Auditor General’s local government report: local government should be professionalised, says IoDSA21/6/2022  The recent report on local government by the Auditor General, Tsakani Maluleke, is a timely reminder of the prevailing dysfunction in municipalities across the country, and the catastrophic impact that is having on all South Africans. The Auditor General is right to lay the blame squarely on the shoulders of municipal leaders, says Parmi Natesan, CEO, Institute of Directors in South Africa (IoDSA)—but perhaps we also need to be talking about professionalising municipal management as well.
“There’s a reason that King IV’s first principle concerns leadership because ultimately everything stems from what goes on at the board or council. Principle 1 speaks to the absolute need for ethical leadership, while Principle 10 deals with the imperative to delegate the council’s authority to a competent municipal manager on whom it can rely,” she argues. “King IV’s sector report on municipalities further recommends that councils ensure they have access to ‘professional and independent guidance on corporate governance and its legal duties’ (King IV, p 85).” The theme of the Auditor General’s Consolidated General Report is “Capable leaders should demonstrate change by strengthening transparency and accountability”. The corollary is that we have now to ask whether municipal councils and audit committees have the right leadership of ethical and effective leaders. What criteria are used to appoint municipal councillors and do we know precisely what competencies they need to have in order to discharge their duties properly? she asks, noting that, as the Auditor General pointed out in her report, senior municipal management has been dilatory at best in implementing the detailed recommendations contained in previous reports. Ms Natesan concurs, saying that this state of affairs seems to be the result of decades of incompetence and even criminal behaviour. “However, as noted, the buck stops with the municipal council. Councils are gravely at fault because they do not hold senior management to account for how they fulfil their duties, and they should, in turn, be held accountable,” she says. Constitutionally, the national and provincial governments are bound to assist in strengthening and supporting municipalities to operate effectively (Constitution of the Republic of South Africa, 1996, s154(1)). Section 139 sets out how, in extreme cases, provincial governments can intervene in local government. But, says, Ms Natesan: “Given that these interventions do not necessarily seem to solve the problem, not least because everything is so politicised, are we now not overdue in simply professionalising local government? Municipalities are where most of the really important service delivery actually occurs—or doesn’t occur. As we seem to be entering a period of unstable municipal coalitions that could make the council’s leadership role even less effective, building up a cadre of professional municipal officials who have current and relevant skills, and who can be held to account rapidly via a professional code of conduct might something to seriously consider at this point.” ENDS MEDIA CONTACT: Stephné du Toit, stephne@thatpoint.co.za, 084 587 9933, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in South Africa Company Page Facebook: Institute of Directors South Africa
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 Recent events in both the public and private sectors are again highlighting the key role that proper succession planning plays in supporting any organisation’s sustainability, particularly when it comes to CEOs and governing-body chairs.
Poor succession planning inevitably creates a leadership vacuum at both governing body and executive management level resulting in a loss of the longer term strategic focus. The impacts of this uncertainty can be dire, says Richard Foster, facilitator at the Institute of Directors in Southern Africa (IoDSA). Impacts can include a loss of performance delivery influenced by such factors as possible churn at the senior management level, the loss of market share to more focused competitors, severe reputational damage and erosion of investor and other key stakeholder confidence in both the governing body and senior management alike. “Because good governance relies on effective leadership, succession planning receives significant focus in King IV. In addition, its five sector supplements deal with the specific issues relating to succession planning in different contexts,” Mr Foster notes. The position is particularly complex when it comes to state-owned entities (SOEs) because certain appointments like the CEO and governing-body chair are typically mandated in legislation or founding documents. The shareholder thus plays a key role, and the process is not as easily aligned with what is considered governance best practice, he says. A similar situation exists in local government. One mark of the difficulties of proper succession planning at SOEs is the reliance on interim appointments. However, they inevitably create uncertainty unless they are well thought-through and the process is properly communicated to stakeholders. “One of the governing body’s primary functions is to create and oversee the implementation of strategy, implying a three-to-five-year, or even longer timeline. Interim appointments, by contrast, tend to be operationally focused pending a permanent appointment,” he says. King IV recommends that governing bodies should ensure succession plans exist for their own members, as well as for the CEO and executive management team. However, because succession planning is intimately connected with the appointment of these senior office-bearers, succession planning for SOEs is, as previously mentioned, more complex and challenging. Typically, the shareholder/executive authority (ultimately the government) has the power (or obligation) to appoint the chair and/or the CEO and/or other governing-body members. In its SOE Sector Supplement, King IV recommends that these appointments should be accomplished via a robust and transparent process that involves the governing body (the accounting authority) as much as possible to give effect to the aspirations of the relevant principle. “The processes for appointing CEOs or chairs at certain SOEs is sometimes questioned. The damage caused by unsuitable appointments is now plain, and both the organisations and the economy as a whole are affected,” he says. To align succession planning in SOEs better with governance best practice, the King IV SOE Sector Supplement recommends that the CEO’s letter of appointment should clearly state that the CEO is accountable to the governing body (rather than the executive authority i.e. shareholder), that the governing body and CEO jointly agree on how the CEO’s performance should be measured, and that the governing body has the primary responsibility for firing the CEO. “It is encouraging that Government seems to have now recognised that good corporate governance requires ethical and effective leadership, and that increased focus appears to have been placed on the succession planning and attendant appointment process,” Mr Foster concludes. “The consequences of not following the recommended practices of good governance are now plain to see.” ENDS MEDIA CONTACT: Idéle Prinsloo, 082 573 9219, idele@thatpoint.co.za, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in Southern Africa Company Page  The first reports and disclosures in line with King IV principles are beginning to appear. King IV is effective in respect of financial years starting on or after 1 April 2017. It would appear that certain organisations still require a deeper understanding of the implications of King IV’s “apply and explain” approach, says Richard Foster, a governance advisor, professional non-executive director and Institute of Directors in Southern Africa (IoDSA) facilitator.
“King III’s ‘apply or explain’ regime had the unintended consequence of allowing organisations to adopt something of a tick-box approach to reporting and compliance. The new approach signals a decisive departure from that way of doing things because it requires organisations to explain how they have applied the 17 principles of King IV,” he says. “The idea is to give stakeholders a real idea of what the organisation is doing to embody the code and the quality of its governance—and how it is using the code to achieve all of this.” The key here is the requirement to explain. Explanation means that stakeholders can easily ascertain whether the organisation is making satisfactory progress towards good governance. It also, to quote Professor Mervyn King, the convenor of the King Committee in his foreword to King IV, “encourage[s] organisations to see corporate governance not as an act of mindless compliance, but something that will yield results only if it is approached mindfully, with due consideration of the organisation’s circumstances.”Foster suggests the approach should be welcomed because it provides a great deal of flexibility in line with the principle of proportionality. Organisations are now free to adapt how they give effect to the Principles of King IV in line with aspects such as their risk profiles, level of complexity, resources, impact on the triple context and other specific circumstances—provided they explain clearly what their thinking was. “Disclosure under King IV directs us away from a quantitative approach to compliance (‘We have implemented the following recommended practices’ or ‘We have implemented all recommended practices except’) to a qualitative one (‘In order to give effect to this Principle of good governance, we have taken the following actions’),” he explains. “The Principles are generic and can be applied to any organisation, what’s unique is how each organisation crafts that application to achieve the goals or outcomes corporate governance: ethical culture, effective control, good performance and legitimacy.” The challenge that organisations now face is that they have to engage deeply with the spirit of corporate governance, rather than its letter. That engagement, and the actions that flow from it, need to be informed by an ethical framework. In practical terms, governance reporting in terms of King IV cannot be done satisfactorily in tabular form. Rather, a narrative approach, guided by materiality, should be used to explain how the organisation understands the Principle in its specific context and what it seeks to achieve; and then what practices were implemented in order to achieve the necessary application of that Principle. King IV allows organisations to deliver their governance reports in various ways as best suits their circumstances: either as a standalone report, or as part of the integrated report or some other report as they consider appropriate for their stakeholders. According to Parmi Natesan, Executive: Centre for Corporate Governance, the IoDSA has recently published its own governance report which can be used as an example of the envisaged approach. A significant amount of time and thinking went into how we wanted to tell our governance story, to enable our stakeholders to make an informed assessment of the quality of the IoDSA’s governance. “Reporting under King IV is all about understanding corporate governance and then explaining how you have implemented it; it’s not about keeping a register of which rules you have followed,” Foster concludes. “It’s highly flexible but it does require organisations truly to engage with what they are doing to improve governance, and what they hope to achieve.” ENDS MEDIA CONTACT: Juanita Vorster, 079 523 8374, juanita@thatpoint.co.za, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in Southern Africa Company Page  Directors’ duties are largely misunderstood. Recent media coverage of Steinhoff, EOH and Multichoice bring these duties directly under the spotlight.
Parmi Natesan, Executive: Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA), says that in South Africa, directors’ duties as set out in our common law and in the Companies Act include the fiduciary duty to act in good faith and for a proper purpose in the best interests of the company and also acting with due care, skill and diligence. Directors could be subject to criminal sanctions like fines, jail time, and even disqualification from serving as a director in future, if they have failed to perform their duties. However, these duties and related potential liabilities should not prevent directors from taking the necessary bold decisions that are often required to drive growth and success. Business is ultimately all about taking risk in order to gain reward. Equally, it is accepted that directors can take decisions that turn out to be wrong or result in loss. What is commonly known as the Business Judgment Rule essentially outlines how directors can defend their decisions if they are able to demonstrate that they satisfied the obligations of acting in the best interests of the company and with the required care of skill, in that they; took reasonably diligent steps to be informed about the matter and access the correct information, had a rational basis to believe that their decision was in the best interests of the company at the time, and that they had no personal financial interest in the matter. In order to be better informed, non-executive directors, who are not involved in the day to day business of the organisation particularly in large and complex organisations such as those referred to earlier, rely heavily on assurances from management, internal audit, and external audit as well as board committees such as the Audit Committee. They must, however, take reasonable steps to ensure the information is accurate and that they understand it prior to making any decisions. Apart from the law, the governance code in South Africa, King IV, sets out the expected governance best practice. In relation to the allegations at the companies in question, King IV contains specific principles and practices around ethical conduct, good corporate citizenship, compliance with laws, rules, codes and standards, fraud, corruption as well as risk and tax governance. It further outlines oversight and monitoring of implementation and execution by management as one of the four primary governance roles and responsibilities of the board within the dynamic business cycle of the organisation “Good governance does not exist apart from the law and a corporate governance code that applies on a voluntary basis may also trigger legal consequences,” says Richard Foster, IoDSA facilitator. “A court considers all relevant circumstances in determining the appropriate standard of conduct for those charged with governance duties, including what the generally accepted practices are. Given that the provisions of voluntary codes of governance find their way into jurisprudence and become part of the common law, failure to meet an established corporate governance practice, albeit not legislated may also invoke liability,” says Foster. Natesan says that King IV is a useful reference point for governance best practice, if it is applied as intended – i.e. meaningful application in a value adding manner to achieve certain outcomes. “An organisation can tick all the boxes, have all the structures, processes, and documents in place, but that does not mean they have good governance.” In King IV, good governance is defined as ethical and effective leadership that achieves the governance outcomes of ethical leadership, good performance, effective control and legitimacy. In a recent BizNews article, Nic Frangos is quoted as saying, “If you have a CEO with no integrity, King Ten wouldn’t suffice. On the other hand, for someone with the integrity of an Adrian Gore (CEO of Discovery), even King One isn’t required.” A few of the directors serving on the boards of these companies are members of the IoDSA. However, the institute is a voluntary body that has no statutory power to appoint, remove or take punitive action against directors, says IoDSA CEO Angela Cherrington. This responsibility lies with regulators, the courts and other statutory bodies like the CIPC. “The IoDSA can nevertheless revoke membership from individuals if they are found to be in contravention of our member code of conduct. The same applies to those who carry the IoDSA’s Chartered Director SA or Certified Director professional designations. There are currently no Chartered Directors SA on the boards of Steinhoff, EOH and Multichoice.” ENDS MEDIA CONTACT: Juanita Vorster, 079 523 8374, juanita@thatpoint.co.za, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: Institute of Directors in Southern Africa King IV shifts focus to outcomes and accessibility Ansie Ramalho, King IV Project Lead, speaking at a press conference in Johannesburg on 31 October 2016 The King IV Report on Corporate GovernanceTM (King IV) was launched on 1 November 2016 by the King Committee and the Institute of Directors in Southern Africa (IoDSA), which owns the intellectual rights to the King Reports and the governance codes they contain. The King Reports, of which this is the fourth iteration, contain the philosophy, principles and leading practices for corporate governance in South Africa.
“The overarching objective of King IV is to make corporate governance more accessible and relevant to a wider range of organisations, and to be the catalyst for a shift from a compliance-based mindset to one that sees corporate governance as a lever for value creation ,” says Prof Mervyn King, chair of the King Committee on Corporate Governance in South Africa. To make the Report more accessible, Ansie Ramalho, King IV Report Project Lead for the IoDSA, and the task team appointed by the King Committee, have introduced a number of innovations. They have broadened the language of the Report, ensuring that the vocabulary is no longer listed company and business-specific, and have provided supplements to make it easier to adapt the Code to different industry sectors, including government and non-profits, and various organisation types. King IV also provides guidance on how to apply its practices proportionally, in line with an individual organisation’s size and resources, and the extent and complexity of its activities. In addition, King III’s 75 principles have been reduced to a mere 16 in King IV, with an additional 17th principle which is applicable to institutional investors such as retirement funds and insurance companies. At a deeper level, King IV has taken the decisive step of focusing on outcomes as a way of driving acceptance of corporate governance as integral to value creation by organisations characterised by an ethical culture, good performance, effective control and legitimacy. Linking governance to outcomes should result in organisations practising quality governance. In this spirit, King IV emphasises not what practices have been implemented but rather what their impact has been on achieving the 16 principles. King IV has moved the regimen of “apply or explain” to “apply and explain”. “Apply and explain” introduces a qualitative approach to the implementation of King IV’s recommendations. Governing bodies now have greater flexibility in how they implement the recommended practices to achieve the goals articulated in the principles, but they have to be transparent about how they did so. The intent is for the reader of the explanation to be able to make an informed decision about whether the organisation has or has not achieved the principles and realised the four outcomes of ethical culture, performance in a sustainable manner, effective controls and legitimacy. Other important issues covered by King IV include the wage gap, shareholders voting on remuneration policies and their implementation so as to trigger engagement with the company and the composition of the governing body. “King IV is the product of wide consultation, and belongs to all South Africans – organisations and individuals – to whom good governance matters,” says Ramalho. “The wish of the King Committee and the IoDSA is that King IV be welcomed as making it easier to understand what the purpose of corporate governance is, and to apply it to achieve the creation of value. King IV aims to make corporate governance understandable beyond the circle of consultants, technicians and academics. Prof King said it would be the committee’s greatest reward if King IV is adopted by all organisations across all sectors with a consequent consistent practice of quality governance. King IV will be available via app download from App Store or Galaxy App Store, or via a digital read-only copy from www.iodsa.co.za. Printed copies will be available for purchase through Lexis Nexis. ENDS MEDIA CONTACT: Cathlen Fourie, 082 222 9198, cathlen@thatpoint.co.za, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: The Institute of Directors in Southern Africa group The long-awaited update of the King Report on Corporate Governance for South Africa, King IV™, will be launched at a high-level conference at the Sandton Convention Centre on 1 November 2016. Interest in the conference is high: when online registrations opened on 6 July, the first registration was made after just three minutes. By the end of the day, 83 people had already registered along with additional confirmations from an international delegation representing 13 countries across the globe.
“King IV introduces some important updates to the landmark King III’s report. In addition, it breaks new ground by differentiating clearly between principles and practices, and linking practices to outcomes—all with a view to making implementation easier,” says Angela Cherrington, CEO of the Institute of Directors in Southern Africa (IoDSA). “Governance is ever evolving, and King IV provides closer, more practical guidance on how to integrate its principles into the way organisations do business.” The conference will be addressed by a number of prominent South African figures, including Chief Justice Mogoeng Mogoeng; Lynne Brown, the Minister of Public Enterprises; Reuel Khoza, president of the IoDSA; David Lewis, Executive Director of Corruption Watch; Thembekile Kimi Makwetu, the Auditor General; Mervyn King, the Chairman of the King Committee; and Ansie Ramalho, the King IV™ Project Lead. An international panel of speakers includes Simon Arcus, CE of the IoD in New Zealand; Heloisa Bedicks, MD of the Brazilian Institute of Corporate Governance; Stan Magidson, CEO of the Alberta Securities Commission, Simon Walker, Director General of the IoD in the United Kingdom and Peter Dehnen, CEO of the German Directors Association. Cherrington says that the IoDSA has also developed a mobile app for the conference. The app will mean that delegates can create a personalised schedule and import it into their calendars, access speaker profiles, and message speakers and other delegates. “The app will reduce the paper generated by the conference while enhancing delegates’ experience,” Cherrington says. “Other green initiatives include sourcing produce locally, using beaded rather than real flower decorations, intensive recycling and providing carbon credits for purchase by delegates.” Online registration is available on http://bit.ly/29R5Vlq until 25 October. ENDS MEDIA CONTACT: Cathlen Fourie, 082 222 9198, cathlen@thatpoint.co.za, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: The Institute of Directors in Southern Africa group The Institute of Directors in South Africa (IoDSA) and King Committee have issued the draft sectoral supplements for the new King Code of Corporate Governance (King IV) for comment. The King IV Supplements will be open for comment from 11 May to 11 July, and all comments should be submitted via the comment platform on the IoDSA’s website.
Prof Mervyn King, chair of the King Committee, says that the supplements are aimed at providing state owned entities, small to medium-sized enterprises (SMEs), retirement funds and other institutional investors, non-profit organisation and municipalities with guidelines on how to apply the King Code for their particular circumstances. “Traditionally, corporate governance has focused on listed companies. However, this does not take into account that corporations all exist in a bigger ecosystem. The ecosystem is made up of the relationships and interactions amongst companies, investors, SMEs within supply chains, civil society and state owned entities, which supply essential infrastructure,” says King. “To bring about large-scale change, one has to address governance across the whole of this ecosystem.” Ansie Ramalho, the King IV Project Lead says that this inclusive, systemic approach breaks new ground for the King Codes, and for corporate governance more generally. She emphasises that the supplements are not standalone codes, and must be read in conjunction with the main King IV report. They also do not seek to provide detailed guidance, but rather to provide each sector with examples of some of its corporate governance challenges, and how to respond to them. These challenges might include relevant legislation, ownership structures, board composition or simply the nature of the business they are in. “We have not attempted to provide exhaustive examples of challenges and solutions, but rather to provide insight into the kind of thinking that should be used to apply King IV to a particular sector. In this way, we hope to provide organisations with the tools they need to craft their own sound governance response to any challenge when applying the principles of King IV,” says Ramalho. The main King IV draft has been open for comment since 15 March and no further comment will be accepted after 15 May. The King IV draft document and link to public commentary platform is available at http://www.iodsa.co.za/page/KingIVcommentary ENDS MEDIA CONTACT: Cathlen Fourie, 082 222 9198, cathlen@thatpoint.co.za, www.atthatpoint.co.za For more information on the IoDSA please visit: Website: www.iodsa.co.za Twitter: @The_IoDSA LinkedIn: The Institute of Directors in Southern Africa group |
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