APPENDIX H

KING III SALIENT PRINCIPLES AND GUIDELINES

1. STRATEGIC AND ETHICAL LEADERSHIP

The philosophy of the King III Report revolves around leadership, sustainability and
corporate citizenship.


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 sources of both opportunities and risks for
businesses. Nature, society, and business are interconnected in complex ways that
should be understood by the 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 organize
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 realization of the
most fundamental rights.


Principle 1.1: The board should provide effective leadership based on an ethical
foundation
Principle 1.2: The board should ensure that the company is and is seen to be a responsible
corporate citizen
Principle 1.3: The board should ensure that the company’s ethics are managed effectively


 Responsible leadership
 The board’s responsibilities
 Ethical foundation
 Ethics risk and opportunity profile
 Code of Conduct
 Integrity ethics
 Assessment in monitoring reporting and disclosure of company’s ethics.


STAKEHOLDER RELATIONSHIPS AND SHAREHOLDER TREATMENT

Principle 8.1: The board should appreciate that stakeholders’ perceptions affect a
company’s reputation
Principle 8.2: The board should delegate to management to proactively deal with
stakeholder relationships.
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 Principle 8.3: The board should strive to achieve the appropriate balance between its
various stakeholder groupings, in the best interest of the company.
Principle 8.4: Companies should ensure the equitable treatment of shareholders.
Principle 8.5: Transparent and effective communication with stakeholders is essential
for building and maintaining their trust and confidence.
Principle 8:6: The board should ensure that disputes are resolved as effectively,
efficiently and expeditiously as possible.
Principle 2.15: The board should consider business rescue proceedings or other
turnaround mechanisms as soon as the company is financially distressed
as defined in the Act.


GROUP AND SUBSIDIARY BRANDS

Principle 2.24: A governance framework should be agreed between the group and its
subsidiary boards

1. STAKEHOLDER INCLUSIVE MODEL

King III follows an inclusive approach to stakeholders, whereby the legitimate

interests of stakeholders (e.g. employees, suppliers, customers, regulators,
environment, community, etc.) are considered and recognised over and above
solely the shareholders’ interests, in a manner which befits the long term
sustainability of the entity.

Implications: the board should identify important stakeholder groupings and

management will have to engage with them to ascertain legitimate expectations.
Communication with all stakeholders will be important and will be reflected in the
integrated report. We anticipate the current common role of the ‘Investor relations
Manager’ to develop towards that of ‘Stakeholder Relations Manager’.

2. BOARD STRUCTURE: COMPOSITION OF THE BOARD

Principle 2.16: The board should elect a chairman of the board who is an
independent non-executive director. The CEO of the company
should not also fulfill the role of chairman of the board.
Principle 2.17: The board should appoint the chief executive officer and establish a
framework for the delegation of authority.
Principle 2.18: The board should comprise a balance of power, with a majority of
non-executive directors. The majority of non-executive directors
should be independent.
Principle 2.19: Director should be appointed through a formal process.
Principle 2.20: The induction of, and ongoing training and development of directors
should be conducted through formal processes.
Principle 2.21: The board should be assisted by a competent, suitably qualified and
experienced company secretary.

Structure and Composition

The board should comprise balance of power with:



 A majority of non-executive directors, of whom the majority should be
independent.

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  Knowledge, skills, resources, size, diversity and demographics of board to be
considered.
 A minimum of two executive directors (CEO and Finance Director).

 The CEO and chairman positions should be separate.

 One third of non-executives should rotate annually.

 Non-executive directors on the board for over nine-years must be assessed

annually for independence and this should be reported.

 Board should be able to remove any director without shareholder approval.

The King Report provides detailed guidance on the role of the chairman and the
CEO.

DEFINITION OF INDEPENDENCE

King III defines an independent non-executive director as a non-executive director

who:

 Is not a representative of a shareholder who has the ability to control or

significantly influence management.

 Does not have a direct or indirect interest in the company (including any
parent or subsidiary in a consolidate group with the company) which is either
material to the director or the company. A holding or five percent or more is
considered material.

 Has not been employed by the company or the group of which he currently
forms part, in any executive capacity for the preceding three financial years.

 Is not a member of the intermediate family of an individual who is, or has

been in any of the past three financial years, employed by the company or the
group in an executive capacity.

 Is not a professional advisor to the company or the group, other than as a

director.

 Is free from any business or other relationships which could be seen to

interfere with the individual’s capacity to act in an independent manner.

 Does not receive remuneration contingent upon the performance of the

company.

APPOINTMENT AND DEVELOPMENT OF DIRECTORS



 A formal process should be established for appointment and development of
directors.


 A nominations committee should assist with the identification and
recommendation of potential directors of the board.

34



  Backgrounds and references should be checked before nomination.

 Letters of appointment should be provided to non-executive directors.

 Full disclosure of directors should be made to shareholders (King III has

details of disclosure e.g. education, experience, age, other directorships, etc.)

 Directors should receive induction and ongoing training (including changes to

laws, rules, standards and codes)

3. DUTIES OF THE BOARD

Principle 2.1: The board should act as the focal point for and custodian of
corporate governance.
Principle 2.2: The board should appreciate that strategy, risk, performance and
sustainability are inseparable.
Principle 2.3: The board should provide effective leadership based on an ethical
foundation.
Principle 2.4: The board should ensure that the company is and is seen to be
responsible corporate citizen.
Principle 2.5: The board should ensure that the company’s ethics are managed
effectively.
Principle 2.6: The board should ensure that the company has an effective and
independent audit committee.
Principle 2.7: The board should be responsible for the governance of risk.
Principle 2.8: The board should be responsible for information technology (IT)
governance. (5.1)
Principle 2.9: The board should ensure that the company complies with applicable
laws and considers adherence to non-binding rules, codes and
standards.
Principle 2.10: The board should ensure that there is an effective risk-based internal
audit.
Principle 2.11: The board should appreciate that stakeholder’s perceptions affect the
company’s reputation.
Principle 2.12: The board should ensure the integrity of the company’s integrated
report.
Principle 2.13: The board should report on the effectiveness of the company’s
system of internal controls.
Principle 2.14: The board and its directors should act in the best interest of the
company.
Principle 2.15: The board should consider business rescue proceedings or other
turnaround mechanisms as soon as the company is financially
distressed as defined in the Act


4. DUTIES OF DIRECTORS

Principle 2.14: The board and its directors should act in the best interest of the
company.

5. PERFORMANCE AND REMUNERATION

Principle 2.22: The evaluation of the board, its committees and the individual
directors should be performed every year.
35



 Principle 2.25: Companies should remunerate directors and executives fairly and
responsibly.
Principle 2.26: Companies should disclose the remuneration of each individual
director and certain senior executives.
Principle 2.27: Shareholder should approve the company’s remuneration policy.


Performance Assessment of Directors

 The performance of the board, its committees and individual directors should
be evaluated every year by the chairman or an independent provider. Results
should assist training and be disclosed in the integrated report.

 Performance evaluation results should inform the nomination for re-

appointment of a director.

 King III requires the board to consider whether the evaluation of performance
should be done in house or conducted professionally by independent service
providers.

6. CORPORATE AND BOARD MEETINGS, RECORDKEEPING &

REPORTS

7. LIABILITIES OF DIRECTORS

8. RISK MANAGEMENT AND INTERNAL CONTROLS & ASSURANCE

RISK MANAGEMENT
Principle 4.1: The board should be responsible for the governance of risk. (2.7)
Principle 4.2: The board should determine the levels of risk tolerance.
Principle 4.3: The risk committee or audit committee should assist the board in
carrying out its risk responsibilities.
Principle 4.4: The board should delegate to management the responsibility to
design, implement and monitor the risk management plan.
Principle 4.5: The board should ensure that risk assessments are performed on a
continual basis
Principle 4.6: The board should ensure that frameworks and methodologies are
implemented to increase the probability of anticipating
unpredictable risks.
Principle 4.7: The board should ensure that management considers and
implements appropriate risk responses.
Principle 4.8: The board should ensure continual risk monitoring by
management.
Principle 4.9: The board should receive assurance regarding the effectiveness of
the risk management process.
Principle 4.10: The board should ensure that there are processes in place enabling
complete, timely, relevant, accurate and accessible risk disclosure
to stakeholders.
Principle 3.8: The audit committee should be an integral component of the risk
management process.
Principle 5.5: IT should form an integral part of the company’s risk
management.
Principle 6.3: Compliance risk should form n integral part of the company’s risk
PDQDJHPHQWSURFHVV
36





INTERNAL CONTROLS

Principle 2.13: The board should report on the effectiveness of the company’s
system of internal controls.

1. RISK MANAGEMENT

The board is responsible for the governance of risk (to be specified in the
board charter). The board responsibilities include the following:

 Develop a document risk management policy and plan, approved by

the board, which policy is widely distributed.

 Comment in the integrated report on the effectiveness of the risk.

 Review implementation of the risk management plan at least annually,

with continuous monitoring.

 Determine levels of risk tolerance (annual risk tolerance to be set with

risk limits and appetites).

 Appoint a risk committee which considers the risk policy, plan and
monitoring. The risk committee may comprise a minimum of three
members from executive, non-executive directors, senior management
and independent risk experts. It should meet at least twice a year.

 Evaluate the performance of the risk committee.

 Delegate to management the responsibility for the risk management

plan.

 Ensure that risk assessments are performed on a continual basis at least

once a year on a top-down approach.

 Receive and review the company’s risk register (quantified where

possible).

 Ensure a framework for anticipating unpredictable risks.

 Ensure management continually implements appropriate risk

management responses with risk monitoring.


 Receive assurance on the effectiveness of risk management from
management as well as written assessment of the effectiveness of the
system of internal controls and risk management from internal audit.

 Disclose in the integrated report its view on the effectiveness of the

risk management process and any unusual risks.



37



 2. INTERNAL CONTROLS
King III requires the audit committee to conclude and report annually to the
stakeholders and the board on the effectiveness of internal financial controls.
This has to be supported by a formally documented annual review of internal
financial controls performed by internal audit. The external attestation of
internal financial controls is not expected, contrary to the requirements of the
Sarbanes Oxley Act.
INTERNAL AUDIT
Principle 7.1: The board should ensure that there is an effective risk based
internal audit. (2.10)
Principle 7.2: Internal audit should follow a risk based approach to its plan.
Principle 7.3: Internal audit should provide a written assessment of the
effectiveness of the company’s system of internal control
and risk management.
Principle 7.4: The audit committee should be responsible for overseeing
internal audit. (3.7)
Principle 7.5: Internal audit should be strategically positioned to achieve
its objectives.

EXTERNAL AUDITOR
Principle 3.9: The audit committee is responsible for recommending the
appointment of the external auditor and overseeing the
external audit process.

INTERNAL AUDIT

The board should ensure that there is an effective risk based internal audit
function which is governed by an internal audit charter approved by the board,
and which adheres to the IIA Standards and code of ethics.

Internal audit should:

 Report functionally to the audit committee (CAE should report

functionally to the audit committee chairman) and report at all audit
committee meetings

 Evaluate the company’s governance processes

 Objectively assess the effectiveness of risk management and the

internal control framework

 Analyse business processes and controls

 Provide information on fraud and unethical practices

 Have an internal audit plan that is informed by the strategy and risks


 Be independent from management and objective


 Provide a written assessment on the effectiveness of the company’s
system of internal controls and risk management to the board
38



  Provide a written assessment of internal financial controls to the audit
committee (after formally documenting and testing internal financial
controls annually).

The CAE should be able to attend all executive committee meetings, and
should develop a quality assurance and improvement programme.

King III requires companies to establish audit function which provides

assurance over the company’s governance, risk management and internal
controls. Internal audit will be required to provide a written assessment of the
system of internal controls and risk management to the board, as well as
written assessment of the internal financial controls to the audit committee.
(King III differs from Sarbanes-Oxley in that no attestation is required from
external auditors on internal controls on financial reporting).

Implications: Internal audit may require more resources to provide assurance

on the system of internal control and risk management to the board. Currently
in practice, many internal audit functions take care not to duplicate the work of
external audit and thereby do not provide assurance on exclusively internal
financial controls. Internal audit will have to determine the basis and
methodology by which it can provide a written assessment on the internal
financial controls to the audit committee going forward. The audit committee
will have to ensure that internal audit is properly resourced and has sufficient
budget.

9. COMPANY AND BOARD COMMITTEES

Principle 2.23: The board should delegate certain functions to well-structured

committees but without abdicating its own responsibilities.




1. NOMINATION COMMITTEE

Board committees should have:

 Terms of reference approved by the board that reviewed annually.

 Composition and terms of reference should be disclosed in the

integrated report.

 Composition should comprise a majority of non-executive directors of

which the majority should be independent (risk committee may have a
mixed composition – refer below).

 The chairman should not be a member of the audit committee. He/she

should not chair the risk or remuneration committees but may
 be
 a

member of these committees. The chairman should be a member of the
nomination committee and may also be its chairman.

 The CEO should not be a member of the remuneration, audit or

nomination committees but should attend by invitation. CEO’s
shouldrecuse themselves when these conflicts arise or when their
39 



 performance and/or remuneration is discussed. CEO’s should not
become a chairman of a company outside the group.


 External advisors and executive directors may attend by invitation.
Non-directors serving as members on committees of the board should
be aware of sections 76 and 77 of the Companies Act 71 of 2008 which
places the same standards of conduct and liability as if they were
directors (but without the benefit of a committee vote).

 Committees should be able to take outside professional advice subject

to following an approved process.

 Committee chairmen should give at least an oral summary of their

committee’s deliberations at the following board meeting.

2. AUDIT COMMITTEE

Principle 3.1: The board should ensure that the company has an effective and
independent audit committee. (26)
Principle 3.2: Audit committee members should be suitably skilled and
experienced independent non-executive directors.
Principle 3.3: The audit committee should be chaired by an independent non-
executive director.
Principle 3.4: The audit committee should oversee integrated reporting.
Principle 3.5: The audit committee should ensure that a combined assurance
model is applied to provide a coordinated approach to all
assurance activities
Principle 3.6: The audit committee should satisfy itself of the expertise,
resources and experience of the company’s finance functions.
Principle 3.7: The audit committee should be responsible for overseeing of
internal audit.
Principle 3.8: The audit committee should be an integral component of the risk
management process.
Principle 3.9: The audit committee is responsible for recommending the
appointment of the external auditor and overseeing the external
audit process.
Principle 3.10: The audit committee should report to the board and shareholders
on how it has discharged its duties.
Principle 4.3: The risk committee or audit committee should assist the board in
carrying out its risk.
Principle 5.7: A risk committee and board committee should assist the board in
carrying out its IT responsibilities


AUDIT COMMITTEE

The board should ensure that it has an effective and independent audit
committee, with approved terms of reference. The audit committee is an
integral part of the risk management process with oversight of financial
reporting risks, internal financial controls, and fraud and IT risks relevant to
financial reporting.

The audit committee should:

40



  Consist of at least three independent members, all of whom should be
independent non-executive directors. The chairman of the board should
not be chairman of, nor a member of, the audit committee. The audit
committee chairman should be elected by the board, set the agenda and
be present at the AGM.

 Meet at least twice a year (at least once a year external and internal
auditors should attend without management).

 Have sufficient qualifications and experience and be up-to-date with

relevant developments.

 Be able to consult with specialists subject to a board-approved process.

 Oversee integrated reporting (i.e. the integrity of the integrated report,

its financial statements and the disclosure of sustainability for
consistency with the financial information).

 Recommend engaging an external assurance provider on material

sustainability issues.

 Consider the need to issue interim results.

 Review summarised information and engage external auditors to

provide assurance on summarized financial information.

 Ensure there is a combined assurance approach for assurance activities

to address all significant risks.

 Monitor the relationship between external assurance providers and the

company.

 Review annually and satisfy itself on the company’s finance function

and disclose such in the integrated report.

 Oversee internal audit (including appointment/dismissal and

performance management of the Chief Audit Executive (CAE),
approve the internal audit plan, evaluate the document review of
internal financial controls, assess internal audit performance and
quality review the function, ensure properly resourced with sufficient
budget).

 Recommend the external audit appointment and oversee the external

audit process (nomination, terms of engagement, remuneration,
monitoring independence, defining non-audit services policy and pre-
approval of non-audit services policy and pre-approval of non-
auditservices, be informed of Reportable Irregularities, and review
quality and effectiveness of external audit process)

 Report internally to the board and externally to shareholders on

- the discharge of its statutory duties

- independence of external auditor

41



 - financial statements and accounting practices
- effectiveness of the internal financial controls
- its role, composition, meetings and activities

 Recommend the integrated report for approval by the board.



AUDIT COMMITTEE COMPOSITION AND DUTIES

King III requires an independent and suitably skilled audit committee,

appointed by the shareholders. This committee also has statutory duties in
terms of the companies Act 71 of 2008, apart from the board of directors. The
duties of the audit committee are extensive and include overseeing integrated
reporting, external audit, internal audit, the risk management process and the
finance function effectiveness. Pat of its function in relation to risk
management is to oversee the IT risks and fraud risks as they relate to
financial reporting and the internal financial controls, and this includes
reporting to the board on the effectiveness thereof. The board in turn has to
report on the effectiveness of the system of internal controls.

Implications:whilst King III supports the unitary board principle, it could be

argued that South Africa is moving towards a two-tiered governance structure
with boards and audit committees both having statutory responsibilities. This
is pertinent where, in the event of conflict, the audit committee’s decisions
will prevail over the boards in areas where the former has legislative
responsibility.

Audit committees will have to look carefully at their composition in order to

have sufficient proficiency in all the areas of financial reporting, sustainability,
risk management (including IT and fraud risks), internal financial controls,
audit processes and corporate law. More specialists may be co-opted as
attendees and advisors onto audit committees who, whilst not being directors,
will have all the responsibilities and liabilities of being a director in terms of
the Companies Act 71 of 2008.

We expect that many audit committees may need support in relation to the
following:

 Integrated reporting and levels of independent assurance;

 How the combined assurance framework addresses all significant risks;

 The practicalities of how the risk committee works with the audit
committee.

3. RISK COMMITTEE

Principle 4.3: The risk committee should assist the board in carrying out its
risk responsibilities.
Principle 5.7: A risk committee and audit committee should assist the
board in carrying out its IT responsibilities.


The risk committee (or audit committee) should consider the risk management
policy and plan, and should monitor the whole risk management process.
42




IT as it relates to financial reporting and the going concern of the company
should be the responsibility of the audit committee. The risk committee has
the responsibility to oversee the broader risk implications of IT.

4. REMUNERATION COMMITTEE

 Companies should remunerate directors and executives fairly and

responsibly i.e. align remuneration policies to company strategy and
individual performance. Detailed individual performance. Detailed
guidance is provided in the report as to what is considered fair and
responsible remuneration practices.

 The remuneration committee should assist the board with setting and
administering remuneration policies (which should address base pay,
bonuses, contracts, severance, retirement benefits, share and incentive
schemes).

 Non-executive director fees should comprise a base and an attendance

fee component. Non-executive directors and chairman should not
receive share options or other incentive awards. Non-executive director
fees should be approved by shareholders in advance by way of special
resolution at intervals of not more than two years

 The detail of each individual directors’ remuneration as well as that of

the three most highly paid employees should be disclosed within the
remuneration report in the integrated report. Other information to be
disclosed should be base pay policy, participation in incentive
schemes, justifications for salaries above medians, material ex-gratia
payments, executive employment policies, and maximum potential
dilution from incentive awards.

 Shareholders should vote a non-binding advisory vote on the

company’s remuneration policy (including share schemes)

 The board should determine executive directors’ remuneration in

accordance with the policy put to shareholders.
5. INFORMATION TECHNOLOGY (IT) GOVERNANCE

Principle 5.1: The board should be responsible for information technology

(IT) governance. (2.8)
Principle 5.2: IT should be aligned with the performance and sustainability
objectives of the company
Principle 5.3: The board should delegate to management the responsibility for
the implementation on an IT governance framework.
Principle 5.4: The board should monitor and evaluate significant IT
investments and expenditure.
Principle 5.5: IT should form an integral part of the company’s risk
management.
Principle 5.6: The board should ensure that information assets are managed
effectively.
Principle 5.7: A risk committee and audit committee should assist the board
in carrying out its IT responsibilities.
43





IT GOVERNANCE

The board of directors is expected to ensure that prudent and reasonable steps
have been taken in regard to IT governance. The focus of IT Governance should
be on strategic alliance with the objectives of the company, development of an IT
governance framework, risk management in safeguarding IT assets, disaster
recovery, continuity and on the protection and management of information.

6. COMPLIANCE GOVERNANCE

Principle 6.1: The board should ensure that the company complies with
applicable laws and considers adherence to non-binding rules,
codes and standards.
Principle 6.2: The board and each individual director should have a working
understanding of the effect of the applicable laws, rules, codes
and standards on the company and its business.
Principle 6.3: Compliance risk should form an integral part of the company’s
risk management process.
Principle 6.4: The board should delegate to management the implementation
of an effective compliance framework and processes.

COMPLIANCE

Compliance should form an integral part of the risk of non-compliance should be

identified, assessed and responded to in the risk management process. The
establishment of compliance function should be considered.

The board should:

 Ensure the company complies with applicable laws and considers adherence to
rules, codes and standards.

 Delegate to management the implementation of an effective compliance

framework and processes (this may include an approved compliance policy,
code of conduct, structures, training, appointment of a compliance officer, key
performance indicators, integration with risk management and ethics
programmes).

 Monitor compliance and have it as a regular item on the board agenda.

 Receive assurance on the effectiveness of compliance controls.

 Disclose details on how it has established an effective compliance framework

and processes, as well as disclose material or oft repeated instances of non-
compliance.

Implications: There may be an increased demand for compliance officers and the
role and positioning of the function will have organisational structure and
reporting implications.Companies will also have to incorporate compliance
methodologies into the risk management and combined assurance frameworks.

44



 7. INTEGRATED REPORTING AND DISCLOSURE

Principle 9.1: The board should ensure the integrity of the company’s
integrated report. (2.12)
Principle 9.2: Sustainability reporting and disclosure should be integrated with
the company’s financial reporting.
Principle 9.3: Sustainability reporting and disclosure should be independently
assured.
Principle 3.4: The audit committee should oversee integrated reporting.

THE INTEGRATED REPORT

The King III Report provides for all companies to prepare an Integrated Report,
which contains information about operations, sustainability and financial
reporting (3.17).

The Audit Committee is charged with the review of the Integrated Report on
behalf of the Board.
It is recommended that the Board should confirm, in the Integrated Report, that
appraisals of the Board and its Committees have been carried out.

The Integrated Report should name the members of Board Committees (1.140).

The company is to include an explanation of any decisions not to establish an

Internal Audit function (5.1).

The Remuneration Committee is to provide a report for the integrated Report

(1.29).

INTEGRATED REPORTING AND DISCLOSURE

Companies are expected to report annually, through an integrated report, on the

operations of the company, the sustainability issues affecting the business, the
financial results, and the results of its operations and the cash flows. The
integrated report should have sufficient information on how the company has
positively or negatively affected the economic life for the community in which it
operated during the year under review, and should also contain forward looking
information in that regard. Sustainability reporting should be independently
assured by external service providers, and the audit committee has an additional
responsibility to assist the board in their review by ensuring that the information
is reliable and that no conflicts or differences arise when compared to the
financial results.


SUSTAINABILITY

There is increased emphasis on sustainability and its inseparable interface with

strategy and control.

King III calls for integrated reporting (reporting of financial information with
sustainability issues of social, economic and environmental impacts) and
recommends that the audit committee engage an external assurance provider

45



 toprovide assurance over material aspects of the sustainability reporting in the
Integrated Report.
Implications: The skill set of the audit committee will have to include member/s
proficient in sustainability.

Furthermore, integrated reporting may require registered auditors and assurance

providers who can provide assurance on both the financial components and the
sustainability aspects of reporting. This is likely to impact the external audit
engagement, opinion and associated costs, as well as director liability in the event
of misrepresentation.

The board should:

 Ensure integrity of integrated reporting. (There should be controls to ensure

integrity of integrated report. The report should be prepared annually, cover
sufficient financial and sustainability performance, focus on substance over
form, and describe how the company made its money).

 Delegate evaluation of sustainability disclosures to the audit committee.

 Comment on the financial results.

 Disclose if the company is a going concern.

 Convey positive and negative impacts of operations of how these will be

improved in the next year.

 Delegate oversight and reporting of sustainability to the audit committee (who

should ensure that sustainability reporting and disclosure is independently
assured).

2. INTEGRATED REPORT

KING III AND THE INTEGRATED REPORT (Integrated Sustainability

Reporting)

The purpose of the Integrated Report

We have endeavoured, as with King I and King II, to be at the forefront of governance
internationally. We believe this has been achieved because of the focus on the
importance of conducting business reporting annually in an integrated manner i.e.
putting the financial results in perspective by also reporting on:

 How a company has, both positively and negatively, impacted on the economic
life of the community in which it operated during the year under review; and

 How the company intends to enhance those positive aspects and eradicate or
ameliorate the negative aspects in the year ahead.

INTEGRATED REPORTING


The market capitalization of any company listed on the JSE equals its economic value
and not its book of value. The financial report of a company, as seen in its balance

46



 sheet and profit and loss statement, is a photograph of a moment in time of its
financial position. In buying a share on any stock exchange, the purchaser makes an
assessment of the economic value of a company. The assessment considers the value
of matters not accounted for, such as future earnings, brand, goodwill, the quality of
its board and management, reputation, strategy and other sustainability aspects. The
informed investor assesses the quality of the company’s risk management and
whether it has considered the sustainability issues pertinent to its business.

Individuals today are the indirect providers of capital. They are consumers and, as
citizens, they are concerned about the sustainability of our planet. Those who prepare
integrated reports should give the readers the forward-looking information they want.
Today’s stakeholders also want assurance on the quality of this forward looking
information.

By issuing integrated reports, a company increases the trust and confidence of its
stakeholders and the legitimacy of its operations. It can increase the company’s
business opportunities and improve its risk management. By issuing an integrated
report internally, a company evaluates its ethics, fundamental values and governance,
and externally improves the trust and confidence which stakeholders have in it.

In King III, we have therefore recommended 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.

King III explicitly required companies to implement the practice of sustainability

reporting as a core aspect of corporate governance. Since 2002, sustainability
reporting has become a widely accepted practice and South Africa is an emerging
market leader in the field (partially due to King II and the emergence of initiatives
such as the JSE’s Socially Responsible Investment (SRI) index which was the first of
its kind in an emerging market).

King III supports the notion of sustainability reporting. But make the case that
whereas in the past it was done in addition to financial reporting it now should be
integrated with financial reporting.

Integrated reporting – Means a holistic and integrated representation of the

company’s performance in terms of both its finance and its sustainability.

3. STRATEGIC LEADERSHIP


Transparency: The board should disclose information in a manner that enables
stakeholders to make an informed analysis of the company’s performance, and
sustainability.

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 STAKEHOLDER AND SHAREHOLDER RELATIONSHIP

External assessment and disclosure of the company’s ethics performance are

necessary to provide internal and external stakeholders with relevant and reliable
information about the quality of the company’s ethics performance. The independent
assurance on the company’s ethics performance, supported by an assurance statement
(as part of the integrated report) enhances the credibility of the information provided
to stakeholders.

The board should disclose in its integrated report the nature of its dealings with its
stakeholders and the outcomes of these dealings.

BOARD COMPOSITION AND APPOINTMENTS

39. If the board appoints a chairman who is a non-executive director but is not
independent or is an executive director, this should be disclosed in the integrated
report, together with the reasons and justifications for the appointment;
88. The board should recognize that high levels of timely disclosure and transparency
enable shareholder to make their own informed assessment of directors, be it in
regard to independence, remuneration or other issues. The following aspects
regarding directors should be disclosed in the integrated report;
88.1 The reasons for the removal, resignation or retirement of directors. The purpose
of this is to enable shareholders to fulfil their role as the ultimate arbiters of who
should sit on the board. Complete, timely, relevant, accurate, accessible and
honest disclosure will reduce speculation and uncertainty;
88.2 The composition of the board and board committees and the number of meetings
held, attendance at those meetings and the manner in which the board and its
committees have discharged its duties;
88.3 The education, qualifications and experiences of the directors;
88.4 The length of service and age of directors;
88.5 Whether supervising of new management is required in which case retention of
board experience would be called for;
88.6 Other significant directorships of each board member;
88.7 Actual or potential political connections or exposure; and
88.8 Any other relevant information.

Principle 2.12: The board should ensure the integrity of the company’s integrated
report.
Principle 2.13: The board should report on the effectiveness of the company’s system
of internal controls.


BOARD PERFORMANCE EVALUATION

114 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.

DIRECTOR REMUNERATION

180 Companies should provide full disclosure of each individual executive and non-
executive director’s remuneration, giving details as required in the Act of base
pay, bonuses, share-based payments, granting of options or rights, restraint
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 payments and all other benefits (including present values of existing future
awards). Similar information should be provided for the three most highly-paid
employees who are not directors in the company.
181 In its annual remuneration report, to be included in the integrated report, the
company should explain the remuneration policies followed throughout the
company with a special focus on executive management, and the strategic
objectives that it seeks to achieve, and should provide clear disclosure of the
implementation of these policies.

BOARD MEETINGS

REPORT ON OPERATIONS

RISK MANAGEMENT

INTERNAL CONTROLS

INTERNAL AUDIT

EXTERNAL AUDITORS

NOMINATION COMMITTEE

112. The chairman, through the nominations committee, may lead the overall
performance evaluation of the board and board committees with the assistance
of company secretary. However, independent performance appraisals should be
considered in the interest of eliciting candid responses. The board should
discuss the board evaluation results at least once a year.

AUDIT COMMITTEE

1. An independent audit committee fulfils a vital role in corporate governance.

The audit committee is vital to, among other thing, ensure integrity of integrated
reporting and internal financial controls and identify and manage financial risks.
14. Because of the audit committee’s responsibility to oversee integrated reporting,
there is a clear need for this committee, collectively to have an understanding of
International Financial Reporting Standards, South African Statement of
Generally Accepted Accounting Practice, the guidelines of the Global
Reporting Initiative and any other financial or sustainability reporting standards,
regulations or guidelines applicable to the company.

Principle 3.4: The audit committee should oversee integrated reporting.



23. The audit committee should assist the board in reviewing the integrated report
to ensure that the information is reliable and that it does not contradict the
financial aspects of the report. The audit committee should also oversee the
provision of assurance over sustainability issues in the same way that it would
do with financial matters. For example, it would consider whether appropriate
policies and processes are in place, whether they are adhered to, and whether
the information about performance is reliable. This role of the audit committee
is still necessary with regard to sustainability performance and reporting, even if
there is a separate sustainability committee, or if sustainability matters are
addressed by another board committee.
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 24. Every year all companies should be prepare an integrated report that conveys
adequate information about the social, economic and environmental impact of
the company on the community in which it operates. (Refer to Chapter 9 for
more information on integrated reporting).
25. In its consideration of the integrated report, the audit committee should consider
any factors that may predispose the management to present an incomplete or
misleading picture of the company’s position, performance or sustainability.
Such factors may include, for example, a perceived need to counter adverse
market sentiment or to report the achievement of performance targets on which
bonus payments depend.
26. The audit committee should be responsible for evaluating the significant
judgments and reporting decisions affecting the integrated report made by the
management, including changes in accounting policies, decisions requiring a
major element of judgement and the clarity and completeness of the proposed
financial and sustainability disclosures. It should require explanations from
management on the accounting of significant or unusual transactions and should
consider the views of the external auditor’s in these instances. The audit
committee should understand how the board and external auditor (and any other
relevant external assurance provider) evaluate materially for integrated
reporting purposes.
27. The audit committee should be informed of any monitoring or enforcement
actions against the company, for example by a regulatory agency, on a timely
basis, to allow the audit committee to be involved in the company’s response to
such monitoring or actions.
28. The audit committee should consider any evidence that comes to its attention
that brings in to question any previously published financial or sustainability
information, including complaints about this information. Where necessary, the
audit committee should take steps to recommend that the company publicly
correct the previously published financial or sustainability information if it is
materially incorrect.
29. The audit committee should carefully review forward-looking statements of
financial or sustainability information to ensure that the information provides a
proper appreciation of the key drivers that will enable the company to achieve
these forward-looking goals.
31. The audit committee’s review of financial report should encourage the annual
financial statements, reports, preliminary or provisional result announcements,
summarized integrated information, any other intended release of price-
sensitive financial information and prospectuses, trading statements, circulars
and similar documents. Scrutiny by the audit committee should not be confined
to the primary financial statements and should extend to all relevant narrative
information which should present a balanced view of the company’s
performance.
32. The audit committee should be informed when there is a disagreement on
auditing or accounting matters between the management and the external
auditors. Where an accounting opinion has been requested from a person other
than the external auditor of the company, the reasoning for the accounting
treatment adopted should be obtained and should be approved by the audit
committee before the committee’s recommendation is made to the board. The
audit committee should also be satisfied with the credentials of the person
providing such an opinion.
33. For the audit committee to assist the board to make a statement on the going
concern status of the company. To enable the audit committee to conduct a
thorough discussion, management should document the key assumptions in
reaching their conclusions.
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SUSTAINABILITY



 34. The board is responsible for the integrity of integrated reporting. The audit
committee should be tasked by the board to assist by overseeing the integrity of
the integrated report. As part of this assigned responsibility, the audit committee
should recommend the annual financial statements for approval by the board.
The overseeing of sustainability issues in the integrated report should be
delegated to the audit committee by the board.
35. The audit committee should assist the board in approving the disclosure of
sustainability issues in the integrated report by ensuring that the information is
reliable and that no conflicts or differences arise when compared with the
financial results.
36. The audit committee should recommend to the board to engage an external
assurance provider to provide assurance over material elements (such elements
should be determined by the relevant committee responsible for overseeing the
sustainability reporting) of the sustainability part of the integrated report. The
audit committee should evaluate the independence and credentials of the
external assurance provider.


SOCIAL AND ETHIC COMMITTEE

INFORMATION TECHNOLOGY GOVERNANCE

COMPLIANCE GOVERNANCE

10. The board should disclose in the integrated report on how it has discharged its
responsibility to ensure the establishment of an effective compliance framework
and processes
36. A company should consider disclosing in its integrated report the number and
reasons for refusals of requests for information that were lodged with the
company in terms of the Promotion of Access to Information Act, 2000.
Disclosure will necessitate will detrimentally affect the company or breach
confidentiality or any agreement to which it is a part.

4. DISCLOSURE OF INTEGRATED REPORT

Summarised information

41. Due the volume and complexity of information conveyed in the integrated report,
users benefit from a summary of the integrated report. The company should

 therefore prepare a summarised integrated report in addition to the complete
integrated report.
42. The objective of the summarised integrated report is to give a concise but
balanced view of the company’s integrated information. In preparing the
summarised integrated report, companies should give due consideration to:
42.1 Providing key financial information. The International Financial Reporting
Standard on Interim Reporting (IAS 34) provides useful guidance as to
which financial information and notes should be included;
42.2 Providing sufficient commentary by the company to ensure an unbiased,
succinct overview of the company’s financial information; and

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 42.3 Providing the company’s key performance measures regarding
sustainability information.
43. Summarized integrated information should be derived from the underlying
integrated report and should include a statement to this effect.
44. The audit committee should engage the external auditors to provide an assurance
report on summarised financial information, confirming that the summarised
financial information is appropriately derived from the annual financial
statements.
45. Both the complete and summarised integrated report s should be made available
to stakeholders electronically and should be placed on the company’s website.
The board should however consider the nature of its stakeholder base in
determining the appropriate method of disseminating the summarised integrated
report. Where a large proportion of stakeholders do not have electronic access to
the company’s information, hard copies of the summarised integrated report
should be made available to all the stakeholders on written request to the
company’s secretary or directed to the company’s registered office.

Principle 9.1: The board should ensure the integrity of the company’s integrated
report.
Principle 9.2: Sustainability reporting and disclosure should be integrated with the
company’s financial reporting.
Principle 9.3: Sustainability reporting and disclosure should be independently
assured.


5. KING III AND LISTED COMPANIES

 Mandatory corporate governance requirements for listed companies

Following the release of King II, the JSE Listings Requirements were significantly
revised and a new set of Listings requirements were adopted in 2003.

All listed companies were required to comply with the principles of the King
Code or explain the extent and reasons for their non-compliance. Briefly, listed
companies are required to:

 Have a minimum of four directors the appointment of whom must be confirmed at

the company’s AGM.

 Have a mandatory separation of the role of the chairman of the board and the
CEO.

 Have a board comprising a majority of non-executive directors and separate audit

and remuneration committees appointed in accordance with the principles in King
II.

 Put in place a formal policy governing the appointment of new directors.

 Obtain approval of non-executive directors’ remuneration by shareholders at the

AGM.

 Make disclosure of non-executive directors’ independence, CVs, meeting

attendance and remuneration in the company’s annual report.
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  Apply higher standards of disclosure in their annual financial statements which
are to be distributed to shareholders within three months of the financial year end,
and to publish interim financial statements.

 Disclose any changes to their boards of directors or the company secretary within
24 hours (or the end of the business day following) the resignation or appointment
(LR 3.59).

 Comply with the requirements of LR 10.4 in relation to transactions involving

related parties.

6. CORPORATE GOVERNANCE AND STATE OWNED ENTERPRISES

THE PUBLIC SECTOR AND DIRECTORS OF STATE OWNED

ENTERPRISES

In the wake of King II, the regulations under the Public Finance Management Act (the
PFMA), which apply to government departments and state owned entities, were
completely revised and promulgated in late 2002 as an updated Protocol on Corporate
Governance for State owned Enterprises. State owned entities are governed by
collectively by their founding legislation, if applicable, the Companies Act, the
PFMA, the King code and the Protocol.

 Appointment with the matter of board appointment, the Protocol largely mirrors
the recommendations of King II, calling for a formal, transparent and credible
procedure for director appointment to avoid the propensity for “tokenism”;

 The leadership of a capable non-executive chairman who brings out the best in
each member;

 A balance between executive and non-executive directors; and

 The planning of board size, composition and succession in line with the strategic
objectives of the organisation. It goes further than King II (and indeed further
even than King III) in recommending that the term served by all directors should
be determined in advance and should form part of a comprehensive letter of
appointment in which performance criteria for directors should be agreed upon.


In line with international practice, the Protocol recommends that directors’
remuneration should be linked, at least in part, to the performance of the organization
and the board and should accurately reflect the responsibility and risk involved in
being an effective director. Like the King Reports, it endorses the principle that
directors’ remuneration be “balanced between an amount at which it would lose
significance for the director and a level at which the director may lose independence”.
The protocol provides for the ultimate sanction of non-executive remuneration by the
shareholders (government) after a recommendation has been made by the
remuneration committee.

In an endeavour to advance the principle of accountability, directors are to be held

personally liable, to a limited extent, for deviations from agreed standards of
governance and behaviour. However, where directors act recklessly of fraudulently,
the Protocol recommends that their liability be unlimited.

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 The independence of directors of state owned companies is considered a critical area
as, it is argued, that the appointment of the board by the state makes board
independence more difficult and even more necessary. A distinction is drawn between
the state’s influence as a shareholder and “undue political influence”. The Protocol
stresses that the ability of the state, represented by the relevant government Minister,
to appoint the board and to approve key strategic and business plans and other.
Aspects of performance management must be framed in terms of acceptable and
recognised procedures. There is a fine line, however, between acceptable state
oversight and the point at which state bounds and seeks to influence the organization
without being publicly accountable. The recent stand-off between the Minister of
Communications and some board members at the SABC is an interesting case in
point. The following case study is a précis of a comment piece I wrote with a
colleague in August 2009 as the furore was unfolding.

ROLE OF THE BOARDS OF STATE OWNED ENTITIES

Despite the recommendation that the content of the organisation’s strategic and
business plans be approved by the stakeholders, the Protocol stresses that the board
should retain “total accountability for all corporate activity”, including:

 Responsibility for strategic planning and direction, major plans of action, risk
policy, annual budgets and business plans, performance objectives, major capital
decisions, and for monitoring good governance.

 Appointing the integrity of accounting and financial reporting systems.

 Implementing a code of ethics for the organization.

 Abstaining from the day-to-day management activities.

 Ensuring that technology and systems used are adequate for running the business
properly for it to remain a meaningful competitor.


 Regular assessment of its own performance and effectiveness, and that of the
individual directors.


 Regular review and reporting on internal procedures.


Like the King Reports (II and III), the Protocol emphasizes the individual and
collective fiduciary duties of directors. The directors are responsible for ensuring that
the business enterprise is financially viable and properly managed. Unlike a normal
public company where shareholders have no input on staffing, the Minister
representing the shareholder (the state) retains the right of final approval of the
appointment of senior management by the board.

BOARD PERFORMANCE AND DECISION-MAKING

In line with the recommendation in the King Reports that the board adopts a charter in
which it outlines its responsibilities relative to management, but going somewhat
further, the Protocol recommends that each board have a performance agreement
which defines how its performance will be monitored and assessed. It further
recommends the adoption of international best practice in respect of board decision
making, which requires the board to:
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  Vote on all material issues.

 Establish formal procedures to govern the conduct of company business.

 Ensure that minutes of meetings accurately record decisions taken and, where
appropriate, the views of individual board members.

 Avoid consensus-seeking decision-making at board level, which could entail too

much compromise and eventually weaken the decision.

Finally, the Protocol suggests that the role of the shareholder in decision-making by
the board should be clearly agreed on and defined in a shareholder compact between
the state and the organization.

FINANCIAL REPORTING

Much of the financial reporting requirements of state owned entities are now
governed by the PFMA. The Protocol endorses international best practice in the view
that there should be total independence of the audit process and that directors
collectively remain ultimately responsible for the integrity of the audit. Like King II,
it requires directors to report on the financial and other internal control mechanisms
within the organization and warrant their adequacy.

ETHICS AND PROBITY

Ethics and probity in relation to corporate governance have received much attention in
the Protocol which, in line with the principles of the PFMA, is also aims at disciplined
management of the public resources and establishing a culture of financial probity and
accountability. The Protocol requires organizations to develop a formal code of
conduct defining the standards of personal behaviour to which individual board
members and all employees should be required to subscribe.


The Protocol recommends that a code of ethical conduct be adopted by all SOEs to
ensure that their stakeholders have confidence in the integrity of the institutions. Its
principles include the a commitment by all employees not to hold conflicting financial
interests or to engage in financial transactions using non-public internal information
to further any private interest and not, except pursuant to such reasonable exceptions
as are provided by regulation, to solicit or accept any gift or other item of monetary
value from any party doing business with, or conducting activities regulated by, the
employee’s organization.

SHAREHOLDER COMPACTS

The Protocol provides a detailed framework for shareholder compacts, which will be
entered into individually by the Cabinet minister representing the state and the
relevant state owned entity. Annexures to the shareholder compacts will include the
organisation’s five-year strategic plan, a one-year business plan,(updated annually)
the organisation’s code of ethics, its corporate governance schedules, a register of
conflicts of interest for management and the board, a risk control plan (including a
strategy for fraud control) and a statement of responsibility signed by the board of
directors.

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