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In our previous article on director tenure and independence under King V, we looked at how the nine-year tenure indicator is a factor for consideration, not a hard limit on independence. That discussion showed that King V is not a rulebook but a framework calling for thoughtful, contextual application. In this article, we take a closer look at the “apply and explain” disclosure regime and why flexibility, and not rigidity, lies at the heart of sound governance under King V.
A common misunderstanding in the market is that King V should be applied as a rigid set of mandatory instructions, to be followed to the letter. The recommended practices in King V are just that – recommendations. They are guidelines to help achieve governance principles, not inflexible rules which demand uniform compliance.
To understand why King V is being misread, it helps to understand its deliberate three-tiered structure. King V is built on a hierarchy flowing from governance outcomes, through its principles, down to the recommended practices.
Outcomes vs Principles vs Recommended Practices
The governance outcomes of King V are:
- Ethical Culture;
- Performance and Value Creation;
- Conformance and Prudent Control; and
- Legitimacy.
These are the ultimate benchmarks for assessing the quality of governance. Simply ticking off recommended practices is not enough – what matters is whether governance actually delivers results.
The principles set out the ongoing objectives an organisation should work towards in each area of governance. King V treats these principles as universally applicable.
The recommended practices, by contrast, are concrete actions and processes that support the principles. King V is clear: these practices are not meant to be treated as rules.
King V itself warns against treating it as a rulebook. Doing so leads to inflexibility and an inability to tailor governance to the organisation’s circumstances and sector. Save for instances where compliance with certain elements of King V are mandated by the JSE Listings Requirements, a listed company has as much of a right to tailor the King V recommended practices to its circumstances. Yet what we are seeing is that stakeholders are insisting that companies adopt identical governance practices without asking whether those practices make sense for the organisation.
Apply and Explain
The “apply and explain” disclosure regime is how the flexibility of King V works in practice. Organisations should apply the principles across the board, but they must explain any decision not to adopt, or to modify, a recommended practice.
King V terms this “mindful application”, which involves understanding how the practices you adopt actually support the governance objectives you are trying to achieve.
In short, the application and disclosure regime of King V operates as follows:
- apply the King V principles universally;
- explain the non-adoption or modification of recommended practices; and
- provide a concluding statement on the governance outcomes, specifically on whether the application of the King V principles and the implementation of its recommended practices are considered to have realised value for the organisation.
Reading King V as a rulebook encourages superficial compliance, and it defeats its very purpose. An organisation that mechanically implements every recommended practice but fails to achieve the governance outcomes cannot, in King V’s own terms, claim to have sound governance.
Conclusion
King V judges governance by results, not by how many boxes have been ticked. The “apply and explain” regime gives boards the freedom to decide what governance arrangements suit their organisation, provided they can explain their thinking. Governance is not a technical exercise, and it requires genuine engagement with the principles and their practical application. Boards that embrace this flexibility will be better placed to achieve the outcomes King V is designed to promote.
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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