Key points in the Draft King IV™ Report: Opportunities and Challenges for HR Directors
by Elizabeth Dhlamini-Kumalo
The SA Board for People Practices (SABPP) is a professional and quality assurance body for the human resource (HR) profession recognised by the South African Qualifications Authority (SAQA) and the Quality Council for Trades and Occupations (QCTO). Given our own governance role as a professional body, as well as our role in guiding and supporting HR Directors with their governance duties, the SABPP Research Department produced several publications over the last eight years on the topic of governance, and HR Governance specifically. The main publications in the SABPP Knowledge Centre relevant to governance are as follows:
• SABPP. (2009). The King III Report and Code – Implications for HR. Johannesburg: SABPP
• SABPP. (2010). HR Risk Management. Position Paper. Johannesburg: SABPP
• Meyer, M. (2011). The three Kings of the King III Code: Governance, Risk and Compliance – Implications for Human Capital Management. In I. Boninelli & T. Meyer (eds) Human Capital Trends: Building a Sustainable Organisation. Randburg: Knowledge Resources
• SABPP. (2012). South African HR Competency Model. Johannesburg: SABPP
• SABPP. (2013). National Human Resource Management Standards for South Africa. Johannesburg: SABPP
• Meyer, M. (2014). Human Resource Management in South Africa. In B. Kaufmaun (ed) (2014). The history and development of HR in leading nations: Unity in Diversity. London: Edward Elgar
• SABPP (2015). HR Audit Tribune: First Annual HR Audit Report. Johannesburg: SABPP
• SABPP (2015). Ethical Competence for HR Practitioners. Johannesburg: SABPP
• Grobler, A. (2016). HR Governance. In E. van der Westhuizen (ed). Human Resource Management in Government. 6th ed. Cape Town: Juta
The SABPP HR Governance Steering Group has been formed to provide inputs on the draft King IV Report, in addition to soliciting inputs from HR Directors and key alliance partners.
SABPP would like to commend the Institute of Directors for the development and release of the Draft King IV™ Report on Corporate Governance for South Africa. The Report once more highlights the importance of corporate governance in any organisation. Moreover, the 4th version of the King Report affirms South Africa as a world leader regarding Corporate Governance from a policy, guidelines and advocacy perspective. It is also important to recognise the fact that while the King Codes remain voluntary, elements of the code have become so useful that it managed to be enshrined into legislation such as the Companies Act. The inclusion of social and ethics committees as prescribed by the Companies Act is a good case in point. Also, the corporate governance requirements and reporting of companies listed on the Johannesburg Stock Exchange has significantly improved as a result of subsequent King Reports. After each release of an updated King Report, significant improvements were implemented, and this process continues. In essence, the report sets out the philosophy, practices and outcomes of corporate governance and therefore serves as a benchmark for corporate governance for South Africa.
However, despite the undisputed quality and impact of the King III Report, it appears as if organisations continue to experience challenges implementing the spirit and guidelines embedded in the King Reports. This problem manifests itself in the strategy-execution gap experienced by many companies. While most boards would express a commitment to good governance, the reality is that boards and management teams often fail in practice to ensure good governance. For instance, most organisations have clear policies on ethics, yet they fail to achieve ethics throughout an organisation. The continuous prevalence of major corporate and government scandals is evidence that corporate governance is not equally well understood and implemented by all organisations.
AN ANALYSIS OF KEY POINTS IN KING IV™
The SABPP HR Governance Steering Group identified the following key points in the draft King IV™ Report:
• The breakdown of the report into 9 parts and 5 chapters are logical and useful for the purpose of categorising the important aspects of corporate governance to be considered in the modern business environment.
• The reduction of the 75 King III principles to 17 in King IV™ augurs well for a more focused and streamlined approach to sound corporate governance. The fact that the principles build on and reinforce one another is very useful and will make a big contribution to a more integrated approach to corporate governance.
• In general the introduction and foundational concepts (part 1) provide an adequate summary of the important background issues and factors to be considered.
• Consistent and building on King III, we are glad to see the reaffirmation of the importance of the role of leadership in corporate governance.
• The overarching, high level leadership responsibility depicted as a golden thread throughout the Report is very useful (Strategy, Policy, Oversight, Disclosure). The organising of the sub-sections under these responsibilities are very appropriate and will contribute to focused improvements in the role of governing bodies in driving good corporate governance (and not interfering in management roles).
• The inclusion of sector supplements (SMEs, NPOs etc.) with different terminologies relevant to their environments provided evidence of the need for flexibility regarding application, without watering down the practices of sound corporate governance across industries and sectors.
• The role of board members in broader society has been clearly articulated.
• Once again, the role of governance as a key enabler for growth and prosperity has been clearly highlighted in part 1.
• There is a stronger focus on the role of corporate governance in value-creation and the achievement of strategic goals. This is a good development from King III to King IV™, in fact, it may be argued that King III focused more on simply being a “good governance organisation” while not necessarily driving business value.
• The importance of ethics is highlighted in King IV™, and yet again it all starts with ethical leadership.
• The overarching responsibilities of the board as governing body are outlined in King IV™ (i.e. providing strategic direction, approving policy to put strategy into effect, providing informed oversight of implementation and performance, and disclosing for the purpose of reporting). This ensures a more systematic approach to the governance value-chain.
• King IV™ builds on the philosophy of good governance as discussed in King III, but now some of the key concepts such as ethical leadership and corporate citizenship are not only refined, but also better defined. In particular, the role of the governing body in developing and overseeing the core purpose of the organisation, including the driving of value, and stakeholder engagement is better articulated.
• The same values underpinning governance, i.e. responsibility, accountability, fairness and transparency as identified in King III, have been retained in King IV™.
• The role of the governing body in taking responsibility for the governance of ethics as well as the ethics of governance is sufficiently covered in the introductory session. Specifically, the creation of an ethical culture is highlighted, in addition to the need for values as expressed in a code of conduct, trust, character and building the reputation of the organisation.
• While the notion of integrated reporting has been around for some time, King IV™ suggests that we need “integrated thinking” first. This is a very useful improvement from King III and will steer boards in realising the need to consider all interdependencies before making decisions. Integrated thinking is a prerequisite for integrated decision-making, and therefore also a strong method for breaking down silos within organisations to enable the company to optimise its functioning. Furthermore, integrated thinking drives the value-creation process by taking cognisance of the external environment. It also appreciates the relationships amongst the six capitals, for example, the training of employees diminishes financial capital but increases the human capital of the organisation.
• Once again, sustainable development is included, but this time organisations are encouraged to “expand its view of success in terms of long-term, positive outcomes for business, society and the environment.” While many organisations have done some good work in terms of environmental performance, it is evident that King IV™ includes corporate social responsibility as part of sustainable development thinking. Thus, sustainable development should be embedded in strategy and not be treated as a separate priority.
• While King III highlighted the “triple context” of the economy, society and the environment, King IV™ goes further to suggest that these three components should not be seen as separate issues, but rather be combined to leverage its impact as an integrated whole or intertwined concept.
• We are glad to see that King IV™ encourages organisations to ensure social transformation and to address social ills such as inequality, skills gaps and unemployment.
• Although King III followed the traditional definition of risk as “the affect of uncertainty on the achievement of business objectives,” it is good to see that King IV™ has made the shift to a more balanced approach to business risk by also considering opportunity as part of the risk mindset. Thus, King IV™ says that “strategy, risk, opportunity, performance and sustainable development have become inseparable and are now treated as such throughout the King IV™ Report.”
• Digital communication platforms such as social media are recognised in King IV™ and deserves more attention from boards and management.
• Since integrated reporting was introduced in King III it has been adopted widely locally and internationally. King IV™ continues on this achievement. Now, with King IV™ the three elements of the triple context within the value creation process are combined “by appreciating that strategy, risk and opportunity, performance and sustainable development are inseparable elements.”
• While IT governance focussed on technology in King III, King IV™ takes this further by stating that technology and information are key building blocks in the digital business value chain that consists of people, technologies, information and processes and that delivers the organisation’s output.
• King IV™ acknowledges an elevated focus on compliance by proposing that a holistic view is needed on how applicable laws, rules, codes and standards relate to one another. In essence, King IV™ recommends that organisations should be more proactive in engaging with regulators, legislators and industry associations. This is consistent with King III. However, while the need for compliance is accepted, King IV™ proposes a balanced perspective by implying that this should not be done at the expense of value creation. This balanced approach is consistent with previous SABPP publications proposing the need for achieving the optimum balance between performance and compliance.
• SABPP is satisfied to see that the King IV™ Report aims to foster enhanced accountability on remuneration. The better focus on remuneration and repositioning it as a “corporate citizenship matter” is a welcome development indeed. The disclosure pertaining to the remuneration policy, as well as the actual remuneration of directors and prescribed officers are commendable. In addition, and in a significant departure from measuring financial targets only, King IV™ recommends that “variable remuneration be measured in accordance with targets relating to sustainable value created across the whole of the economic, social and environmental context”. Moreover, the increased disclosure pertaining to fairness of executive remuneration in the context of overall employee remuneration is a positive development, in particular the new practice of interaction between the social & ethics committee and the remuneration committee.
• Building on the combined assurance model introduced in King III, King IV™ expands the traditional “three lines of defence” to “five lines of assurance” to incorporate all assurance role players. Making the transition from “defence” to creating an “adequate and effective control environment” is more proactive and meaningful in promoting sound governance. This shift is based on the assumption that combined assurance will play a more significant role to “strengthening the integrity of reports for better decision-making.” Therefore, the role of the audit committee is now to oversee the implementation of the combined assurance model. This will require audit committees to combine, co-ordinate and align assurance activities across the various lines of assurance, so that assurance has the “appropriate depth and reach.” Assurance requires the imperative of consolidating inputs from internal auditors, risk and compliance managers and other line managers in contributing to an effective control environment and ensuring the integrity of reports.
• The notion of shareholder activism is further expanded in King IV™. SABPP is therefore glad to see that institutional investors should apply the principles of responsible investment towards long-term, sustainable results. While the governing body was at the centre of corporate governance under King III, now under King IV™ this perspective is broadened by requiring that “the governing body of the institutional investor to ensure that the organisation manages its rights, obligations, legitimate and reasonable needs, interests and expectations, as holder of beneficial interest in the securities of a company.” The increased shareholder activism is encouraging to further promote the role of shareholders as custodians of good governance.
• As already embedded in its predecessors, King IV™ also addresses the issue of dispute resolution as a key process and business management tool of resolving disputes. Dispute resolution should be used “in the best interest of the organisation to enhance its social and relational capital.” In fact, alternative dispute resolution mechanisms have gained traction since being introduced in King III and is now regarded as “an established element of good governance.”
• Given the fact that dispute resolution is once again included in the latest King report, this matter deserves attention. During the implementation period of King III (2009-2016), South Africa has seen some of the worst periods of labour conflict, unrest and violence. The Marikana massacre, right in the middle of the King III cycle in 2012, is a stark reminder of the worst case scenario pertaining to the consequences of unresolved disputes. It is therefore not surprising that King IV™ urges organisatons to resolve disputes “expeditiously, efficiently and effectively” especially in the light of labour strike action becoming protracted and hostile.
• Although most governance strategists would prefer practices to follow principles, the King IV™ elements of practices, principles and governance outcomes are well defined and explained. It is indeed explained that the practice recommendations should give effect to the principles. It then follows logically that the achievement of principles lead to the realisation of the related governance outcomes. Likewise, the aim of King IV™ is well explained.
• While a tick box approach to corporate governance is discouraged, King IV™ warns against the mindless adoption of the practices as rules from a compliance perspective. It is therefore good to see the key consideration of adopting a “mindful way in considering the size, resources and complexity of strategic objectives and operations of an organisation.”
• Part 3 provides an adequate explanation of the application of King IV™. The statutory versus voluntary approach is clearly articulated, and once again highlights the need for sound governance as the foundation of managing any governance risks, while striving towards implementing good practice. Thus, it is good to see that King IV™ has done everything possible to broaden acceptance of corporate governance across sectors, organisations and entities of a variety of sizes, resources and complexity of strategic objectives and operation. Essentially, practices are proportionally applied according to the three criteria of (1) size of turnover (2) resources, and (3) complexity of strategic objectives and operations. Furthermore, the “apply and explain” regime of King IV™ is relevant in encouraging applying the principles and explaining how they are being effected. In essence, this means disclosure will include reference to applying principles and explaining practices implemented in giving effect to the principles.
• Chapter 1 of King IV™ contains some relevant recommended practices for ensuring that the governing body sets the example with ethical leadership. The six ethical characteristics are important, but it is recommended that in order to achieve competence, all board members must be trained in corporate governance, with specific reference to the roles and responsibilities of board members. To give further expression to setting an ethical tone, a recommendation should be added that all board members undertake an oath to lead the organisation in an ethical way. This will further enable them to set the tone for an ethical culture in the organisation. The other recommended practices pertaining to ethics management are appropriate, in particular regarding ethics codes becoming more prominent, and that ethics is infused into recruitment, promotion and performance evaluation practices. In addition, several appropriate recommended practices have been documented to ensure that the organisation is a responsible corporate citizen.
• Chapter 2 takes corporate governance to a new level of significance by establishing principles and practices for the governing body to lead the value creation process by appreciating that strategy, risk and opportunity, performance and sustainable development are inseparable elements. This moves away from the traditional approach to organisations in which the core business process and the financial goals attached to it dominate the organisation, and all other functions being expected to support this goal. Once again, in driving strategy, performance is expected in the economic, social and environmental context and the achievement over the short, medium and long-term. Furthermore, policies, plans and performance criteria and the reporting thereof should be in place for all these areas. Consistent with the SABPP standard on HR Risk Management, risks are not seen from a negative perspective only, thus, identifying opportunities go hand in hand with sound risk management practices. The interconnectivity and inter-dependence of all these factors, including the six capitals are outlined as key factors for governing bodies to consider. Reporting on these areas by including industry standards enable stakeholders to make an informed assessment of the performance of the organisation and its ability to create value in a sustainable manner. While different reports may be generated, an integrated annual report is of utmost importance in disclosing organisational performance.
• SABPP is satisfied with the principles and recommended practices regarding the role of the governing body as focal point and custodian of corporate governance in the organisation. Building on chapter 2 and providing further evidence of integration, chapter 3 also emphasises the role of the governing body in directing ethics, performance and value creation, including the reporting thereof. Specific reference is made to the governing body structure and delegation. For instance, ensuring that in its composition there is a balance of the skills, experience, diversity, independence and knowledge needed to discharge its role and responsibilities. Also, the governing body is empowered to consider additional governing structures to assist with the balancing of power and to discharge responsibilities. The SABPP team is also satisfied that the Code recommends the appointment of competent executive management to ensure effective exercise of authority and responsibility. Additionally, the performance evaluation of the governing body, its structures, its chair and members, the CEO and governance professional is another recommended practice.
• In an effort to prevent the current practice of the same board members sitting on too many governing bodies, while simultaneously tapping into multiple boards experience, King IV™ requires a statement of other commitments and a statement of time available to fulfil governance responsibilities.
• SABPP supports all the recommended practices pertaining to the formalising of governing body appointments, induction, training and professional development and mentorship to ensure that board members are sufficiently appointed and developed.
• Given the current increase in corporate and governance scandals relating to conflicts of interest, the King IV™ drafters have done a good job at listing relevant factors on a substance-over-form basis, when making an assessment of independence for the purpose of classification as “independent.” SABPP is also satisfied with all recommended actions pertaining to the chair of the governing body as these actions promote independence and prevent undue influence and/or manipulation by a Chair or ex-CEO.
• SABPP is glad to see that King IV™ recommends that various functional heads such as finance, human resources, technology and information, assurance and stakeholders relationships are appropriately appointed with clear role clarity and subsequently managed and resourced. In particular, the competence and ability of functional managers is emphasised. Moreover, SABPP is impressed with the additional recommendation that they be assessed regularly by an independent assessment of skills and competence. The disclosure of the executive and senior managers’ structure, including the role and relevant qualifications and experience could make a major contribution to improving the appointment of organisational leaders who are well qualified and experienced. The could play a positive role in building the reputation of governing bodies and managers, and thereby the reputation of the organisation, and may lead to greater trust of the media and the public in management appointees.
• We are happy to see that a fraud risk management framework is needed that prevents, detects and responds to incidents of fraud (chapter 4). This should relate to the critical dependencies on its capitals and relationships, including human and social capital.
• Regarding technology and information governance, the ethical and responsible use of technology and information is addressed. This section also acknowledges the integration of people, technologies, information and processes in the digital business value chain of the organisation. It also mentions the integration of cyber-security risk into risk and opportunity management. In essence, a culture needs to be created where employees are alert to cyber-security risk and being proactive in raising concerns.
• Another important area to address is compliance governance. This section addresses compliance to laws (including labour laws), and non-binding rules, codes and standards and how these relate to one another in an integrated manner. Management should decide on strategic relationships with regulators and professional bodies in order to understand the environment and trends.
• A whole sub-section on remuneration governance has been included in chapter 4. In essence, the governing body should provide strategic direction for fair, responsible and transparent remuneration on an organisation-wide basis, including approving policy and attracting, rewarding and retaining high-quality talent.
• Chapter 4 also addresses the importance of ensuring that assurance results are adequate in an effective control environment, as well as the integrity of reports for better decision-making. The five lines of assurance constitutes a comprehensive and integrated approach to combined assurance.
• Chapter 5 of King IV™ covers the notion of stakeholder relationships. A stakeholder-inclusive approach is adopted, which takes into account and balances their legitimate and reasonable needs, interests and expectations. The recommended practice of an integrated stakeholder communication plan is particularly useful. Additionally, King IV™ proposes standards and processes for development of content and sharing of information on digital and other communication platforms. This includes assigning of decision-making authority on approval of content and manner of dissemination. Furthermore, a systematic analysis of information emanating from communication platforms to assess reputational risks and to develop appropriate responses are needed. A dispute resolution mechanism is also needed to address the organisation’s contractual arrangements with employees and other stakeholders. Chapter 5 also includes reference to the impact of digitisation and automation on future workforce requirements, and the possible impact on employees and society. Skills development of employees will be key to drive innovation, growth and the leverage of technology for business and societal impact.
This paper summarises the key points from the King IV™ Report. In many ways, the corporate governance system has been strengthened and this bodes well for improved governance of South African organisations. However, we must guard against the mindless application of King IV™ without optimising the role of people, i.e. all key stakeholders – directors, managers, employees, trade unions and other role-players. I would like to challenge HR Directors to read the full draft King IV™ Report and to consider preparing aligning current HR strategies and governance structures in anticipation of the release of the final King IV™ Report in November. To expedite this process, and to support HR Directors with their preparation as Executive Committee, Remunerations Committee, Social and Ethics Committee, or Board member roles, the SABPP HR Governance Steering Group will continue with analysis and research to build a body of knowledge on corporate governance in general and HR Governance specifically. We will continue to encourage HR Directors to improve their knowledge and functioning as Directors and Prescribed Officers. In addition, the SABPP group will develop an HR Governance Framework to support HR Directors in their board duties beyond the requirements of King IV,™ The ultimate goal is to make all people key custodians of good governance, thereby ensuring that our organisations develop cultures conducive to the best possible level of corporate governance.
Elizabeth Dhlamini-Kumalo is Chairperson of the SABPP HR Governance Steering Group. She was the previous chairperson of SABPP and was HR Executive at Sandvik and SARS. She will present a full paper on the role of HR in King IV™ at the 4th Annual HR Standards Summit on 28 July in Midrand.