JSE Listings Requirements Amended to Align with King IV
The Johannesburg Securities Exchange (JSE) announced last month, that it would require application by all JSE listed companies of amendments introduced to the JSE Listing Requirements to align it with the King IV corporate governance codes (King IV). Disclosure of application of the King IV will be peremptory in respect of any documents (including circulars and annual reports) submitted for approval to the JSE on or after 1 October 2017. The amendments will also affect prospectuses and other documents submitted in connection with new listings on the JSE from 19 June 2017.
The King IV is the fourth iteration of the King Reports, a series of corporate governance codes published by the Institute of Directors in Southern Africa (IoDSA). They are prepared by the King Committee, a committee on corporate governance formed in 1992 and led by former judge, Mervyn King. The King codes do not have the force of law, but have served as models for best practice in corporate governance and as a benchmark for corporate leadership in South Africa.
The King IV aims to address local and international developments since publication of the King III. Although the King III was progressive, it was published before promulgation of the Companies Regulations in 2011. It further preceded developments in integrated thinking and integrated reporting as promoted by the International Integrated Reporting Council and the Integrated Reporting Committee of South Africa. The King III was also seen as rigid in its application and compliance in post-2008 corporate governance.
An example of this progression is the move away from factual to "functional" independence of company auditors. Previously, it was accepted that a company's external auditors remained independent regardless the period for which they have acted as such. The King IV however recommends regular rotation of auditors to bolster true independence.
Compliance with King IV is achieved through its requirement for disclosure, pursuant to the King IV's "apply and explain" regime. This is a departure from King III's "apply or explain" approach to compliance. The King IV principles should now all be actively applied to the extent relevant to the type and size of the organisation in question. Disclosure of the manner and extent of actual compliance, should then be made through a narrative account in stakeholder-accessible reports. Typical documents which will be affected include companies' integrated reports, sustainability reports and social and ethics committee reports.
The King IV deliberately steers away from rule-based enforcement and relies mainly on disclosure to achieve its objectives. Investor activism and indirect market enforcement are seen as the main means of ensuring adherence to its principles. This is premised on the view that a failure to do so, would be an indication of unsustainable corporate governance practices.
The predecessors to the King IV have also served as guidelines in assessing the discharge of directors' common law duties, which are also codified in the current Companies Act. In particular, the King III was used as benchmark for the application of the 'business judgment rule', a statutory rule allowing exemption of directors from liability where reasonable business judgment was exercised in the discharge of their duties. It is anticipated that King IV could in future serve as a similar interpretive benchmark.
Corporate governance best practice for South African organisations should now be aimed at compliance with the King IV. Listed companies in turn, should act promptly to ensure compliance with King IV requirements adopted in the amended JSE Listings Requirements by 1 October 2017.
More detail on the differences between King III and King IV and the resultant changes to the Listings Requirements will follow in our next communication.