There are no legal sanctions for non-compliance in terms of King III itself. However, certain governance issues emanating from the King III principles are enforceable through legislation. This is because King III does not have legislative force, but rather applies on a “comply or explain” basis, in terms of which all entities are encouraged, by way of explanation, to make a positive statement to their stakeholders about how the principles of the King Code have or have not been applied, in order that the quality of their governance may be assessed and, where required, challenged.

Certain governance issues emanating from the principles in King III are however made enforceable through legislation. For example:

• the Companies Act 71 of 2008 (CoA) in section 94 requires public companies and certain other companies to appoint a statutory audit committee in compliance with the requirements of the section;
• the Public Finance Management Act 1 of 1999 prescribes internal control requirements, including the appointment of audit committees, for the relevant public entities and institutions to which the said Act applies, which are and may be further supplemented by regulation.

Although JSE listed companies are required to adopt King III on a ‘comply or explain’ basis, it is mandatory for them to comply with certain specific requirements concerning corporate governance and they must disclose their compliance therewith in their annual report (see paragraph 3.84 of the JSE Listings Requirements and JSE Guidance Letter: Guidance on Corporate Governance, dated 31 January 2013).

In respect of a main board listed company, these mandatory compliance requirements are as follows:

• there must be a policy detailing the procedures for appointments to the board of directors;
• board appointments must be formal and transparent and a matter for the board of directors as a whole, assisted where appropriate by a nomination committee;
• the nomination committee (if appropriate to appoint one, taking into account the size and composition of the board) must only constitute non-executive directors, of whom the majority must be independent, and should be chaired by the chairman of the board of directors;
• there must be a policy evidencing a clear balance of power and authority at board of directors’ level, to ensure that no one director has unfettered powers of decision-making;
• the issuer must have an appointed chief executive officer and a chairman and these positions must not be held by the same person;
• the chairman must either be an independent director, or the issuer must appoint a lead independent director, in accordance with the King Code;
• all issuers must, in compliance with the King Code appoint an audit committee and a remuneration committee throughout the accounting period with all the provisions of King III and indicating for what part of the period any non-compliance occurred.

In practice, the JSE expects listed companies to comply with such requirements by addressing, in the form of a register, each of the 75 principles set out in King III, setting out how each and every principle has been applied or explain why or to what extent they were not applied. The register is required to be made available on the website of the company and to be kept current and relevant.

Key things to remember

• The presence of strong governance standards within an organisation provides better access to capital and aids economic growth, through enhancing the reputation of the organisation and making it more attractive to investors, employees, customers and suppliers.
• Good corporate governance supports effective decision making, giving entities the capacity to set up a framework with organisational systems and processes that can detect or anticipate failures and weaknesses.

LexisNexis South Africa in partnership with Cox Yeats Attorneys and ENS Africa have produced the online solution, Practical Guidance Corporate Governance, in order to assist companies to remain abreast of the latest corporate governance requirements. This web based solution provides practical, up-to-date guidance for all corporate governance needs and offers useful templates, guidance notes, checklists and other practical aids and resources to assist in making informed and accurate decisions.

For more information click here.

Submitted by LexisNexis, written by Charmain du Preez, Director at Edward Nathan Sonnenbergs