KING III VS COMPANIES ACT

KING III VS COMPANIES ACT

INTRODUCTION The King Report on Governance for South Africa, 2009 (King III) and the accompanying King Code together constitute the premier corporate governance code in South Africa. They are the latest in a series of King reports since 1994, and contain numerous recommendations and principles with respect to best corporate governance practice. King III is supplemented by practice notes issued from time to time by the Institute of s in Southern Africa (IODSA). King III is not legally binding. However, for entities with a primary listing on the JSE Limited securities exchange certain aspects of King III are binding by virtue of the listings requirements imposing obligations on issuers to comply therewith. In respect of those matters in King III which the JSE does not consider mandatory, an issuer is nevertheless required to describe the extent of its compliance, and explain any non-compliance, in its annual report to shareholders. This is in accordance with the overall apply or explain philosophy of King III. There have also been cases where the high court has considered the principles expounded by King to be binding on state-owned entities (SABC v Mpofu 2009), and where it has referred to those principles as a yardstick against which the conduct of directors should be measured in the context of their fiduciary duties (Minister of Water Affairs and Forestry v Stilfontein Gold Mining Company 2006). King III applies to all entities and not only to companies. It generally imposes additional and more stringent corporate governance standards than does the Companies Act, No 71 of 2008 (Companies Act) and/or the founding legislation of entities, however in a few instances the Companies Act imposes a more stringent regime than King III. KING III APPLIES TO ALL ENTITIES AND NOT ONLY TO COMPANIES

Some key areas of comparison between the Companies Act and King III are set out below. AREAS OF OVERLAP COMPANIES ACT, 2008 KING III & KING CODE DIFFERENCE? Which entities are governed Only companies and, in limited circumstances, external companies (which are foreign companies with a registered office in South Africa). All entities. King III extends to a wider range of entities. To whom is the fiduciary duty owed s must act in the best interests of the company s76(3)(b). This is understood in company law to refer to the general body of shareholders as a whole. s must act in the best interests of the company Principle 2.14. Textually no difference, although, in other parts thereof, King III generally puts far greater focus on the interests of other stakeholders such as the community in which the company operates. It is not limited to shareholders. Duties of directors A codification of important common-law duties is contained in s76, namely: Duty to act in good faith in the best interests of the company. Disclose information to the board. No secret profit. Act for a proper purpose. Act with reasonable care, skill and diligence. The duties of good faith, to act in the best interests of the company and to act with requisite care, skill and diligence, are restated as they are in the Companies Act Principle 2.14. Further duties are cast in high-level terms, such as: Duty to provide effective leadership on an ethical foundation. Ensure that the company is, and is seen to be, a responsible corporate citizen. Duty to ensure the company s ethics are managed effectively. Be the focal point and custodian of corporate governance (Principles 2.1 to 2.13). Insofar as King III states that the board must act in good faith in the best interests of the company and restates the test in the Companies Act with respect to the duty of care, skill and diligence, that essentially captures all of s76 of the Companies Act. It can be said that King III is more onerous in imposing more responsibilities and expectations, and the duty to consider interests of stakeholders other than shareholders.

AREAS OF OVERLAP...CONTINUED COMPANIES ACT, 2008 KING III & KING CODE DIFFERENCE? Disclosure of personal financial interests These must be disclosed to the board, and the director in question must recuse himself. This is also the case with regard to interests of related persons s75. Real or perceived conflicts should be disclosed and managed Principle 2.14.4. Requirements in the Companies Act are more extensive and detailed. Board appointments s of profit companies can be directly appointed by a third party, hold office ex officio or may be elected by shareholders, as long as at least 50% are elected by shareholders s66(4). s must be appointed through a formal process; nomination committee should be involved; the appointment of non-executives should be formalised through a letter of appointment; shareholder approval is required for all appointments. King III has more extensive requirements and, in particular, recommends that all director appointments be subject to shareholder approval. Company secretary Duties set out in s88. They principally relate to guiding the board as to its duties and developments in the law, and ensuring the company s secretarial documents and filings are properly maintained and up to date. Duties set out in Principle 2.21. These cover the statutory duties under the Companies Act, but there are additional duties. King III covers what the Companies Act does, but goes further in providing as follows: The company secretary should have an arm s length relationship with the board. The company secretary should not be a director. Some extra duties are set out such as assisting in drafting yearly work plans, assisting with the induction of new directors, and assisting the nominations committee. Delegation of authority The board may delegate to committees, but this does not in itself constitute sufficient exercise of its duties and functions s72 (in particular s72(3)). The board should delegate to well-structured committees without abdicating its responsibilities Principle 2.23. No difference in substance. Board committee members Members of board committees may be nondirectors if the company s MOI or the committeeestablishing resolution provides for this s72(2)(a). Members should only be directors, the majority of whom should be nonexecutive, and the majority of the non-executives should be independent Principle 2.23. King III sets more onerous requirements in that non-directors should not be members of board committees, and the composition of committees is more regulated.

AREAS OF OVERLAP...CONTINUED COMPANIES ACT, 2008 KING III & KING CODE DIFFERENCE? Remuneration fees to be approved by a special resolution of shareholders adopted within the previous two years s66(8) & (9). Remuneration policy should be put to a non-binding advisory vote (ordinary resolution) by shareholders Principle 2.27. Companies Act is more stringent with regard to director fees. However, the Companies Act is silent on the composition of remuneration to executives and non-executives, whereas King III contains numerous recommendations in this regard, eg base pay, options, attendance fees, severance pay, and in particular share incentive schemes Principle 2.25. Remuneration - disclosure Companies that are required to be audited must in their annual financial statements disclose the remuneration of all directors and all prescribed officers s30(4)(a). Companies to disclose remuneration of all directors and top three senior managers Principle 2.26. Companies Act is more onerous in that it requires disclosure in respect of all prescribed officers and not only the top three. Audit committees - composition Audit committees must consist of at least three independent non-executive directors, at least a third of whom must have certain qualifications - s94 read with reg 42. Audit committees must consist of at least three independent non-executive directors, all of whom must collectively be suitably qualified - Principle 3.2. King III is slightly more onerous in that all members must, collectively, be suitably qualified (for instance compare with the very minimal thresholds set in reg 42), and further the test for independence is more stringent and prescriptive in King III. Audit committees - duties Duties set out in s94(7), and principally relate to the engagement of the external auditor, reviewing the auditor's independence, determining the scope of non-audit services to be carried out by the auditor, and commenting on the company's financials. Duties set out in Principles 3.4 to 3.10. They include the statutory duties as contained in the Companies Act. King III is more onerous in that it refers to the statutory duties and then goes on to impose additional requirements, for example: Overseeing integrated reporting. Ensure a combined assurance model is applied. Satisfy itself of the expertise, resources and experience of company s finance function. Should be an integral component of the company s risk management process. Oversee internal and external audit.

AREAS OF OVERLAP...CONTINUED COMPANIES ACT, 2008 KING III & KING CODE DIFFERENCE? Social & ethics committees Listed companies, stateowned companies and other companies with public interest scores of over 500 points in any 2 of the previous 5 years, are required to have social & ethics committees s72(4) read with reg 43. Reference is simply made to the fact that certain categories of companies will require social & ethics committees under the Companies Act Principle 2.23. No difference. Independence of directors The only references / allusions to independence are in the requirements for membership of an audit committee (s94(4)(b)) and those relating to independent boards of offeree regulated companies during affected transactions (reg 108(8)). Contains comprehensive provisions and criteria with respect to independence Principle 2.18. King III contains a general and prescriptive test for the independence of directors. It is in most respects more onerous than that contained in the Companies Act. Internal audit Only deals with this through the audit committee requirement. Only public companies and state-owned companies are required to have an audit committee s94. Entire chapter dedicated to the internal audit function, applicable to all entities (Chapter 7). King III is more extensive and detailed with regard to the internal audit function. Governing stakeholder relationships Only deals with this through the social and ethics committee, whistleblower mechanism (s159) and certain rights and entitlements of employees and trade unions in the context of s45 financial assistance and the business rescue provisions. Refers to social and ethics committees but further contains an entire chapter dedicated to governing stakeholder relationships (Chapter 8). King III is more extensive and detailed with regard to the governance of stakeholder relationships. Important examples are: The board should take account of legitimate interests and expectations of all stakeholders in its decision-making Principle 8.3.1. The board should ensure that minority shareholders are protected Principle 8.4.2. The board should apply itself to the use of alternative dispute resolution mechanisms as a method of preserving stakeholder relationships Principle 8.6.

AREAS OF OVERLAP...CONTINUED COMPANIES ACT, 2008 KING III & KING CODE DIFFERENCE? Reporting to shareholders Companies are required to prepare annual financial statements, including the directors report and auditors report. The directors report should contain any matter material for the shareholders to appreciate the company s state of affairs s30(3). Extensive and detailed requirements with regard to integrated or so-called triple-bottom line reporting. The integrated report must also disclose the reasons for the removal, resignation or retirement of directors Chapter 9. King III requires the minimum that is stated in the Companies Act, but sets out far more detailed and onerous provisions with regard to triple bottom-line reporting, ie reporting from an economic/ financial, environmental and social impact perspective. Duties during takeovers A wide range of duties and responsibilities is contained in s126 and the takeover regulations. There is simply a practice note which largely sets out what is contained in the Companies Act and the takeover regulations. No material difference.

KEY CORPORATE GOVERNANCE ASPECTS DEALT WITH IN KING III BUT NOT IN THE COMPANIES ACT A company should have a Code of Conduct which is made a material term of employment and supplier agreements Principle 1.1. The requirement for the board to have a charter Principle 2.1.1. All committees should also have formal terms of reference Principle 2.23.1. The number of meetings of the board per year: King III recommends at least 4 per year Principle 2.1.2. Listed companies should have a policy regarding dealing in company s securities by directors Principle 2.14.5. The board must appoint an independent non-executive chairman and/or lead independent director Principle 2.16. The board should appoint a CEO and establish a framework for delegation of authority Principle 2.17. Various duties of the chairman and the CEO are set out in Principles 2.16 and 2.17. Further, King III deals with the question of which committees the chairman of the board may be a member or chairman. The board should comprise a balance of power, with the majority being non-executive and the majority of the nonexecutives being independent Principle 2.18. The independence of independent non-executive directors must be reviewed annually and be subject to an especially rigorous review after 9 years Principle 2.18.8. The holding of other directorships by an executive director ought to be in accordance with a board-approved policy Principle 2.19. An induction programme should be put in place for new directors Principle 2.20. Board evaluations should be done every year Principle 2.22. Companies should have a risk committee, remuneration committee and nomination committee. They should also consider having governance and IT steering committees Principle 2.23.6. A governance framework should be agreed between holding companies and their subsidiaries Principle 2.24. The audit committee should meet at least twice per year, and should meet with external and internal auditors without management being present at least once per year Principles 3.1.4 and 3.1.5. The chairman of the board should not be the chairman or member of the audit committee Principle 3.2.3. There should be a minimum of two executive directors, namely the CEO and the CFO Principle 2.18.5. At least one third of the non-executive directors should rotate every year Principle 2.18.6.

THE KING REPORT ON GOVERNANCE FOR SOUTH AFRICA, 2009 (KING III) AND THE ACCOMPANYING KING CODE TOGETHER CONSTITUTE THE PREMIER CORPORATE GOVERNANCE CODE IN SOUTH AFRICA

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