The prominence of ethics in the fourth King Report on Corporate Governance

By Professor Deon Rossouw

 

CEO: The Ethics Institute

 

Introduction

Ethics is even more prominent in the Fourth King Report on Corporate Governance (King IV) than its predecessor report (King III) that was published in 2009. The first part of The King IV Code on Corporate Governance, (available at www.iodsa.co.za) which was released on 1 November 2016, deals with leadership, ethics and corporate citizenship, and consists of three principles. This is not unlike the King III Code that also had a similar chapter consisting of three principles. The big difference in terms of prominence is that whereas King III consisted of 65 governance principles, King IV only consists of 16 principles, which mean that three out of the 16 principles is now specifically focused on ethics.

These three ethics principles deal respectively with ethical leadership, ethical organisational culture, and the ethical responsibilities of organisations to the environment in which they operate (corporate citizenship).

Ethical Leadership

The first principle (The governing body should lead ethically and effectively) deals specifically with ethical leadership. It makes it clear that the ethical tone of the organisation should be set at the top – and specifically in the governing body. In this respect it deals with characteristics that the governing body, both collectively and as individual members, should exhibit. By using the terminology of ‘characteristics’ the King IV Report focuses on the character of the people involved in governance. Good governance thus does not start with principles, rules and procedures, but with the character of those tasked with governance. This is a timely reminder at a time when governance failures have become too common in South Africa.

The King III Report also referred to the cardinal values that should underpin and inform good governance and referred specifically to the so-called RAFT values (Responsibility, Accountability, Fairness and Transparency). King IV has retained the RAFT values of King III, but has added two more to it, viz., Integrity and Competence. These are now referred to as the ICRAFT characteristics (Integrity, Competence, Responsibility, Accountability, Fairness and Transparency).

The addition of the characteristics of Integrity and Competence is important, as it is probably the two characteristics that will make the biggest difference to the quality of governance in South Africa. It is exactly the absence of these two characteristics amongst leaders that causes organisations to underperform, and even fail.

Ethical Culture

In the second principle of King IV (The governing body should govern the ethics of the organisation in a way that supports the establishment of an ethical culture) governing bodies are given the mandate to ensure that an ethical culture is developed and maintained in the organisation. In King III there was also a principle that dealt with organisational ethics, but it focused on the management of ethics. King IV, thus goes further than its predecessor report, by indicating that the management of ethics in organisations is not sufficient, unless and until it results in the establishment of an ethical culture. Organisational ethics is widely understood as ‘the way we do things around here’, and thus suggests that ethics should become a normal part of ‘how things are being done in the organisation’.

This emphasis on an ethical culture in King IV, rather than on ethics management as the case was in King III, does not imply that ethics management has become less important. To the contrary, in the discussion of the second principle in King IV, several aspects of managing ethics in organisations are specifically recommended. These aspects include setting an ethics strategy for the organisation, ensuring that there are ethical standards to guide internal and external stakeholders in their interactions, and ensuring that they are familiar with, and adhere to these ethical standards. Explicit provision is also being made for providing safe reporting (whistle-blowing) mechanisms for persons who wish to report unethical conduct in a confidential manner.

This makes it clear that ethics management is neither a goal in itself, nor a mere tick-box exercise, but that ethics management should be approached and applied in a manner that will result in the cultivation and maintenance of an ethical organisational culture over time.

Corporate Citizenship

The third principle in King IV deals with organisational citizenship (The governing body should ensure that the organisation is, and is seen to be, a responsible corporate citizen). It thus focuses on the ethical responsibilities of organisations to the triple context of the economic, social and natural environment in which they operate.

Since the publication of King III in 2009, the Companies Act (2008) and Companies Regulations (2011) came into effect, which made the introduction of social and ethics committees mandatory for certain categories of organisations. It was thus required that King IV should recognize the existence of social and ethics committees, and also aligns itself with this new reality. However, the fourth King Report went beyond mere recognition of the existence of social and ethics committees, and in fact, made a number of important recommendation that has the potential of improving the impact and effectiveness of these committees. Especially three recommendations of King IV in this regard are worth taking note of.

First, King IV recommends that all organisations should have a governance structure that takes responsibility for governing the social and ethics performance of organisations. The Companies Regulations only requires listed companies, state-owned companies, and companies with significant public interest to have mandatory social and ethics committees. King IV, however, recognises that the social and ethics performance of all types of organisations have an impact on their success, and ultimately, on their sustainability. It therefore recommends that the governing bodies of all organisations (or one of their existing sub-committees) should take the responsibility for governing their social and ethics performance.

Second, King IV recommended that the mandate of the social and ethics committee should be broadened to also include oversight of a number of areas that are not mentioned in the mandate of the committee as set out in the Companies Regulations. These areas include fair remuneration, and responsible and transparent tax practices. Of critical importance in this regard, is that the governance of ethics is now also included in the mandate of the social and ethics committee. This represents an important correction of an oversight in the Companies Regulations. In the latter, ethics only appears in the name of the committee, but never in its mandate.

Thirdly, King IV recommends that the composition of the social and ethics committee should be such that there is a majority of non-executive members of the governing body on the committee. This, once more, is an important correction to the Companies Regulations that allows for a composition of the committee in which there can be a majority of executive directors, or prescribed officers on the committee. The latter is not an ideal governance arrangement, as it puts executive directors in a position, where they oversee their own social and ethics performance. And as we all know, one tends to be not very objective when marking your own homework.

Conclusion

King IV has elevated the prominence and importance of ethics to unprecedented heights. It is now up to organisations to turn the words on paper in King IV into organisational practice. South Africa is in need of governing bodies that act ethically and effectively, organisations with deeply embedded ethical cultures, and organisations that are responsible citizens of the societies in which they operate.