King Report on Corporate Governance - Essay Example

King Report on Corporate Governance (King, M (2002) Institute of Directors, Johannesburg) a Critical Review and Comparative Analysis with Principles of Corporate Governance (OECD (1999) Paris) 1.0 Introduction: The quality and level of stakeholder involvement in the administration of business enterprises and other organizations have been increasingly recognized, especially after the Asian Crisis in 1997 and the high magnitude corporate scandals that made the US Corporate World stumble. The external stakeholders mainly the shareholders in the countries where the stock markets are active have been demanding a higher level of participation from their sides as well as an enhanced transparency in the corporate reporting. Adding to this, the institutional investors also like to satisfy themselves that their investments have been made in companies where internationally accepted corporate governance practices are being adopted. This also calls for a more transparent disclosure by business entities of their established governance practices in their annual reports. Such reporting requirements are not limited only to public companies but even the privates companies are also expected to follow recognized governance policies and report thereon. Several initiatives have been taken to integrate and organize different principles of corporate governance and arrive at a set of definite guidelines. These initiatives were undertaken by various orgnisations and committees including the United Nations Conference of Trade and Development. Some of the other organisations and committees whose reports are used to form the guide lines are: The Cadbury Committee The OECD principles on Corporate Governance - 1999 The King Report (2002) on Corporate Governance for South Africa The CACG Guidelines - Principles of Corporate Governance in the Commonwealth CACG guidelines on Boards and directors ASX Corporate Governance Council Principles - March 2003 Out of the above reports this paper envisages making a critical review of the King Report 2002 and also makes a comparative analysis of the Kings Report with the The OECD principles on Corporate Governance - 1999. 2.0 King Report (2002): "Directors must act with enterprise and always strive to increase shareholders' value while having regard for the interests of all stakeholders "(King Report (South Africa) Ch. 5:27.7) This is the central theme on which the King (II) Report is evolved. The King (II) Report published in the year 2002 was prepared by 'task teams' consisted of representatives from institutional and private investors, civil society regulators, and government officials. This way the report aimed to bring in the view points of all kinds of stakeholders in to the report. "The King II Committee itself was composed of 'leading proponents' of corporate governance as well as 'representatives of significant professional, private and public sector institutions'. Local and international consultation was 'extensive', with the Institute of Directors in Southern Africa providing a 'facilitative role' and secretarial support" (Armstrong et al2005). King (II) contains CODE OF Corporate Practices and Conduct ('the code') and the report's recommendations are applicable to all companies listed in Johannesburg Stock Exchange and several other public and private organizations including certain government organisations. King II Report contains recommendations relating the following six areas of corporate governance: The role and responsibilities of the Board and Directors: The report recommends guidelines for fixing the accountability of the board of directors by redefining the responsibilities of the directors towards all the internal and external stakeholders including the shareholders The aspect of Risk Management: In order to achieve the organisational goal of wealth creation and also to sustain the growth of the company it is important for the board to follow recognized principles of risk management. The function of internal audit: The report identifies the critical role of an internal auditor with a functional reporting to the chairman of the audit committee and the chairman of the Board. Integrated sustainability reporting: "The concept of sustainability has recently been recognised and adopted in a business context to mean the achievement of balanced and integrated economic, social and environmental performance ("triple bottom line")."(Cliffe Dekkar) Accounting and auditing: Adoption and follow up of established principles of accounting in accordance with recognized international standards and the auditing there of to ensure the disclosure of a true and fair view of the financial status of the companies Compliance and enforcement: As outlined in the integrated sustainability reporting, a 'triple-bottom-line' reporting on the economic, social and environmental performance of the company or the organization is envisaged and also the reporting in a transparent manner to the information of all the stakeholders is made a prerequisite for a good corporate governance. As commented by Wixley and Everingham (2005) the 'code' can be considered as a living document with a possibility to update as and when circumstances warrant. 3.0 Positive Impact of King II Report: Since the King II report provides a significant compilation of the standards for corporate governance it has gained recognition not only with the South African Companies but also globally for its extensive guidance on the effective principles of corporate governance. This is due to the fact that the participants to the report were drawn from nearly all relevant sectors of the economy including the government and the regulators. The introduction of 'Triple-bottom-line' reporting in South Africa providing for the reporting on the sustainability and environmental performance as also the performance of the companies in various social angles in addition to the economic performances is indicative of the positive impact the report has created in the area of corporate governance in South Africa. In addition the Johannesburg Stock Exchange has included a Socially Responsible Investment Index in the year 2004 directly as a result of the impact of the King (II) report which is the first of its kind in the world. According to Painter-Morland (2006), King II sets itself apart from many other governance regulations in succeeding to bridge the gap between CSR [corporate social responsibility] and good governance" This, the report made possible by indicating that it is wrong to consider the social and environmental issues are non-financial issues, while they do have financial implications which also need to be reported to the information of all the stakeholders as a matter of good governance. The public sector enterprises in South Africa were subjected to the following of the effective principles of corporate governance by the promulgation of the public Finance Management Act 1999 as amended in the 2002 which adopted most of the recommendations of the King Reports I and II. The banking sector was also subjected to considerable disclosure requirements making several provisions of the King II report mandatory. The Johannesburg Stock Exchange has also taken up a lot of reform measures by revising its listing rules on the basis of the recommendations contained in the King II report. "Other developments which are too many to list have taken place within the regulatory framework of South Africa, including an envisaged overhaul of its corporate laws in line with international developments and again to take account of various observations contained in the second King Report" Philip Armstrong (2003) 4.0 Criticisms on King II Report: However it is important to note that the although King (II) makes valid and workable recommendations for corporate governance in South Africa, it suffers from an inherent demerit that it is not a legally binding legislation as with the case of SOX in the United States. Another criticism raised against the King II report is that the recommendations are made on the basis of 'self governance' which may make it difficult to apply the code and principles of the report in improving the corporate governance in South Africa. Sarra (2004) comments that "the South African Department of Trade and Industry, among others, has asked whether a report based on voluntary compliance really can ensure that measures are effectively implemented and sustained" This presents a complicated picture about the adoption of the corporate governance principles by the entities in a self regulating environment as advocated by King (II) report. In fact this forms the very basis of the criticism about the overly prescriptive approach of the King Committee on the principles of corporate governance. This 'self-regulating environment' is often misunderstood in emerging market conditions. For the operation of the good corporate governance principles on a self regulatory basis, the existence of well organized financial and business environment backed by a regulated capital market, an active media to provide detailed information to all concerned, well informed shareholders and investors and the availability of organized pension and other funds are the essential prerequisites. Unfortunately South Africa as an emerging economy lacks all these essential requirements and this makes the relevance and applicability of the King (II) principles of corporate governance questionable in the South African Context. But some of the steps taken by the government in adopting these principles in a legislative frame work or a listing requirement are sure to mitigate the problems to some extent. 5.0 OECD Principles of Corporate Governance: According to the Policy Brief "the OECD Principles of Corporate Governance provide specific guidance for policymakers, regulators and market participants in improving the legal, institutional and regulatory framework that underpins corporate governance, with a focus on publicly traded companies". The OECD principles also provide guidelines for other organizations including stock exchanges, investors and corporations who would like to practice good corporate governance policies. The OECD Principles govern the following main areas: Ensuring the formation of a basis for an effective corporate governance framework by promoting transparent and efficient markets which operate under defined set of regulations that divide the responsibilities among various authorities Providing a framework for corporate governance that ensures the protection and free exercise of the shareholders' rights Ensuring the role of the framework in providing equitable treatment of all shareholders and provide for the remedies in case of violation of their rights. Defining the roles and responsibilities of other stakeholders for the creation of wealth, job and to ensure the sustainability of a financially sound organisation. In the matter of disclosure and transparency "The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company" (Policy Brief) The Principle broadly outlines the responsibilities of the Board and provides for ensuring the effective monitoring of the company by Board and also the accountability of the Board to the company and the shareholders. 6.0 King (II) Report and OECD Principles: The basic ideology behind both the King (II) Report and the OECD principles are basically same in that both of these principles aim at providing better guidelines for ensuring good corporate governance among organisations. Both define the roles of the board of directors and also deal with the reporting and disclosure requirements of public limited companies and other business entities to keep the stakeholders well informed about the financial status of the organizations concerned. The protection of the interests of the shareholders and their rights is the prominent objective of both the principles. For achieving this end both advocate transparent disclosure and reporting requirements. The OECD principles do take into account the role of other stakeholders in the corporate function of wealth creation and profit maximization, while the King (II) report doesn't talk bout the roles and responsibilities of the other stakeholders. One of the other aspects dealt with extensively by the OECD principles is the Capital Market Regulations, which is not the case with the King II Report. Even in the case of recommendations for stock market regulations the OECD principles have assumed the principles to be based on a vibrant and regulated capital market which need to be adapted to developing economies like South Africa. Hence it lacks practical approach in this respect, while King II report's recommendations for the changes in the banking system have mostly been adopted and implemented. In the issue of reporting and disclosure, the general view is that the guidance and level or the reporting requirements recommended by the OECD principles especially in the South African Context, do not correspond to the international standards such as Global Reporting Initiative, whereas the King (II) Report has a global recognition in this respect. The OECD principles lack depth in detailing the roles and responsibilities of the board and its obligations to make a fair presentation of a balanced and understandable assessment of the organisation's financial position to the shareholders. In this respect the analysis and recommendations of the King (II) report is wide and extensive. While the King (II) Report provides an extensive idea about the role of the auditor and their accountable responsibilities including the issues associated with the consulting services by the auditors, the OECD principles have not elaborated this aspect in its principles. Perhaps, the reason of being more recent than the OECD principles, the King (II) report provides greater and detailed specifications of the roles, functions and responsibilities of the board of directors than the OECD principles. Philip Armstrong (2003) opines that the OECD principles must deal with more details on the purpose and role of the board and also on the scope of authority and powers of delegation. The principles should also address the issues relating to the structure, formulation and purpose of board committees, position on the relationship of non-executive board members with management and access to corporate information. While King (II) report brings to fore the 'triple bottom line' reporting principles concerning the economic, social and environmental performance of any organization by making detailed recommendations for reporting on the aspects of corporate social responsibility as well as financial reporting the approach of the OECD principles are not that extensive and detailed. This is the basic reason for the King (II) Report to gain world recognition. The role of multinational companies in the development of emerging economies is just considered at a contractual level, without specifying much about the pressures they bring in on the developing economies, However the King (II) Report doesn't deal with this subject itself. 7.0 Conclusion: This paper discussed the basic principles advocated by the King (2002) report and also reviewed the positive impact of the report and the changes it has brought about in the South African corporate and business environment. The paper also detailed the features of the OECD principles and presented a comparative analysis of the King (II) report and the OECD principles. Out of the discussions it emerges that the King (II) recommendations though detailed and effective have not been mandatory as a legislative framework. This leaves the option for the companies to follow them voluntarily. According to Philip Armstrong (2003) it is important for South Africa to consider whether the businesses operating in South Africa would be willingly comply with the voluntary recommendations of the King (II) report or if it so happens that large corporate scandals take place, then the South African government may be able to combat the situation by going beyond the present implementation of the King (II) principles in the form of Public Finance Management Act, the legislations governing the local governments and the listing requirements of the Johannesburg Stock Exchange and make the King (II) recommendations in to full pledged law to ensure a better corporate governance. References: Armstrong, Philip, Nick Segal and Ben Davis. (2005) Corporate Governance: South Africa, a pioneer in Africa. Global Best Practice, Report No. 1. The South African Institute of International Affairs, Johannesburg. Cliffe Dekkar King Report on Corporate Governance for South Africa 2002 What it Means to You: Integrated Sustainability Reporitng http://www.cliffedekker.co.za/literature/corpgov/intreport.htm Sarra, Janis P. (2004) Strengthening Domestic Corporate Activity in Global Capital Markets: A Canadian Perspective on South Africa's Corporate Governance. The George Washington University Law School Public Law and Legal Theory Working Paper No 118, Institute for International Corporate Governance and Accountability, 29 October, at http://papers.ssrn.com/sol3/papers.cfmabstract_id=628702. Painter-Morland, Mollie. (2006) Triple bottom-line reporting as social grammar: integrating corporate social responsibility and corporate codes of conduct. Business Ethics: A European Review 15(4):352-364. Philip Armstrong (2003) Status Report on Corporate Governance Reform In Africa Prepared on behalf of the Pan-African Consultative Forum on Corporate Governance http://www.ifc.org/ifcext/cgf.nsf/AttachmentsByTitle/Pan_Africa_2003_Report_on_CG_in+Africa/$FILE/Status+Report+on+Corp+Gov+in+Africa.pdf Policy Brief The OECD Principles of Corporate Governance http://www.oecd.org/dataoecd/41/32/33647763.pdf. Wixley, Tom and Geoff Everingham. (2005) Corporate Governance, 2nd ed. Claremont: Siber Ink. Read More