The term corporate governance is widely defined as: “The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with all its stakeholders (financiers, customers, management, employees, government, and the community)….”
It is also defined as: “…..the structures and processes for the direction and control of companies. Corporate governance concerns the relationships among the management, board of directors, controlling shareholders, minority shareholders and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital.”
Defining corporate governance
It is thus, in my view, no surprise that a general misconception exists in the industry as to the exact nature of corporate governance, what it involves and the need for it in any entity (regardless of size).
In my view, appropriate corporate governance structures serve, essentially, the following purposes:
- It is a broad concept involving the body or rules consisting of the MOI (if applicable to the entity – otherwise the constitution), rules of the company (sometimes referred to as “by laws” or regulations) and policies;
- This body of rules (in the broad sense) helps to guide the current and future board of directors (management) in decision–making, running the company (entity) and ensures that accountability, fairness, and transparency is created and maintained within the entity,
- it strategically contributes to sustainable development and growth within the entity, and
- ensures continuity.
The role of the MOI and rules in corporate governance
A Memorandum of Incorporation (MOI) is defined in the Companies Act 71 of 2008, as amended (the “Act”), as an instrument: ‘that sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to the company, and other matters as contemplated in section 15; and by which:
1. The company was incorporated in terms of this Act, as contemplated in section 13; or
2. A pre-existing company was structured and governed before the later of:
aa) the effective date; or
bb) the date it was converted to a company in terms of schedule 2’.
This means that the MOI is the constitution of the company and regulates the relationships of the company both internally and externally. It is also a public document, filed with the CIPC (companies and intellectual property commission), thus, additional protection is afforded to persons dealing with the company.
Where companies choose to implement MOI’s that incorporate special or more restrictive provisions, they are obliged to disclose these by affixing the suffix ‘RF’ to the company name under section 19 of the Act so that the general public is alerted thereto.
The board of directors may, however, in addition execute rules to regulate matters not addressed in the Act or MOI. Section 15(3) of the Act provides that “except to the extent that a company’s Memorandum of Incorporation provides otherwise, the board of the company may make, amend or repeal any necessary or incidental rules relating to the governance of the company in respect of matters that are not addressed in this Act or the Memorandum of Incorporation, by:
(a) publishing a copy of those rules, in any manner required or permitted by the Memorandum of Incorporation, or the rules of the company; and
(b) filing a copy of those rules.
Section 15(4) then provides that “a rule contemplated in subsection (3) must be consistent with this Act and the company’s Memorandum of Incorporation, and any such rule that is inconsistent with this Act or the company’s Memorandum of Incorporation is void to the extent of the inconsistency;….”
Section 1 defines the rules as “any rules made by a company as contemplated in section 15(3) to (5).”
Therefore the MOI can be viewed as the foundation of the corporate governance structure or, put differently, the framework thereof.
In my view, in the absence of guidance as to the exact nature and practical purpose of the rules (as defined in the Act) in either the Act, CIPC (practice directives) and precedent, we can only but assume that the rules amplify matters already regulated by the MOI in more practical detail.
Accordingly, the aspect of governance policies as envisioned in King III is a guideline for achieving accountability, transparency and generally good governance in both the profit (business) and non-profit sector and for that reason (in my view) a very different concept to the rules as enshrined in section 15 of the Act.
Does King III only apply to big business?
According to the report King III applies to: “all entities regardless of the manner and form of incorporation or establishment and whether in the public, private or non-profit sectors.”
Based on the above, King III applies to all entities, regardless of industry or size. Importantly, the report sets an international benchmark with an ‘apply or explain’ approach, which means that entities need not comply with the Code when they can justify their non-compliance.
Although King IIII does regulate the formation of committees and advisory structures within a corporate structure (which easily reinforces the myth) the important principles included therein which are all applicable to any entity regardless of size, should be noted – these include:
- Board composition
- Director development and performance management
- IT governance
- Compliance and risk management
- Alternative dispute resolution.
A strong focus is on informed decision-making, regulation regarding systems and processes used (including IT), monitoring and evaluation of business strategies generally and electing the best managers (directors) and managing / monitoring their performance. Resolving disputes through more cost effective means and to ensure compliance and implementing risk aversion strategies.
Accordingly, in my view, companies should implement policies aligned with the spirit of King III and, where appropriate, incorporate these in the company’s MOI and rules.
Policy documents are dynamic guidelines and thus flexible enough to evolve with the business’ needs strategically.
The rules on the other hand, also enjoy a degree of flexibility (compared to the MOI which requires a special resolution of shareholders to amend), but is filed with the CIPC and ideally should only contain that which is not of a confidential nature and would be in the general public / stakeholder’s interest to have readily available as a public document.
Implementing governance policies that are in line with the provisions and spirit of King III as well as the entity’s specific needs instils stakeholder confidence, ensures business continuity and risk aversion generally, in any size entity. King III is therefore by no means reserved for listed companies only and should be implemented in any entity regardless of its size. It is therefore in my view a non-negotiable element of any responsible business or entity.