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"
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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