boards King IV TM update Stakeholders and stakeholder relationships

Transcription

1 5 Insights for boards King IV TM update Stakeholders and stakeholder relationships 1

2 The draft King IV TM (King IV) was released on 15 March (available at resmgr/king_iv/king_iv_report_draft.pdf) Various local and international developments in corporate governance, including in relation to integrated thinking and integrated reporting, remuneration, development of board roles and responsibilities and related board structures, and stakeholder engagement practices have prompted the need to update King III. King IV TM is open for comment until 15 May Any individual or organisation can submit comments using the electronic portal on the Institute of Directors in Southern Africa s website ( 2

3 1 What is King IV TM proposing regarding stakeholders and stakeholder engagement? An outcomes-based approach drives the organisation s achievement of the King IV TM Principles. The intended result is an implementation approach that ought to be both more practical and impact-focused. As Illustration of this approach, King IV TM guides the governing body s approach to discharging its responsibilities relating to strategy and policy, and oversight and disclosure, adopting the stakeholderinclusive model of governance (Principle 5.1). This approach supports the wider concept of sustainable development. Accordingly, applying the outcomes-based approach, the governing body should design and adopt governance practices to discharge its governance responsibilities relating to stakeholder relationships in such a way that supports achievement of the King IV TM Principles, and the outcome of protecting and building trust in the organisation, its reputation and legitimacy. The following King IV TM principles are of key relevance: Performance and Value Creation (Chapter 2) Principle 2.1 Strategy, implementation and performance The governing body should lead the value creation process by appreciating that strategy, risk and opportunity, performance and sustainable development are inseparable elements. Principle 2.2 Reports and Disclosure The governing body should ensure that reports and other disclosures enable stakeholders to make an informed assessment of the performance of the organisation and its ability to create value in a sustainable manner. Stakeholder Relationships (Chapter 5) Principle 5.1 Stakeholders As part of its decision-making in the best interests of the organisation, the governing body should ensure that a stakeholder-inclusive approach is adopted, which takes into account and balances their legitimate and reasonable needs, interests and expectations. 3

4 The governing body of the organisation is thus expected to lead the organisation in use of the stakeholderinclusive approach to drive adoption of a holistic value creation strategy for the organisation. This includes approving the policies and processes management develops to support implementation of that strategy. Board members are able to offer a fresh perspective on the value creation alternatives available to the company. This is a much needed change from the case where boards may in some cases have been passive recipients of management s five-year rolling strategic plans, or have perhaps tended to rely solely on management to assess those value creation alternatives and the selected strategy. Shareholder activism King IV TM includes a new Governance Principle for institutional investors as the holders of beneficial interests in company securities: Principle 5.2 Shareholders The governing body of an institutional investor should ensure that the organisation responsibly exercises its rights, obligations, legitimate and reasonable needs, interests and expectations, as holder of beneficial interest in the securities of a company. King IV TM recognises the development of increased shareholder activism and the key role shareholders play in promoting good governance. As explained in the introduction to King IV TM, the revised code recognises the paradigm shift in corporate thinking from financial capitalism to inclusive capitalism, as a key perspective driving holistic value creation. Draft King IV TM encourages the governing boards of companies and company shareholders to develop a common understanding of what value creation entails and how performance is measured and rewarded. This is in the interest of promoting sound corporate governance practices that support sustainable, long term value creation, and shared prosperity. In effect, members of the governing body will need to adopt an activist mind-set. By following a routine practice of maintaining stakeholder dialogue, including with shareholders and lenders as capital providers, the management team is able to understand and test whether stakeholders are supportive of the organisation s strategy for long-term value creation. King IV TM recommends that the governing body of an institutional investor should provide strategic direction on responsible investment, and ensure it approves policy that provides for adoption of recognised responsible investment practices and principles. 4

5 2 What are the key areas of difference from King III 1? Integration of the stakeholder-inclusive model King IV TM includes greater emphasis of, and guidance on deploying the stakeholder-inclusive model by the organisation and its governing body. It follows its predecessor code in advocating the stakeholder-inclusive model and explains it in greater detail. It explains that this model answers the question to whom is a governing body accountable from a different perspective than other models of corporate governance such as the enlightened shareholder model. Specifically, it acknowledges the governing body s key duty to balance the legitimate and reasonable needs, interests and expectations of all the organisation s material stakeholders in its decisionmaking, in context of its overall fiduciary duty to always make decisions and act in the best interests of the organisation. Within this approach it is recognised that the governing body may give precedence to the interests of shareholders or any other stakeholder grouping based on what it believes will best serve the interests of the organisation at a given point in time, and depending on the circumstances. With a focus on enhancing the accessibility of the King IV TM Principles for a variety of entities, the updated code reduces the number of principles addressing stakeholder relationships to just two. Principle 5.1 is an overarching principle for governance of all stakeholder relationships. Principle 5.2 separately addresses responsibilities of institutional investors as shareholders of companies. The recommended practices on governance of stakeholder relationships are rationalised to 32 practices under draft King IV TM (23 specifically address shareholder relationships and responsibilities of shareholders). Similar to King III, King IV TM recognises the importance of proactive engagement with the organisation s stakeholders, and effective and transparent stakeholder communications. It recommends that the governing body should ensure that it approves policy that articulates its strategic direction in stakeholder relationships and that provides for adoption of appropriate standards and frameworks to give effect to the approved policy. An enhanced definition of stakeholder is included. There are also new definitions of internal and external stakeholders, as King IV s recommended practices differentiate between these two stakeholder groups in some respects. Governance of stakeholder relationships King IV TM proposes a fresh approach to governance of stakeholder relationships, and guides governing bodies to ensure that stakeholder-inclusivity considerations feature throughout the organisation s governance systems and processes. Among new recommended practices identified for oversight of management of stakeholder relationships are having policies and processes in place to measure quality of stakeholder relationships, and appropriate responses to the results. The governing body s oversight of this area should also extend to the organisation s assessment of the influence of digitisation and automation on its future workforce requirements, and possible impacts on its employees and society. 1 Available at: 5

6 King III introduced an emphasis on the resolution and management of disputes and King IV TM elaborates further on dispute resolution as an established element of good governance. It recommends that dispute resolution mechanisms and associated processes be addressed in standard terms and conditions of the organisation s contractual arrangements with employees and other stakeholders, as part of the organisation s overall stakeholder relationship management plan. Recommended Practices for Group Governance (for companies in a group structure) King IV TM sets out a comprehensive set of recommended practices addressing group governance. Firstly, the board of a holding company should ensure a group governance framework is in place to address relationships and the exercise of authority and power among companies in the group structure. Further recommended practices are included addressing various areas of challenge commonly encountered in design and implementation of group governance policies. The group governance framework should provide for recognition of the separate and independent juristic personalities of each company in the group, and the legal duties of each director to the company to whose board the director is appointed. The board of the holding company should oversee that the agreed framework is implemented and adequately maintained across the group, as part of discharging its legal duties to the holding company. Boards of the subsidiary companies in the group (as separate legal entities) should consider and approve the extent of the adoption and implementation of policies and procedures of the holding company by the subsidiary company, and disclose this information in their external reporting. 6

7 3 Governing How will the King IV TM proposals affect your organisation and its governing body? bodies will need to take cognisance of structural adjustments that may be required to ensure the integration of the stakeholder-inclusive model throughout governance structures and processes. Adoption of stakeholder-inclusivity ought to form part of the governing body s practices applied in its ethical leadership of the organisation, and governance oversight of the organisation s strategy, policy, oversight and disclosure practices. This means adoption of stakeholder engagement practices that transition beyond communication to where value is extracted and created through enduring relationships. The concept should also permeate the activities of board committees. King IV TM recommends that the role and functions of the governing body s Social and Ethics Committee (where established) should extend to upholding, monitoring and reporting on stakeholder inclusivity. However the practices and activities of other board committees will also likely contribute significantly to achieving the same outcome. King IV TM does not advocate or endorse any specific stakeholder engagement standards within its recommended practices for governance of stakeholder relationships and shareholder relationships i.e. beyond recommending that the approved policy that articulates is strategic direction on stakeholder relationships should provide for adoption of the appropriate standards and frameworks to give effect to the policy. it is recommended that the approved policy should identify the adopted framework and standards. Examples of such frameworks and standards are the AccountAbility AA1000 Stakeholder Engagement Standard and the Global Reporting Initiative (GRI) s G4 Sustainability Reporting Guidelines 2. An area that requires consideration is the recommended practice of ensuring the organisation s reports and other disclosures enable stakeholders to make an informed assessment of the performance of the organisation and its ability to create value in a sustainable manner. Reporting the organisation s performance on value creation is guided by the IIRC s Integrated Reporting Framework 3. Practical design and implementation of internal processes and IT systems for internal and external reporting of appropriate and relevant Key Performance Indicator (KPI) information requires significant investment. This affords the organisation flexibility in selecting among frameworks and standards as appropriate to the organisation and the governing body s approved stakeholder relationship strategy. Implicitly however, ¹ Available at: AccountAbility first introduced the principle of inclusivity in the AA1000 Framework Standard published in 1999, and defined the term to mean the participation of stakeholders in developing and achieving an accountable and strategic response to sustainability. The Standard defined stakeholder engagement to mean a tool that organisations use to help them achieve inclusivity. ² Available at: 3 Available at: 7

8 Ideally the reporting of KPI information to reflect the organisation s performance in overall value creation should: Reinforce the organisation s culture and values in context of the design and implementation of its approved value creation strategy, and 4 desired Reflect the governing body s orientation to decision-making that supports a long-term view of performance and value creation. What are the main benefits of these proposals? A key benefit of the restructure code is its accessibility and wider applicability to a variety of organisations. The focus is placed on achieving the stated principles in order to realise specific targeted outcomes, with the overall impact being improved corporate responsibility. Paying attention to the long-term interests of the organisation is a fundamental duty of the governing body. Draft King IV TM gives focus to achieving the outcomes of sustainable performance and value creation, and protecting and building trust in the organisation, and its reputation and legitimacy reflected in the draft Code s principles and recommended practices to give effect to stakeholder-inclusiveness (Chapter 2), and to encourage sound stakeholder relationships (Chapter 5). The approach in draft King IV TM aligns with international best practice as set out in the G20/OECD Principles of Corporate Governance, which state the following main principle on the role of stakeholders in Corporate Governance: The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. The OECD Code explains further that corporations should recognise that the contributions of stakeholders constitute a valuable resource for building competitive and profitable companies. It is, therefore, in the longterm interest of corporations to foster wealth-creating co-operation among stakeholders. The governance framework should recognise the interests of stakeholders and their contribution to the long-term success of the corporation. 8

9 5 What questions should the governing body of an organisation be asking/considering in relation to draft King IV TM? Is the organisation s strategic plan geared to achieve sustainable long-term performance and value creation, taking account of the legitimate and reasonable needs, interests and expectations of its stakeholders? Is the governing body satisfied that the organisation s adoption of this strategic focus is pervasive throughout the organisation, including the tone at the top? Is there need for adjustments to support this strategic focus, including for example changing the format of meetings of the governing body to enhance its ability to exercise governance oversight responsibilities in line with this strategic focus? Has the governing body approved policy for the organisation that articulates its strategic direction on stakeholder relationships, including adopting appropriate standards and frameworks aligned with best practice to give effect to that policy? Does the organisation disclose its structures and processes for stakeholder relationship management, including mechanisms for monitoring and assessing quality thereof, and the key focus areas during the relevant reporting period? Does the board understand the governance priorities of the company s key stakeholders, and of its key shareholders? [Governing bodies of institutional investors] Does the governing body ensure the investor organisation responsibly exercises its rights, obligations, legitimate and reasonable needs, interests and expectations, as holder of beneficial interest in the securities of its investees? EY stakeholder relationship specialists are able to assist you in responding to the IODSA and the King Committee on the draft King IV TM, and in assessing the adequacy of your organisation s current stakeholder relationship management systems and processes and stakeholder reporting practices. 9

10 EY Governance, Integrated Reporting and Sustainability Services Governance Designing board structures Board inductions Board effectiveness Board culture assessments Review of risk governance effectiveness Alignment of risk and monitoring systems Integrated governance reporting Application of governance requirements/best practices in the sector context Governance of Remuneration Advice on developing the organisation s strategy-remuneration chain; the remuneration philosophy and related remuneration policy to achieve alignment between pay and performance; the organisation s performance measures linked to total value creation Review of remuneration disclosure in the integrated annual report Assessing compliance with statutory disclosure requirements for remuneration in the annual report. Integrated Reporting Excellence in Integrated Reporting Awards On-site briefings on the International Integrated Reporting Council s <IR> Framework and on applying the Framework <IR> benchmark reports Gap analysis against GRI G4 Guidelines, IIRC Framework and local and international best practice and peers Facilitation of the materiality determination process Assistance with writing sustainability or integrated reports Assistance with design of processes and systems to support implementation of integrated assurance Bespoke training and development Sustainability Advice on design of reporting and reporting systems to communicate value creation in the triple context (King IV) Assistance with KPI identification and design, and systems design to support KPI reporting Assurance reports for non-financial information reporting in the sustainability report or the integrated report Policy advice on sustainable development Stakeholder relationship management and engagement Advice on application of stakeholder engagement frameworks Design of stakeholder communications policy and related processes Facilitation for implementation of stakeholder engagement framework (policy, process and procedures) 10

11 Want to learn more? We want to hear from you Contact me today to set up a King IV TM briefing session with your board. EY s Excellence in Integrated Reporting Awards 2015 A survey of integrated reports of South Africa s top 100 JSE-listed companies Name: Joanne Henstock Title: Governance and Integrated Reporting Leader Tel: Mobile: joanne.henstock@za.ey.com Name: Thomas van Viegen Title: Associate Director Tel: thomas.vanviegen@za.ey.com Name: Kelly Gillman Title: Senior Manager Tel: Mobile: kelly.gillman@za.ey.com 11

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