Professor Mervyn King, Chair of the King Committee and Chair of the International Integrated Reporting Council (IIRC), shared his reflections on the development of corporate governance in South Africa during an interview with business journalist Bruce Whitfield and EY Senior Researcher, Jess Schulschenk, on 13 March 2012. The video interview is included above, and reflections from both this and the longer research interview are given below. These findings were made possible by the Gordon Institute of Business Science (GIBS) and form part of the ongoing Corporate Governance Research Programme with the Albert Luthuli Centre for Responsible Leadership (University of Pretoria) supported by Ernst & Young.
Prof King is often referred to as the Doyen of Corporate Governance, in South Africa and internationally. He convened the first King Committee and has been leading the corporate governance process in South Africa ever since. South Africa is often considered ahead of the game in terms of introducing new principles or incorporating burning issues into the governance frameworks. Many contribute this to Prof King’s extensive involvement in the international developments of corporate governance which he fed back into the King Committee during their quarterly meetings over the past two decades.
Reflections on Corporate Reporting
As the chair of the Global Reporting Initiative, Prof King was leading the latest thinking on sustainability reporting which, combined with his visionary take on governance, led to integrated reporting being a core principle in King III – once again, ahead of the game.
“Corporate reporting as we’ve been doing it for the last decade is no longer fit for purpose - with the complexity of reporting, nine out of ten people do not understand it. What you need is a concise international language so that the trustee of your pension fund can make an informed assessment about investing your money in the equity of a company - that it's going to sustain value creation in the long term. You cannot tell that by looking at a balance sheet or profit and loss statement. In the nature of things, that is historical information. You’re trying to look into the future when you’re looking at sustained value creation in the completely changed world in which we operate. Climate change, ecological overshoot and using the natural assets of the planet earth faster than nature is regenerating them - all these things are happening around the world.”
Prof King went on to share how embedding of sustainability in long term strategy is critical. He also looked back on how not only was King III the first ever to recommend integrated reporting but that following the JSE making it a listing requirement, the JSE 2010/2011 won the World Federation stock exchange prize for the best stock exchange regulator in the world. Later that same year he received the award of excellence from the World Federation of Exchanges for his contribution to corporate reporting for exchanges around the world.
A Principles-based Approach
The King Reports remain essentially a voluntary, principles based set of codes of good governance practices, even though the backing of the JSE (requiring aspects of the King Codes to be applied as part of their listing requirements) and incorporation of aspects of the King Codes into legislation, such as the New Companies Act, have formalised compliance with these corporate governance principles to a certain degree.
Prof King reflected on the principles based approach that continues to inform the King Committee’s take on governance. Drawing on his many years of experience with the judicial system, Prof King reflected that there will always be ways of getting around a rule, but that this is not the case with a principles based approach. He went on to share that:
“The ultimate test of compliance is in fact your stakeholders and they will very quickly tell you that as a director of a company they don’t think you are justified in adopting a certain process or we think you were wrong in the judgment call and they will no longer support the company – as customers or as providers of capital. So it's never been intended that the King reports should be rule based documents. They are principles based.”
Prof King is aware of some of the disconnects between King III and the New Companies Act, despite attempts to align practices during the New Companies Act but that resulted from delays in the development of the legislation. Subsequent practice statements have been issued by the King Committee in order to address some of these issues. He felt that there may be a King IV depending on judicial interpretations of some controversial provisions in the New Companies Act.