• King IV™: The Rise of the Stakeholder

King IV™: The Rise of the Stakeholder

12 April 2017

The word stakeholder appears 150 times in the report – showing its importance

By Shantell Dartnal, Head of Governance Services at Statucor, Ronelle Kleyn and Yolandi van Zweel, Governance consultants at Statucor

Now that the King IV™ Report on Corporate Governance for South Africa 2016 is in broad circulation, and most companies are becoming familiar with its recommendations, it is useful to unpack one of the distinguishing characteristics of the report: its stakeholder focus.

The term “stakeholder” appears 150 times in the report, which shows how important the concept has become.

It’s easier to understand who a stakeholder of an organisation is, and what their rights and responsibilities are, when contrasting King IV’s™ stakeholder focus with the company focus of the Companies Act (“Act”).

The Act takes, as a given, that the directors of a company and its governing body, have a fiduciary duty towards that company and the directors must act in the best interests of the company.

By contrast, King IV™ states that an organisation “can no longer be seen as existing in its own narrow universe (or society) of internal stakeholders or resources needed to create value, as it also operates in, and forms part of general society. In this view, the licensor of an organisation is not just those individuals and entities within its narrowly defined value chain, but society as a whole.”

Let’s imagine there is a company involved in a shareholder dispute. One of the shareholders has brought an application to liquidate the company because they’re not getting access to the funds. The directors decide to oppose the application, because they’re acting on behalf of the company, not the shareholders.

What King IV™ intends is for the directors to consider all stakeholder interests in choosing their course of action.

Here, it’s important to distinguish between shareholders and stakeholders. A shareholder holds equity in the company. A stakeholder is anybody that touches the company — certainly shareholders, but also employees, customers, service providers, unions, communities, legislators, the media… even the environment is listed as a stakeholder in many of our charters.

In our example of the company, where the shareholders want the firm liquidated, what is the ultimate determiner of value? Traditionally and according to the Companies Act, it’s the survival of the company. So, say the company is a juristic entity. It has 200 employees and 50 suppliers. It has a R50-million impact on the economy. It contributes to the local municipality, so the footprint is huge. And all of these groups are stakeholders of the company. All their interests must be considered.

How does the company do that? By way of its social and ethics committee. Although the Companies Act does not require all companies to have a social and ethics committee, King IV™ recommends the establishment of a social and ethics committee as best practice.

As we’ve said before, King IV™ encourages a cultural shift within companies. For companies to embrace a stakeholder focus means more than just establishing a social and ethics committee. The reasons behind its establishment need to be discussed at board level, and a culture of corporate citizenship and stakeholder awareness needs to be driven from the top - down throughout the company.

The committee also needs to be established properly. A recommendation (#70) of the report says the committee should have executive and non-executive members, with the majority being non-executive members — which encourages broader stakeholder representation.

For companies to implement King IV™, it therefore becomes crucial for organisations to ensure that their social and ethics committee is properly constituted, that the committee’s charter, or terms of reference are correct, and that the duties and responsibilities of the members are clear.

By giving the social and ethics committees a bigger punch, King IV™ makes stakeholders more involved and encourages ethical leadership.

The requirements around social and ethics have become stricter. Committees and governing bodies must be conscious of diversity, transparency, conflicts of interests and various other considerations.

But this makes sense, as doing business ethically is a complex process, with many interests — and many stakeholders — to be considered. We believe that the social and ethics committee should be the custodian of the stakeholder-inclusive approach.

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