The King Committee report won’t satisfy everybody, but it’s a good start to more openness and accountability by companies at board level. Reg Rumney reports
COMPANIES will soon be under pressure to reveal exactly how much directors as a group earn. But individual salaries of the top dogs in the corporate pack — unlike in the United States — will still be a closely guarded secret.
The King Committee Report on Corporate Governance was released this week. It contains a number of recommendations in a Code of Corporate Practices and Conduct. Big companies, particularly listed ones, and parastatals will be persuaded to adopt this code by peer pressure, particularly by a likely change in the listing requirements of the Johannesburg Stock Exchange. The JSE will probably want companies to state whether they comply with the code or not as a listing requirement.
According to the code, the total earnings of non-executive and executive directors should now be disclosed separately.
That is still far from the recommendations of the Cadbury Committee on Corporate Governance. In the United Kingdom companies are encouraged to disclose the number of directors in each band of Stg 5 000 income, making it easy to see what kind of money the top earners are getting. It is even further from the regime of transparency that rules in the United States, where the Securities and Exchange Commission enforces disclosure.
On the other hand, for the first time the full basis of directors’ remuneration must be disclosed, and split into salary, fees, benefits, share options and bonuses. And the nature of the disclosure ensures the real value of share options will be known.
Committee chairman Mervyn King said this week the reason the committee did not go for full disclosure of individual salaries was that this made it easier for competing companies to poach top executives in a country short of skills.
In other areas, such as affirmative action, King went further than Cadbury, which was more concerned with shareholders than stakeholders. Specifically, the King report calls for more information on the social ??????
But unions will be disappointed by the recommendations, which they will see as not going far enough in worker representation. The report suggests workers should participate in governance of companies. But it leaves the exact mechanism up to individual companies.
King said the debate, which had been heated, ranged from workers only being able to participate if they accepted their share of risk and reward to automatic worker entitlement to a seat on the board.
“We’ve adopted a via media approach,” King said.
Cosatu executive committee member Ebrhaim Patel did not endorse the final report.
It remains to be seen whether the recommendations on affirmative action will satisfy those in the government who are considering legislation to force companies to advance blacks.
The report says affirmative action is a reality in South Africa, and should be part of the business plan of any company abiding by the code. But it is defined in reference to the guidelines produced by the South African Chamber of Business, a body which still represents white business interests.
That the committee backed off recommending full compulsory disclosure of the identities of beneficial holders of shares held by a nominee company will disappoint those who believe this contributes to a culture of non-transparency.
The committee only recommended the Standing Committee on Company Law should investigate whether such disclosure should be compelled so that nominee companies could not be used as a shield for insider trading.
Of more direct concern to shareholders is that the responsibility of the directors to shareholders has been tightened.
The recommendations have been welcomed by the auditing profession. This is not surprising, given that the recommendations correspond closely with proposals made by the South African Institute of Chartered Accountants to the committee.
Pat Smit of Deloitte & Touche points out the report is strongly supportive of the role of external auditors, as a cornerstone of corporate governance. He adds that the report emphasises the need for auditor independence and supports the profession’s move towards the adoption of international accounting standards, legal backing for these standards and a review panel to monitor compliance with these standards.
While external auditing gets a boost in the King report, the auditing profession has been let off the hook. Directors have to take responsibility for the accounts and not lay off the responsibility of the auditors.
SAICA technical director Monica Singer says the message of the King Committee is clear: directors, not auditors, are responsible for financial statements.
Also, the accounting practice review panel will have the power to apply to the supreme court to have the accounts of a company re-issued — at the expense of the directors.
And directors will have to tell stakeholders whether the business is in serious trouble. They have to state in the annual report they have no reason to believe the business will not be a going concern in the forthcoming financial year. They have disclose any concerns they do have.
On the other hand, it is recommended that a director should not incur liability for breach of duty where he or she has exercised a business judgment in good faith in a matter where the decision is an informed and rational one and there is no self-interest.
King explained the committee had agreed this was necessary to encourage experienced directors to take non-executive appointments in new entrepreneurial ventures. As the law stood a breach of care and skill by one director meant other directors incurred collective responsibility.
Finally, an attempt is made to make the non-executive director a watchdog, as in the Cadbury report, as well as contributing his skills in a broader sense to the board. King spells out what is desired from non-executive directors to make them more effective and calls for an end to “cronyism” in their appointment.
Among detailed recommendations on non-executive directors, the report calls for a balanced board, with at least as many, if not more, non-executive as executive directors.
The code advocates the chairman should be independent and preferably non-executive — but it adds that this falls away if the board does not consider this in the company’s interests. Some of the more powerful businessmen in the country are executive, including Anglo American’s Julian Ogilvie Thompson.
The Code is recommended to take effect on June 30 next year, and the recommendations have already been endorsed in principle by organised business, professional associations like SAICA, and some large corporations, according to King.