A brief overview of King II

Corporate governance is the manner in which organisations direct and control their assets, resources and actions. In companies, direction and control is in the hands of the directors who are accountable not only to shareholders but also indirectly to other stakeholders such as employees, suppliers, customers, the government and the community. In South Africa, company law describes the minimum requirements for proper corporate governance. These requirements have been expanded on and given practical form by the recommendations of King II.

The aim of King II is to improve governance and accountability on a voluntary basis for affected companies, although all organisations are encouraged to adopt the code. All listed companies, financial institutions and public sector enterprises, agencies and government (local, provincial and national) departments are classed as affected companies.

Recommendations

The recommendations of King II which specifically affect directors, are:

Appointment of new directors

• the board as a whole should appoint new directors, preferably assisted by a nomination committee consisting only of non-executive directors
• potential directors should be investigated to ensure they qualify to be directors and have suitable backgrounds. The JSE Listings Requirements and the Banks Act already require this

CEO and chairman

• a division of responsibilities between CEO and chairman is necessary to ensure no one individual has unfettered power or authority
• if the CEO and chairperson roles are combined, then either a deputy chairperson who is an independent director should be appointed or there should be a strong independent director component of the board

Executive directors, non-executive directors and independent directors

• the annual report should categorise directors as either executive, non-executive or independent
• executive directors are involved in day-to-day management or are employed by the company or its subsidiaries.
• a "shadow director" who covertly directs the activities of a company is considered an executive director. If an executive director has a fixed term employment contract, the term should not to be for more than three years, otherwise shareholder approval is required
• non-executive directors should have appropriate skill and experience to bring to bear on strategy, performance, and standards of conduct. Non-executive directors should consider the number of directorships they hold, in order to perform effectively. Non-executive directors should have unfettered access to management
• King II introduces the concept of an independent director. Non-executive independent directors should not (a) represent or be nominated by a major shareholder, (b) have been employed by the company in the preceding three financial years, (c) be a professional advisor to the company, (d) be a significant supplier or customer to the company, (e) have significant contractual relationships with the company or (f) be in any business or other relationship which could materially interfere with his/her ability to act independently

Training and induction of directors

• an orientation programme should be held to introduce new directors to the company and brief them on their fiduciary duties
• directors should be briefed on new laws and regulations and kept abreast of changes in the industry in which the company operates
• induction and training should include instruction on the fiduciary rights and duties of directors

Directors' remuneration

• directors’ remuneration should be sufficient to attract and retain directors of suitable calibre
• performance-related elements should constitute a large portion of executive directors' remuneration packages
• the remuneration committee should recommend remuneration for non-executive directors on merit. Each non-executive director should be paid an appropriate fee, which may differ from that of other non-executive directors depending on his individual contribution
• the remuneration committee should preferably consist entirely (or at least mainly) of independent directors and make recommendations to the board on remuneration related issues. The CEO may attend, by invitation, for most business, but should recuse himself while his remuneration is considered
• the annual report should disclose membership of remuneration committee, a declaration of individual directors' remuneration, share options and other benefits and a statement of remuneration philosophy which sets out the company's approach to remuneration in general terms

Share options

• share options may be granted to non-executive directors by the shareholders. This may be a contentious issue as the status of independent directors may be considered by some to be adversely affected by the grant of share options
• a vesting period should be required for options to non-executive directors to avoid short-term decision-making
• pre-pricing of options requires shareholder approval, as does the issue of shares at any discount to the ruling price

Board meetings

• boards should meet at least once every three months or more frequently as the business of the company requires
• the Annual Report should record the number of meetings and attendance of each director at meetings
• the board should regularly review processes and procedures and ensure the effectiveness of internal controls
• the board should ensure that it receives non-financial information that will enable it to address broader stakeholder issues relevant to the company

Board committees

• board committees generally have no executive authority
• a formal procedure for delegation to board committees can assist the board to discharge its obligations and facilitate decision-making
• board committees should have written terms of reference
• all companies should have at least audit and remuneration committees
• the chairpersons of board committees should report to the board on the committee's activities at each board meeting
• board committees, with the exception of operational committees, should be chaired by an independent (non-executive) director
• chairpersons of board committees should attend the AGM to answer questions relating to the board committees and matters within their mandate

Insider trading

• a board should have a practice prohibiting directors and officers from trading in the period between the end of an accounting period and the date on which results are published and at other times while in possession of price sensitive information. A formal policy should be set for closed periods, which the company secretary should implement and monitor. The JSE Listings Requirements and the Insider Trading Act contain various directives to companies in this regard

Key questions:

• To what extent are the recommendations of King II applicable to my company?
• Is the company directed by a largely non-executive board of directors under the guidance of a non-executive chairman? 
• If the roles of the chairman and CEO are vested in a single individual, has a lead independent director been appointed? 
• As a director, am I always aware of the need to ensure that power within the company is vested and exercised in a balanced manner in the best interests of the company? 
• Does the company have audit and remuneration committees which are compliant with the recommendations of King II? 
• Are the powers of the board and board committees appropriately defined in a formal board charter and terms of reference? 
• Is the division of responsibility between the board, its committees and management appropriate and clear, and does the board ensure that it suitably monitors the exercise of delegated authority within the company? 
• Is the remuneration of directors appropriate, given the performance of the company and the legal and fiduciary responsibilities carried by directors?