• King IV™ and Corporates: Don’t Focus on Goal Seeking - Show where you Want to be
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King IV™ and Corporates: Don’t Focus on Goal Seeking - Show where you Want to be

13 April 2017

By Shantel Dartnall,Head of Governance Services at Statucor, Ronelle Kleyn and Yolandi van Zweel, Governance consultants at Statucor

To give it its full name, the King IV™ Report on Corporate Governance for South Africa 2016 is a more focused approach to corporate governance, listing 17 principles that “embody the aspirations of the journey towards good corporate governance”.

While this is a far more consolidated approach compared to the 75 principles of the King III report, at Statucor, we urge our clients not to celebrate this as a case of “fewer boxes to tick”.

It’s true that South African corporate governance can be a goal-seeking environment and some companies might fall into the trap of delegating compliance to a company secretary, who then works their way through a checklist, issues a report and everybody moves on.

King IV™ heralds a fundamental change of approach towards integrated reporting that takes cognisance of the “triple context of economy, society and the environment”. Traditionally, a healthy balance sheet, used to be the measure of success for corporations. King IV™, however, encourages organisations to step outside the norms of tradition and measure and report on progress from a financial, social, environmental, and ethical perspective.

Integrated reporting requires organisations to take into account all the types of capital they work with in their business model. The Six Capitals, quoted in the King report and mentioned in the Integrated Reporting Framework by the International Integrated Reporting Council’s (IIRC), are financial, manufacturing, human, intellectual, natural, social, and relationship capital.

This is a different, more holistic way for companies to assess and report the value that they add. Using financial criteria alone will no longer suffice in a world with finite resources, where social and environmental sustainability are now the watchwords of the day.

King IV™ is in line with current international thinking on environmental, social, and governance (ESG), reporting, which encourages greater transparency on all these fronts. Most stock exchanges have incorporated similar principles into their listing requirements.

Consequently, most JSE-listed companies have welcomed King IV™ as keeping South Africa in line with global best practice — and indeed ensuring a more equitable, sustainable and transparent corporate governance in the future.

The often repeated summary of King IV’s™ new approach is that it encourages an “apply and explain” regime versus King III’s “apply or explain”. It’s worth elaborating that this pertains to applying the principles and explaining the practices.

The principles — 17 of them — are ideals to be aimed for. For example, the first reads, “The governing body should lead ethically and effectively”. The practices are the ways an organisation chooses to practically apply the principles. Here the King style of reporting calls for a narrative account, an explanation of how on organisation is trying to apply the principles to achieve the governance outcomes.

The outcomes are four universally aspirational benefits of good governance, namely ethical culture, good performance, effective control, and legitimacy.

The key is that achieving these admirable values and finding ways to best apply the principles is a journey. They cannot be accomplished in a year or two.

The JSE has already proposed changes to the listing requirements and these changes include King IV™ principles. Inevitably, listed entities need to implement and integrate King IV™ into their organisation, into the culture. Another challenge for companies, when it comes to the disclosures, is how they are going to disclose, and how much. With the new narrative approach, there is less chance to look at King IV™ as a tickbox method.

We warn our clients against overshooting in their corporate-governance reports. Resist the urge to impress your stakeholders by trumpeting that you have achieved, say, fair remuneration, or responsible corporate citizenship. We should aim to report responsibly and with a fair amount of transparency to enable the uninformed reader to understand the company better.

Rather approach this as a journey. Map a plan of your company’s journey towards achieving these outcomes in the future. Communicate this clearly with your stakeholders and then year by year, report on your steady progress.

Be transparent about saying, “We’re moving towards this, these are our goals. We haven’t got there yet, but this is the process we intend to follow.”

Our listed clients seem to appreciate this approach. We advise our clients against goal seeking; to be realistic about the steps it will take to reach the point the board has set for itself.

You set your own goal, and then work towards that, because year on year, you’re going to have to trend your progress and report on that.

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