CORPORATE GOVERNANCE AND THE NEW KING III REPORT
Riaan (C.B.) Visser
Head: Research & Liaison
Southern Business School
World wide corporate governance has come under the spotlight during the past decade. At its
simplest level corporate governance can be described as “the system by which organisations are
directed and controlled” (Cadbury Report, 1992). In the past many enterprises regarded issues of
governance as incidental to financial or bottom-line performance. Governance was therefore
something nice to have if there was time to be concerned about it. This trend has, however, changed
and company directors are becoming increasingly aware of the concerns of investors and the public
about the impact that their company’s activities may have on society. This has led to a heightened
interest in corporate governance and other aspects of the non-financial drivers of value. As a result
recent thinking on corporate governance is moving towards an approach that goes beyond the
traditional financial bottom line. Aziz (2002) therefore stated that “Business is not just about making
sound investment decisions, taking management risks, and dealing with economic uncertainties.
Today, it is about social responsibility, putting all our actions under public scrutiny and responding to
the concerns of those among whom we conduct our business in an open and accountable way. It is
important for all of us to remember that good governance, like personal integrity, is no longer the
luxury of the virtuous; it has become a global business necessity”.
Nowadays many enterprises experience power struggles in the form of directors attempting to
dominate corporate decision-making and to influence the company’s profitability and earnings for
their personal benefit and enrichment. Although the pursuit of profit is part of the ultimate goal of
corporations it has to be done within ethical boundaries and not for illegal personal enrichment or by
the extortion of the public and employees. In fact the primary duty of directors in terms of corporate
legislation lies in their judicial duty. In other words to act in the best interests of the corporation or
shareholders as well as their statutory duty which requires that they act with due care and skill and
not in a reckless or fraudulent manner. In the past ‘corporate failure’ was visible through examples
such as Enron, World Com and Tyco in the United States of America (USA), HIH in Australia as well as
Regal Treasury (Bank), Health and Racket (Leisure Net) and Krion in South Africa. These examples
confirmed that many directors put their own interests before those of the corporation and the
shareholders. It is, however, interesting to note that in the case of Enron and World Com the
malpractices were exposed by female employees who acted as whistle-blowers. These directors’ and
executive managers’ greed and lust for personal power led to deceit and deception and questionable
accounting by accountants and auditors. These failures no longer seem to be the exception, but
rather the rule. Its magnitude and impact not only on the local economy but also on the global
economy is enormous. The failure of these businesses is too a large extent as a result of
mismanagement and poor governance practices. The people responsible have also in essence
attempted to destroy the good intentions of the capitalist and free enterprise/market system.
To uphold the good intentions of capitalism and the well-being of the myriad of innocent
shareholders/investors as well as employees the need for reform in the area of corporate
governance has been recognised as essential for the global economy. As a result various reform
initiatives took place during the past years. Supranational bodies such as the Organisation for
Economic Co-operation and Development (OECD) and the Commonwealth Association for Corporate
Governance adopted guiding principles for governance practices. The OECD released their principles
in 1999 and revised it in 2004. At national level the outcome of the Cadbury, Greenbury, Turnbull,
Hempel and Higgs reports in the United Kingdom, the Bosch Commission in Australia and the Blue
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Ribbon Commissions sponsored by the National Association of Corporate Directors in the USA,
provided further evidence of the development in this field. The USA government adopted the
Sarbanes-Oxley Act (SOX) in 2002 that provides a statutory basis for corporate governance. This
statutory regime is based on ‘comply or else’ (rules approach), which means legal sanctions for noncompliance. It is, however, important to note that the cost of compliance with SOX by American
companies is estimated at $264 billion since its inception. The total cost to the American economy to
comply with SOX is more than the total write-off of Enron, World Com and Tyco combined. Professor
Romano of the Yale Law School stated that “SOX’s corporate governance provisions were illconceived. Other nations, such as the members of the European Union who have been revising their
corporation codes, would be well advised to avoid Congress’ policy blunder”.
In South Africa the King Commission on Corporate Governance under chairpersonship of Professor
Mervyn King, showed itself to be at the forefront of international governance thinking in the
completed King I Report of 1994 and the King II Report of 2002. The 1994 Report drew attention to
the importance of stakeholders in corporate governance and in 2002 was one of the first codes to
raise the issue of sustainability reporting (the so-called non-financial issues). On 25 February 2009 a
draft of the third Report on Corporate Governance in South Africa, also referred to as King III or the
King III Report, was published in Johannesburg by the Institute of Directors in Southern Africa asking
for comments. The final report will be issued in September 2009 and be effective from 1 March 2010.
Until then King II will apply.
The King III Report became necessary because of the anticipated new Companies Act and changes in
international governance trends that is expected to become effective 1 July 2010,. On advice of Sir
Adrian Cadbury the King Committee has been retained, even though only three members of the
original 1992 committee remained. The Report was compiled by the King Committee with the
assistance of nine subcommittees, which had to deal with the aspects of boards and directors,
corporate citizenship, audit committees, risk management, internal audit, integrated sustainability
reporting, compliance with laws, regulations, rules and standards, managing stakeholder
relationships, fundamental and affected transactions and business rescue. In other words the focus
of a subcommittee was on a specific chapter of the Report. These subcommittees were assisted by
six researchers and Professor Michael Katz that checked the legal aspects. It is interesting to note
that as with King I and II none of the committee members received remuneration for their work on
King III since the only value driver for members was service in the best interest of South Africa. The
code of good corporate governance flowing from the King III Report is based on a code of principles
and practices, which means a ‘comply or explain’ approach. This will allow for flexibility because if a
board believes a practice not to be in the best interest of the company, it can adopt a practice
different from that recommended in the code, but it must be able to explain the reason for their
decision. Explaining the different practices and acceptable reasons for it, results in compliance. It is
important to note that South African listed companies (those listed on the Johannesburg Stock
Exchange (JSE)) are regarded by foreign institutional investors as being among the best governed in
the world’s emerging economies and it is therefore important that South African companies should
strive to maintain that high ranking.
Some of the key changes that will be brought about by the King III Report are the following:

Boards and directors: The majority of the directors must be non-executive directors and
independent. A minimum of two executive directors (CEO and financial head) should serve on
the Board. The board should be directed by an independent non-executive chairperson.

Remuneration of directors: Shareholders must approve the remuneration policy. A
remuneration report must be published annually. Inflated payments when resigning does not
meet the requirements of a ‘fair remuneration policy’. The chairperson and non-executive
directors must not receive incentive awards that are linked to the share price.
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Risk management: The concept that risk management is inseparable from the company’s
strategy and business processes was introduced.
Compliance with laws, regulations, rules and standards: It is dealt with in a separate chapter
and not a mere function of the board.
Managing stakeholder relationships: Is dealt with for the first time as a separate chapter and
not as part of reporting on sustainability.
Mergers, acquisitions and take-overs: It is included for the first time in the Code due to
changes in the Companies Act.
Application of the code: King III applies to all entities regardless of the manner and form of
incorporation or establishment, even the so-called state-owned companies described as ‘SOC
Limited’ as defined by the Public Finance Management Act and Municipal Finance
Management Act.
King III is therefore in essence about the building of an ethical culture within the corporate world and
not just about the mechanical ticking off of duties and processes.
It is important to note that the credit crunch and the accompanying crises among leading financial
institutions globally are increasingly presented as a crisis of corporate governance. These problems
should, however, not be interpreted as reflecting dysfunction in the broader South African and UK
corporate governance models, where value-based principles are followed and governance is
practiced. Critics of South Africa’s ‘light’ regulatory model often suggest that emulation of the more
‘robust’ US approach (SOX) would improve corporate governance standards and thereby reduce the
risk of systemic economic crisis in the future. The reality is, however, that the USA is the primary
source of the current global financial crises and despite their Sarbanes-Oxley Act they could not
prevent the collapse of many of the leading names in USA banking and finance.
It is interesting to note that the total value of fraud reported annually in the USA exceeds the GDP of
virtually the entire African continent. Yet certain African countries have been criticised by the
international community as being corrupt and placed at the top of Transparency International’s
corruption index. Whilst this reputation is not wholly undeserved, Africa has committed itself to
addressing the problem. One of the key elements discussed during the establishment of the African
Union (AU) in Durban was the need for sound corporate governance. The same philosophy is at the
core of NEPAD (New Partnership for Africa’s Development), an initiative that will be fundamental to
the fight against the devastation of HIV/AIDS, poverty, illiteracy, unemployment and the wholesale
destruction of Africa’s resources. Although the intention was not for this discussion to lead to Africa
and NEPAD it is necessary to stress the importance of good corporate governance in a country, on a
continent and for the international community in general.
To conclude: It is important to note that in the King II Report on Corporate Governance of 2002 it was
stated that “The 19th Century saw the foundations laid for modern corporations; this was the century
of the entrepreneur. The 20th Century became the century of management … The 21st Century
promises to be a century of governance, as the focus swings to the legitimacy and the effectiveness
of the wielding of power over corporate entities worldwide’.
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