The release of the King IV report earlier in November this year has once again raised South Africa’s status as a world-leader in corporate governance. As innovative as the earlier King Reports have been, what has been this Report’s most striking feature, according to Professor Deon Rossouw, CEO of The Ethics Institute, is that ethics has been elevated to an unprecedented level of prominence compared to the King III Report or any of its predecessors.
2 December 2016
KING IV: Focus on Ethical Leadership, not Ethics Management
SOUTH AFRICA, Pretoria -The release of the King IV report earlier in November this year has once again raised South Africa’s status as a world-leader in corporate governance. As innovative as the earlier King Reports have been, what has been this Report’s most striking feature, according to Professor Deon Rossouw, CEO of The Ethics Institute, is that ethics has been elevated to an unprecedented level of prominence compared to the King III Report or any of its predecessors.
What has also been extremely noteworthy is the focus on ethical leadership rather than ethics management, and the setting of the tone from the top, specifically by the governing bodies of organisations. Professor Rossouw feels that this is South Africa’s response to a growing need for its governing bodies to act ethically and effectively, and for organisations to be responsible citizens of the societies in which they operate.
“The first part of The King IV Code on Corporate Governance, (available at www.iodsa.co.za) is not unlike the King III Code that also had a similar chapter consisting of three principles. The difference in terms of prominence is that whereas King III consisted of 65 governance principles, King IV only consists of 16 principles, which mean that three out of the 16 principles is now specifically focused on ethics. These three ethics principles deal respectively with ethical leadership, ethical organisational culture, and the ethical responsibilities of organisations to the environment in which they operate (corporate citizenship),” says Professor Rossouw.
“By using the terminology of ‘characteristics’ the King IV Report focuses on the character of the people involved in governance. Good governance thus does not start with principles, rules and procedures, but with the character of those tasked with governance. This is a timely reminder at a time when governance failures have become too common in South Africa,” he elaborates.
Another significant change, is that King IV goes further than its predecessor report, by indicating that the management of ethics in organisations is not sufficient, unless and until it results in the establishment of an ethical culture. “Organisational ethical culture is widely understood as ‘the way we do things around here’, and thus suggests that ethics should become a normal part of ‘how things are being done in the organisation’” Professor Rossouw explains.
“This emphasis on an ethical culture in King IV, rather than on ethics management as the case was in King III, does not imply that ethics management has become less important. To the contrary, in the discussion of the second principle in King IV, several aspects of managing ethics in organisations are specifically recommended. These aspects include setting an ethics strategy for the organisation, ensuring that there are ethical standards to guide internal and external stakeholders in their interactions, and ensuring that they are familiar with, and adhere to these ethical standards. Explicit provision is also being made for providing safe reporting (whistle-blowing) mechanisms for persons who wish to report unethical conduct in a confidential manner.”
“This makes it clear that ethics management is neither a goal in itself, nor a mere tick-box exercise, but that ethics management should be approached and applied in a manner that will result in the cultivation and maintenance of an ethical organisational culture over time.”
The third principle in King IV deals with organisational citizenship. Since the publication of King III in 2009, the Companies Act (2008) and Companies Regulations (2011) came into effect, which made the introduction of social and ethics committees mandatory for certain categories of organisations. It was thus required that King IV should recognize the existence of social and ethics committees, and also aligns itself with this new reality.
“The fourth King Report goes beyond mere recognition of the existence of social and ethics committees, and in fact, has made a number of important recommendations that have the potential of improving the impact and effectiveness of these committees,” says Professor Rossouw.
“First, King IV recommends that all organisations should have a governance structure that takes responsibility for governing the social and ethics performance of organisations. The Companies Regulations only require listed companies, state-owned companies, and companies with significant public interest to have mandatory social and ethics committees. King IV, however, recognises that the social and ethics performance of all types of organisations have an impact on their success, and ultimately, on their sustainability. It therefore recommends that the governing bodies of all organisations (or one of their existing sub-committees) should take the responsibility for governing their social and ethics performance.
Second, King IV recommended that the mandate of the social and ethics committee should be broadened to also include oversight of a number of areas that are not mentioned in the mandate of the committee as set out in the Companies Regulations. These areas include fair remuneration, and responsible and transparent tax practices. Of critical importance in this regard, is that the governance of ethics is now also included in the mandate of the social and ethics committee. This represents an important correction of an oversight in the Companies Regulations. In the latter, ethics only appears in the name of the committee, but never in its mandate.
Thirdly, King IV recommends that the composition of the social and ethics committee should be such that there is a majority of non-executive members of the governing body on the committee. This, once more, is an important correction to the Companies Regulations that allows for a composition of the committee in which there can be a majority of executive directors, or prescribed officers on the committee. The latter is not an ideal governance arrangement, as it puts executive directors in a position, where they oversee their own social and ethics performance. And as we all know, one tends to be not very objective when marking your own homework.”