be appropriate safeguards ).

25 Our Key Recommendations 1. With the above perspectives in mind, we consider that the immediate usefulness of the Sector Supplements -- all 5 of the currently issued supplements -- may be significantly improved by including a brief set of key considerations for developing the organisation s implementation roadmap within each of the sector supplements. This would require the King IV Project team to put themselves in the shoes of the management teams and governing bodies of the type of entity being targeted in each of the supplements. For example each of the public sector supplements would need to consider what an implementation roadmap would look like for a typical SOE, and a typical municipality in order to consider and document the key considerations and key steps that the organisation would need to follow in implementing a decision (voluntary or mandatory) to implement King IV in their particular organisation. 4. Significantly greater emphasis is needed to underline the importance of designing and implementing effective governance practices to address the governance outcome of ensuring an ethical culture in the types of entities represented within the sectors covered. The discussion and illustration of practices designed to addressing specific fiduciary responsibilities of governing bodies charged with oversight of an entity s activities involving the ethical application of public monies, and other peoples money is an issue of paramount important. In our view, the draft King IV Code and its sector supplements ought to not miss an important opportunity to highlight the significance of this issue. Responses to the Poll Questions (online submission portal) Do the Sector Supplements provide adequate guidance and explanation of how the recommended practices in the Code could be customised to meet the situational specifics of the various sectors? Our response: We do not believe the Sector Supplements provide adequate guidance and explanation.

26 We consider that the sector supplements should contain more practically useful information, geared to promoting implementation of the King IV Code by entities in the covered sectors. In the case of SMEs, as a first order priority the content of this sector supplement should have stronger focus on promoting SME understanding of the benefits to be gained from implementing corporate governance, and on recognizing and overcoming the key challenges they are likely to face in considering implementation of corporate governance in a proportional manner, i.e. suited to the size, complexity and ownership characteristics of the individual entity. Do the supplements illustrate the general approach to the application and interpretation of the Code in such a way that it enables users to formulate their own sound solutions to corporate governance challenges? Our response: We do not believe the supplements are sufficiently illustrative of the general approach to the application and interpretation of the Code. See our detailed comments above for our suggestions to optimise achievement of this result. SUPPLEMENT FOR RETIREMENT FUNDS SUPPLEMENT FOR RETIREMENT FUNDS Add your comments on the Supplement for Retirement Funds here: General Comments

27 In general we welcome the revised, principles-based and outcomes-focused design of draft King IV, structured as the main Code and sector-specific supplements. In principles, this relatively simple and logical structure ought to encourage fairly intuitive application of King IV by a wider variety of entities, including smaller and less complex entities. We recognise that this stream-lined version of the King Code focused on achieving governance outcomes, through applying a given set of 17 governance principles and appropriate governance practices designed to achieve each principle, may require adjustments by some entities. The new challenge posed by King IV requires every entity applying King IV to actively consider, evaluate and select the set of governance practices that will both have a good fit with the entity s size, complexity and governance philosophy and will also achieve the King IV governance outcomes. We believe this approach will serve to drive a more active approach to governance across a wider range of entities. However some entities for example in the public sector, where governance practices are still developing in some instances and in other instances are relatively mature and legislated (and hence perceived as less judgemental) may consider there is need for more guidance to assist their implementation of King IV, including via the sector supplements that will provide sector-specific guidance. In our view, the key question that needs to be considered in relation to the draft sectorsupplements is whether, as drafted, they can be expected to achieve their stated intended purpose sufficiently well, i.e. to provide guidance and direction on how the King IV Code should be interpreted and applied by the various categories and sectors of organisations. Our detailed comments below reflect our view on this question, including as relate to our specific areas of concern. Specific Areas of Concern - draft Sector Supplements Generic point for the sector supplements (SOEs, municipalities, not-for-profit entities, retirement funds) concerning design of effective governance practices to achieve the proposed King IV Principles and the outcome of ensuring an Ethical Culture

28 Additional, more specific guidance is needed addressing governance of ethics and the ethics of governance in some of the sector supplements. In light of the high significance of the fiduciary role and responsibilities assumed by the governing bodies/trustees of not for profit entities, retirement funds, SOEs and municipalities specifically the high level of fiduciary responsibility associated with being entrusted with governance oversight of the proper application of other peoples money to authorised objective/purposes in context of typical activities of entities within each of these sectors, we believe the sector supplements need to go a lot further to illustrated how each of the proposed King IV Principles is effectively implemented and applied by entities in each of these sectors. Specific Areas of concern in relation to the draft King IV Code We expressed the following specific areas of concern in relation to the draft King IV Code in our submission dated 16th May 2016, also relevant in context of entities seeking to apply and implement the draft sector supplements. Design of board structures and relationships between board committees We do not support the proposed recommended practice set out in paragraph 34 under Principle 4.4 of the draft King IV Code. Composition of audit committees requisite financial knowledge, skills and experience In consideration of the expanded responsibilities of audit committees under draft King IV, including with respect to oversight of the relationship with the external auditor to enhance audit quality and having oversight of the entity s reports and disclosures and the arrangements for assurance thereof, we recommend that a further recommended practice is warranted to address the composition of the audit committee. Specifically, in line with international best practice, membership of this committee should include one or more members that are financially literate in the sense of having recent and relevant financial experience, and understanding of the industry in which the entity operates. We believe that this recommended practice is essential to ensure the audit committee is able to perform its functions effectively, including as relates to the statutory functions of the committee.