1 - AG (Chapter 1)

Applied Governance
Learning Outcome 1
Overview of the General Principles of Corporate Governance
Research and critically apply the growing global, regional and local information sources
on corporate governance.
Introduction
Corporate Governance is essentially the practice by which companies are managed and
controlled. It encompasses:
❖ The creation and ongoing monitoring of a system of checks and balances to ensure
a balanced exercise of power within a company
❖ The implementation of a system to ensure compliance by the company with its legal
and regulatory obligations
❖ The implementation of a process whereby risks to the sustainability of a company's
business are identified and managed within agreed parameters
❖ The development of practices which make and keep the company accountable to
the broader society in which it operates
Corporate Governance directs responsible leadership of companies in terms of

transparency, and accountability towards stakeholders. Corporate governance aims at
achieving a balance between economic, social, individual and collective goals, seeking to
align as closely as possible the interests of individuals, the company and society.
Corporate Governance encompasses:
Why do we need good Corporate Governance?
In the words of Arthur Levitt, Former Chairman, US Securities and Exchange Commission: “If a
country does not have a reputation for strong corporate governance practices, capital will
flow elsewhere. If investors are not confident with the level of disclosure, capital will flow
elsewhere. If a country opts for lax accounting and reporting standards, capital will flow
elsewhere. All enterprises in that country, regardless of how steadfast a particular company's
practices may be, suffer the consequences. Markets must now honour what they, perhaps,
too often have failed to recognise. Markets exist by the grace of investors. And it is today's
CSSA Accredited Service Provider (CSSA/02/2009) 1. Professional Distance Education (PTY) LTD
more empowered investors that will determine which companies and which markets will
stand the test of time and endure the weight of great competition. It serves us right to
remember that no market has a divine right to investors' capital."
The Evolution of Corporate Governance
To a large extent and on a global level, corporate governance was a self- regulated activity
within the company where prescriptive legislation was the key to corporate compliance and
stewardship. Unfortunately, with the financial turbulence of the corporate failures which
uncovered broad mismanagement, manipulation of records and rampant disregard for
shareholders and the greater economic effects, it become glaringly obvious that there was
an urgent and dire need for codes of governance to be introduced and that companies
should be persuaded to adopt them.
In some countries, the attitude towards codes of governance is still on a voluntary basis, but
that directors should explain why the principles have not been adopted. In other countries,
the codes have become more prescriptive in legislative partnering – e.g. The JSE has
implemented in its rulings that the King Codes of Governance must be applied in order to list
a company on the exchange.
Certain corporate legislation has been amended to incorporate the prescriptive element of
compliance with codes of governance.
United Kingdom
The United Kingdom has made large and progressive strides in addressing corporate
governance issues. The first step on the road was the publication of the Cadbury Report in
1992. Produced by a committee chaired by Sir Adrian Cadbury, the Report was a response
to major corporate scandals associated with governance failures in the UK. The committee
was formed in 1991 after Polly Peck, a major UK company, went insolvent after years of
falsifying financial reports. Initially limited to preventing financial fraud, when BCCI and
Robert Maxwell scandals took place, Cadbury's responsibility was expanded to corporate
governance generally.
The Cadbury Code (1992) Sir Adrian Cadbury, representing major financial markets and with
encouragement from the London Stock Exchange produced the code. It was aimed at
researching the financial aspects of corporate governance due to growing concerns about
financial reporting being misleading and manipulated.
It further investigated the roles and effectiveness of the board of directors. Its
recommendations for sound corporate governance were issued in a Code of Best Practice.
Included in the code was a recommendation that all listed companies complied with the
code and should explain their annual report and accounts and should indicate to what
extent they had complied with the code together with reasons for non-compliance.
The London Stock Exchange added purpose to the code by issuing a requirement that listed
companies include a statement of compliance in their annual report and accounts.
Major provisions of the Cadbury Code
Board of Directors
❖ They should be accountable to shareholders for the way in which they use their
associated power
❖ Control of the company should be exercised by a collective board
❖ There should not be a dominant individual exerting undue power
❖ The Board should meet regularly and monitor executive management performance
❖ Certain decisions should be delegated, and others reserved for the board
❖ Professional advice should be sought on certain matters at company’s expense
❖ The CEO and Chairman roles should be separated, but should the same person fill the
role, there should be enough director independence to counter the individual power
❖ Responsibilities of the chairman, CEO and collective board should be clearly defined
Non-Executive Directors
❖ Differentiate between non-executives and independents

❖ Not all, but most non-executives should be independent
❖ Judgement and experience should exist on the board
❖ Non-Executives elected through a formal process - avoid reliance on chairman for
their post (diluting their independence)
❖ A Nominations committee may be employed to assist with initial interviews
❖ Appointment to be made collectively by the board and should be for a fixed term
❖ No automatic re-appointment, although there is no indication of the maximum term
Executive Directors: Service Contracts and Remuneration
❖ Term of office not to exceed three years without shareholder approval (this was later
reduced to 12 months to reduce compensation obligations in the cases of earlier
dismissal)
❖ A remuneration committee comprising largely non-executives should decide on
executive remuneration with board approval
❖ Not much cover of director remuneration which was addressed later in the
Greenbury Report
Company Accounts
Audit committee:
❖ Communicate with the external and internal auditors

❖ Minimum of three non-executive directors with written terms of reference
❖ Audit committee to steer the relationship between the board and external auditors
❖ Statement of Going Concern to be issued by the board
❖ Company internal control systems to be reported to shareholders by the board
❖ Accountable risk management (hostel reaction resulting in reports on financial
controls only)
The Greenbury Report (1995)
Focussed on directors’ remuneration:
❖ Perception that directors reward themselves irrespective of performance

❖ Remuneration was not an effective tool to improve performance
A code of best Practice issued:
❖ All listed companies should adopt code

❖ Listed companies should include a statement on directors’ remuneration in the
annual report and accounts
❖ Incorporated into the UK listing rules
Directors’ Remuneration and Service Contracts
❖ Remuneration committee comprising entirely non-executive directors to investigate

executive director remuneration
❖ Maximum term of office 12 months (in certain cases a maximum of 24)
The recommendation for the remuneration policy was vaguely phrased and open to broad
interpretation but stated that remuneration should not be excessive but should be sufficient
to attract and retain individuals of suitable quality and experience.
❖ Remuneration packages must include performance incentives

❖ Where share options are offered, these should be phased over time rather not
granted in large once-off amounts
❖ Share options should not be issued at a discount
❖ Maximum levels of incentive bonuses should be considered Severance payments:
o Should not be a reward for failure
o Notice periods to be reduced to mitigate large pay outs
o Staggered payments and to be discontinued where subsequent employment
is found
Remuneration Disclosures in Annual Reporting
❖ More disclosure recommended

❖ Annual report should contain itemised breakdown of remuneration for each director
❖ Disclosure to include any director with a notice period of more than 12 months and
reasons why
❖ External auditors to validate disclosures
❖ Remuneration committee should be present at AGM (shareholders queries)
Remuneration Committee Report
❖ A report on director’s remuneration policy should be included in annual report

❖ Bonus schemes should be contingent on satisfactory performance criteria
❖ Long term incentive schemes must have shareholder approval
❖ Statement covering share option policies/other long-term incentive schemes to be
included in annual reports
❖ Must include a statement on the share grant policies/other long-term incentive
schemes – must include justification for any deviations
❖ Shareholder approval not required for general director remuneration/short term
incentive schemes
The Hampel Report 1998
Recommended a combination of Hampel, Cadbury and Greenbury reports (later published

as the Combined Code in 1998).
It concluded that “ticking the boxes” did not take diversity of companies into account and
principles are preferable to rules and supported the shareholder view of corporate
governance:
❖ Board’s primary responsibility is to shareholders

❖ Primary objective - enhance the shareholder wealth over time
❖ No direct responsibility to other stakeholders
The Directors
❖ CEO and chairman roles should be kept separate, but not essential
❖ Where roles are combined a senior non-executive should be identified
❖ Should be a balance between executive and non-executive directors - some to be
independent
❖ Appointment procedure must be formal and transparent
❖ May use a nominations committee
❖ Essential evaluation of director performance
❖ Directors must be re-elected regularly (at least every 3 years)
❖ Board requires prompt information in the discharge of its duties
Directors’ Remuneration
❖ Remuneration committee determine executive packages

❖ Committee to develop a remuneration policy
❖ Packages to be reasonable to attract and retain quality board members
❖ Performance elements linked to company and individual performance
❖ Notice periods to be reduced to one year/less
❖ Statement on remuneration policy to be included in annual report
Shareholders
❖ Encouraged greater shareholder involvement

❖ No recommendation of an extension of shareholder rights
❖ “Bundling” unrelated proposal into one resolution should stop
❖ Notice of Annual General Meeting should be no less than 20 working days
❖ Encouraged communication with shareholders
❖ Shareholders to be more involved and more vigorous in exercising their rights
❖ Institutional investors to be more actively involved in companies in which they
invested – to stop granting proxy votes in favour of a board resolution
Accountability and Audit
❖ Formal and clear arrangement to maintain professional relationships with external

auditors
❖ Independent reporting of auditors to shareholders
❖ Like Cadbury, board to maintain sound system of internal control to protect
shareholders investment and company assets
❖ Risk management responsibility became “best practice”, but board not required to
report on its controls
❖ Auditor opinion on internal controls to be reported privately to the board
The Combined Code (1998)
Single Code comprising Cadbury, Greenbury and Hampel reports.
Two sections:
1. Sets out principles and codes of best practices for companies
2. Proposes principles and codes of practices for institutional investors
❖ Adopted by the London Stock Exchange (included in the UK listing rules as an

appendix, but did not form part of the listing rules)
❖ Listing rules: Two-part Statement:
o A narrative statement describing how the company has applied the
corporate governance principles in section 1 of the combined code
o A statement describing whether they have complied with the provisions of
section 1 - if not, which have been omitted and why (apply or explain)
Approach Was To “Comply or Explain”
Superseded by the 2003 Combined code.
The Turnbull Report (1999)
Provided guidance on implementation of provisions of the combined code in relation to

internal control.
❖ Directors responsible for risk management and internal controls (it did not seek to
eliminate risk - recognised some risks are necessary for earning returns on investments)
❖ Foreseeable risks to be justified
❖ Directors to take a more strategic approach instead of historical
❖ Directors to keep shareholders informed regarding risks
❖ Strategic approaches to adapt to changing environments
❖ Regular risk review
❖ Evolving risk control procedures to meet changes in business and environments
Directors’ Remuneration Report Regulations 2002
Created amendment to the Companies Act 1985.
❖ Listed company to prepare annual report describing remuneration policy giving

detailed disclosures on individual director remuneration
❖ Report to be provided to shareholders for approval at the AGM
The Higgs Report
“The Review of the role and effectiveness of Non-Executive directors”
The Board
❖ Collectively responsible
❖ Annual report to provide details on frequency of board and committees meetings
and attendance of individual directors
❖ Board should comprise at least 50% independent non-executive directors
The Chairman
❖ Plays crucial role

❖ Role of chairman and CEO to be separate
❖ Division of responsibility to be separate and in writing and agreed by entire board
❖ CEO must never become chairman of the same company
❖ At the time of appointment, Chairman should be independent
Non-Executive Directors
❖ Must carry out due diligence to the board prior to appointment

❖ They must have knowledge, skills, experience and time to do execute their duties
❖ Designation of a senior independent non-executive for shareholders to address
concerns should normal channels prove ineffective
❖ Definition of “independence” to be included
❖ Nomination committee should assist sourcing new directors – broaden search pool
❖ Directors to be provided induction appointment
❖ Company Secretary responsible to the entire board
❖ Directors to provide undertaking that they have enough time to carry out their duties
prior to appointment
❖ Although shares may be given as part of package, directors should not be offered
participation in share option schemes
The Smith Report (2003)
Established by the Financial Reporting Council (FRC).
Audit Committee
❖ Guidance to boards regarding implementing suitable arrangements for audit

committees
❖ Guidance to individual audit committee members on fulfilling roles and responsibilities
The Combined Code 2003
Incorporated Higgs and Smith reports into original combined code.
Two sections:
1. Companies
– Directors
– Directors remuneration
– Accountability and Audit
– Relations with shareholders
2. Institutional investors
❖ Principles over rules
❖ “Comply or explain”
❖ Relaxed rules on number of non-executive’s board members for smaller listed
companies
The Combined Code and Institutional Investors
❖ Aimed to encourage institutional investors to take a more active role in the

governance of the companies in which they invest.
❖ Duty to shareholders to ensure boards are properly accountable and oversee
company responsibly
❖ Should communicate their views to the company – forcibly if required
❖ Principles general with few practical guidelines
❖ Dialogue with company based on mutual understanding
❖ Avoid ticking boxes by adding weight to factors drawn to their attention
❖ Use votes effectives – attend AGMs
Changes to UK Company Law
❖ Public Interest Disclosures Act 1998 (on whistle-blowing)

❖ Director’s remuneration Report Regulations 2002.
Operating and Financial Review
❖ Accounting Standards Board recommends an operating and financial review in

annual report
o Purpose is to explain factors underlying company performance during period
under review
o Report must be discussionary - written in clear style understandable to users
o Should consist of two elements:
An operating review
– Reader understands the main businesses of company
– Results discussed with significant influences
– Discussion on investment intentions
– Dividend policy and comparisons of previous year profits
Financial review
– Explains company’s capital structure
– Financial position dynamics
– Source and utilisation of cash
– Implications of future capital expenditure projects
– Going concern statement included
❖ Likely to become a statutory requirement for larger companies

❖ Codification of directors’ duties - clear code of conduct including:
o Company success for the benefit of shareholders
o Compliance with company’s constitution
o Fair treatment for shareholders
o Independence
o Exercising care, diligence and skill
o Consideration for creditors where insolvency appears a possibility
❖ Stakeholder approach - embrace employees, suppliers, customers, community and
environment.
UK Government White Paper: Modernising Company Law
Provides rationale for UK Government ‘s planned companies bill for reform of the Companies
Act.
Proposals covered:
❖ Codification of director responsibilities (rejecting the principles of including creditors)

❖ Long- and short-term considerations for results of director actions
❖ Consider relationships with employees and environments in which directors operate
❖ Electronic communication with shareholders (provided there is agreement between
the shareholder and company)
❖ Mandatory annual financial reporting for economically significant companies
Auditing and Financial Reporting
❖ Obligation of independent auditing standards

❖ Regulations for disclosure of non-audit work carried out by audit firms for a client
company and the remuneration earned
❖ Auditors to be empowered to obtain information from the company
❖ Criminalised the act of knowingly/recklessly providing misleading/false information to
auditors
❖ Directors to state that they have not withheld any information from the auditors
UK Corporate Governance Code 2011
The FRC published a new UK Corporate Governance Code on 28 May 2011 The new Code
replaces the Combined Code for financial years commencing on/after 29 June 2011.
All companies with a Premium Listing of equity securities are required to state in their annual
report:
❖ How the” Main Principles” of the Code are applied
❖ Whether they do comply with its “Provisions” or provide a rational explanation for
noncompliance.
The new Code re-emphasises the role and responsibilities of the board. The most discussed
aspect of increased board accountability is a new requirement for all directors of FTSE 350
companies to be put forward for re-election by shareholders every year. Other key features
of the new Code include:
Schedule A (Paragraph 1) provides that in consideration of the eligibility of directors for

annual bonuses, the remuneration committee should be aware of performance conditions
which are ‘stretching and designed to promote the long-term success of the company.’
Paragraph 2 - Other benefits directors receive should be considered ‘under other kinds of
incentives scheme’
Schedule 8 (Paragraph 3) Shareholders must approve any new long-term incentive schemes
and should replace any existing schemes.
The Schedule strongly promote using robust performance criteria by companies when
considering remuneration – pay-outs/grants under all incentive schemes, including new
grants under existing share option schemes, should be subject to challenging performance
criteria reflecting the company’s objectives, including non-financial performance metrics
where appropriate. Remuneration incentives should be comparable with risk policies and
systems.
A new Stewardship Code is still to be implemented and aims to balance the focus on the
responsibilities of the board by encouraging institutional investors to engage constructively
with companies.
United States
Prior to 2002, there was little focus on corporate governance. However, following the
corporate and accounting scandals of Enron, Tyco International, Adelphia, Peregrine
Systems, and WorldCom, U.S senators Paul Sarbanes and Michael G. Oxley co-sponsored the
Sarbanes Oxley Act. This act was supposed to increase the standards that large public
companies were following. It directly affected the boards of the companies, the
management of the companies and accounting firms by holding them accountable for
what happened in the company. This also had implications for the Securities and Exchange
Commission or the SEC because it had to implement rules to enable companies to comply
with requirements of the Sarbanes Oxley Act (SOX). SOX created much
The Sarbanes Oxley act had the following effects on business in the United States:
❖ It reformed and re-empowered the corporate board of directors. The most prominent
change SOX engendered was a shift from a perspective that the board serves
management to a perspective that management is working for the board
❖ It encouraged the adoption of corporate codes of ethics. SOX required companies
to disclose whether their senior executives and financial officers followed a code of
ethics. If they didn’t have one, they had to explain why. Around the same time, both
the New York Stock Exchange and NASDAQ adopted rules requiring that listed
companies adopt and disclose a code of conduct. While the SOX rule didn’t require
adoption of a code, it made clear that the SEC expected one
❖ It created the PCAOB. SOX created the independent Public Company Accounting
Oversight Board (PCAOB) in 2002 to oversee the independent auditors of public
companies, replacing a self-regulatory scheme and mandating true independence.
The Board’s inspection powers mean the audits of companies’ internal controls are
subject to scrutiny
❖ It both clarified and complicated the role of in-house counsel. SOX created an SEC
rule that requires in-house and outside lawyers practicing before the SEC to report
evidence of a material violation to the company’s CLO or CEO.
The CLO is obliged to investigate the evidence and take reasonable steps to respond to the
report. If the reporting attorney is not satisfied with that response, they must then report the
potential misconduct to the audit/another committee
❖ It laid the cultural roots of shareholder activism. Shareholder activism is increasing,

with Dodd-Frank pushing forward shareholder proxy access and “say on pay”
compensation advisory rules. Such trends have their roots in SOX and the Enron-era
corporate scandals, which pushed issues like executive compensation and board
independence into the spotlight.
❖ It made public companies more expensive to run - most companies in their first year
of SOX compliance indicated that costs outweighed benefits. However, after the first
year, they consistently took the opposite view, identifying benefits such as a better
understanding of control design and increased effectiveness and efficiency of
operations
❖ It empowered the SEC. Among other measures, SOX extended the statute of
limitations for the SEC to pursue actions and increase the penalties at their disposal.
SOX changed the balance of power between companies and prosecutors, putting
prosecutors in the driver’s seat
❖ In most private companies (not subjected) to SOX reforms adopted some of its
provisions as best practices, such as ensuring the independence of directors and
adopting audit and audit committee procedures
The European Union
Key Financial Market Initiatives
The following are policies that focus on protecting consumers, attracting foreign investment,
and providing more efficient funding to companies to stimulate employment and growth.
There is a growing emphasis on infrastructure and SMEs and a limited focus on corporate
governance.
Australian Principles of Good Corporate Governance and Best Practice Recommendation
The Australian stock exchange (ASX) published principles.
The New Partnership for Africa (NEPAD)
The NEPAD nations have adopted the following principles.
The Board of Directors shall:
International Corporate Governance
The OECD Principles of Corporate Governance
The Organisation for Economic Cooperation and Development (OECD) is an international

body established to help countries, (particularly developing economies,) by providing
advice and assistance on economic matters and on ways of helping them to adapt to the
demands of the international economy.
A purpose of the OECD Principles was to assist governments in their efforts to improve the
legal, institutional and regulatory framework for corporate governance in their countries. The
Principles were also intended to provide a source of suggestions and guidance for stock
exchanges, institutions, companies and other organisations with a role to play in formulating
detailed corporate governance practices.
The OECD Principles of Corporate Governance, first published in 1999, have been widely
adopted as a benchmark both in OECD countries and elsewhere. They are used as one of
twelve key standards by the Financial Stability Forum for ensuring international financial
stability and by the World Bank in its work to improve corporate governance in emerging
markets.
In 2002, OECD governments called for a review of the Principles to take account of
developments in the corporate sector.
In 2004 the governments of the 30 OECD countries approved a revised version of the OECD’s
Principles of Corporate Governance adding new recommendations for good practice in
corporate behaviour with a view to rebuilding and maintaining public trust in companies and
stock markets. Some of the issues addressed are:
Corporate Governance and The Commonwealth Countries
The Commonwealth Association for Corporate Governance (CACG) was established in April
1998 to promote excellence in corporate governance in the Commonwealth
The CACG has two primary objectives:
❖ To promote good standards in corporate governance and business practice

throughout the Commonwealth
❖ To facilitate the development of appropriate institutions which will be able to
advance, teach and disseminate such standards
Concern for the need to establish good corporate governance practice has led to an
initiative from the Commonwealth countries, which began with the first King report in 1994.
Many commonwealth countries have emerging economies and some such as South Africa
have developing stock markets. Good corporate governance is seen as essential to the
further development of national economies and the growth of the capital markets in those
countries.
The work of the first King report led to the setting up in 1998 of the Commonwealth
Association for Corporate Governance (CACG). It produced a set of Corporate
Governance guidelines in 1999.
The CACG Guidelines comprise 15 principles of corporate governance, which have been
structured to accommodate the needs of emerging and transitional economies, which
make up a large part of the Commonwealth, as well as those of the more advanced
economies and their international investors.
The Guidelines are aimed primarily at boards of directors with a unitary board structure, most
common in Commonwealth countries. Thus, they apply to boards of directors (executive and
non-executive) of all forms of business enterprises, including non-governmental organisations
and agencies.
The Guidelines were prepared because the work on national capacity building had
demonstrated the need for an indicative code, which could be readily adapted by the
national task forces to develop their own guidelines. Following the adoption of the main
Guideline in 1999, others have been issued dealing with the functions of boards, a case study
of the national corporate governance programme in Kenya, a personal code for company
directors, and guidelines for state enterprises.
In 2000, the Commonwealth introduced a significant new initiative, which focuses on the
banking sector, working through the various Central Banks. The following are the reasons
advanced for this special focus:
❖ The banking sector is critical, and can be likened to the bloodstream of the economy
– if the banking sector is healthy the rest of the economy can be strong; if the
banking sector is poisoned by poor corporate governance the whole economy will
be infected
❖ In many developing countries the equity markets are small and do not play a strong
role in the national capital markets, as many companies rely more on debt finance
from their banks; in this context there are no institutional investors to perform the
powerful role to encourage corporate governance as in OECD countries, but this
function can be fulfilled to some extent by the banks
❖ Central Banks can exert moral persuasion and influence over the commercial banks
and set requirements for all licensed commercial banks in accordance with the
standards set by the Bank for International Settlements; the commercial banks can in
turn recommend good corporate governance practices for their corporate
customers (including majority of the private and family owned companies which are
not publicly listed and subject to the stock exchange) in order to reduce their risk
(and possibly enable improved interest rates)
The CACG has set out its agenda for the future. This will be concentrated in four main areas:
❖ Extension of national ‘road shows’ to regions not yet been fully covered (the
Caribbean, parts of Central Asia and the Pacific)
❖ Expansion of corporate governance practice to new areas (banking, co-operatives
and public sector bodies)
❖ Intensive training programme, developed through regional centres of excellence in
director training, and the training of trainers in courses at the established institutes; in
this area a new initiative was launched in 2001
❖ Technical support for the newly established institutions to assist them in becoming self-
sustaining
❖ Contributions to the international debate on corporate governance through the
Global Corporate Governance Forum, and through the Commonwealth structures of
the Business Forum and ministerial meetings
National workshops and follow up programmes will continue and are intended to:
❖ Improve the strategic direction of state enterprises (provide appropriate training for
top executives to enable them to compete effectively in the global market)
❖ Grant international recognition to countries who have sound corporate governance
standards as priority locations for investment
❖ Ensure high standards of corporate citizenship and business ethics among national
companies and foreign direct investors in all participating countries
❖ Establish self-sustaining national institutes that can maintain and promote best
practice in corporate governance for the benefit of their countries, adequately
supported through a network of international Commonwealth connections.
The CACG is not oblivious of the drawbacks arising from the diversity of cultures and business
practices around the world and a ‘a one size, fits all’ approach to corporate governance in
the Commonwealth is neither desirable nor practicable. Rather, these emerging and
transition economies need to be nurtured through “practical assistance and guidelines,
which form the basis of common attributes that can assist them in developing standards that
can accommodate their own unique circumstances”.
Hence, the approach to corporate governance adopted has been to focus on working
through institutions such as the Institute of Directors, the Institute of Chartered Secretaries and
other professional associations. This has led to the establishment of IoDs in some developing
countries in the Commonwealth such as Ghana in 1999 and Zambia in 2000. In Uganda, the
Institute of Corporate Governance of Uganda (ICGU) was launched in October 2000, and in
Malawi, the Society of Accountants in Malawi (SOCAM) drives corporate governance
initiatives. Although there is an established IoD in Zimbabwe, there is no Code of Best
Practice in place. However, listed companies are voluntarily applying appropriate corporate
governance mechanisms, such as establishing audit committees.
Corporate Governance in South Africa
The King Codes of Governance: King I
In 1992 the King Committee on Corporate Governance was formed in South Africa, and, in
line with international thinking, considered corporate governance from a South African
perspective. The result was the King Report in 1994, which marked the institutionalisation of
corporate governance in South Africa. King I advocated an integrated approach to good
governance, considering stakeholder interests and encouraging the practice of sound
financial, social, ethical and environmental practice. The principles set out in the Report were
influenced by reforms in the United Kingdom and the United States (Turnbull, Greenbury,
Hampel etc. and Sarbannes-Oxley Act).
The King Committee has no official mandate (unlike nearly all the other similar initiatives in
other countries), and thus its recommendations were self-regulatory. It also aimed to promote
corporate governance in South Africa and established recommended standards of conduct
for boards and directors of listed companies, banks, and certain state-owned enterprises,
with an emphasis of companies to become a responsible part of society.
The corporate responsibility focus captured in the first King Report was reinforced and
strengthened with the implementation of the Labour Relations Act (1995), the Basic
Conditions of Employment Act (1997), the Employment Equity Act and the National
Environmental Management Act (1998).
King II
To be responsive to developments in the international environment and to align the

governance practice with international trends King II emerged in 2002. The report
acknowledged a transition from single bottom line (profit for shareholders) to a triple bottom
line reporting. This required companies to report on social, health, ethical, environmental
practise, human capital and black economic empowerment.
The report stated: “The company must be open to institutional activities and there must be
greater emphasis on the sustainable or non-financial aspects of its performance. Boards must
apply the test of fairness, accountability, responsibility and transparency to all acts or
omissions and be accountable to the company but also responsive and responsible towards
the company’s identified stakeholders. The correct balance between conformance with
governance principles and performance in an entrepreneurial market economy must be
found, but this will be specific to each company “.
It contains a Code of Corporate Practices and Conduct. Although voluntary, the

Johannesburg Securities Exchange requested listed companies to comply with the King
Report recommendations or to explain their level of non-compliance. This report applied only
to certain categories of business enterprises, namely, Companies listed on the JSE, Banks,
financial and insurance entities and Public sector enterprises governed by the Public Finance
Management Act and the Municipal Finance Management Act.
The King II Report referred to seven characteristics of good corporate governance:
A particular emphasis in the second King Report was on the qualitative aspects of good
corporate governance. King II was not designed as a regulatory instrument, but as a tool to
identify core areas of good practice for boards, directors and companies, which extended
beyond the existing legal and policy framework to embrace several aspirational principles.
King III
King III opted for an "apply or explain" approach that more appropriately conveyed the
intent of the Code. However, good governance and compliance with legislation are
mutually inclusive. In contrast to its predecessors, King III applies to both public and private
entities regardless of the manner and form of incorporation. The principles contained in the
Code were therefore drafted so that they can be applied by every entity and in doing so
achieve good governance across the entire economic spectrum in South Africa.
King III: Principles of Good Governance
The issuance of King III was necessitated by the new Companies Act (2008) of South Africa
and changes in international governance trends.
For board composition, in adhering to the principle of independence the Board should
consist of a balance of executive and non-executive directors, with most nonexecutive
directors. A balance of executive and non-executive directors, with most non-executive
directors should exist in the Board of Directors. The King III guidelines specify that a minimum
of two executive directors, the CEO and Chief Financial Officer\Director should be
appointed.
King III proposes a lead independent director that serves actively in this capacity where the
chairman is absent or not able to perform his duties for whatsoever reason or where the
independence of the chairman of the board is questionable or impaired.
In accordance with international trends King III provides a clear and extensive definition of
an independent non-executive.
The report clarifies the requirements of the Chairman of the board who should be an
independent non-executive and their level of independence should be carefully monitored.
The Chairman’s ability to add value should be considered at the annual evaluation.
The King Report defined transparency as “…. the ease with which an outsider is able to make
meaningful analysis of a company’s actions, its economic fundamentals and the
nonfinancial aspects pertinent to the business.
The Report sets out guidelines with regards to best practice in relation to disclosure and
reporting to stakeholders.
Key Differences Between King II and King III
KING IV King IV was released on 1 November 2016 and will become effective for companies
with financial years commencing 1 April 2017.
King IV builds on King III and has been revised align it with international governance codes
and best practice; shifts in the approach to capitalism (towards inclusive, integrated thinking
across the six capitals) and to take account of specific corporate governance
developments in relation to effective governing bodies, increased compliance requirements,
new governance structures (e.g. Social and Ethics Committee), emerging risks and
opportunities from new technologies and new reporting and disclosure requirements e.g.
Integrated Reporting.
King IV is structured as a Report that includes a Code, with additional, separate sector
supplements for SME’s, NPO’s, State-Owned Entities, Municipalities and Retirement Funds. The
King Code contains both principles and recommended practices aimed at achieving
governance outcomes.
Whilst King IV is voluntary (unless prescribed by law or a stock exchange Listings Requirement)
it is envisaged that it will be applicable to all organisations irrespective of their form or
manner of incorporation. The King Code principles of good governance are presumed to
apply, whilst the practices should be applied on a ‘proportionality’ basis depending on the
nature, size and complexity of the organization.
There are several differences between King III and King IV and are briefly discussed:
Outcomes Based Governance
The most significant difference between the two codes is that King IV is outcomes oriented. It
places accountability on the board in companies to attain the governance outcomes of an
ethical culture, good performance and effective control within the organisation and
legitimacy with stakeholders. King IV aims to reduce the ‘tick box’ or compliance approach
to applying governance practices.
Apply AND Explain
King IV requires an “Apply AND Explain” approach to disclosure, as opposed to King III which
was ‘Apply or Explain’. This means that application of the principles is assumed and that an
explanation is disclosed on the practices that have been implemented and how this support
achieving the associated governance principle. The board can choose where and how to
make its King IV disclosures which should be publicly accessible. Use of cross referencing
between reports is encouraged to avoid duplication.
Structure of King IV
The report is more concise than King III in that It contains 16 principles applicable to all
organisations, and a 17th principle applicable to institutional investors. Against the 16
principles there are 208 recommended practices, and for the 17th principle applicable to
institutional investors there are an additional 6 recommended practices. See over the page.
Note that where the term “governing body” is used, in a business, this will refer to the Board
of Directors.
Sector Supplements
Sector supplements for specific categories of organisations have been included in order to
broaden acceptance of corporate governance and to make King IV accessible and fit for
application across sectors, organisations and entities of varying sizes, resources and
complexity (in addition to the traditional audience of listed, public and large private
companies).
Every sector supplement sets out how the terminology, concepts and recommended
practices in the King IV Code can be interpreted, adapted and customised to meet the
needs and requirements of organisations in specific sectors.
King IV mentions throughout the report how governance principles and policies of the entity
must align with the basis of the six capitals cited in the International Integrated Reporting
document. The primary purpose of an integrated report is to explain to financial capital
providers how an organization creates value over time. The best way to do so is through a
combination of quantitative and qualitative information, which is where the six capitals
come in.
The capitals are stocks of value that are affected or transformed by the activities and
outputs of an organization. The Framework categorises them as:
❖ Financial
❖ Manufactured
❖ Intellectual
❖ Human
❖ Social
❖ Relationship
❖ Natural
Across these six categories, all the forms of capital an organization uses or affects should be
considered.
An organization’s business model draws on various capital inputs and shows how its activities
transform them into outputs. The diagram below gives illustration to the principle.
The principles of King IV are discussed over the next few pages.
The following are the 17 principles covered in the report
King III and King IV Compared
The King IV Code on Corporate Governance builds on the strengths of King III and is based
on the same philosophical foundations, but there has also been a refining and re-
enforcement of key concepts.
King IV replaces King III in its entirety and the new Code became effective for financial years
commencing April 2017.
Entities that consciously applied King III, have found the transition to be less significant. As
with King III, the application of the King IV Code is not legally enforced and is viewed as a
“best practice” approach towards good governance.
Having said that, various pieces of legislation (Companies Act, JSE Listing Requirements,
Public Finance Management Act and the Municipal Finance Management Act contain
governance requirements that are mandatory to implement which are in line with the King
Codes of Governance.
The differences between King III and King IV are discussed below:
Relevance to All Entities: Less Complex and More Clearly Defined
Besides needing a revision due to several changes and advances in the local and
international environments, King IV is more relevant for a broader range of entities.
King III refers to the “Board” and King Iv refers to the “Governing Body” to acknowledge that
not all entities have Boards. In addition, sector supplements have been introduced for NPO’s,
Municipalities, Retirement Funds, SOEs and SMMEs.
The complexity of the Code has been simplified and the number of principles significantly
reduced for most entities, from 75 to 16. The 17th principle is only applicable to listed
companies and relates to responsible investment.
Clear Description Of “Governing Body” Roles
The primary roles of the Governing Body have been clearly defined in King IV:
❖ Steer entity and set the strategy, whilst defining the way in which the specific
governance areas are approached, addressed and implemented
❖ Approve policy and ensure planning to give effect to approved strategy and
direction
❖ Oversee and monitor the performance of the entity and to execute the strategy by
the Executive
❖ Ensure accountability for organisational performance, by inter alia:
o Ethical and transparent reporting and disclosure
“Tick Box” Approach Vs Outcomes Based
King IV is the first outcomes-based code which aims to demonstrate what can be achieved if
governance principles are implemented effectively and attempts to reduce the “tick box” or
“mindless compliance” approach when applying King corporate governance principles.
Governance outcomes:
❖ Ethical culture
❖ Worthy performance
❖ Effective control
❖ Legitimacy
This provides focus on what projected achievement by implementing the recommended

principles and sound governance practices.
The 17 principles build on and re-enforce each other and are supported by 208 practices
that will assist in achieving the governance outcomes.
King IV encourages mindful consideration of the application of the principles and practices.
The practices are recommended to achieve an optimal level of governance and should be
adapted to consider the size, resources and complexity of each entity so that the principle is
applied, and the governance outcome is ultimately achieved.
King III: Apply or Explain Vs King IV Apply and Explain
King IV requires an “apply and explain” approach, not “apply or explain” as required by King
III. This translates to an application of the principles and assumes entities now need to explain
how they have implemented practices to achieve the governance principles and outcomes
in a way that is practical to their structure.
King III: 9 Chapters Vs King IV: 5 Chapters
Chapter 1: Leadership, Ethics and Corporate Citizenship (3 principles like King III):
Chapter 2: Strategy, Performance and Reporting (2 Principles):
Chapter 3: Governing Structures and Delegation (5 principles – covers areas previously

contained in King III chapter 2 on Boards and Directors
Chapter 4: Governance Functional Areas (5 principles: Governance of Risk, Technology and

Information, Compliance, Remuneration and Assurance - changed from King III to put all
governance functional areas together)
Chapter 5: Stakeholder Relations (2 principles related chapters in King III: Chapter 8

“Governing Stakeholder Relations” and Chapter 9 “Integrated Reporting and Disclosure
King IV does not contain a separate chapter on Integrated Reporting, compared to the
chapter contained in the King III Code. In the foreword of the King IV Report and again in
part 2, (Fundamental concepts) there is discussion around integrated thinking and the move
from silo reporting to integrated reporting. Reference is made to the International Integrated
Reporting Council (IIRC) in King IV.
The King IV Code assumes that entities should use the work and publications from the IIRC to
implement the requirements of integrated reporting. In each chapter of King IV the
disclosure and reporting requirements for that specific area are indicated.
Corporate Governance in State Owned Companies
The South African public sector, not unlike many other public sectors, is very regulated, which
obviously directly influences the roles of directors in the public sector.
With reference to the public sector, the term director in this guide is used to generally refer to
the member of a board, and not to the term director as opposed to chief director or director
general or director, commonly used in government departments.
The term public sector furthermore includes all public entities as listed by National Treasury in
terms of Section 47(1) of the PFMA (latest update December 2010) and municipal entities as
defined in Section 1 of the MFMA and Section 1 of the Municipal Systems Act, Act 32 of 2000.
In practice, this means that the term director refers to a member of a board of a public entity
at any of the three spheres of government, i.e. national, provincial and local.
Two pieces of legislation are core to the functioning of the public sector, and specifically the
responsibilities of boards and directors in the public sector, namely:
❖ The Public Finance Management Act, Act No 1 of 1999 (PFMA), affecting specifically
the national and provincial spheres of government
❖ The Municipal Finance Management Act, Act No 56 of 2003 (MFMA)
The roles and responsibilities of directors are clearly dealt with in these Acts, supported by
further legislation.
The “basic values and principles governing public administration” can be found in Section
195 of the Constitution. These nine principles provide clear guidance for all stakeholders and
all role players in all organs of state (thus also all public entities and public institutions at all
three spheres of government), and although not an exhaustive list, it is imperative to closely
scrutinise and understand these principles as the guiding and even mandating parameters
for all boards and all directors of such boards.
Subsection 195(1) reads as follows:
“(1) Public administration must be governed by the democratic values and principles
enshrined in the Constitution, including the following principles:
(a) A high standard of professional ethics must be promoted and maintained
(b) Efficient, economic and effective use of resources must be promoted
(c) Public administration must be development-oriented
(d) Services must be provided impartially, fairly, equitably and without bias
(e) People’s needs must be responded to, and the public must be encouraged to
participate in policy-making
(f) Public administration must be accountable
(g) Transparency must be fostered by providing the public with timely, accessible and
accurate information
(h) Good human-resource management and career-development practices, to

maximise human potential, must be cultivated
(i) Public administration must be broadly representative of the South African people, with
employment and personnel management practices based on ability, objectivity, fairness,
and the need to redress the imbalances of the past to achieve broad representation.”
The public sector is very dynamic, and changes are frequent and sometimes far-reaching.
The sections below address the situation as at the date of writing, and thus does not
incorporate imminent changes, such as the changes that may flow from the Presidential
Review Committee led by Ms. Riyah Phiyega currently reviewing important aspects of public
entities at all three spheres of government.
Responsibilities in terms of the PFMA and the MFMA
There is a fundamental difference in approach between these two Acts, directly and clearly
affecting the roles and responsibilities of boards in the national/provincial spheres of
government, as compared to the local (municipal) sphere of government.
The PFMA places the responsibilities of the ‘accounting authority’ in the hands of (usually) the
board, while the MFMA places similar responsibilities in the hands of the CEO. The
responsibilities for members of boards of public entities (including state-owned enterprises,
public enterprises and similar terms used) at the provincial and national spheres would thus
be quite different to the responsibilities for board members at municipal entities.
In Section 1 of the PFMA, “accounting authority” is described as “a body or person

mentioned in section 49”. The latter indicates firstly that “every public entity must have an
authority which must be accountable for purposes of this Act”. It continues that if such public
entity “has a board or other controlling body, that board or controlling body is the
accounting authority for that entity” or if it “does not have a controlling body, the CEO or the
other person in charge of the public entity is the accounting authority for that public entity
unless specific legislation applicable to that public entity designates another person as the
accounting authority”. A third alternative is that the relevant treasury (i.e. National Treasury
for a national public entity (as listed in Schedules 1, 2, 3A and 3B of the PFMA) or the
provincial treasury (for Schedule 3C and 3D provincial public entities)) “may approve or
instruct that another functionary of a public entity must be the accounting authority for that
public entity”.
Since most national and provincial public entities do have boards as their controlling bodies,
the members of such boards collectively serve as the “accounting authority”.
The MFMA takes a different approach for municipal entities. The term “accounting authority”
is not used at all, but the Act describes “accounting officer” of a municipal entity to mean
“the official of the entity referred to in section 93”.
Section 93 then determines that “(t)he Chief Executive Officer of a municipal entity
appointed in terms of section 93J of the Municipal Systems Act, Act 32 of 2000 (as amended)
is the accounting officer of the entity”.
Section 93J of the Municipal Systems Act reads as follows:
“(1) The board of directors of a municipal entity must appoint a Chief Executive Officer of the
municipal entity.
(2) The Chief Executive Officer of a municipal entity is accountable to the board of directors
for the management of the public entity.”
It is clear that the MFMA holds the CEO of the municipal entity responsible for matters and
issues in such Act, while the PFMA assigns similar responsibilities to (mostly) the boards of
public entities. Members of boards at the national and provincial spheres are expected to
be more hands-on and are legally bound to more direct and active participation, than is the
case with board members of municipal entities.
Similarly, despite practices to the contrary, the responsibilities and accountability of the CEO
for entities at the national sphere are legally somewhat limited.
The PFMA differentiates between different categories (called “schedules”) of public entities.
This can graphically be summarised as follows
Constitutional Institutions (also known as Schedule 1 institutions) are dealt with similarly to
government departments. Schedule 3A (national) and 3C (provincial) entities are also similar
to the ‘centre’, while Schedule 3B (national) and 3D (provincial) public entities have more
freedom and are similar to Schedule 2 (Major Public Entities) somewhat distant from the state
and especially the budget of the state. Treasury Regulations (TR) in terms of the PFMA have
been published in March 2005 as a single set. The applicability of such regulations can be
summarised as follows:
The list of public entities, including the categories, is updated frequently on National
Treasury’s website (www.treasury.gov.za). The schedules can be summarised as follows:
PFMA Provisions for Boards at The National and Provincial Spheres
Chapter 6 of the PFMA deals with public entities specifically, while Part 2 of this chapter
specifically refers to “Accounting authorities for public entities”. Chapter 6 consists of three
parts, dealt with as follows:
All sections of this part of chapter six are important, but the core of the responsibilities of
board members are dealt with in sections 50 and 51, which will be discussed at in some
detail.
Section 50 (“Fiduciary duties”) can be summarised as follows:
(1) The Accounting Authority must:
(a) exercise duty of utmost care to ensure reasonable protection of the assets and
records of the public entity
(b) act with fidelity, honesty, integrity and in the best interests of the public entity in
managing the financial affairs of the public entity
(c) on request disclose the Executive Authority or Parliament/the legislature all

material facts which in any way may influence the decisions or actions of the
Executive Authority or Parliament or the legislature
(d) seek to prevent any prejudice to the financial interests of the state.
(2) A member of an Accounting Authority or the Accounting Authority (if not a board or
other body) may not:
(a) act in a way which is inconsistent with the responsibilities assigned to an

Accounting Authority in terms of this Act
(b) use the position or privileges of, or confidential information obtained as,
Accounting Authority for personal gain or to improperly benefit another person.
(3) A member of an Accounting Authority must:
(a) disclose to the Accounting Authority any direct or indirect personal or private
business interest that that member or any spouse, partner or close family member
may have in any matter before the Accounting Authority
(b) withdraw from the proceedings of the Accounting Authority when that matter is
considered, unless the Accounting Authority decides that the member’s direct or
indirect interest in the matter is
(i) trivial or
(ii) irrelevant (provisions quite like the situation with municipal entities, as
captured in section 93H of the Municipal Systems Act).
“General responsibilities of accounting authorities” (section 51) can be summarised as

follows:
(1) The Accounting Authority:
(a) must ensure that the public entity has and maintains
(i) effective, efficient and transparent systems of financial and risk

management and internal controls,
(ii) a system of internal audit under the control and direction of an audit
committee,
(iii) an appropriate procurement and provisioning system which is fair,

equitable, transparent, competitive and cost-effective (verbatim repetition of
the wording of Section 217 of the Constitution of the Republic of South Africa,
1996), and
(iv) a system for properly evaluating all major capital projects prior to a final
decision on the project
(b) must take effective and appropriate steps to
(i) collect all revenue due to the public entity, and
(ii) prevent irregular, fruitless and wasteful expenditure, losses resulting from
criminal conduct and expenditure not complying with the operational policies
of the PE, and
(iii) manage available working capital efficiently and economically
(c) is responsible for the management, including the safeguarding, of the assets and
for the management of the revenue, expenditure and liabilities of the public entity
(d) must comply with any tax, levy, duty, pension and audit commitments as
required by legislation
(e) must take effective and appropriate disciplinary steps against any employee
who
(i) contravenes or fails to comply with a provision of the PFMA,
(ii) commits an act which undermines the financial management and internal
control system of the public entity, or
(iii) makes or permits an irregular expenditure or a fruitless and wasteful

expenditure
(f) is responsible for the submission by the public entity of all reports, returns, notices
and other information to Parliament or the provincial legislature and to the relevant
executive authority or treasury, as may be required by the PFMA
(g) must promptly inform National Treasury on any new entity which that public entity
intends to establish or in the establishment of which it takes the initiative, and allow
National Treasury a reasonable time to submit its decision prior to formal
establishment, and
(h) must comply, and ensure compliance by the public entity, with the provisions of
the PFMA and any other legislation applicable to the public entity.
(2) If an accounting authority is unable to comply with any of the responsibilities of this part
(thus sections 49 to 55), the accounting authority must promptly report the inability, together
with reasons, to the relevant executive authority and treasury.
Boards of Municipal Entities
The fact that the PFMA and the MFMA place final responsibility for certain aspects of the two
Acts on the shoulders of different bodies (i.e. boards (for national and provincial entities) and
the CEO for municipal entities), should not be construed to assume that the role of directors
in municipal entities would imply a total lack of and/or limited responsibility. This part provides
a general overview of the responsibilities of and related issues around directors at municipal
entities.
In Part 6 of the Municipal Systems Act, and specifically in Section 93E, it is determined as
follows (“Appointment of directors”):
1) The board of directors of a municipal entity:
(a) must have the requisite range of expertise to effectively manage and guide the
activities of the municipal entity
(b) must consist of at least a third non-executive directors
(c) must have a non-executive chairman.
(2) The parent municipality of a municipal entity must, before nominating or appointing a
director, establish a process through which:
(a) applications for nomination or appointment are widely solicited
(b) a list of all applications and any prescribed particulars concerning applicants is
compiled
(c) the municipal council makes the appointment or nomination from such list.”
Section 93F deals with “Disqualifications”:
(1) A person is not eligible to be a director of a municipal entity if he or she;
(a) holds office as a councillor of any municipality
(b) is a member of the National Assembly or a provincial legislature
(c) is a permanent delegate to the National Council of Provinces
(d) is an official of the parent municipality of that municipal entity
(e) was convicted of any offence and sentenced to imprisonment without the
option of a fine, and a period of five years since completion of the sentence has not
lapsed
(f) has been declared by a court of law to be of unsound mind
(g) is an unrehabilitated insolvent.
(2) if a director of a municipal entity during that person’s term of office becomes disqualified
on a ground mentioned in subsection (1), such person ceases to be a director from the date
of becoming disqualified.
Section 93G is headed “Removal or recall of directors”:
The parent municipality of a municipal entity may remove or recall a director appointed or
nominated by that municipality:
(a) if the performance of the director is unsatisfactory
(b) if the director, either through illness or for any other reason, is unable to perform
the functions of office effectively
(c) if the director, whilst holding office;
(i) is convicted of fraud or theft or any offence involving fraudulent conduct
(ii) has failed to comply with or breached any legislation regulating the
conduct of directors, including any applicable code of conduct.
Section 93H then goes on to deal directly with the important aspect “The duties of directors”:
(1) The board of directors of a municipal entity must:
(a) provide effective, transparent, accountable and coherent corporate

governance and conduct effective oversight of the affairs of the municipal entity
(b) ensure that it and the municipal entity comply with all applicable legislation and
agreements
(c) communicate openly and promptly with the parent municipality of the municipal
entity
(d) deal with the parent municipality of the municipal entity in good faith.
(2) A director must:
(a) disclose to the board of directors, and to the representative of the parent
municipality, any direct or indirect personal or business interest that the director or his
or her spouse or partner may have in any matter before the board, and must
withdraw from the proceedings of the board when that matter is considered, unless
the board decides that the director’s direct or indirect interest in the matter is trivial or
irrelevant
(b) at all times act in accordance with the Code of Conduct for directors referred to
in section 93L.”
Section 93L deals with the matter of “Meetings of board of directors”, and specifically in two
subsections:
(1) Meetings of the board of directors of a municipal entity must be open to the municipal
representatives referred to in section 93D(1)(a).” In the latter it is stated that the council of a
parent municipality “must designate a councillor or an official of the parent municipality, or
both, as the representative or representatives of the parent municipality ... to represent the
parent municipality as a non-participating observer at the meetings of the board of directors
of the municipal entity concerned”.
Subsection (2) of section 93L reads as follows:
Municipal representatives referred to in section 93D(1)(a) have non-participating observer

status in a meeting of the board of directors of a municipal entity.”
Also refer to Sections 93K (“Establishment of and acquisition of interests in corporate bodies
disallowed” and 93L (“Code of Conduct of directors and members of staff of municipal
entity”). The latter highlights that “the board of directors... may investigate and make a
finding on any alleged breach of a provision of this Code by a director” or “establish a
special committee to investigate... or to make appropriate recommendations to the board
of directors”. It furthermore gives the board four options if the board or the committee finds
that a director has breached a provision of this Code, namely to:
❖ Issue a formal warning to the director

❖ Reprimand the director
❖ Fine the director
❖ Recommend to the parent municipality that the director be removed or recalled (in
terms of Section 93G).
It also requires that the board must inform the parent municipality of “any action taken
against a director”.
End of Chapter
Please refer to your Applied Governance, Author: Karen, Publisher: CSSA textbook, for further
studies, reference, case studies and practical examples.
Well done! You have now completed Learning Outcome 1. Please ensure you have used
your textbook in conjunction with the study guide and utilised any self-assessments and
examples along the way.

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Applied Governance

Overview of the General Principles of Corporate Governance

Corporate Governance directs responsible leadership of companies in terms of

Corporate Governance encompasses:

Why do we need good Corporate Governance?

The Evolution of Corporate Governance

Major provisions of the Cadbury Code

❖ Differentiate between non-executives and independents

Executive Directors: Service Contracts and Remuneration

❖ Communicate with the external and internal auditors

The Greenbury Report (1995)

Focussed on directors’ remuneration:

❖ Perception that directors reward themselves irrespective of performance

A code of best Practice issued:

❖ All listed companies should adopt code

Directors’ Remuneration and Service Contracts

❖ Remuneration committee comprising entirely non-executive directors to investigate

❖ Remuneration packages must include performance incentives

Remuneration Disclosures in Annual Reporting

❖ More disclosure recommended

Remuneration Committee Report

❖ A report on director’s remuneration policy should be included in annual report

The Hampel Report 1998

Recommended a combination of Hampel, Cadbury and Greenbury reports (later published

❖ Board’s primary responsibility is to shareholders

❖ Remuneration committee determine executive packages

❖ Encouraged greater shareholder involvement

Accountability and Audit

❖ Formal and clear arrangement to maintain professional relationships with external

The Combined Code (1998)

Single Code comprising Cadbury, Greenbury and Hampel reports.

1. Sets out principles and codes of best practices for companies

2. Proposes principles and codes of practices for institutional investors

❖ Adopted by the London Stock Exchange (included in the UK listing rules as an

Approach Was To “Comply or Explain”

Superseded by the 2003 Combined code.

The Turnbull Report (1999)

Provided guidance on implementation of provisions of the combined code in relation to

Directors’ Remuneration Report Regulations 2002

Created amendment to the Companies Act 1985.

❖ Listed company to prepare annual report describing remuneration policy giving

The Higgs Report

“The Review of the role and effectiveness of Non-Executive directors”

❖ Plays crucial role

❖ Must carry out due diligence to the board prior to appointment

The Smith Report (2003)

Established by the Financial Reporting Council (FRC).

❖ Guidance to boards regarding implementing suitable arrangements for audit

The Combined Code 2003

Incorporated Higgs and Smith reports into original combined code.

The Combined Code and Institutional Investors

❖ Aimed to encourage institutional investors to take a more active role in the

Changes to UK Company Law

❖ Public Interest Disclosures Act 1998 (on whistle-blowing)

Operating and Financial Review

❖ Accounting Standards Board recommends an operating and financial review in

– Reader understands the main businesses of company