DRAFT FOR DISCUSSION PURPOSES ONLY Tshisevhe Gwina Ratshimbilani Inc. Illovo Edge Office Park, Building 1, 3rd Floor Fricker Road CNR Harries Illovo Sandton, 2196 P.O. Box 782352, Sandton 2146 t. +27 (0) 11 243 5027 f. +27 (0) 11 243 5028 e. info@tgrattorneys.co.za website: www.tgrattorneys.co.za SOE FOUNDING LEGISLATION: KING CODE ON CORPORATE GOVERNANCE FOR SOUTH AFRICA 2008 2 ANALYSIS OF SOE FOUNDING LEGISLATION PROVISIONS 1. CORPORATE GOVERNANCE MATTERS: PROVISIONS ON DIRECTORS Constitution of Board of Directors Provisions on Independent Directors Provisions of Executive Directors Appointment and removal of Directors Appointment and removal of CEO / MD The board should comprise a balance of power, with a majority of non-executive directors. The majority should be independent. They should ensure that there is an appropriate balance of power and authority on the board and that the power of the board is not concentrated in the hands of individuals or a block of individuals. (Principle 2.18 and recommendation 2.63) As a minimum, there should be two executive directors appointed to the board, namely the Chief Executive Officer (“CEO”) and the person in charge of finance (CFO etc.) (recommendation 2.73) The majority of non-executive directors should be independent. (recommendation 2.64) As a minimum, there should be two executive directors appointed to the board, namely the Chief Executive Officer (“CEO”) and the person in charge of finance (CFO etc.) (recommendation 2.73) Directors should be appointed through a formal and transparent process. Where the board as a whole, with the assistance of a nomination committee, subject to shareholder approval, would be involved in the process. (principle 2.19 and recommendation 2.82) The board should appoint the CEO and establish a framework for the delegation of authority of the board to the CEO. (principle 2.17) An independent director should be independent in character and judgement and there should be no relationship or circumstances which are likely to affect, or could appear to affect his independence. (recommendation 2.66) Boards should assess the skills and suitability of a proposed candidate director, there are three matters that require consideration, namely the knowledge and experience required for the board, the apparent integrity of the individual, and the skills and capacity of the individual to 3 The board should elect a chairman of the board who is an independent non-executive director. The CEO of the company should also fulfil the role of chairman of the board. (principle 2.16) An independent director should be independent in fact and in perception of a reasonable informed outsider. (recommendation 65) An independent director should: not be a representative of a shareholder who has the ability to control or significantly influence management or the board; not have a direct or indirect interest in the company which exceeds 5% of the group’s total number of shares in issue; not have a direct or indirect interest in the company which is less than 5% of the group’s total number of shares in issue, but is material to his personal wealth; not have been employed by the company or the group in any executive capacity, or appointed as the designated auditor or partner in the discharge his duties to the board. (recommendation 2.81) All new directors should have a background check to ensure that they have not been declared delinquent nor are serving probation. (recommendation 2.82) 4 groups external audit firm or senior legal adviser for the preceding three financial years; not be an immediate family member of an individual who is or has been employed by the company or the group in an executive capacity in the preceding three financial years; not be a professional adviser to the group or a director; be free from any business or other relationship which could be seen to materially interfere with the individual’s capacity to act independently; not receive remuneration contingent upon performance of the company. (recommendation 67) At least one third of nonexecutive directors should retire by rotation annually. (recommendation 76) 5 2. CORPORATE GOVERNANCE MATTERS: PROVISIONS ON DIRECTORS CONTINUED Duties of Directors Directors Powers The following principles are applicable to directors: The board should be the focal point for and custodian of corporate governance. (2.1) The board should appreciate that strategy, risk, performance and sustainability are inseparable. (2.2) The board should provide effective leadership based on an ethical foundation. (2.3) It should ensure that the company is and is seen to be a responsible corporate citizen. (2.4) The board should also ensure that the company’s ethics are managed effectively. (2.5) The board is to elect a chairman of the board who is an independent nonexecutive director. (principle 2.16) Validity of Directors Actions No provisions. Liability of Directors Delegation of Powers Offences and Penalties No provisions. The board should delegate certain functions to wellstructured committees but without abdicating its own responsibilities. Board committees constitute an important element of governance process and should be established with clearly agreed reporting procedures and a written scope of authority. The terms of reference of committees should be reviewed every year and any changes should be approved by the board. (principle 2.23 and recommendations 2.125 and 2.126) No provisions. 6 The board should ensure that the company has an effective and independent audit committee. (2.6) The board should be responsible for the governance of risk, information technology and ensure that the company complies with all applicable laws and considers adherence to nonbinding rules, codes and standards. (2.7 – 2.9) The board should ensure that there is an effective riskbased internal audit and ensure the integrity of the company’s integrated report. (2.10 and 2.12) The board should appreciate that stakeholders’ perceptions affect the company’s reputation. (2.11) The board and its 7 directors should act in the interests of the company. (2.14) The board should consider business rescue proceedings and other turnaround mechanisms as soon as the company is financially distressed as defined in the Companies Act 71 of 2008 (the “Act”). (2.15) 8 3. AUDIT AND REPORTING MATTERS Report Submission Requirement Responsible Reporting Officer The Board should ensure the integrity of the company’s integrated report which should include commentary of the financial statements of the company, as well as a copy of the annual financial statements of the company. The report should explain how the company has made its money. Reporting should be integrated across all areas of performance, reflecting choices made in the strategic decisions adopted by the board and should include reporting in the triple context of economic, social and environmental issues. (principle 9.1 and recommendations 9.11 and 9.12) Assurance over the financial disclosure in the integrated report should be obtained and a formal process with regard to sustainability reporting should be established. (recommendation 9.17) The audit committee should assist the board in reviewing the integrated report to ensure that the information is reliable and The board is the ultimate custodian of the corporate reputation and stakeholder relationships. The board should take account of and respond to the legitimate interests and expectations of shareholders linked to company in its decision making. (recommendation 8.4) To whom SOE Reports (Parliament or Government) Transparent and effective communication with stakeholders is essential for building and maintaining their trust and confidence. (Principle 8.5) Frequency of Reports (Annual/Semi-Annual) At least annually. Reporting Standards / Benchmarks King III Report on Corporate Governance. 9 does not contradict the financial aspects of the report. (recommendation 3.35) 10 4. AUDIT AND REPORTING MATTERS Auditing Requirements Business Plans / Statement of Objectives Liquidity and Solvency Management Provisions Performance Review The audit committee of a public or state owned company must be elected by the shareholders of the company at each AGM. (recommendation 3.9) The board should play a prominent role in the strategy-development process and not be the mere recipient of strategy as proposed by management. (recommendation 2.5) The board should consider rescue proceedings or other turnaround mechanisms as soon as the company is financially distressed as defined in the Act. (principle 2.15) The audit committee should recommend to the shareholders the appointment, reappointment and removal of the external auditor. The recommendation of the auditing firm or person should be based on the assessment of the auditing firm and the individual’s qualifications, expertise and resources, effectiveness and independence. (principle 3.9 and recommendation 3.75) The annual financial statements should include a description of non-audit services rendered by the external auditor, including the nature and quality thereof. (Recommendation 3.79) The board should approve the long and short term strategy of the business of the company and monitor their implementation by management. (recommendation 2.6) The evaluation of the board and its committees and the individual directors should be performed annually by the chairman with the assistance of the company secretary and the nominations committee. (principle 2.22 and recommendation 2.112) The board should state in the integrated report whether the appraisals of the board, its committees have been conducted. The report should provide an overview of the results of the performance assessment and the action plans to be implemented, if any. (recommendation 2.114) The board should ensure that its long-term planning will result in sustainable outcomes. The strategy development process should take account of the dynamics of the changing external environment and be responsive to changing market conditions. (recommendation 2.10)