The HR Implications of King IV™

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The HR Implications of King IV™
by Elizabeth Dhlamini-Kumalo

BACKGROUND

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).  Today we formally announce the launch of the HR Governance Steering Group. On 23 June 2016 at the SABPP Annual General Meeting, I was asked to share the work of this new committee with the HR community.  More than 100 HR Managers attended the SABPP AGM.  Our purpose is to champion and position HR Governance as the most important function for HR Directors in South Africa.  But let us first share the output of our first project, i.e. the analysis of the King IV™ Report on Corporate Governance for South Africa.  Today I will only share the main HR implications.

HR IMPLICATIONS

Some key implications for HR are as follows:

  • The role of leadership in broader society is clearly emphasised in the draft King IV™ Report, e.g. the need to address the reality of inequality not only in organisations, but also in society at large. Likewise, skills shortages – another key focus area for HR Managers are specifically identified in the draft King IV™ Report. Moreover, addressing other societal issues such as corruption, social transformation and poverty are outlined in part 1 of King IV™ (these issues are covered in the SABPP HR Competency Model as one of the four pillars, i.e. duty to society).
  • The role of organisations in supporting and driving the goals of the National Development Plan (NDP) for 2030 are acknowledged in King IV™.
  • Organisations are dependent on broader society to provide talent. Thus, the role of organisations in providing employment and developing skills are emphasised. It is acknowledged in King IV™ that businesses are struggling to recruit workers with the necessary skills. Hence, King IV™ suggests that “organisations should be pro-active in developing the skills they will need” despite traditional educational systems.
  • The concept of Ubuntu is described in part 1 of King IV™. While this is repeated from previous editions of the King Report, a lot still needs to be done to embed the true spirit of Ubuntu in South African organisations.
  • The three concepts of fairness, innovation and collaboration” are outlined in King IV™. Hence, the need for organisations to leverage these three aspects as part of sustainability. It appears as if King IV™ criticises current incremental approaches to innovation, fairness and collaboration, and therefore recommends a fundamental shift in the way organisations deal with their governance around these issues.  In essence, the role of leadership to make sustainable development mainstream is highlighted.
  • Human rights abuses constitute poor citizenship behaviour and it depletes human capital in the supply chain of the organisation, which, in turn, could affect the reputation of the organisation.
  • The value creation process outlined in chapter 2 provides a holistic process of converting inputs to outputs, and finally reporting on the value-creation and performance. HR Directors should also consider this process in all HR activities to determine the human capital value created.
  • HR issues should feature prominently as part of the integrated annual reports of organisations. While financial reporting deals with historic reporting, integrated reporting including human capital reporting is more futuristic.
  • The shift from “financial capitalism” to “inclusive capitalism” that takes account of employment, transformation and provision of all sources of capitals is very positive.
  • The shift from short term thinking to long-term thinking will assist in enabling the creation of long term human capital development in organisations.
  • HR should play a more proactive role in supporting a digital business strategy in leveraging information and technology. Boards should consider the impact of this on the organisation, its employees and broader society.
  • Increased disclosure in remuneration policy and actual remuneration will require more dedicated HR work in this area. Now that variable remuneration will not only be measured in accordance with financial targets only, means that current performance management approaches and systems will need to change to include social and environmental performance.  This will be a major shift for executives who are currently only measured on financial targets.  Also, it will require measurement cycles to be extended to also measure medium and long-term value and not only the current focus on short-term results.  Likewise, the expanded focus on creating fairness in executive remuneration within the context of overall employee remuneration will further put the spotlight on the whole reward system of the organisation. As recommended in the SABPP standard on Reward and Recognition, this will require a detailed analysis of the current reward strategy and pay scales of organisations.
  • In making a meaningful contribution to the combined assurance model, HR will be required to provide information and inputs regarding the HR control environment, including framework, policies, processes, systems and controls. Thus, HR Managers will be required to inform the internal audit function of the role they play in implementing the SABPP HR standards, as well as the results of audits against the HR standards.
  • HR Managers should keep up to date on the fiduciary duties of shareholders regarding investments in pension funds. As indicated in King IV™, appropriate consideration should be given to  “any factor which may materially affect the sustainable long-term performance of a fund’s assets, including environmental, social and economic performance.”
  • The role of HR and Employment Relations Managers in dealing with dispute resolution together with management and unions cannot be over-emphasised. The need for resolving disputes quicker, efficiently and effectively is well articulated in King IV™ and require dedicated effort by HR Managers.
  • A significant amendment has been the clause requiring boards to oversee that recruitment processes, promotion criteria and performance evaluations of employees recognise adherence to ethics norms as out in codes of ethics and conduct and that sanctions are in place for the contravention thereof. Thus, the HR department needs to ensure that HR policies and procedures are firmed up on these matters and that ethics takes a prominent position in this regard.  However, this recommended practice may require proper board induction and/or training.
  • Several HR areas are addressed in the section dealing with the organisation as a corporate citizen. Specific areas mentioned are sustainable development, human rights, impact on communities, fair labour practices, remuneration, employee well-being, employee development, employment equity and compliance to legislation. These areas are fully covered in the National HR Standards, and the HR standards are therefore a useful guide in ensuring that these areas are sufficiently covered.   In addition, HR should also play a stronger role in the prevention, detection and response to fraud and corruption as this area is specifically recommended in King IV™.  Likewise, HR reports will be useful as inputs into reports for the disclosure in corporate citizenship.   The role of HR in contributing to these areas and in particular driving good practices in achieving an ethical culture cannot be over-emphasised.
  • HR should ensure that key aspects requiring their attention, such as HR risks, remuneration and incentives are aligned to performance and sustainable value creation and therefore include in the integrated annual report.
  • While the governing body is responsible for succession planning of its members, HR may provide the professional expertise to assist in this regard, for example in the identification mentorship and development of future board members.
  • It is recommended that HR Directors familiarise them with all the recommended actions of King IV™ and ensure that they raise any concerns of undue influence or manipulation regarding remuneration or nominations committees.
  • The HR Director may assist the company secretary in ensuring that proper policy and procedures are in place for the work of nominations committees, remuneration committees and social and ethics committees.
  • The HR Director should liaise with the Chief Risk Officer or Chair of the Risk and Opportunity Committee to determine whether human capital risks have been included in the risk register of the organisation. Also, while risk committees have been in place for a decade, the new added role of “Opportunity” may require some refocus and training of members of the governing body to make this transition. This should also include building the capacity of the risk manager to understand this expanded role in the risk management strategy and operations of the organisation.
  • Regarding the CEO appointment and role, the Board typically delegates this activity to the HR Director. The Board may also ask for advice from the HR Director regarding the succession plan for the CEO. The HR Director should also assist the CEO in ensuring that the governing body is consulted on other executive appointments.
  • The HR Director should also ensure that the company secretary or other governance professional is sufficiently competent and trained to execute corporate governance duties.
  • The HR Director as the top performance management professional of the organisation, has a key role in providing inputs and/or advice in performance evaluations of the governing body, its structures, and the company secretary where relevant.
  • HR functions should prepare to be included in the new combined assurance model. HR should study the combined assurance model and identify the relevance of HR as a specialist function within this framework. Internal audit will be the third line of assurance for the HR function, external audit as the fourth line and the board or audit committee as the fifth line of assurance.  HR should provide reports about the quality of HR work performed within organisations (this is part of reporting other than financial reporting).
  • Now that many HR Directors are represented at Board, Executive Committee, Remuneration Committee, and Social and Ethics committee level, the capacity of HR Directors to contribute optimally at board and board committee level should be improved. It is recommended that HR Directors be trained in corporate governance.

THE WAY FORWARD

The HR Governance Steering Group of SABPP consist of various senior HR Leaders. I am the Chairperson and Dawid Swart is the vice-chairperson.  We have the following mandate:

  1. To ensure that HR Directors fulfil their role in accordance with King IV™ and to provide a framework for training HR Leaders in corporate governance.
  2. To ensure that HR is sufficiently infused into local and international integrated reporting frameworks.
  3. Building on King IV™ the HR Governance Working Group will develop a framework for HR Governance that will exceed the requirements of King IV™. This framework will guide HR Directors to effectively govern the HR function, influence board committees and boards, and to ensure that human capital is optimised as one of the 6 capitals in organisations.
  4. To provide an advocacy forum for HR Directors on issues affecting them and to engage with key stakeholders such as government, business chambers and other s

The full paper covering the above will be presented at the 4th Annual HR Standards Conference in Midrand on 27 and 28 July 2016.  I invite you to join me at this special occasion so that we can share the full report with you.

CONCLUSION

In conclusion, 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 encourage HR Directors to improve their knowledge and functioning as Directors and Prescribed Officers.   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 Kumalo

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 Conference on 28 July in Midrand.

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