South Africa King IV governance code implications for executive pay

The King Report on Corporate Governance is a booklet of guidelines for the governance structures and operation of companies in South Africa. It is issued by the King Committee on Corporate Governance. Three reports were issued in 1994 (King I), 2002 (King II), and 2009 (King III) and a fourth revision (King IV) has recently been published.

Compliance with the King Reports is a requirement for companies listed on the Johannesburg Securities Exchange (JSE).

The guidelines are of interest to Australian directors given the cross-pollination of South African and Australian directors on both JSE-listed and ASX-listed company boards. The exchanges and economies of both countries are heavily weighted to commodity (i.e. mining) companies.

Executive remuneration, both in terms of its quantum and the disparity between top and bottom wage-earners, has become a major cause of social discontent and is fuelling a debate on inequality. The recently launched King IV Report on Corporate Governance recognises this has become a key governance issue, with major implications for long-term corporate sustainability.

The relevant principle, Principle 14, is framed in those terms: The governing body should ensure the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.

King IV recommends certain practices for governing bodies to consider to achieve the outcomes expressed in the principle. One important development is enhanced accountability through more definitive disclosure recommendations.

Similar to the UK requirements, King IV asks for remuneration to be disclosed in three parts:

  • a background statement that explains the context for remuneration considerations and decisions,
  • an overview of the remuneration policy which is forward-looking, and
  • an implementation report which is looking back at the details of remuneration awarded to each director and member of executive management.

King IV proposes two separate, non-binding advisory votes by shareholders at each AGM, one on the remuneration policy itself, and one on the implementation report.

Borrowing, in part, from Australia, King IV also specifies that in the event either is voted against by 25 percent or more of the votes cast, the board should engage with dissenting shareholders to understand their concerns and objections.

The JSE will make the passing of the two non-binding advisory votes and the responses as stipulated in King IV mandatory through its proposed amendments to the listing rules.

The draft amendments to the listing rules are currently out for public comment before finalisation.

King IV has gone a step further in respect of the highly inflammable issue of wage disparity within organisations. King IV recommends that arrangements be included in the policy that ensure the remuneration of executive management is fair and responsible in the context of overall employee remuneration. An explanation of how this matter is addressed should also be disclosed in the remuneration report.

Furthermore, King IV recommends that boards look beyond financial indicators when identifying performance. Account should also be taken of the effect (both positive and negative) the organisation has on the different types of capital it uses or affects, and the triple context of the economy, society and the environment.

See the report HERE.

© Guerdon Associates 2024
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