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© LKA1
Key Issues in the
King III Report
Dr Len Konar
© LKA2
King III
• Key principles
– Leadership
– Sustainability
• Emerging governance trends
– Alternative dispute resolution
– Risk based internal audit
– IT governance
– Shareholders and remuneration
– Evaluation
• New issues
– Fundamental and affected transactions
• Nine task groups
© LKA3
King IIIChapter 1 Boards and directors
Chapter 2 Corporate citizenship: leadership, integrity and responsibility
Chapter 3 Audit committees
Chapter 4 Risk management
Chapter 5 Internal audit
Chapter 6 Integrated sustainability reporting and disclosure
Chapter 7 Compliance with laws, regulations, rules and standards
Chapter 8 Managing stakeholder relationships
Chapter 9 Fundamental and affected transactions
© LKA4
Background
• King III released for two-month public comment period by the Institute of Directors (IoD) on 25 February 2009
• Changes necessitated by:– Proposed changes to the Companies Act
– Changes in international governance trends
• King III remains principles based
• Final King III report is effective from 1 March 2010
• King III available from the website of the IoD.
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Summary of key changes
• Alternative dispute resolution (ADR) – It is suggested that ADR will enable business to preserve business relationships, by speedily solving problems.
• Risk based internal audit – This will enable companies to place more reliance upon internal controls, which internal audit will verify/assure. The appointment of a Chief Audit Executive should be considered.
• IT Governance – IT governance becomes a board responsibility; it is important as it is a major operational risk. Consideration should be given to the appointment of a Chief Information Officer.
• Shareholders – The remuneration policy of non-executive directors of the board to be authorised by shareholders, before implementation.
• Evaluation of directors – The board of directors, the board committees and individual directors should be evaluated annually, preferably by independent service providers.
• Compliance – A compliance function with adequate resources should be established.
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Applicability of the code
King III King II
Applicability Applies to all entities, regardless of their nature,
size or form of incorporation.
Listed companies
Financial institutions
Public sector enterprises
Positive statement of compliance Similar requirements to King II. The directors should report in the annual report that the
Code has been adhered to.
Reasons should be given for non-compliance.
Governance framework “Apply or explain” as opposed to “comply or else”. “Comply or explain” as opposed to “comply or else”.
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Chapter 1: Boards and Directors
King III King II
Composition of the board The board should comprise a balance of executive
and non-executive directors, with a majority of
non-executive directors.
The majority of non-executive directors should
preferably be independent.
The board should comprise a balance of
executive and non-executive directors,
preferably with a majority of non-executive
directors of whom sufficient should be
independent of management.
Independent non-executive director A non-executive director who:
i. Is not a representative of a shareholder who
has the ability to control or significantly
influence management;
ii. Similar to (ii) in King II;
iii. Similar to (iii) in King II.
A non-executive director who:
i. Is not a representative of a shareowner
who has the ability to control or
significantly influence management;
ii. Has not been employed by the company
or the group of which it currently forms
part, in any executive capacity for the
preceding three financial years;
iii. Is not a member of the immediate family
of an individual who is, or has been in
any of the past three financial years,
employed by the company or the group
in an executive capacity.
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Chapter 1: Boards and Directors
King III King II
Independent non-executive
director (continued)
i. Similar to (iv) in King ii;
ii. Is free from any business or other relationship
which could be seen to interfere materially with
the individual’s capacity to act in an independent
manner;
iii. Does not have a direct or indirect interest in the
company (including any parent or subsidiary in a
consolidated group with the company) which is
either material to the director or to the company.
A holding of five percent or more is considered
material, and
iv. Does not receive remuneration contingent upon
the performance of the company.
i. Is not a professional advisor to the company or
the group other than in a director capacity;
ii. Is free from any business or other relationship
which could be seen to materially interfere with
the individual’s capacity to act in an independent
manner;
iii. Is not a significant supplier to, or customer of the
company or group, and
iv. Has no significant contractual relationship with
the company or group.
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Chapter 1: Boards and Directors
King III King II
Minimum number of directors on
the board
As a minimum, two executive directors should be
appointed to the board, being the chief executive
officer and the director responsible for the finance
function. For listed companies, a financial
director must be appointed to the board from
June 2009.
Not addressed.
Frequency of board meetings Not addressed. The board should meet regularly, at least once a
quarter, if not more frequently, as circumstances
require.
Rotation of non-executive directors A programme ensuring staggered rotation of non-
executive directors should be put in place.
Rotation of board members should be structured
so as to retain valuable skills, to have continuity
of knowledge and experience and to introduce
persons with new ideas and expertise.
At least one third of non-executive directors
should retire by rotation at the company’s AGM or
other general meetings. The retiring board
members may be re-elected, provided they are
eligible.
Rotation of non-executive directors not addressed
specifically.
Regarding rotation of directors in general:
There should be an effective programme of continuing
rotation of appointments in respect of each individual
director. All companies should adopt a process of
staggered continuity and re-election of their boards to
ensure continuity of experience and knowledge,
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Chapter 1: Boards and Directors
King III King II
Removal of CEO The memorandum of incorporation of the
company should allow the board to remove the
CEO as an executive director on the board
without shareholder approval being necessary.
Not addressed.
Chairman of the board The chairman of the board should be an
independent non-executive director.
The chairman of the board should not be the
CEO.
The chairperson should preferably be an independent
non-executive director.
It is preferable that the chairperson and CEO functions
are kept apart.
Lead independent non-executive
director
Should be appointed if the chairman of the board
is not independent and free of conflict of interests
on appointment.
Consideration should be given to appoint a senior
independent or “lead director” where chairperson is not
independent or where conflicts exist.
Share option of non-executive
directors
Non-executive directors should not receive share
options.
Share-options may be granted to non-executive
directors but must be subject to prior approval by
shareholders.
Board committees Unless legislated otherwise, the board should
appoint the audit, risk, remuneration and
nomination committees as standing committees.
Companies should have, as a minimum, an audit and
remuneration committee.
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Chapter 1: Boards and Directors
King III King II
Remuneration policies The board (with the assistance of the
remuneration committee) should put forward a
policy of remuneration to the shareholders for
their approval in general meeting. Shareholders
need only approve the remuneration for non-
executive directors. Remuneration of executive
directors may be approved by the board.
A policy to pay salaries above the median
requires special justification.
Balloon payments on termination does not meet
requirement of fairness.
Remuneration policy approved by the board.
Performance related elements should constitute a
substantial portion of total remuneration.
Directors’ performance evaluation King III requires the board to consider whether
the evaluation of performance should be done by
a professional independent service provider.
Self-evaluation of the board, its committees and the
contribution of each individual director.
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Chapter 1: Boards and Directors
Summary of King III chairmanship / membership of the board committees
Member of
audit
committee
Member of
remuneration
committee
Chairman of
remuneration
committee
Member of
nomination
committee
Chairman of
nomination
committee
Member of
risk
committee
Chairman of
risk
committee
Chairman of
the boardNo Yes No Yes Yes Yes No
Chief
executive
officer
No No No No No Yes No
• Board committees should only comprise members of the board
• External parties may be present at committee meetings by invitation
• Respective committee’s chairmen should give at least an oral summary of their committee’s deliberations at the board meeting following the
committee meeting.
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Chapter 1: Impact of changes
• Review skills and experience of board and board committee members
• Review composition of board and board committees
• Review board charter and terms of reference of board committees
• Review remuneration policy and ensure alignment with requirements of King III
• Ensure approval of remuneration policy at AGM
• Outsource directors’ performance evaluation to independent service providers
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Chapter 2: Corporate Citizenship, leadership,
integrity and responsibility
King III King II
Corporate citizenship, leadership,
integrity and ethical behaviour
• The board is responsible to ensure that the
company acts as a responsible citizen.
• Programmes should be developed for
transformation, human rights, human
capital, social capital, safety and health.
• The company should develop strategies
and policies to guide its activities to fall in
line with actions of good corporate
citizenship.
• Board must ensure that company is run
ethically and should ensure ethical
corporate culture.
Ethical practices and organisational integrity discussed
as part of integrated sustainability reporting.
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Chapter 2: Impact of changes
• Incorporate board duties in board charter
• Review of current sustainability policies and procedure documents (code of ethics, etc.)
• Ensure adequate processes for:– Transformation
– Human rights
– Human capital
– Social capital
– Safety
– Health
• Ensure policies and processes are duplicated for operations outside South Africa
• Appoint an Ethics Officer
• Measure compliance to code of ethics and King III report
© LKA16
Chapter 3: Audit Committees
King III King II
Membership All members at holding company level for companies
incorporated in South Africa should be independent
non-executive directors.
Audit committees at subsidiary level that will act as
sub-committee of the holding company may appoint
executive directors within the group as audit
committee members, provided the group audit
committee accepts overall responsibility.
Majority of members should be independent non-
executive directors.
Audit committees at subsidiary level not addressed.
Minimum number of members Audit committees should consist of at least three
members.
Not addressed.
Qualifications The audit committee as a whole should
• have a good understanding of financial risks,
financial and sustainability reporting and internal
controls;
• possess sufficient and relevant knowledge of
corporate law;
• have a thorough understanding of IFRS/SA
GAAP/GRI standards or any other financial
reporting framework or set of standards
applicable to the company.
Majority of members should be financially literate.
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Chapter 3: Audit Committees
King III King II
Frequency of meetings At least twice a year. Not addressed.
Responsibility regarding
sustainability reporting
The board may delegate the responsibility for and
review of the integrated sustainability section of the
integrated report to either the risk committee,
sustainability committee or audit committee.
The audit committee should consider and recommend
to the board the need to engage an external assurance
provider to provide assurance over the accuracy and
completeness of sustainability reporting.
Not addressed.
Combined assurance The concept of combined assurance is introduced.
The audit committee must monitor the appropriateness
of the company’s combined assurance model.
The combined assurance model co-ordinates the
efforts of management, internal and external
assurance providers and increases their collaboration.
Not addressed.
Appointment In line with the Companies Bill 2008, the shareholders
should appoint the audit committee.
Audit committee appointed by the board.
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Chapter 3: Impact of changes
• Ensure that audit committee fulfils its functions for subsidiary companies as well
• Review of audit committee terms of reference and ensure reflection of concept of combined assurance
• Allocate responsibility for sustainability reporting to either the audit, risk and compliance committee or the safety, health and environment committee
• Ensure that shareholders appoint the audit committee for every financial year
• Assess the skills, qualifications and track record of all assurance providers
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Chapter 4: Risk Management
King III King II
IT Governance The board should ensure that IT is aligned with
business objectives and sustainability.
The board should be active in IT strategy and
governance.
IT governance should focus on four key areas:
Strategic alignment with the business and
sustainability
Optimising expenses and improving value of IT
Addressing the safeguarding of IT assets,
disaster recovery and continuity of operations
Resource management
Not addressed.
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Chapter 4: Impact of changes
• One of the most significant changes to King III
• IT, information security, business continuity and disaster recovery should regularly appear on the agendas of the board as well as Exco
• IT risks must be assessed and reviewed by the audit committee, review audit committee terms of reference
• Ensure that IT Governance is based on a framework like COBIT to review adequacy of information security
• Consider the appointment of a Chief Information Officer, this individual would assist the board, alternatively the responsibility must be assigned to executive management
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Chapter 5: Internal Audit
King III King II
Internal audit should be risk-
based
The board should ensure that there is an effective risk-
based internal audit.
The risk-based audit plan should:
Address the full spectrum of risks
Show areas of high priority
Indicate how assurance will be provided
Reflect the linkage between the plan and
assessment of risk maturity
Any changes to the plan should be approved by
the audit committee
Not addressed.
Direct relationship with the audit
and risk committee
Internal audit should report in such a way that its
independence is ensured.
The Chief Audit Executive (CAE) should report
functionally to the audit committee.
Not addressed.
Internal audit function should be
staffed with competent resources
Internal audit should be subjected to independent
quality at least every three years
Appropriate for CAE to become a member of Exco.
No addressed.
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Chapter 5: Impact of changes
• Together with IT Governance one of the major changes to King III
• Review the role of internal audit within AFF in light of King III requirements
• Consider the appointment of a Chief Audit Executive (who should also become a member of Exco), this individual should manage the relationship with the outsourced service provider
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Chapter 6: Integrated sustainability reportingThis chapter should be read together with Chapter 2
King III King II
Sustainability reporting should be
focused on substance over form
Sustainability reporting should be:
Material
Relevant
Accessible
Understandable
Comparable
Formalised as part of the company’s reporting
processes
Not addressed in same level of detail.
Assurance Sustainability reporting and disclosure should have
independent assurance.
Disclosure should be governed by principles of reliability,
relevance, clarity, comparability, timeliness and
verifiability.
Frequency of reporting Regular engagement of stakeholders, on a basis more
frequent than once a year, is essential.
Sustainability reporting may be built on a number of different
examples such as:
the Global Reporting Initiative Guidelines
AA 1000 Framework and Stakeholders Engagement
Standard
OHSAS 18000 Occupational Health and Safety
Standard
ISO 9000 Quality Management Assurance Standard
ISO 14000 Environmental Standard
Every company should at least annually report on its
social, transformation, ethical, safety, health and
environmental management practices.
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Chapter 6: Impact of changes
• Sustainability reporting must be integrated and be part of reporting processes to Exco, board committees and the board
• Integrated reporting entails more than a mere “add-on” of economic, social and environmental information in the annual report –sustainability reporting must be embedded in the organisation
• There should be co-ordination between the audit, risk and compliance committee as well as the safety, health and environment committee in this regard
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Chapter 7: Compliance with laws, regulations,
rules and standards
King III King II
The board should ensure that the
company implements an
effective compliance framework
The compliance policy and procedures should be
developed.
KPI’s should concentrate on the risk of non-
compliance.
Not addressed.
Compliance should form part of
the risk management process
The risk of non-compliance should be identified
and addressed through the risk management
process.
The compliance function should have adequate
resources to discharge its responsibilities.
Not addressed.
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Chapter 7: Impact of changes
• The adopted compliance policy and processes of the Compliance Institute of South Africa must be rolled-out group-wide
• A compliance function, headed by a compliance officer must be established
• The head of compliance must have independent reporting lines in accordance with the standards of the Compliance Institute of South Africa
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Chapter 8: Managing stakeholder relationships
King III King II
Alternative dispute resolution
(ADR)
It is recognised that ADR has become an important
element of good governance.
Mediation or conciliation, and failing that, arbitration, is
favoured.
Not addressed.
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Chapter 8: Impact of changes
• An example of ADR clause has been developed by the IoD and the Arbitration Foundation of Southern Africa (AFSA) and settled by senior counsels
• All contracts reviewed and to be drafted should contain an ADR clause
• Appropriate individuals who should represent the company in ADR processes should be selected.
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Chapter 9: Fundamental and affected
transactions
King III King II
Definition of an affected
transaction
Affected transactions include the following:
A transaction resulting in the disposal, or greater
part of the assets of a company
A merger or amalgamation
A scheme of arrangement
The acquisition of voting rights in a company
The acquisition of a beneficial interest in a
company
A mandatory offer
A compulsory acquisition
Not addressed.
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Chapter 9: Fundamental and affected
transactions
King III King II
Director’s duties Directors should disclose any conflict of interest
immediately.
Directors of both the offeree and the offeror companies
are presumed to have a conflict of interest.
Directors with conflicts must recuse themselves from
the board
Not addressed.
Independent board An independent board should compromise a minimum
of three independent directors.
Directors’ fiduciary duties include the general body of
the company’s relevant security holders.
Not addressed.
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Chapter 9: Impact of changes
• This chapter is new and sets out the accepted principles of good governance which supplement the Takeover Regulations
• Indications are that the Takeover Regulations would be published during 2009
• Directors should be made aware of their duties in affected transactions
• The board charter should be reviewed
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