Complying with Changes in Legislation

Appointment of auditor (Section 90)

Section 19 is amended to include any company that is required in terms of its MOI to have its annual financial statements audited to appoint an auditor.

Audit committees (Section 94)

Section 94 is amended to include any company that is required by its MOI to have an audit committee to elect an audit committee comprising of at least three members.

Effect of business rescue on employees and contracts (Section 136)

The Bill proposes that the business rescue practitioner may only entirely, partially or conditionally suspend, for the duration of the business rescue proceedings, an obligation of the company and that the cancellation thereof may only take place upon application to court and if the court is satisfied that the cancellation would be just and reasonable.

Continuation of pre-existing companies (Schedule 5)

The Bill proposes to extend the two year grace period to shareholders agreements as well by the insertion of the following subsection:

If, before the general effective date, the shareholders of a pre-existing company had adopted any agreement between or among themselves, under whatever style or title any such agreement continues to have the same force and effect:

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  As of the general effective date, for a period of two years, or until changed by the shareholders who are parties to the agreement; and
  
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  After the two year period, to the extent that the agreement is consistent with this Act and the company’s MOI.
  

King III

Structure of the report

King III is divided into nine chapters, in which each of the principles to be contained in the code, are listed as headings and discussed in paragraphs underneath those headings.

Structure of the report:

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  Chapter 1 – Ethical leadership and corporate citizenship;
  
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  Chapter 2 – Board and Directors;
  
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  Chapter 3 – Audit committees;
  
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  Chapter 4 – The governance of risk;
  
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  Chapter 5 – The governance of information technology;
  
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  Chapter 6 – Compliance with laws, rules, codes and standards;
  
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  Chapter 7 – Internal audit;
  
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  Chapter 8 – Governing stakeholder relationships;
  
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  Chapter 9 – Integrated reporting and disclosure.
  

Application of the code

The report applies to all entities regardless of the manner and form of incorporation or establishment and whether in the public, private sectors and non-profit sectors.

Each entity should consider the approach that best suits its size and complexity.

It is recommended that all entities disclose which principles and / or practices they have decided not to apply and explain why.

This level of disclosure will allow stakeholders to comment on and challenge the Board to improve the level of governance.

Effective date

The King III report is effective from 1 March 2010.

Chapter 1 – Ethical leadership and corporate citizenship

The board should:

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  Provide effective leadership based on an ethical foundation;
  
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  Be responsible for the strategic direction of the company and for the control of the company;
  
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  Consider not only the financial performance of the company but also the impact of the company’s operations on society and the environment;
  
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  Ensure that it builds and sustains an ethical and corporate culture in the company.

  The board and the directors should act in the best interest of the company.

  Directors and the board should be permitted to take independent advice in connection with their duties.

  Listed companies should have a policy regarding the dealing in securities by directors, officers and selected employees.

  The board should consider business rescue proceedings or other turnaround mechanisms as soon as the company is financially distressed.
  

Chapter 2 – Board and Directors

Composition

The board must comprise a balance of executive and non-executive directors, with a majority of non-executive directors.

The majority of the non-executive directors should be independent.

Directors must be appointed through a formal process. The Nomination Committee assists with the process of identifying suitable candidates to be proposed to the shareholders.

As a minimum, two executive directors should be appointed to the board, being the chief executive officer (CEO) and the director responsible for the finance function. For listed companies, a financial director must be appointed to the board effective from June 2009.

At least one third of non-executive directors should retire by rotation at the company's AGM or other general meetings. These retiring board members may be re-elected, provided they are eligible.

The memorandum of incorporation of the company should allow the board to remove the CEO as an executive director on the board. Shareholder approval is not deemed necessary for these decisions.

Any independent non-executive directors serving more than 9 years should be subject to a rigorous review of his / her independence.

The board should include a statement in the integrated report regarding the assessment of the independence of the independent non-executive directors.

Independent non-executive director

An independent non-executive director is a non-executive director who:

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  Is not a representative of a shareholder who has the ability to control or significantly influence management;
  
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  Does not have a direct or indirect interest in the company (including any parent or subsidiary in a consolidated group with the company) which is either material to the director or to the company. A holding of five percent or more is considered material;
  
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  Has not been employed by the company or the group of which he / she currently forms part in any executive capacity for the preceding three financial years;
  
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  Is not a member of the immediate family of an individual who is, or has been in any of the past three financial years, employed by the company, or the group in an executive capacity;
  
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  Is not a professional adviser to the company or the group, other than as a director;
  
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  Is free from any business or other relationship which could be seen to interfere materially with the individual's capacity to act in an independent manner;
  
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  Does not receive remuneration contingent upon the performance of the company.
  

The chairman

The chairman should be appointed by the board on an annual basis and should be independent.

If the board appoints a chairman who is a non-executive director but is not independent, this should be disclosed in the integrated report, together with the reasons and justifications for it.

The CEO should not become the chairman of the company.

With regards to additional roles of the chairman on committees:

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  The chairman should not be a member of the audit committee;
  
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  The chairman should not chair the remuneration committee, but may be a member of it;
  
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  The chairman should be a member of the nomination committee and may also be its chairman; and
  
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  The chairman should not chair the risk committee but may be a member of it.
  

The chief executive officer

The board should appoint the Chief Executive Officer.

The CEO should not be a member of the remuneration, audit or nomination committees, but should attend by invitation.

CEO’s should recuse themselves when conflicts of interest arise, particularly when their performance and remuneration are discussed.

Appointment of board members

Directors should be appointed through a formal process.

Shareholders are ultimately responsible for the composition of the board.

Boards should ascertain whether potential directors are competent.

Background and reference checks should be performed before the nomination and appointment of directors.

It is also important to ensure that new directors have not been declared delinquent nor serving probation.

The nomination committee should play a role in this process.

The Company secretary

The board should be assisted by a competent company secretary.

The appointment of a company secretary in public companies with share capital is mandatory under the Act.

The appointment and removal of a company secretary is a matter for the board.

The secretary should not be a director of the company.

The responsibilities of the company secretary are as follows:

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  Ensure that the board and board committee charters are kept up to date;
  
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  Provide comprehensive practical support and guidance to directors;
  
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  Support the non-executive directors and the chairman;
  
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  Provide a central source of guidance and advice to the board;
  
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  Ensure the proper compilation of board papers;
  
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  Ensure that the minutes of board and board committee meetings are circulated to the directors in a timely manner, after the approval of the chairman of the relevant board committee;
  
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  Ensure that the procedure for the appointment of directors is properly carried out and he / she should assist in the proper induction, orientation and development of directors.
  

Board committees

Public and state-owned companies must appoint an audit committee.

The audit and remuneration committees should be chaired by an independent non-executive director.

The nomination committee should comprise of the board chairman and non-executive directors only, of whom the majority should be independent.

All members of the remuneration committee should be non-executive directors, of which the majority should be independent.

External advisors and executive directors should attend committee meetings by invitation.

Committees should be free to take independent advice at the cost of the company.

Training and development of directors

Training and development of directors should be conducted through formal processes.

The board should establish a formal orientation programme to familiarise incoming directors with the company's operations, senior management and its business environment, and to introduce them to their fiduciary duties and responsibilities.

New directors with no or limited board experience should receive development and education on their duties, responsibilities, powers and potential liabilities.

Inexperienced directors should be developed through mentorship programmes.

Continuing professional development programmes should be implemented.

Directors should receive regular briefings on matters relevant to the business of the company, changes in laws and regulations applicable to the business of the company, including accounting standards and policies, and the environment in which it operates.

Performance assessment

The performance of the board, its committees and the individual directors should be evaluated annually.

The chairman may lead the overall performance evaluation of the board, its individual members and the company secretary, although independent performance appraisals should be considered.

The board should discuss the board evaluation results at least once a year.

The board should state in the integrated report that the appraisals of the board and its committees have been conducted.

The same principles adopted in the evaluation of the board should be applied to the board committees’, chairman and members.

The nomination of a director at the AGM should only occur after the proper evaluation of the performance and attendance of the director at relevant meetings.

The chairman should not be present when his / her performance is discussed by the board.

Remuneration of directors

Companies should remunerate fairly and responsibly.

The remuneration committee should assist the board in its responsibility for setting and administering remuneration policies.

The company’s policy of remuneration should be approved by shareholders in a general meeting. Shareholders should pass a non-binding advisory vote on the company’s yearly remuneration policy.

The board is responsible for determining the remuneration of executive directors.

These decisions need not be approved by shareholders.

Non-executive director fees, including committee fees, should comprise of a retainer, where considered desirable, which may vary according to factors including the level of expertise of each director, as well as an attendance fee per meeting.

Non-executive directors should not receive incentive awards geared to share price or corporate performance.

Non-executive fees should be approved by shareholders in advance.

Annual bonuses should clearly relate to performance against annual objectives consistent with long-term value for shareholders.

Contracts should not commit companies to pay on termination arising from failure.

Shareholders should approve in advance all long-term share-based and other incentive schemes or any substantive changes to existing schemes.

Participation in share incentive schemes should be restricted to genuine employees and executive directors.

Non-executive directors should not receive share options.

The remuneration report should include:

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  All benefits paid to directors;
  
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  The salaries of the three most highly paid employees who are not directors;
  
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  The policy on base pay;
  
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  Participation in share incentive schemes;
  
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  The use of benchmarks;
  
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  Incentive schemes to encourage retention;
  
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  Material payments that are ex-gratia in nature;
  
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  Policies regarding executive employment; and
  
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  The maximum expected potential dilution as a result of incentive awards.
  

Meetings

The board must meet at least four times per year.

Additional meetings may be scheduled at the instance of a board member.

The chairman may meet with the CEO and the CFO or the company secretary prior to a board meeting to discuss important issues and agree on the agenda.

All directors should be individuals of integrity and courage, and have the relevant skill and experience to bring judgment to bear on the business of that company.