JSE and IoDSA Collaborate on corporate Governance Guidelines
Johannesburg, 5 February 2013 – As stakeholder interest in the corporate governance of listed companies continues to grow, companies grappling with how to be more transparent about these practices have received guidance from two practice notes issued by the King Committee on Corporate Governance. The drafting of the practice notes has been spearheaded by the Institute of Directors in Southern Africa (IoDSA) in collaboration with the Johannesburg Stock Exchange (JSE).
Corporate governance reporting under the spotlight
King III proposes that companies should report on their application of its corporate governance principles to give stakeholders a more comprehensive picture. This disclosure allows stakeholders to understand and challenge boards on the quality of their governance. "The aspirational nature of King III should drive continuous improvement of governance practices among JSE-listed companies," says JSE Director of Issuer Regulation John Burke.
IoDSA Chief Executive, Ansie Ramalho says the practice note on disclosure on the application of King III was issued by the King Committee because the JSE and IoDSA have received several requests about how companies should approach this. Says Ramalho: "King III is adopted by companies on an "apply or explain" basis to allow for flexibility of application depending on the size, nature and complexity of the organisation." What complicates matters for listed companies is that the listings requirements stipulate that there are certain governance requirements that are mandatory, where issuers do not have the option of explaining any non-compliance. These include the need for a company to have separate CEO and Chairman, the composition of the Audit Committee and having a policy detailing the procedures for appointment to the Board," says Ramalho.
However to implement King III, listed companies need continually to consider the judicious application of each of those non-mandatory principles. The proposal in the practice note is that each company provide a register of application on its website, referenced in the annual integrated report. "The philosophy of integrated reporting is that material information should be provided that presents a holistic picture of how the company is creating value now and will continue into the future," says Prof Mervyn King, the chairman of the King Committee.
Focus on directors retiring by rotation
The second practice note addresses the corporate governance requirement for directors to retire by rotation.
The JSE Listings Requirements provide that all directors' appointments (both executive and non-executive) are subject to shareholders' approval. However like King III, the Requirements state only non-executive directors need rotate. Despite this many investors insist upon executive directors being included in the rotation and the practice note sets out the potential problems associated with this.
While there is in law no distinction between executive and non-executive directors, there are differences in their functions from a governance perspective. The executive director is an employee and office bearer of the company. The role of non-executive directors is to balance the power of the executive and to serve as a counterfoil to management serving self-interest.
Some of the principles that director rotation seeks to address (including bringing in fresh perspectives, ensuring a smooth transition, retaining knowledge) could also be applicable to executive directors. However, the succession of executive directors should be dealt with by the board through different processes.
"While South Africa is a leader in terms of good corporate governance, there are always aspects that are open to interpretation. We released these guidelines in response to requests from listed companies to clarify the JSE's interpretation of the King Code's rules regarding corporate governance," says Mervyn King, Chairman of the King Committee.
To view the practice notes visit http://www.jse.co.za/How-To-List/Listing-requirements.aspx