There has been much public debate about company laws as a result of the enactment of the new Companies Act of 2008; and, more recently, the release of the King Code and Report on Governance in South Africa ("King III"), which will become effective on 1 March 2010. But what does King III deal with and how will it apply to business South Africa?
Although King III relates to all entities, irrespective of their size or the nature of their business, it relies on self-regulation rather than legislation that can be enforced in our courts. In other words, there is no body that is mandated to enforce King III nor is there any sanction for non-compliance. However, there are instances in which public interest companies and parastatals are obliged to comply. In terms of the JSE Listing Requirements, a listed company is contractually bound to adopt King III and any failure to do so would amount to a breach of the Listing Requirements. This is a rather round about enforcement mechanism but, in short, listed companies will have no option but to follow King III or be subjected to the wrath of the JSE.
King III is drafted on an "apply or explain" basis which requires management to explain how the principles of the code were applied, or if not applied, their reasons for not applying them. In essence, if an entity does not comply, the reasons behind that decision will have to be explained to stakeholders. This is different to the previous King codes which were underpinned by a "comply or explain" theory.
It is no surprise that many of the concepts in the new code mirror the ideas of the new Companies Act of 2008. For example, the code requires the board to act in the "best interests of the company" and to act as a focal point for, and custodian of, corporate governance by providing effective leadership based on ethical foundations and by ensuring that the company is a responsible corporate citizen and that company ethics are managed effectively. The best interest principle is also contained in section 76 of the new Companies Act which will provide that a director must exercise his or her powers in the best interests of the company. The code therefore gives content to the duties of directors as set out in the new Act, but the code does not enjoy the force of law. At best, the code can be looked to for guidance to determine what is regarded as an appropriate standard.
The code also contains business rescue provisions which are in line with the new Companies Act and ought to be read with that Act. It provides that the board should consider business rescue as soon as the company is financially distressed. This option will only become a reality once the Companies Act probably comes into force in late 2010. Generally speaking, business rescue is a step in the right direction (sometimes a step too far) as our current laws limit options available to businesses that are under financial strain to either liquidation or judicial management. It will be interesting to see whether business rescue provisions of the new Act, together with the code, can give businesses under financial stress a second chance, to the ultimate benefit of employees, creditors and shareholders.
The code also touches on softer issues which are not cast in legislation at all, such as sustainability. Environmental issues surrounding business, such as climate change, are addressed with the idea that South African entities should no longer merely pursue commercial interests only.
King III is in line with international trends as many other countries have issued corporate governance guidelines along similar lines. South African companies will need to consider the provisions of King III, and develop and implement policies in relation to social and environmental issues that are relevant to the company. Hopefully, King III will encourage better relations between companies, their shareholders and the community at large.
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