 Companies exist within a governance
framework which is set by law, regulations,
codes of best practise (e.g. the King reports,
the Cadbury Report etc), the company's own
constitution (memorandum and articles) and
the policies adopted by the board of directors
to guide the day to day operations of a
company
 the efficiency of a corporate regulatory
framework depends on how effective the
legal and regulatory environment is, the level
of shareholder awareness and activism, , the
institutional investors
 A robust legal system based on the principles
of an unassailable constitution, and
independent judiciary and the due process of
law is critical to the providing an effective of
a corporate regulatory system in which
companies are governed
 Sir Adrian Cadbury observed that;
“the actions which corporations take to improve
their internal governance cannot make up for
deficiencies in the internal framework, notably if
an appropriate and enforceable legal system is
lacking…”
 The OECD in its Policy Brief No 23: Corporate
Governance in Developing, Transition,
Emerging-Market Economies noted that;
“The institutions of corporate governance
– combined with those of market competition
and government regulation – are society’s
principal means of motivating corporations
collectively to behave in ways that are good for
society as a whole.”
The same policy document also noted that;
“The existence of institutional infrastructure
that is crucial for any country’s system of
corporate governance, and which can largely be
taken for granted in OECD countries (e.g. widely
recognised and enforceable property rights,
reasonably well-functioning legal, judicial and
public regulatory systems), cannot, in sum, be
taken for granted in many developing, transition
and emerging-market economies.”
• Basically there are three models for improving
corporate governance
(1) Traditional ‘top-down’ regulation
(2) Self regulation
(3) Hybrid regulation model
Traditional Model
 Involves top-down public ordering through
legislative acts
 Hierarchical rules
 Control by state agencies
Legislation
• What is the role of legislation in corporate
governance?
• The primary piece of legislation in the realm of
corporate governance is the Companies Act
• Companies are creatures of statute and cannot
exist unless they are created in terms of the law
and given certain powers in terms of their founding
documents and it defines the manner in which
companies come into being, it defines their
objects, authorities, rights and obligations the
offenses of which they are capable and the
penalties applicable to those offenses
 Typically, company law also lays down the
minimum requirements for reporting by
companies to their stakeholders, determining
what, how frequently and to whom
information must be provided
 In addition to company law, companies must
comply with a host of other laws that regulate
for example, health and safety issues,
competition, securities trading marketing,
labour and tax obligations
Delegated Legislation
 Regulations exist to assist the primary legislative
process
 The normal passage of legislative acts is a
protracted process that is not easily adaptable to
changing business circumstances and delegated
legislation helps to some extent to overcome
this shortcoming on the part of the legislative
process
 Primary legislation e.g. contain provisions which
allow certain bodies established under the law to
make regulations, in terms of defined process
Listing Requirements
 Securities exchange regulations such and the ZSE
Listing Requirements determine the
requirements that companies must fulfil in order
to have their shares listed on the securities
exchange
 The Zimbabwe Stock Exchange Act establishes
the Zimbabwe Stock Exchange Act [Chapter
24:18] as a body corporate ‘capable of suing and
being sued in its corporate name and, [subject to
this Act,] of performing all such acts as bodies
corporate may by law perform’ see section 3 of
the ZSE Act
 The ZSE is controlled by the government to a
large extent through the minister of finance
who has extensive powers over the exchange
granted by the ZSE Act
 The Minister in terms of section 22 appoints the
Registrar of the Stock Exchange whose duties
are as follows;
1) The Registrar shall establish a Register of Stockbrokers.
(2) It shall be the duty of the Registrar to—
(a) enter in the Register the name, address and such other particulars as
may be prescribed of each person registered by him in terms of
paragraph (a) of subsection (4) of section thirty; and
(b) make in the Register any necessary alterations in the name, address
or prescribed particulars of a registered stockbroker; and
(c) delete from the Register the name of a registered stockbroker who
dies; and
(d) when required to do so by or under this Act or in pursuance of an
order made by the Minister in terms of subsection (2) of section forty or
of action taken by the Committee in terms of subparagraph (1) of
subsection
(1) of section thirty-six—
(i) mark in the Register the registration of an applicant or, as the case
may be, the suspension from practice of a registered stockbroker; or
(ii) cancel in the Register the registration of a registered stockbroker;
The affairs of the Exchange shall, subject to this Act, be
managed and controlled by a committee to be known as
the Committee of the Zimbabwe Stock Exchange
This committee shall comprise (Section 5);
(a) two members, neither of whom shall be the Registrar,
appointed by the Minister; and
(b) not less than five members and not more than seven
members, as the Committee may from time to time
determine, being members of the Exchange—
(i) elected by members of the Exchange; and (ii) not more
than two of whom shall be members of any one
partnership or company; who shall hold office for a period
Shortcoming of the traditional regulatory
model
 The traditional model’s top-down approach can
be out of touch with business reality and can be
influenced by political considerations become
overly prescriptive
 The cost of compliance can unduly burden
companies and can result in corporate
governance degenerate into a ‘tick box’
mentality
 This approach is exemplified in its worst form in
the Sarbanes Oxley Act (SOX) which was passed
after the collapse of Enron
 It has been described as a ‘knee-jerk’ reaction to
the corporate scandals that started with the
collapse of Enron in early 2002, the US
government, faced with public pressure for more
corporate accountability reacted by passing the
SOX Act in 2002
 The SOX makes senior management directly
accountable for the accuracy and integrity of
financial reporting and related internal controls.
 It prescribes the real time/immediate disclosure of
material events relating to the affairs of the
company and legislates stricter independence
standards for board audit committee members and
for auditors, including a requirement for regular
rotation of audit partners every 5 years
 It imposes obligations on a company’s lawyers
to report violations, creates an independent
funded Public Accounting Oversight Board to
oversee the accounting profession with
extensive powers comparable to the Securities
Exchange Commission itself,
 It has been reported that American companies
have spent more than $240 billion complying
with section 404 of the SOX
Self Regulation
 ‘Bottom up’ private ordering
 Market driven codes of best practises
 Adoption of the codes of best practises by
stock exchanges
Codes of best practises
 These codes of good governance or best
practises are codes developed usually at the
instigation of business itself e.g. the King
Reports were developed at the instigation of the
South African institute of Directors
 They do not have legislative force and usually
provide a set of objectives and universal
principles of good governance, leaving boards to
decide how to pursue the objectives as best suits
their companies unique needs
 Much of the progress in improving
corporate governance throughout the
world has come about through
contracted or consensual agreements, or
statements of principle, that are not
codified by statute but rely on
enforcement through market forces
 This latter category includes securities
exchange listing requirements, which
may contain mandatory provisions for a
listed company, as well as principles and
policies of institutional investors
 A contentious issue is whether the
requirements of corporate governance codes
should be mandatory (i.e. policed and
enforced by penalties and other punitive
measures) or recommended only, thereby
giving the advantage of being flexible,
adaptable and responsive to changing
business circumstances
Notable codes of good governance
The Treadway Commission Report
 This was the product of an independent
National Commission on Fraudulent Financial
Reporting set up in the US by the American
Accounting Association (AICPA), The Institute
of Internal Auditors, and the Institute of
Management Accountants and chaired by
James C. Treadway Jr, a former SEC
Commissioner
 In 1987 the Commission produced a report
titled ‘Report of the National Commission of
Fraudulent Financial Reporting but came to be
generally known as the Treadway Commission
Report
 The Report made the following 11
recommendations designed to improve the
effectiveness of audit committees which are
considered to be the keystone of corporate
financial governance;
1. They should have adequate resources and
authority to discharge their responsibilities
2. They should be informed, vigilant, and
effective overseers of the company’s financial
reporting process and its internal control
system
3. They should review management’s evaluation
of the independence of the company’s public
accountants
4. They should oversee the quarterly as well as
the annual reporting process
5. The SEC should mandate the establishment
of
an audit committee composed solely of
independent directors in all companies
6. The SEC should require committees to issue a
report describing their responsibilities and
activities during the year in the company’s annual
report to shareholders
7. A written charter for the committee should be
developed. The full board should approve, review,
and revise it as necessary
8. Before the beginning of each year, audit
committees should review management’s plans to
engage the company’s independent public
accountants to perform management advisory
services
9. Management should inform them of second
opinions sought on significant accounting
issues
10.With top management, the committee should
ensure that internal auditing involvement in the
financial reporting process is appropriate and
properly co-ordinated with independent public
accountant
11.Annually, committees should review the
programme that management establishes to
monitor compliance with the company’s code
of ethics
 The Treadway Report was well received and
most audit committees chairs saw the
recommendations as having exerted a positive
influence on corporate reporting and internal
controls
Internal Control- Integrated Approach
 This was a report produced by the Committee
of Sponsoring Organisations (COSCO) in 1992
 It provided principles that served the needs of
all interested parties- management, audit
committees, internal auditors, as well as a
standard against which organisations could
assess their internal control systems and
determine imnprovement
The Cadbury Report 1992
 Although the larger US economy had produced
two codes of best practise, it is the UK’s Report
on the Financial Aspects of Corporate
Governance 1992 better known as the Cadbury
Report after the chairman of the Cadbury
Commission, Sir Adrian Cadbury, become the
world leader
 The Cadbury Report was a direct response to the
death of Robert Maxwell on a cruise in the
Canary Islands which revealed numerous ills in
his media empire
 A series of risky acquisitions in the mid-eighties had led
Maxwell Communications into high debts, which was being
financed by diverting resources from the pension funds of
his companies. After Maxwell’s death, it emerged that the
Mirror Group's debts (one of Maxwell's companies) vastly
outweighed its assets, while £440 millions (GBP) were
missing from the company's pension funds.
 Despite the suspicion of manipulation of the pension
schemes, there was a widespread feeling in the City of
London that no action was taken by UK or US regulators
against the Maxwell Communications Corp.
 Eventually, in 1992 Maxwell's companies filed for
bankruptcy protection in the UK and US. At around the
same time the Bank of Credit and Commerce International
(BCCI) went bust and lost billions of dollars for its
depositors, shareholders and employees. Another company,
Polly Peck, reported healthy profits one year while declaring
bankruptcy the next.
 Following the raft of governance failures, Sir Adrian
Cadbury chaired a committee whose aims were to
investigate the British corporate governance
system and to suggest improvements restore
investor confidence in the system. The Committee
was set up in May 1991 by the Financial Reporting
Council, the London Stock Exchange, and the
accountancy profession. The report embodied
recommendations based on practical experiences
and with an eye on the US experience, further
elaborated after a process of consultation and
widely accepted. The final report was released in
December 1992 and then applied to listed
companies reporting their accounts after 30th June
1993.
The terms of reference for this committee, which
Sir Adrian Cadbury himself
drew up, were:
‘To consider the following issues in relation to the
financial reporting and accountability and to make
recommendations on good practice:
a) the responsibilities of executive and nonexecutive directors for the reviewing and
reporting on performance to shareholders and
other financially interested parties; and the
frequency, clarity and form in which information
should be provided;
b) the case for audit committees of the board,
including their composition and role;
c) the principal responsibilities of auditors and the
extent and value of audit;
d) the links between shareholders, boards, and
auditors;
e) any other relevant matters.’
The main recommendations of the Cadbury report
were:
• a division of responsibilities at the head of the
company to ensure that no one individual has
powers of decision
• a majority of non-executive directors to be
independent
• at least three non-executives on the audit
committee
• a majority of non-executives on the remuneration
committee
• non-executives should be selected by the whole
board
The Greenbury Report
 The Greenbury Report released in 1995 was the
product of a committee established by the United
Kingdom Confederation of Business and Industry
on corporate governance.
 It followed in the tradition of the Cadbury Report
and addressed a growing concern about the level
of director remuneration.
 It was realised that corporate governance issues
relating to director’s remuneration needed to be
addressed in a more rigorous manner.
The main recommendation in the Greenbury Report
were as follows;
1. The role of a Remuneration Committee in setting
the remuneration packages for the CEO and other
directors
2. The required level of disclosure needed by
shareholder regarding details of directors
remuneration and whether there is need to obtain
shareholder approval
3. Specific guidelines for determining a remuneration
policy for directors
4. Service contracts and provisions binding the
company to pay compensation to a director,
particularly in the event of dismissal
 Like the Cadbury Report, the Greenbury Report
recommended the establishment of
Remuneration Committee, comprising entirely
of non-executive directors, to determine the
remuneration of the executive directors
The Hampel Report 1996
 The Hampel Committee was established in
1996 to revise the earlier recommendations of
the Cadbury and Greenbury Committees
 The final report was published in January 1998
and it had the following recommendations;
(1) Companies
 Should include in their annual reports a narrative
account of how they apply the braod principles
 Explain their governance policies, justifying
departure from best practises
(2) Directors
 Should receive appropriate training
 The majority of non0-executive directors should
be independent, and boards should disclose in
their annual report which of the non-executive
directors are considered to be independent
 Separation of the roles of chairman and chief
executive officer is preferred, other things being
equal, and companies should justify a decision to
combine the roles
 A senior non-executive director should be
identified in the annual report, to whom
concerns should be conveyed
 Names of directors submitted for re-election
should be accompanied by biographical details
 It may be appropriate and helpful for a director
who resigns before the expiry of his term to give
an explanation
(3) Accountability and Audit
 We suggest that the audit committee should be
keep under review the overall financial
relationship between the company and its
auditors to ensure a balance between the
maintenance of objectivity and value for money
(4) Directors remuneration
 There is no objection to paying a non-executive
director’s remuneration in the company’s
shares, but do not recommended this as
universal practise
 Boards should establish a remuneration
committee made up of independent nonexecutive directors
 Decisions on the remuneration packages of
executive directors should be delegated to the
remuneration committee
 The broad framework and cost of executive
remuneration should be a matter for the board
on the advice of the remuneration committee
 Shareholder approval should be sought for new
long term incentive plans
(5) Shareholders and the AGM
 Institutional investors have a responsibility to
their clients to make considered use of their
votes and we strongly recommend them to
vote the shares under their control
 The Hampel Report emphasised principles of
good governance rather than explicit rules in
order to reduce the regulatory burden on
companies and to avoid a ‘tick-box’ mentality
so as to be flexible enough to be applicable to
all companies
 It also viewed governance from a strict
principal/ agent perspective, regarding
corporate governance as an opportunity to
enhance long term shareholder value, which
was asserted as the primary objective of the
company
 This was a new development from the Cadbury
and Greenbury codes which had primarily
focused on preventing the abuse of the
discretionary authority entrusted to
management
 In particular the Hampel Report favoured
greater shareholder involvement in company
affairs
Combined Code (1998)
 It consolidated the principles and
recommendations of the Cadbury, Greenbury
and Hampel Reports
 It was first published in 1998 and revised in 2003
following the Higgs Report and again in 2010
 The Combined Code is divided into two section,
the first outlines best practise for companies
and the second for shareholders
Internal Control: Guidance for Directors on
the Combined Code (1999)/ Turnbull Report
 is a report drawn up with the London Stock
Exchange for listed companies. The committee
which wrote the report was chaired by Nigel
Turnbull (who was the Director of Finance at Rank
plc)
 The report informs directors of their obligations
under the Combined Code of the London Stock
Exchange with regard to keeping good "internal
controls" in their companies, or having good audits
and checks to ensure the quality of financial
reporting and catch any fraud before it becomes a
problem
 The recommendation of the report can be
grouped into five key areas as follows;
(1) The importance of internal control and risk
management. These are connected with the
achievement of business objectives, and
securing shareholder investment and company
assets
(2) Maintaining a sound system of internal control.
This involves the policies, processes, taks,
behaviours and other aspects of a company
which in combination permit a company to;
 Respond to significant business, operational,
financial, compliance and other risks to achieving
objectives
 Ensure the quality of internal and external
reporting
 Comply with relevant laws and regulations
(3) Reviewing the effectiveness of internal control.
The respective responsibilities of the board of
directors, board committees and management
 The board at the very least needs an effective
and continuous monitoring process, to receive
regular reports…
…, and to carry out an annual assessment to
guarantee that all significant risks have been
considered prior to a public statement being
issued
(4) The board statement on internal control. The
board must acknowledge its responsibility for
the system of internal control
(5) Internal audit. This is designed to provide
objective assurance as required by senior
management and the board. The board will
need to consider the adequacy of such
assurance.
Myners: Review of Institutional Investment
(2001)
 The report was commissioned by the UK
government and the commission was chaired
by Paul Myners
 The commission’s brief was ‘to consider
whether there were factors distorting the
investment decision-making of institutions
 The Myners Report highlighted the following
problems;
 There are wholly unrealistic demands being
made of pension fund trustees, whereby they
are expected to make crucial investment
decisions without either the resources or the
expertise needed;
 Consequently, there is too heavy a burden
being placed on the investment consultants
who advise the trustees to ensure the decisions
made are correct
 The job allocation, the selection of which
markets, as opposed to which individual stocks,
to invest in, is under resourced; and
 There is lack of clarity about objectives at a
number of levels, for instance the objectives of
Fund Managers, when taken together, appear to
bear little relation to the ultimate objective of
the pension fund
The Review concluded that structures used by the
various types of institutional investors to make
investment decisions lack both efficiency and
flexibility, which often means that savers money is
not being invested in ways which will maximize
their interests
 The Review made the following
recommendations;
The Higgs Report (2003)
 The Report was named after Derek Higgs and
focused on the role of the non-executive director
and also suggested changes to the Combined
Code
 The report viewed the role of the non-executive
director as;
(i) Making contributions to corporate strategy
(ii) monitoring the performance of executive
management
(iii)Satisfying themselves regarding the
effectiveness of internal controls
(iv)Setting the remuneration for executive
directors ; and
(v) Being involved in the nomination, removal and
succession planning of senior management
 The Combined Code had recommended that
the board of directors should comprise of at
least a 1/3 non-executive directors, a majority
of whom should be independent
 The Higgs Report outlined a series of tests of
independence such as length of service (10
years), associations to executive management,
financial interest or significant shareholding
 In particular the Higgs Report identified crossdirectorships as compromising independence,
the simplest case being where two directors act
as executive directors and non- executive
directors alternatively at two companies
 The Higgs Report recommended stronger
provisions governing nomination committees
 It recommended that all listed companies
should have nomination committees, chaired
by an independent NED and comprising a
majority of independent NEDs
 The Board should review its performance, the
performance of its committees and individual
directors at least once a year
 The Company Secretary should be
accountable to the Board of Directors through
the Chairman on all governance matters, and
 The terms or reference of the remuneration
committee should be published
Revised Combined Code (2003)
 The Revised Combined Code was a direct result
of the recommendations of the Higgs report
 As with the 1998 Combined Code, companies
are required to report on their compliance
against the Code and should explain areas of
non-compliance
 The Revised Code was a significant revision of
the 1998 Combined Code, it calls for ;
 A separation of the roles of Chairman and CEO.
The Chairman should satisfy the criteria for
independence on appointment, but should not,
thereafter, be considered independent when
assessing the balance of board membership
 A Board of at least half Independent NEDs. The
Code defines independence as recommended in
the Higgs Report
 Candidates for Board selection to be drawn
from a wider pool;
 The Board, it committees and directors to be
subject to an annual performance review;
 At least one member of the audit committee to
have recent and relevant financial experience
UK Corporate Governance Code 2010
 is a set of principles of good corporate
governance aimed at companies listed on the
London Stock Exchange.
 It is overseen by the Financial Reporting
Council and its importance derives from the
Financial Services Authority's Listing Rules.
 The Listing Rules themselves are given
statutory authority under the Financial Services
and Markets Act 2000
 It requires public listed companies to disclose
how they have complied with the code, and
explain where they have not applied the code in what the code refers to as 'comply or explain'.
 Private companies are also encouraged to
conform; however there is no requirement for
disclosure of compliance in private company
accounts
 The Code 2010 contains the following
recommendations;
Directors
This sets out the requirements for non-executive directors.
The appointments committee should be run by NEDs and
their independence should be assured by absence of any
previous or present personal or business links.
Remuneration
This sets out guidance for the committee which
determines director remuneration. Its principle is that of
performance related pay. It is meant to complement the
rules in the Companies Act 2006 which require a say on pay
by the general meeting. The remuneration committee is
meant to be composed of NEDs, although it allows for the
Chairman of the board of directors to sit in.
Accountability and Audit
Here rules are discussed about the audit
committee, which is meant to be composed of
only independent non-executive directors. In the
wake of the Enron scandal, more emphasis has
been placed on high standards of integrity.
Relations with Shareholders
This part sets out the best practice of
maintaining good relationships with
shareholders and keeping them well informed on
company affairs.
Institutional Shareholders
These provisions deal with a unique part of the
UK financial market structure, which is great
involvement and influence of institutional
investors.
The King Reports
 These were developed in a context much more
similar to that of Zimbabwe
 developing countries face a larger context
when dealing with corporate governance in
that they have not only to consider the issues
of corporate collapse and creative accounting
that have been the driving force behind
corporate governance reforms in developing
countries, but they must also consider issues
like skewered wealth distribution patterns,
globalization and to balance a locally
acceptable and relevant corporate governance
strategy with the need to meet international
expectations
 The King Reports were developed in such an
environment
 In 1992 a Commission, which was chaired by
Mervyn King, was set up by the Institute of
Directors Southern Africa to established a Code
on corporate governance in South Africa and it
produced the first such Code, titled ‘ the Code of
Corporate Practises and Conduct’, better known
as King I, in 1994
 The code marked the institutionalisation of
corporate governance
 It established recommended standards of conduct
for boards and directors of listed companies, banks
and certain state-owned enterprises, with an
emphasis on the need for companies to become a
responsible part of the societies in which they
operate
 King I was heavily influenced by the English codes
of recommended practises but was unique in the
sense that it advocated an integrated approach to
good governance, taking into account stakeholder
interest and encouraging the good of good
financial, social, ethical and environment
Board of Directors
 It acknowledged that South Africa has a unitary
board system in much the same fashion as the US
& UK and recommended continued adherence to
this board structure because unitary board
structure provides greater interaction among all
board members
 No board should have less than two non-executive
directors of sufficient calibre that their views will
carry significant weight in board decisions.
 The board must retain full and effective control
over the company, monitor the executive
management and ensure that the decision of
material matters is in the hands of the board.
 Directors' remuneration, including that of the
non-executive directors. should be the subject
of recommendations to the board of a
Remuneration Committee with a majority of its
members (including the chair) being nonexecutive directors.
 The board, in-order to properly dispense its
duties, must meet regularly
 It distinguishes the functions of the chairperson
and the CEO. It postulated that the function of
the chairperson of the board of directors
Is being responsible for presiding over the
meetings of directors and to ensure the effective
functioning of the board and the CEO is
responsible for the running of the business of the
company and to implement policies and strategies
adopted by the board
 King I recommended that these functions be
kept separate and if they are combined then
there should be an independent deputy
chairperson and such a decision must be
justified in the company’s annual report
Auditing
 Companies should have an effective internal
audit function that has the respect and cooperation of both the board of directors and
management.
 The auditors must observe the highest
standards of professional and business ethics
Code of Ethics
 A corporation should implement its Code of Ethics
as part of the corporate governance of that
corporation.
 A Code of Ethics should:
(i) Commit the corporation to the highest standards
of behaviour;
(ii) Be developed in such a way as to involve all its
stakeholders to infuse its culture;
(iii) Receive total commitment from the board and
chief executive officer of the corporation.
(iv) Be sufficiently detailed as to give a clear guide to
the expected behaviour of all employees.
King II
 King II was published in 2002 and although
voluntary, the JSE requested listed companies to
comply with King II or to explain their level of noncompliance
 King II begins with a quote from Sir Adrian Cadbury
from the Cadbury Report; “Corporate governance is
concerned with holding the balance between
economic and social goals and between individual and
communal goals…the aim is to align as nearly as
possible the interests of individuals, corporations and
society”
 King II, in line with corporate governance reports
worldwide, makes reference to the ‘ the four pillars
of fairness, accountability, responsibility and
transparency”
 Transparency:- the ease with which an outsider is
able to analyse a company’s actions
 Independence:- the mechanisms to avoid or
manage conflict
 Accountability:- the existence of mechanisms to
ensure accountability
 Responsibility:- processes that allow for
corrective action and acting responsibility towards
all stakeholders
 Fairness:- balancing competing interests
 Social Responsibility:- being aware of and
responding to social issues
Directors
 King II prescribes what constitutes an
independent director
 Non- executive independent directors should
not;
(a) Represent or be nominated by a major
shareholder
(b) Have been employed by the company in the
preceding three financial years
(c) be a professional adviser to the company
(d) Be a significant supplier or customer to the
company
(e) Have significant contractual relationships with
the company or
(f) Be in any business or other relationship which
could materially interfere with his/her ability to
act independently
Training and induction of directors
 An orientation programme should be held to
introduce new directors to the company and
brief them on their fiduciary duties
 Directors should be briefed on new laws and
regulations and kept abreast of changes in the
industry in which the company operates
 King II has a more pronounced inclination towards an
inclusive approach to corporate governance
 Para 6:- the inclusive approach requires that the purpose
of the company be defined, and the values by which the
company will carry on its daily life should be identified
and communicated to all stakeholders. The stakeholders
relevant to the company’s business should be identified.
These three factors must be combined in developing the
strategies to achieve the company’s goals. The
relationship between the company and its stakeholders
should be mutually beneficial. A wealth of evidence has
established that this inclusive approach is the way to
create sustained business success and stead, long-term
growth in long term shareholder value
Para 5.3 “ the inclusive approach recognises that
stakeholders such as the community in which the
company operates, it customers, its employees,
and its suppliers need to be considered when
developing its strategy for the company”
Para 17.1 – refers to the acknowledgement of the
interest of various stakeholders and advocates
for the triple- bottom line approach to financial
reporting which embraces the economic,
environmental and social aspects of a company’s
activities
Para 17.3 “ the so-called shareholder dominant
theory ….has been rejected by Courts in various
jurisdictions …consequently, directors, in
exercising their fiduciary duties, must act in the
interest of the company as a separate person”
 Shareholders remain as the most important
beneficiary of directors’ fiduciary duties, but
social, economic and environmental concerns
should be considered. By considering these
factors, the shareholders will usually benefit in
any event. ( para 5.1 of the Executive Summary
of KING II)
The inclusive approach of King II justified on
several grounds:
 By appeal to improved economic efficiency for
the company;
“ a company is likely to experience indirect
economic benefits such as improved productivity
and corporate reputation by taking [social
responsibility] factors into consideration”
[introduction to King II para 18.7]
 By appeal to current socio-economic conditions
in South Africa:
‘…companies in South Africa must recognise that
they co-exist in an environment where many of
the country’s citizens disturbingly remain on the
fringes of society’s economic benefits’
[Introduction para 36]
 By appeal to traditional African values. King II
(Introduction, para 38) refers to a umber of
values considered to be characteristic of the
African worldwide and culture, including coexistence, collectiveness and consensus. The
exclusion of stakeholders in decision-making
would seem to run counter to these principles
 King II was premised on the philosophy that
governance in any context must reflect the
value system of the society in which it
operates. Whilst corporate governance
worldwide will be informed by certain universal
principles, there can be no single, global
applicable model
 Traditional African society is generally agreed
to be communitarian in nature and this is seen
as the defining attribute of African cultures
 This view has received judicial recognition in the
case of SABC Ltd v Mpofu [2009] JOL 23729
(GSL) were Jajbhay J spoke of the need for
directors to incorporate these values [ubuntu]
into their decision- making. ‘ubuntu speaks to
our inter-connectedness, our common humanity
and responsibility to each that flows from our
connection. Ubuntu is a culture which places
some emphasis on the communality and on our
interdependence of the members of the
community. It recognises a person’s status as a
human being, entitled to unconditional respect,
dignity, value and acceptance from the
members …
… of the community, that such a person may be
part of. In South Africa ubuntu must become a
notion with particular resonance in the building
of our constitutional democracy. All directors
serving on state owned enterprises must take
cognisance of these factors in the determination
of their duties as directors”
 Whichever view is taken, it is apparent that
when compared to Western or Anglo-American
societies, African societies have traditionally
given much more weight to the rights and
interest of the community than the rights and
interests of the individual
 The implications for corporate governance in
Africa lies in the effect that this has on the
choice of an appropriate model
 The Anglo-American corporate environment,
and shareholder and instrumental stakeholder
theory rely on the primacy of individuals’ right to
private property.
 Such a model would be inappropriate in a
society that traditionally holds communal rights
at least equal in value to, if not greater than
individual rights. An exclusive focus on profit
maximization for the benefit of shareholders to
the exclusion of all the considerations would fly
in the face of African ethical considerations
King III
 King III was published in 2009 as a result of
because of the new Companies Act no. 71 of 2008
(‘the Act’) and changes in international
governance trends.
 In a fundamental move away from the approach
of King II (which applied to affected companies
only) King III sets out aspirational best practise
governance standards for all companies
 It departs from the ‘comply or explain’ approach
of King II – an approach which implied an element
of enforcement and sanctions attaching to noncompliance in recognition that there is no ‘one
size fits all approach to corporate governance
 King III adopted the ‘apply or explain’ approach
 The ‘comply or explain’ approach could denote
a mindless response to the King Code and its
recommendations whereas the ‘apply or
explain’ regime shows an appreciation for the
fact that it is often not a case of whether to
comply or not, but rather to consider how the
principles and recommendations can be
applied.
 It is the legal duty of directors to act in the best
interests of the company.
 In following the ‘apply or explain’ approach, the
board of directors, in its collective decision-making,
could conclude that to follow a recommendation
would not, in the particular circumstances, be in the
best interests of the company.
 The board could decide to apply the
recommendation differently or apply another
practice and still achieve the objective of the
overarching corporate governance principles of
fairness, accountability, responsibility and
transparency.
 Explaining how the principles and
recommendations were applied, or if not
applied, the reasons, results in compliance. In
reality, the ultimate compliance officer is not
the company’s compliance officer or a
bureaucrat ensuring compliance with statutory
provisions, but the stakeholders
Key aspects of the Report
1. Good governance is essentially about effective
leadership. Leaders should rise to the challenges
of modern governance. Such leadership is
characterised by the ethical values of
responsibility, accountability, fairness and
transparency and based on moral duties that find
expression in the concept of Ubuntu. Responsible
leaders direct company strategies and operations
with a view to achieving sustainable economic,
social and environmental performance.
2. Sustainability is the primary moral and
economic imperative of the 21st century. It is one
of the most important sources of both
opportunities and risks for businesses. Nature,
society, and business are interconnected in
complex ways that should be understood by
decision-makers. Most importantly, current
incremental changes towards sustainability are
not sufficient – we need a fundamental shift in the
way companies and directors act and organise
themselves.
3. The concept of corporate citizenship which
flows from the fact that the company is a person
and should operate in a sustainable manner.
Sustainability considerations are rooted in the
South African Constitution which is the basic
social contract that South Africans have entered
into. The Constitution imposes responsibilities
upon individuals and juristic persons for the
realisation of the most fundamental rights.
Tripple bottom line approach
 Because the company is so integral to society, it is
considered as much a citizen of a country as is a
natural person who has citizenship. It is expected
that the company will be and will be seen to be a
responsible citizen.
 This involves social, environmental and economic
issues – the triple context in which companies in
fact operate.
 King III, recommends integrated sustainability
performance and integrated reporting to enable
stakeholders to make a more informed
assessment of the economic value of a company.
 The integrated report should have sufficient
information to record how the company has
both positively and negatively impacted on the
economic life of the community in which it
operated during the year under review, often
categorised as environmental, social and
governance issues (ESG).
 Further, it should report how the board
believes that in the coming year it can improve
the positive aspects and eradicate or
ameliorate the negative aspects, in the coming
year.
“The success of companies in the 21st century is
bound up with three interdependent sub-systems
– the natural environment, the social and political
system and the global economy. Global
companies play a role in all three and they need all
three to flourish.” This is according to Tomorrow’s
Company, UK. In short, planet, people and profit
are inextricably intertwined.
Inclusive approach


The Report seeks to emphasise the inclusive
approach of governance. It is recognised that in
what is referred to as the ‘enlightened
shareholder’ model as well as the ‘stakeholder
inclusive’ model of corporate governance, the
board of directors should also consider the
legitimate interests and expectations of
stakeholders other than shareholders.
Inclusivity of stakeholders is essential to
achieving sustainability and the legitimate
interests and expectations of stakeholders must
be taken into account in decision-making and
strategy.
OECD Principles of Corporate
Governance
 These were published by the Organisation for
Economic Cooperation and Development
(OECD) in 2004
 The OECD Principles of Corporate Governance
were originally developed in response to a call
by the OECD Council Meeting at Ministerial
level on 27-28 April 1998, to develop, in
conjunction with national governments, other
relevant international organisations and the
private sector, a set of corporate governance
standards and guidelines.
 The Principles are intended to assist OECD and
non-OECD governments in their efforts to
evaluate and improve the legal, institutional
and regulatory framework for corporate
governance in their countries, and to provide
guidance and suggestions for stock exchanges,
investors, corporations, and other parties that
have a role in the process of developing good
corporate governance.
 The Principles focus on publicly traded companies
 The Principles note the following:
 Corporate governance is one key element in
improving economic efficiency and growth as well
as enhancing investor confidence.
 Corporate governance involves a set of
relationships between a company’s management,
its board, its shareholders and other stakeholders.
 Corporate governance also provides the structure
through which the objectives of the company are
set, and the means of attaining those objectives
and monitoring performance are determined.
 The presence of an effective corporate
governance system, within an individual
company and across an economy as a whole,
helps to provide a degree of confidence that is
necessary for the proper functioning of a
market economy.
 As a result, the cost of capital is lower and firms
are encouraged to use resources more
efficiently, thereby underpinning growth.
 The corporate governance framework also
depends on the legal, regulatory, and
institutional environment. In addition, factors
such as business ethics and corporate
awareness of the environmental and societal
interests of the communities in which a
company operates can also have an impact on
its reputation and its long-term success.
 There is no single model of good corporate
governance. However, work carried out in both
OECD and non-OECD countries and within the
Organisation has identified some common
elements that underlie good corporate
governance.
 The Principles build on these common elements
and are formulated to embrace the different
models that exist.
 The Principles are non-binding and do not aim
at detailed prescriptions for national
legislation. Rather, they seek to identify
objectives and suggest various means for
achieving them.
 Their purpose is to serve as a reference point.
They can be used by policy makers as they
examine and develop the legal and regulatory
frameworks for corporate governance that
reflect their own economic, social, legal and
cultural circumstances, and by market
participants as they develop their own
practices.
 The Principles cover the following areas:
(i) Ensuring the basis for an effective corporate
governance framework;
(ii) The rights of shareholders and key ownership
functions;
(iii)The equitable treatment of shareholders;
(iv)The role of stakeholders;
(v) Disclosure and transparency;
(vi) The responsibilities of the board.
United Nations Global Compact
 Launched in July 2000, the UN Global Compact
is a both a policy platform and a practical
framework for companies that are committed
to sustainability and responsible business
practices.
 As a leadership initiative endorsed by chief
executives, it seeks to align business operations
and strategies everywhere with ten universally
accepted principles in the areas of human
rights, labour, environment and anticorruption.
 The UN Global Compact aims to advance two
complementary objectives:
(i)
Mainstream the ten principles in business
activities around the world
(ii)
Catalyze actions in support of broader UN
goals, including the Millennium
Development Goals (MDGs)
 By doing so, business, as the primary agent
driving globalization, can help ensure that
markets, commerce, technology and finance
advance in ways that benefit economies and
societies everywhere and contribute to a more
sustainable and inclusive global economy.
 The UN Global Compact is not a regulatory
instrument, but rather a voluntary initiative that
relies on public accountability, transparency and
disclosure to complement regulation and to
provide a space for innovation.
Human rights
1. Business should support and respect the protection of
internationally acclaimed human rights; and
2. Make sure they are not complicit in human rights
abuses
Labour
3. Business should uphold the freedom of association and
the effective recognition to the right of collective
bargaining
4. The elimination of all forms of forced or compulsory
labour;
5. The effective abolition of child labour; and
6. The elimination of discrimination in respect of
employment and occupation
Environment
7. Business are asked to support a precautionary
approach to environmental challenges;
8. Undertake initiatives to promote greater
environmental responsibility; and
9. Encourage the development and diffusion of
environmental technologies
Anti- Corruption
10. Business should work against corruption in all
its forms, including extortion and bribery
Codes of best practises and the law
 There is always a link between good
governance and compliance with law. Good
governance is not something that exists
 separately from the law and it is entirely
inappropriate to unhinge governance from the
law.
 As far as the body of legislation that applies to a
company is concerned, corporate governance
mainly involves the establishment of structures and
processes, with appropriate checks and balances
that enable directors to discharge their legal
responsibilities, and oversee compliance with
legislation.
 In addition to compliance with legislation, the
criteria of good governance, governance codes and
guidelines will be relevant to determine what is
regarded as an appropriate standard of conduct for
directors. The more established certain governance
practices become, the more likely a court would
regard conduct that conforms with these practices
as meeting the required standard of care.
 Corporate governance practices, codes and
guidelines therefore lift the bar of what are
regarded as appropriate standards of conduct.
 Consequently, any failure to meet a recognised
standard of governance, albeit not legislated, may
render a board or individual director liable at law.
 Around the world hybrid systems are developing. In
other words, some of the principles of good
governance are being legislated in addition to a
voluntary code of good governance practice. In an
‘apply or explain’ approach, principles override
specific recommended practices.
 However, some principles and recommended
practices have been legislated and there must
be compliance with the letter of the law.
 This does not leave room for interpretation.
Also, what was contained in the common law is
being restated in statutes. In this regard,
perhaps the most important change is
incorporation of the common law duties of
directors in the Act. This is an international
trend