CORPORATE GOVERNANCE
FOREWORD
Fasset, as a public entity, is governed by the Public Finance Management Act and is also committed to
ensuring that the recommendations of the King Reports are adhered to.
In this regard a
comprehensive set of policies have been designed and implemented in accordance with the Fasset
Constitution and in support of Fasset's Sector Skills Plan and Business Plan. These policies contribute
towards the effectiveness of corporate governance strategies and are in accordance with the Public
Finance Management Act and King Reports.
Fasset has also undertaken to assist employers in its sector by developing guidelines on corporate
governance and advice on how the strategies relating to corporate governance can be implemented.
These guidelines have been published as a part of Fasset’s commitment to promoting the highest
standards of corporate governance in South Africa.
This guideline document not only embraces the King recommendations, but goes beyond these
principles in setting out the most important duties and responsibilities for all directors, trustees, sole
proprietors, members and partners.
Fasset believes that these guidelines will assist employers in the sector in performing their duties and
fulfilling their responsibilities. In addition to acting as a source of reference to newly appointed
directors, members or trustees a review of the guidelines may identify new methods and ideas.
The guidelines have been prepared for Fasset, by our attorneys, Webber Wentzel Bowens. Should you
have any suggestions and or questions with regard to corporate governance, please contact the
corporate department at Webber Wentzel Bowens, the author of this document.
Cheryl James
Fasset
Blackheath
November 2002
W
This publication has been prepared as a guideline and is not intended to be exhaustive. While
the utmost care has been taken in the preparation of the publication, it should not be used or
relied upon as a substitute for detailed advice or as a basis for formulating a business decision.
"Copyright 2002 Webber Wentzel Bowens"
The above notice serves as a warning to third parties that Webber Wentzel Bowens claims to be
the proprietor of the copyright subsisting in the literary work. In the event of there being any
infringement, it will impute knowledge on the infringing party and assist in recovering damages.
TABLE OF CONTENTS
PART I ..................................................................................................................................4
1.
Introduction – what is corporate governance?......................................................4
PART II ................................................................................................................................5
2.
Different types of enterprises .................................................................................5
3.
Sole proprietorships .................................................................................................6
4.
Partnerships .............................................................................................................6
5.
Close Corporations ...................................................................................................7
6.
Trusts ........................................................................................................................8
7.
Companies ................................................................................................................9
8.
Director's duties and responsibilities .....................................................................9
9.
Director's duties in terms of the Companies Act .................................................. 11
10.
Other obligations imposed on directors ............................................................... 19
PART III ............................................................................................................................. 20
11.
The King Reports of corporate governance .......................................................... 20
12.
Corporations affected by the Code of Corporate Practices and Conduct ("the
Code") ................................................................................................................................ 20
13.
Recommendations of King II ................................................................................ 21
Appointment of directors .................................................................................................. 23
Director's remuneration and remuneration committee.................................................. 24
Board meetings ................................................................................................................. 25
Board committees ............................................................................................................. 25
Annual reports and company meetings ........................................................................... 26
Risk management ............................................................................................................. 27
Internal control and audit committee ............................................................................. 27
Financial statements and the annual report ................................................................... 27
Transactions with directors and conflicts ........................................................................ 29
14.
Integrated sustainability reporting ...................................................................... 29
15.
Organisational integrity /Code of Ethics .............................................................. 30
PART IV .............................................................................................................................. 30
16.
Conclusion .............................................................................................................. 30
USEFUL TELEPHONE NUMBERS FOR FASSET MEMBERS ................................................. 34
PART I
1.
Introduction – what is corporate governance?
Corporate governance is the system or process by which companies, partnerships, close
corporations and trusts are directed and controlled. Directors of the board, members of a
close corporation and trustees of a trust are all responsible for the governance of their
enterprise.
The concept of corporate governance has grown in prominence in recent times. In the
wake of Enron, WorldCom, Adelphia Communications and an ever-lengthening litany of
corporate malpractice scandals, finding new ways to protect average investors has become
an international priority. It is, therefore, not surprising that corporate governance reform is
gaining importance as a crucial mechanism for addressing the erosion of investor
confidence.
It goes without saying that there is no single, universally appropriate, model of corporate
governance. This principle is recognised in the King Report on Corporate Governance for
South Africa 2002 ("King II"), which reiterates that:
"companies are governed within the framework of the laws and regulations of the
country in which they operate. Communities and countries differ in their culture,
regulation, law and generally the way business is done. In consequence, as the
World Bank has pointed out, there can be no single generally applicable corporate
governance model. Yet there are international standards that no country can
escape in the era of the global investor. Thus, international guidelines have been
developed by the Organisation for Economic Development Principles of Corporate
Governance (OECD), the International Corporate Governance Network and the
Commonwealth Association for Corporate Governance. The four primary pillars of
fairness, accountability, responsibility and transparency are fundamental to all the
international guidelines of corporate governance."1 (Our emphasis)
It follows that corporate governance can not be reduced to a set of pro-forma rules capable
of mechanical application. It is, and should be, a flexible, tailor-made, multidimensional
process to which a company, and many and varied individuals, submit themselves.
1
paragraph 23 on page 15
Many companies in the corporate arena today have a distinctive split between control and
ownership. The need for corporate governance becomes ever increasing as directors are
becoming more accountable to their shareholders and stakeholders.
Other enterprises such as trusts, close corporations, partnerships and sole proprietors do
not necessarily have to ensure that they comply with the requirements of corporate
governance due to their nature and composition. However, as will be discussed in a later
part of this publication, it is suggested that these enterprises follow the broad, underlying
principles of corporate governance recommended in King II.
The primary sources of law and regulation relating to corporate governance and director's
duties comprise:

statute, particularly the Companies Act, the JSE Listings Requirements of the JSE and
the Securities Regulation Code on Take-overs and Mergers. In addition, there is specialpurpose legislation such as the Banks Act, 1990, the Long-term Insurance Act, 1998,
the Short-term Insurance Act, 1998, the Financial Markets Control Act, 1989, the Stock
Exchanges Control Act, 1985, the Unit Trusts Control Act, 1981 and the Public Finance
Management Act, 1999;

the common law ;

the company’s articles of association; and

King II.
The first part of this publication will detail the common law and statutory duties and
responsibilities of directors, sole proprietors, partners, members of close corporations and
trustees whilst the second part of the publication will detail the recommendations laid down
in the King Reports on corporate governance. It is our aim that this section will explain the
principles of corporate governance in the South African context and provide practical
guidance to the people who are responsible for ensuring good corporate governance in their
enterprises.
PART II
2.
Different types of enterprises
There are a variety of investment vehicles available to people interested in setting up
commercial enterprises in South Africa. The forms of enterprises include:

sole proprietorships;

partnerships;

close corporations;

limited companies, public and private; and

business trusts.
In the paragraphs that follow, we will briefly explain the way in which each of these
enterprises operate and more importantly, we will outline the duties and responsibilities of
the people who control the specific enterprises.
3.
Sole proprietorships
The sole proprietorship is usually a relatively small enterprise in which the capital of only
one person, the proprietor, is invested.
As sole proprietors are single owner businesses, the business is operated with full personal
risk. The sole proprietor’s estate is ultimately liable for all the commitments of the business.
Due to the fact that sole proprietors run their own affairs and are not accountable to
shareholders, the principles of corporate governance applicable to the manager/ owner
relationship are generally not applicable to the sole proprietor. In a later part of this report,
we do however highlight the manner in which these entities can apply certain corporate
governance principles to the conduct of their business.
4.
Partnerships
A partnership is a legal relationship arising from an agreement between at least two, but
usually not more than twenty persons, in terms of which each contributes towards a
business which is carried on in common with the object of obtaining mutual material
benefit.2
A partnership does not have legal personality as it is simply a contractual association of
persons and has no existence in law independent of its partners. Since a partnership does
not exist as a separate legal persona, the partners are personally liable for its debts and
they own the partnership estate.
2
HS Cilliers, Ml Benade, JJ Henning, JJ du Plessis, Pat, JSA Fourie, L de Kocker: Entrepreneurial Law at page 10
Various rights and obligations in respect of partners arise from the partnership agreement.
There are further rights and obligations which arise as consequences of a partnership.
These include:

a duty of good faith between partners;

the duty to promote the interests of the partnership unselfishly;

a duty to disclose all information which affects the partnership;

a duty to make a contribution to the partnership; and

the duty to exercise reasonable care and expertise in the management of the business
of the partnership.
Unlike a company, the partners owe duties to one another whereas directors owe duties to
the company and its shareholders. In light of the absence of a partnership’s independent
legal personality and the relationship that partners have with one another, corporate
governance principles applicable to the internal management of an organisation may serve
only as guidelines for good practice. In certain circumstances they will be neither applicable
nor sufficiently extensive.
However, those principles outlined in paragraphs 14 and 15
below, may be implemented.
5.
Close Corporations
The introduction of the close corporation into our law in 1984 created a new form of
business for small businessmen. The close corporation is a juristic person distinct from its
members. The close corporation enjoys succession and its members have limited liability in
respect of the corporation’s debts. The main source of law and regulation with regard to
close corporations, is in terms of the Close Corporations Act, 1984.
Members of a close corporation stand in close relationships to one another but they owe
fiduciary duties to the corporation as a separate legal persona. The Close Corporations Act
sets out some of the fiduciary duties of members.
Each member of the close corporation must act honestly and in good faith and must
exercise powers he or she has to manage or represent the corporation in its interests and
for its benefit. A member should not exceed his or her powers. A member must further
avoid a conflict between his or her interest and that of the corporation and may not derive
any personal economic benefit from the corporation or anyone else, nor compete with its
business activities.
6.
Trusts
A trust is defined in the Trust Property Control Act as the arrangement through which
the ownership in property of one person is by virtue of a trust instrument made over or
bequeathed:
-
to another person, the trustee, in whole or in part, to be administered or disposed of
according to the provisions of the trust instrument for the benefit of the person or class
of persons designated in the trust instrument or for the achievement or for the
achievement of the object stated in the trust instrument; or
-
to the beneficiaries designated in the trust instrument, which property is placed under
the control of another person, the trustee, to be administered or disposed of according
to the provisions of the trust instrument for the benefit of the person or class of persons
designated in the trust instrument or for the achievement or for the achievement of the
object stated in the trust instrument,
but does not include the case where the property of another is to be administered by any
person as executor, tutor or curator in terms of the Administration of Deceased Estates Act.
A trust is not a legal person. The assets, liabilities, rights and duties of the trust vest in the
trustee.
The primary source of law and regulation relating to a trust and the trustees
duties, are in terms of the trust deed and the Trust Property Control Act.
The trustee is the person to whom the property is entrusted as administrator to manage it
in accordance with the objects of the trust.
A trustee must comply, inter alia, with the following general duties:

he or she must comply with the duties as outlined in the trust document;

he or she must fulfil his or her duties impartially and in good faith;

in the performance of his or her duties and in the exercise of his or her powers, the
trustee must act with care, diligence and skill which can reasonably be expected of a
person who manages the affairs of another;3

he or she must take control of the trust assets and keep these clearly separate from his
or her personal property;4

the trustee must preserve the trust property and keep it free from burdens such as
liens;

he or she must manage the trust assets which are capable of producing an income in
such a way that a reasonable return is obtained;

the trustee must maintain a proper account of trust funds and trust business, retain
documents relating to the administration of the trust 5 and render account of his or her
administration of the trust when the Master of the High Court requests him to do so; 6
7.
Companies
Two types of limited liability companies are capable of being formed: public companies
(whose shares may, but are not obliged to, be listed on the JSE Securities Exchange South
Africa ("the JSE")) and private companies. Both are created in terms of, and are governed
by, the provisions of the Companies Act.
In the paragraphs that follow, we discuss in detail the duties and responsibilities of directors
in terms of the common law and the Companies Act, 1973.
8.
Director's duties and responsibilities
General
The duties of directors are regulated by their contracts with the company, statute, the
memorandum and articles of association of the company and the common law.
Duties at common law
The duties that directors have, at common law can be summarised as follows:
3
4
5
6
Section
Section
Section
Section
9(1) of the Trust Property Control Act 57 of 1988
10 and 11 of the Trust Property Control Act 57 of 1988
17 of the Trust Property Control Act 57 of 1988
16 of the Trust Property Control Act 57 of 1988

Directors are required to act both lawfully and honestly in their official as well as
personal capacities. Failure by a director to act lawfully will result in him being held
criminally liable and also to being disqualified to act as a director either automatically or
in terms of a court order.

Directors are also expected to act with care, skill and diligence when conducting the
business of the company. Where a director fails to exercise the necessary skill, care
and diligence required and as a result, he or she breaches the duty of care owed to a
third party and the director may incur personal liability for any loss suffered as a result
of the breach. Liability in this instance will be based either on delict, where a duty of
care is owed to a third party, or on breach of contract, if there is a contract between the
director and the company.

A director, from the time appointed or at the time he or she commences to act as such,
stands in a fiduciary relationship to the company. A director may, amongst others, be
held personally liable to the company for breach of his or her fiduciary duties.

A director's fiduciary duty comprises two separate and distinct duties, which in turn each
comprise a number of further duties. These duties include:

the duty to exercise powers in good faith:

a director must exercise his or her powers in an independent and objective
manner. He or she has a duty to do what he or she considers best serve the
company's interests.

a director must further exercise his or her powers for the purpose for which
they were given.

a director must act within the limits of authority.
A director may not act
outside the limits placed in his or her powers by the Companies Act, the
common law and the company's memorandum and articles of association.

a director must observe any limitation of powers imposed on the company of
which he or she is a director. When a director acts on behalf of a company
he or she must do so within the scope of the company's objects and powers.

duty to avoid a conflict between personal interests and the interests of
the company:

in general, a director must exercise judgment in an honest manner as to what
is in the company's interests and must act for the benefit of all shareholders
and disclose on request to all shareholders, certain information connected
with the company;

a director must account to the company for profits made by reason of his or
her directorship.
This includes any gain or advantage made by a director
while carrying out his or her duties as a director;

a director may not misappropriate or usurp a business opportunity which the
company is pursuing or which the director is obliged to acquire for the
company;

a director has a common law duty to disclose to the company any interest he
or she has in a contract with the company. The rule at common law is that,
unless the company's articles provide otherwise, a director may not, whether
directly or indirectly, have an interest in a contract with the company, unless
a general meeting of the company approves the contract, following full
disclosure.
9.
Director's duties in terms of the Companies Act
In addition to the common law duties and any other duties or restrictions which may be
imposed on directors in terms of statute or their contracts with the company, the Companies
Act imposes obligations on directors of companies. The obligations imposed on directors in
terms of the Companies Act, include:
Number of directors

Public companies must have at least two directors, whilst private companies are only
required to have one director.

Until directors are appointed, every subscriber to the memorandum of a company, is
deemed to be a director of the company.
Appointment of directors

The first directors of the company may be appointed by a majority of the subscribers to
the memorandum.

Any person who, before the issue of a certificate to commence business, is appointed as
a director of the company, shall:

sign and lodge with the company, his or her consent to act as a director, on a form
CM27;

subscribe for the minimum number of qualification shares or lodge with the
Registrar of Companies, a written agreement to acquire the shares.

Persons who are appointed as directors, after a company has been issued with a
certificate to commence business must, within 28 days of appointment, sign and lodge
with the company, their consent to act as a director of the company. This must be
done on the prescribed form.
Disqualification from appointment
The following categories of persons are disqualified in terms of the Companies Act, from
being appointed or acting as directors:

a body corporate;

a minor or any other person under legal disability;

any person who is the subject of any order under the Companies Act, which disqualifies
them from being a director;

except with the authority of the Court:

an unrehabilitated insolvent;

any person removed from an office of trust on account of misconduct;

any person who has at any time been convicted of theft, fraud, forgery or uttering
a forged document or any offence involving dishonesty or in connection with the
promotion, formation or management of a company and has been sentenced
therefor to imprisonment without the option of a fine or to a fine exceeding R100;

any person who is disqualified in terms of the company’s articles of association.
Removal from office

A company may, notwithstanding anything in its articles or memorandum or in any
agreement between it and a director, remove a director from office before the
expiration of their period of office. Removal from office can be done by passing an
ordinary resolution. Special notice must be lodged with the company of any proposed
resolution to remove a director from office.

A director who is affected by a proposed removal has the right to make representations
with regard to his or her removal from office. The director is entitled to have his or her
representations heard at the meeting which is convened for the purposes of proposing a
resolution for the director’s removal.
Register of directors and officers
Every company must keep in one of the official languages of the country, a register of
directors and officers of the company and secretaries which are corporate bodies.
The
Companies Act prescribes the particulars of each of the parties, that are to be entered into
the register.
Loans to directors

Section 226 of the Companies Act imposes restrictions on the granting of loans to
directors and the provision of security on behalf of directors.

Section 226 provides, that no company shall directly or indirectly make a loan to:


any director or manager of:

the company; or

its holding company; or

any other company which is a subsidiary of its holding company; or
any other company or other body corporate controlled by one or more directors or
managers of the company or of its holding company or any other company which is a
subsidiary of its holding company.
Main exemptions to Section 226 of the Companies Act

Loans made to a director or manager provided prior consent of the members of the
company is obtained in the form of a special resolution.

Loans made to a director or manager in order that they meet expenditure incurred or to
be incurred by him or her to perform duties in regard to the company. These loans
require the approval of the company at a general meeting.

Loans made to employee share trusts as contemplated in section 38(2)(b) and (c) of the
Companies Act.

Loans made bona fide to a director in the ordinary course of business of a company
regularly carrying on the business of making loans.

Loans made to a director or manager of a subsidiary provided such director or manager
is not also a director or manager.

Loans be made to a director or manager of the company for housing, with the approval
of the company in general meeting.
Issue of shares

A director may not issue any shares of the company or debentures which are capable of
being converted into shares, to a director or his or her nominees unless:

approval has been specifically given by the company in general meeting; or

allotted or issued under a contract underwriting such shares or debentures; or

such shares or debentures are allocated or issued in proportion to the director's
existing holdings, on the same terms and conditions as have been offered to all the
members or debenture holders of the company or to the members or debenture
holders of the class or classes being allotted or issued; or

such shares or debentures are allotted or issued on the same terms and conditions
as have been offered to members of the public.

A director who knowingly takes part in an allotment or issue of any shares in
contravention of Section 221 and 222 may be liable to the company for losses as a
result thereof. A director who contravenes Section 222 will also be guilty of an offence.
General administrative duties of directors

Directors must ensure that the company does not commence business before a
certificate to commence business has been issued by the Registrar of Companies.
Failure to do so is a criminal offence.

If requested to do so by the required number of members, the directors must call a
general meeting, by issuing a notice to the members within 14 days of the lodging of
the requisition. Any director or officer of a company who knowingly is party to a failure
to convene a meeting as required, will be guilty of an offence.

In the absence of the approval of the company in general meeting, the directors may
not dispose of the whole or the greater part of the company's undertaking or assets.

Directors must ensure that the notice convening a meeting to confirm or authorise a
contract in which a director is materially interested, (whether directly or indirectly),
states the full particulars of the interest of the relevant director. Failure to do so is a
criminal offence.
Attendance registers
The directors of a company present at a directors' meeting must sign their names under the
date of the meeting in an attendance register, which must be kept at the company's
registered office, or at the office where it is made up. Failure to do so is a criminal offence.
Minute books

The directors are responsible for ensuring that minutes are kept of all meetings of
directors or managers.

The minutes must be recorded in one of South Africa’s official languages.

Any resolution signed by directors or managers of the company, shall be deemed to be
a minute of a meeting. The resolution must be entered into the minute book and noted
at the next director’s meeting.

The minutes of a meeting must be signed by the chairman of that meeting or by the
chairman of the following meeting.

The directors of a subsidiary company must ensure that the annual financial statements
are made out to cover an accounting period ending on the same date as the period
covered by the annual financial statements of its holding company.

When requested to do so by a company or its auditors, directors must give the
necessary information regarding loans obtained from the company, for inclusion in the
company's annual financial statements. Failure to do so is a criminal offence.

When requested in writing by the company or its auditors, the directors must give the
prescribed information regarding their emoluments and pensions, within 21 days of the
date of the request. Failure to do so is a criminal offence.
Director's names on letterheads

A company is not permitted to issue or send any trade catalogue, trade circular or
business letter bearing the company's name, to any person in South Africa, unless the
document states all the director's forenames, initials, surnames and nationalities if the
directors are not South Africa.

A company is to publish its name and registration number on all its notices and official
publications, which include all bills of exchange, promissory notes, endorsements,
cheques, orders, delivery notes, letters, invoices, receipts and letters of credit.
Appointment of auditors

When the memorandum and articles of a company to be incorporated are lodged with
the Registrar of Companies for registration, a written consent of a person accepting
appointment as an auditor may be lodged simultaneously. The auditor will be deemed
to have been appointed by the company at this point in time.

If the company does not appoint an auditor when it lodges the memorandum and
articles with the Registrar, then an auditor must be appointed within 21 days after the
incorporation of the company.

If the directors of a company fail to appoint an auditor, the Registrar may appoint an
auditor on the company's behalf. In this case, each director will be guilty of an offence.
Appointment of a company secretary

The directors of a public company having a share capital must appoint a secretary. The
secretary must be permanently resident in South Africa and have, in the opinion of the
directors, the requisite knowledge and experience to carry out the duties of a secretary
of a public company. The directors of a public company who fail to appoint a secretary
after being ordered to do so by the Registrar of Companies shall be guilty of an offence
Accounting records

Every company is to keep, in one of South Africa's official languages, accounting records
that are necessary to fairly represent the company's state of affairs and business and to
explain its transactions and financial position. The records must include:

records showing the assets and liabilities of the company;

a register of fixed assets;

records containing entries from the day-to-day in sufficient detail of all cash
received and its out and of the matters in respect of which receipts and payments
take place;

records of all goods sold and purchased and (except in the case of ordinary retail
trade) records showing the identity of the buyers and the sellers; and


statements of annual stocktaking.
The accounting records are to be kept at the registered office of the company or at such
other place as the directors think fit. The records must be available for inspection
Financial statements

The directors of a company are responsible for producing annual financial statements in
one of South Africa's official languages, each year.

The annual financial statements must consist of:

a balance sheet and income statement and the notes thereon or another attached
document which provides the information required by the Companies Act;


a cash flow statement;

a director's report, which is to comply with the Companies Act; and

an auditor's report.
The contents of the annual financial statements must be approved by and are the
responsibility of the directors.

The annual report must be approved by its directors and signed by at least two directors
of the company or if there is only one director, by that director.
There are many and varied potential liabilities, both in common law and in statute, which
could render a director to both criminal and civil liability. The Companies Act prevents a
company from validly exempting or indemnifying directors of a company against negligence,
default, breach of duty or breach of trust. It is however possible for a company to take out
insurance against such liability. It is
not clear whether such insurance will protect the
company or the directors themselves.
10. Other obligations imposed on directors

A multitude of statutory provisions exist which impose obligations on directors in
addition to the general fiduciary duties of all directors.
Non-compliance with these
statutory obligations may give rise to civil and criminal liability.
statutes include:

The Income Tax Act, 1962 , as amended;

The Pension Funds Act, 1956 as amended;

The Banks Act, 1990;

The Trust Property Control Act, 1988;

The Financial Institutions (Investment in Funds) Act, 1984.
Examples of these
PART III
11. The King Reports of corporate governance
The first King report on corporate governance ("King I") was released on 29 November
1994. The purpose of King I was to promote the highest standards of corporate governance
in South Africa.
The King Committee was formed at the instance of the Institute of
Directors.
The King Committee was similar in concept to the Cadbury Committee in England. King's
terms of reference were however wider. The King and Cadbury reports both considered
financial reporting and accountability, good practice concerning the responsibility of
directors, the case for audit committees, the principal responsibility of auditors and the links
between shareholders, boards and auditors.
In addition the King's terms of reference
included a Code of Ethical Practice for South African enterprises and took account of special
circumstances and of disadvantaged communities in South Africa.
The King Committee issued a detailed report on corporate governance, a series of
recommendations and a Code of Corporate Practices and Conduct.
A number of recommendations in the King I were superseded by legislation in the social and
political transformation in South Africa. Further, a dominant feature of business since 1994,
was the emergence of information technology. In light of these factors as well as many
others, the King Committee reviewed corporate governance standards and practices for
South Africa against developments that took place after the publication of King I.
The Code of Corporate Practices and Conduct in King II replaced the Code of Good
Corporate Practices and Conduct in King I, with effect from 1 March 2002.
12. Corporations affected by the Code of Corporate Practices and Conduct ("the
Code")
The Code applies to:

companies with securities listed in the JSE Securities Exchange, South Africa;

banks, financial and insurance entities as defined in the various Financial Services Acts;

public sector enterprises and agencies that fall under the Public Finance Management
Act and the Local Government: Municipal Finance Management Bill.
Although King II, including the Code, applies only to certain categories of business called
"affected enterprises", it is suggested that all companies should, nevertheless, give due
consideration to the application thereof.
As explained above, the concept of corporate governance applies mainly to companies as
there is a need for the directors of a company to be accountable to its owners, that is the
shareholders. However, in so far as the other enterprises are concerned, it is recommended
that these enterprises comply with the seven characteristics of good corporate governance,
as outlined in King II. These seven characteristics are:

discipline;

transparency;

independence;

accountability;

responsibility;

fairness; and

social responsibility7.
Adherence to the Code is voluntary, however the JSE Listings Requirements require listed
companies to disclose in their annual reports a narrative statement of how the company has
applied (or intends to apply) the principles set out in the Code. The statement must contain
explanations enabling shareholders to evaluate how the principles have been applied and
must address the extent of the company's compliance with the Code and the reason for any
non compliance, indicating for what part of the relevant accounting period the non
compliance occurred.
13. Recommendations of King II
In the paragraphs that follow, we outline the corporate governance recommendations
contained in King II and some relevant statutory provisions contained in the Companies Act.
This outline is not exhaustive and should be used only as a source of reference for directors
and other interested parties.
7
King Report on Corporate Governance issued by the Institute of Directors at pages 11 and 12
Composition and role of the board of directors of a company

It is recommended that South African companies have a unitary board structure (as
opposed to separate supervisory and management boards), with directors being
appointed in terms of the provisions of the company's articles of association. A board of
directors usually includes directors who are also senior employees of the company these are usually referred to as “executive directors”.

The Companies Act requires every public company to have at least two directors and
every private company to have at least one director. The JSE Listings Requirements
provide for a minimum of four directors for a listed company. There is no maximum
limit on the number of directors. A company's articles of association may provide for a
minimum or maximum number of directors and for a means of determining such
number.

A board of directors should be balanced between non-executive and executive directors.
Although the role of non-executive directors are recognised, South African law does not
recognise the distinction between the duties of executive and non-executive directors.
Neither the Companies Act, nor the JSE Listings Requirements regulate the position of
non-executive directors. However, King II recommends a balanced board comprised of
executive and non-executive directors, preferably with a majority of non-executive
directors, of whom sufficient should be independent of management. The principle,
which is echoed in the Code of Corporate Practices and Conduct incorporated in the JSE
Listings Requirements, is that the board should ensure that there is an appropriate
balance of power and authority on the board, such that "no one individual or small
group of individuals can dominate the board's decision making".

King II defines an executive director as an individual involved in the day-to-day
management and/or in the full time salaried employment of the company and/or its
subsidiaries. A non-executive director is defined as an individual not involved in the
day-to-day management and not a full time salaried employee of the company or its
subsidiaries.

Non-executive directors are subject to the same duties and potential liabilities as
executive directors.

The board of directors is ultimately responsible for ensuring that the business remains a
going concern and that it achieves its objectives. It must therefore ensure that the
company is controlled in an effective manner.
The Chairman and the Chief Executive Officer

The chairperson is responsible for the effective functioning of the board and the chief
executive officer is responsible for the running of the company's business. There should
be a clear distinction between these roles.

King II emphasises that there should be a clear division of responsibilities at the head of
the company, ensuring a balance of power and authority, so that no one individual has
"unfettered powers of decision making".

It is recommended that the chairperson or a sub-committee of the board should
annually appraise the chief executive's performance.
The results of such appraisal
should also be considered by the remuneration committee to guide it in the evaluation
of the performance and remuneration of the chief executive officer.
Appointment of directors

Usually, the articles of association of the company to provide that directors be appointed
by the members in a general meeting. At common law, the appointment of a director
comprises of his or her appointment by those duly authorised to do so, combined with
his or her acceptance or consent to such appointment.
King II recommends the
establishment of a nomination committee comprised only of non-executive directors, the
majority of whom should be independent, to recommend all new appointment of
directors.

Unless otherwise provided in the articles of association of a company, or in terms of a
separate contract between the company and the director, a director continues in office
until his or her death, resignation or disqualification. It is however suggested in King II
that board continuity is imperative and that the board should put in place a programme
ensuring staggered rotation of directors.
King II recommends that an executive
director's fixed term contract, if any, should not exceed three years. Also, provision is
made in the JSE Code, for an executive director's service contract not to exceed five
years. If a longer period is required, it is suggested that shareholder approval should be
obtained. (It is understood that the five year period referred to in the JSE Code will be
amended to three years during the first quarter of 2003).

King II further recommends a formal orientation program for newly appointed directors,
in order to familiarise them with the company's structure, operation and plans. New
directors must also, in terms of King II receive developmental and educational training
in respect of their duties and responsibilities to the company.
Director's remuneration and remuneration committee

The remuneration of directors is determined in accordance with the provisions of the
articles of association of the company, as well as any existing contracts between the
directors and the company. It is proposed in King II that levels of remuneration should
be sufficient to attract, retain and motivate executives of the quality required by the
board and, furthermore, that performance related elements should constitute a
substantial portion of the total remuneration packages of executives.

King II recommends that companies should establish a formal and transparent
procedure for developing policy on executive and director remuneration and,
furthermore, that companies should appoint a remuneration committee, comprised of
exclusively or mainly of non-executive directors, to determine individual remuneration
packages for each of the executive directors. No director should be involved in deciding
his or her own remuneration. Non-executive director remuneration should be a matter
for the board as a whole, to be approved by the shareholders in a general meeting.

Detailed statutory provisions regulate the disclosure of directors’ emoluments in the
annual financial statements of the company. These include, for example, disclosure of
the aggregate amount of the emoluments received by the directors as a group
(including basic salary, bonuses and performance related payments, sums paid by way
of expense allowances, the estimated monetary value of other material benefits
received, gains made on the exercise of share options, the amount of the pensions paid
or receivable by directors and past directors and details of directors' service contracts).

The JSE Listings Requirements and King II require more detailed disclosure in relation to
directors' emoluments.
In particular, the annual financial statements of listed
companies are required to contain an analysis in the aggregate and by individual
directors, and distinguishing separately between executive and non-executive directors
as separate groups, of emoluments paid during the last financial period by the
company, or receivable by directors in their capacity as directors or otherwise (including
fees for services as director, basic salary, bonuses and performance related payments,
sums paid by way of expense allowance, any other material benefits received,
contributions paid under any pension scheme, any commission, gain or profit-sharing
arrangements and any share options (including their strike price, period when and at
what price options have been exercised and any other relevant information)).
Board meetings
The board of directors should sit at least once a quarter. The frequency of meetings should
however be determined with reference to specific circumstances within the company.
Board committees

King II recommends that board committees be established to aid the board and its
directors in giving detailed attention to specific areas of the directors' duties and
responsibilities.

The board or its directors should determine a policy for the frequency, purpose, conduct
and duration of its meetings and those of the formally established committees.

There should be transparency and full disclosure from the board committee to the
board, except where the committee has been mandated otherwise by the board.

At a minimum, each board should have an audit and a remuneration committee.

It is recommended that all board committees be chaired by an independent nonexecutive director.

The annual report should detail the composition of the committees (especially the
remuneration, audit and nomination committee) as well as a description of the
committee's responsibilities, the number of meetings held and other information that
may be of relevance to the company's shareholders.

The board should regularly evaluate the board committees to ascertain their
performance and effectiveness.
Annual reports and company meetings

The Companies Act provides for every company to hold an annual general meeting.
Private companies may, however, by written approval of shareholders dispense with the
obligation to do so.

The Companies Act provides that the annual general meeting shall deal with the matters
assigned to it in the Companies Act and may deal with matters provided for in the
articles of association of the company, or matters which may be dealt with by any
general meeting of the company. The issues usually addressed at an annual general
meeting include, for example:

the consideration of the annual financial reports. Shareholders are not entitled or
required to approve the annual financial reports, but merely to consider them;


the election of directors (but not managers);

the selection or ratification of the selection of outside auditing firms;

the passing of special resolutions (if any);

the extension of a general authority to the directors to issue shares;

the approval of certain loans to directors;

the declaration or approval of dividends.
Certain transactions of the company may not be approved by the board, without
reference to the shareholders. The JSE has specific requirements for Category I, II, III
and IV transactions with Category I transactions (where the size of the transaction
equates to 30 per cent or more of the capitalisation of the company or where 30% of
new shares are issued as consideration) requiring approval by ordinary shareholder
vote. Furthermore, provision is made for shareholder approval for executive and staff
share option schemes. These issues may be dealt with at the annual general meeting.

King II emphasises the importance of the annual general meeting of listed companies as
an opportunity to communicate with shareholders and to encourage shareholder
activism and participation.
Risk management

King II suggests that the board has the responsibility to ensure that the company has
implemented an effective ongoing process to identify risk, to measure its potential
impact against a broad set of assumptions and to activate what is necessary to
proactively manage these risks.
It is, furthermore, recommended that a board
committee should be appointed to assist the board in reviewing the risk management
process and the risks facing the company.
Internal control and audit committee

King II requires that companies have an effective internal audit function that has the
respect and co-operation of both the board and management. The objective of internal
audit is to assist members of executive and senior management in the effective
discharge of their duties and responsibilities. Where the board decides not to establish
an effective internal audit function, full reasons must be disclosed in the company's
annual report, with an explanation as to how assurance of effective internal controls,
processes and systems will be maintained.

King II further requires that the audit committee should be comprised by a majority of
independent non-executive directors.
The majority of the members of the audit
committee should have a financial background.
It is further recommended that the
chairperson of the audit committee be an independent non-executive director and not
the chairman of the board. The audit committee should have written terms of reference
that deal adequately with its membership, authority and duties.
Companies should
further, in their annual reports disclose whether or not the audit committee has adopted
formal terms of reference and if so, whether the committee has satisfied its
responsibilities for the year in compliance with its terms of reference. Membership of the
audit committee should also be outlined in the annual report.
Financial statements and the annual report

In terms of the Companies Act, the accuracy of the annual financial statements of a
company (which should achieve fair presentation in conformity with generally accepted
accounting practice (GAAP)) is primarily the responsibility of the directors. If accounts
are not reasonably accurate every director who is in default is potentially guilty of a
criminal offence, unless such director is excused from liability in accordance with the
provisions of the Act. Similarly if annual accounts are approved which do not conform
to statutory requirements, every director who is a party to their approval and who
knows that they do not comply or is reckless as to whether they comply is guilty of an
offence.

Directors must prepare an annual directors' report with respect to, amongst other
things, the state of affairs and business of the company. If a director fails to take all
reasonable steps to comply with the provisions of the Companies Act in relation to the
directors' report, he or she is guilty of an offence.

King recommends that directors should report on the following specific matters in their
annual report8:

that it is the director's responsibility to prepare the financial statements that
fairly represent the state of affairs of the company as at the end of the
financial year and the profit or loss and cash flows for that period;

that it is the director's responsibility to prepare the financial statements that
fairly represent the state of affairs of the company as at the end of the
financial year and the profit or loss and cash flows for that period;

whether the auditor is responsible for reporting on whether the financial
statements are fairly presented;

whether adequate accounting records and an effective system of internal
controls and risk management have been maintained;

whether appropriate accounting policies supported by reasonable and
prudent judgements and estimates have been used consistently;

whether applicable accounting standards have been adhered to or, if there
has been any departure in the interest of fair presentation, this must not only
be disclosed and explained, but qualified;

whether there is no reason to believe the business will not be a going
concern in the year ahead or an explanation of any reasons otherwise; and

whether the Code of Corporate Practices and Conduct has been adhered to
or, if not, where there has not been compliance to give reasons.
8
King Committee on Corporate Governance, issued by Institute of Directors at page 40
Transactions with directors and conflicts

The common law provides that a director stands in a fiduciary position toward each
company on whose board he or she serves. A director is obliged to display the utmost
good faith towards the company, and in his or her dealings on its behalf, once he or she
accepts an appointment as a director and may not place himself or herself in a position
in which he or she has, or may have, a personal interest conflicting with his or her duty
to act in the interests of the company. The failure by a director to comply with his or
her fiduciary duties constitutes a breach of trust and gives rise to a claim by the
company against the director.

Various provisions of the Companies Act regulate and restrict transactions between a
company and its directors.
The articles of association of a company may contain
additional restrictions. Statutory provisions include a duty to disclose an interest in any
contract or proposed contract with the company, the minuting of declarations of
interest, as well as a prohibition on loans to, or security in connection with, transactions
by directors.

The JSE Listings Requirements contain detailed provisions dealing with "related party"
transactions, which provide certain safeguards against shareholders, directors and other
related parties to a listed company taking advantage of their position. "Related party"
transactions must be reported to the JSE, whereupon the JSE is entitled to require
written notification to be given to shareholders and approval of the transaction by
shareholders other than the related party shareholders and their associates.
14. Integrated sustainability reporting

King II recommends that every company should report, at least annually on the nature and
extent of its social, transformation, ethical, safety, health and environmental management
policies and practices. It is further recommended that the board must determine what is
relevant for disclosure, having regard to the company’s special circumstances. 9

It is further recommended that matters requiring specific consideration should include:

description of practices reflecting a committed effort to reducing workplace
accidents, fatalities and occupational health and safety incidents against stated
measurement targets and objectives and a suitable explanation where appropriate.
9
King Committee on Corporate Governance, issued by Institute of Directors page 35
This would cover the nature and extent of the strategy, plans and policies adopted
to address and manage the potential impact of HIV/AIDS on the company activities;

reporting on environmental corporate governance;

policies defining social investment prioritisation and spending and the extent of
initiatives to support black economic empowerment, in particular with regard to
procurement practices and investment strategies;

disclosure of human capital in areas such as the number of staff, with due regard
on progress against equity targets, achievement of corporate training and
development initiatives, age, employee development and financial investment. 10
15. Organisational integrity /Code of Ethics

King II recommends that every company should engage its stakeholders in determining
the company’s standards of ethical behaviour. The company should demonstrate its
commitment to organisational integrity by codifying its standards in a code of ethics. 11
PART IV
16. Conclusion

The Executive Summary of the King Committee on Corporate Governance, issued by the
Institute of Directors in March 2002, sums up the concept of corporate governance,
where it states:
"In summary, successful corporate governance in the world of the 21 st century requires
companies to adopt an inclusive approach and not an exclusive approach.
The
company must be open to institutional activism and there must be greater emphasis on
the sustainable or non-financial aspects of its performance. Boards must apply the
tests of fairness, accountability, responsibility and transparency to all acts or omissions
and be accountable to the company also but responsive and responsible towards the
company's identified stakeholders.
The correct balance between conformance with
governance principles and performance in an entrepreneurial market economy must be
found, but this will be specific to each company."
10
11
King Report on Corporate Governance, issued by Institute of Directors at pages 36 and 37
King Report on Corporate Governance, issued by Institute of Directors at page 37

As many companies in the modern corporate arena, have a distinct split between control
and ownership, the need for transparency and accountability to the stakeholders has
increased.
For these reasons, corporate governance is becoming more and more
important.

Due to the nature of the other corporate entities which have been discussed above,
there will not necessarily be a need for these entities to comply with the requirements
of corporate governance.
However, in so far as they can, these enterprises should
apply the principles of openness, honesty, fairness, accountability, responsibility and
transparency in relation to all business dealings, but particularly with regard to the
persons to whom they are required to report. These enterprises should also conduct
their affairs, with due regard to the principles of corporate governance that relate to
environmental, health and safety, economic empowerment and human capital
development issues.
It is also recommended that these enterprises codify their
standards in a code of ethics.

The key aspects of corporate governance, recommended by King II can be summarised
as follows:

The Board

should have a balance of executive and non-executive members;

should be honest and open in its disclosure to stakeholders;

should establish procedures to monitor risk assessment;

should conduct risk assessments;

should identify and establish internal control to match the company's level
of risk;


should delegate the establishment and maintenance of internal control;

should establish and clearly define committees;

should establish at least a remuneration and audit committee.
The Chair

should have a distinct role from the chief executive officer.

Directors

should have a formal orientation program if newly appointed

new directors should receive developmental and educational training in
respect of duties and responsibilities;

Director's remuneration

should be determined by a remuneration committee, comprised
exclusively or mainly of non-executive directors;

no director should be involved in deciding his or her own
remuneration;

non-executive remuneration should be decided by the board as a
whole and approved by the shareholders in a general meeting.

Board meetings


should take place at least four times a year.
Board committees

should be established to aid the board and its directors in giving
detailed
attention
to
specific
areas
of
directors'
duties
and
responsibilities;


should be chaired by an independent non-executive director;

should be transparent and report to the board.
Internal control
 companies are to have effective internal control that has the respect of the
board and management;
 an audit committee should be appointed that has a majority of nonexecutive members;
 the majority of members on the internal audit committee should have a
financial background

Conflicts of interest

directors have a duty to disclose an interest in any contract or
proposed contract with the company;

the conflict should be minuted.
In our view, all businesses in Fasset's sector should design and adopt effective governance
systems which incorporate a means for enforcement and accountability to stakeholders
and/or other interested bodies, persons or entities. To assist businesses in overcoming this
challenge, we suggest that the recommendations outlined in this publication be adapted to
the specific business' needs and implemented by those who govern them.
USEFUL TELEPHONE NUMBERS
1.
Fasset
(011) 476-8570
2.
Webber Wentzel Bowens (JHB)
(011) 530-5000
3.
Webber Wentzel Bowens (Cape Town)
(021) 505-5000
4.
Institute of Directors (JHB)
(011) 643-8086
5.
Institute of Directors (Cape Town)
(021) 686-0158
6.
Institute of Directors (Durban)
(031) 566-2352
7.
Institute of Directors (PE)
(041) 365-1163
8.
Department of Labour (Eastern Cape)
(043) 701-3030
9.
Department of Labour (Free State)
(051) 505-6200
10.
Department of Labour (Gauteng South)
(011) 497-3218
11.
Department of Labour (Gauteng North)
(011) 309-5136
12.
Department of Labour (Kwa-Zulu Natal)
(031) 336-1545
13.
Department of Labour (Mpumalanga)
(013) 655-8700
14.
Department of Labour (North West Province)
(018) 387-8100/9
15.
Department of Labour (Northern Cape)
(053) 838-1500
16.
Department of Labour (Limpopo Province)
(015) 290-1607
17.
Department of Labour (Western Cape)
(021) 460-5104
18.
CCMA (Eastern Cape)
(043) 743-0826
19.
CCMA (Free State)
(051) 505-4400
20.
CCMA (Gauteng)
(011) 377-6600
21.
CCMA (Kwa-Zulu Natal)
(031) 362-2300
22.
CCMA (Kwa-Zulu Natal – Richards Bay)
(035) 789-0357/1415
23.
CCMA (Mpumalanga)
(013) 656-2800
24.
CCMA (North West Province)
(018) 464-0700
25.
CCMA (Northern Cape Province)
(053) 831-6780
26.
CCMA (Northern Province)
(051) 297-5010
27.
CCMA (Western Cape)
(021) 469-0111
28.
Labour Court (Johannesburg)
(011) 359-5800
(011) 403-4893
29.
Labour Court (Cape Town)
(021) 424-9035
30.
Labour Court (Durban)
(031) 301-0140
31.
Labour Court (Port Elizabeth)
(041) 586-4923
32.
Registrar of Companies
0861 843 384
33.
Auditor General
(011) 842-4814
34.
Department of Finance (Cape Town)
(021) 464-6100
35.
Department of Finance (Pretoria)
(012) 315-5372
36.
Department of Trade and Industry
0861 843 384
37.
Johannesburg Stock Exchange
(011) 520-7777
38.
Receiver of Revenue (Bloemfontein)
(051) 506-3000
39.
Receiver of Revenue (Cape Town)
(021) 460-2911
40.
Receiver of Revenue (Durban)
(031) 360-8911
41.
Receiver of Revenue (East London)
(043) 722-7270
42.
Receiver of Revenue (Johannesburg)
(011) 374-8000
43.
Receiver of Revenue (Kimberley)
(053) 831-2250
44.
Receiver of Revenue (Port Elizabeth)
(041) 505-7500
45.
Receiver of Revenue (Pretoria)
(012) 317-2000
46.
South African Reserve Bank (Bloemfontein)
(051) 403-7500
47.
South African Reserve Bank (Cape Town)
(021) 481-6700
48.
South African Reserve Bank (Durban)
(031) 310-9300
49.
South African Reserve Bank (East London)
(043) 707-3400
50.
South African Reserve Bank (Johannesburg)
(011) 240-0700
51.
South African Reserve Bank (Port Elizabeth)
(041) 501-6600
52.
South African Reserve Bank (Pretoria)
(012) 313-3911