Since King III came into being in 2009, the focus on corporate governance and associated regulatory compliance has risen to the forefront of the global business environment. Additionally, today’s business has to respond to a demanding, dynamic and complex external environment, all of which sets the backdrop for the latest draft version of the King Report.

Broader Context

King IV, which aspires to be the revamped, modern version of its predecessor, comes across as more philosophical in nature with strong ties to sustainability, ethical behaviour and a call on all corporate citizens to ensure that governance extends further than the boardroom. It attempts to instil the ethos of maintaining a symbiotic balance between sustainable value creation and its ripple effect on the socio-economic eco-system in which business operates.

There is a definite intent to cast the corporate governance net much wider. We see this in King IV now knocking at the door of non-profit organisations, private companies and entities in the public sector, whereas previously, the principles of King III predominantly asserted its presence in the ticker code companies of the JSE.

Moreover, the 75 principles of King III have now been collapsed into 17 principles, each with its own set of practice notes and linked to what seems to be very distinct outcomes. These principles carry overtones of interdependency and integration to its fullest extent. It advocates the substitution of the “silo” way of thinking with “integrated” thinking. Further, it aims to curb the tick box approach to governance and replaces this with the following simple concept: “How will we govern our decision-making if no-one is watching”. Call it the corporate honesty bar of governance, if you will.

Remuneration

The body of King IV is extensive but, as always, remuneration joins the ensemble, taking centre stage in the draft report. There are no developments which point to a paradigm shift in remuneration practice and reporting, but rather a focus on an enhanced accountability.

It suggests that remuneration policy decisions should now stand trial through providing shareholders an opportunity to pass a non-binding advisory vote with regards to remuneration policy and its application. This is a good example of how the “King” way of thinking promotes a broader governance framework by including wider stakeholder engagement into decision-making prior to resolution.

Additionally, King IV attempts to set a benchmark around remuneration disclosure. This should allow for better comparative analysis between peer group companies. However, achieving this will be influenced by what companies deem material, a term very loosely defined in King. We also do not see enhanced guidelines on peer group selection as found in King III.  As this is an issue which is regularly deliberated on at subcommittee level, one would expect this to be a touch point.

As with King III, the new draft remains consistent in its principle that companies must remunerate fairly and responsibly. It should however be noted that King IV now classifies remuneration as a corporate citizenship matter, and with this, comes a more involved role of the Social and Ethics Committee. It is suggested that the Social and Ethics Committee (S&E Committee) “oversee” remuneration decisions in collaboration with the Remuneration Committee.

In response to this, public comment has raised some concerns around the proposed role of the S&E Committee, as the term “oversee” implies an authoritative role. Concerns raised are:

  • This may possibly dilute the authority of the Remuneration Committee;
  • It could impact on the flexibility of decision-making for future Remuneration Committees who experience difficult business realities;
  • Members of the S&E Committee may lack the required expertise on remuneration philosophy and practice as applied in the business and South African context; and
  • It is the responsibility of the Remuneration Committee to ensure transparency, honesty and fairness, as this is one of the guiding principles of good remuneration practice.

Although integrated governance is welcomed, the practical application thereof requires more thought. The S&E Committee’s role in remuneration governance should be supportive and confirmatory rather than that of ombudsman.

In King IV, a focus on wage gap is introduced and, considering the South African socio-economic context, should be welcomed into the governance framework. Reporting on wage gap might encourage companies to address this sensitive issue and allow shareholders and future investors to track progress thereon. However, when determining the wage gap ratio, it is suggested that a comparison be drawn on net post-tax remuneration rather than overall pre-tax remuneration. This would be a more realistic indication.

A recent global trend is the use of the Gini coefficient as a determinant of wealth distribution. Hence, beside a focus on wage gap, it may be appropriate to determine a company Gini coefficient for comparative analysis against a relevant peer group.

Conclusion

Comfort should be found in King IV’s pursuit of a progressive governance framework for “tomorrow’s organisation”. The aim for its philosophies and principles to extend to broader society is well-intentioned. It is still early days and the draft is entering its second phase of review. Taking into account a 2-year drafting lead time and another year’s grace period for implementation within organisations, King IV is envisaged to become effective from middle 2017.