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King IVTM updateStakeholders and stakeholder relationships
5Insights for boards
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The draft King IVTM (King IV) was released on 15 March 2016. (available at https://c.ymcdn.com/sites/iodsa.site)ym.com/resource/resmgr/King_IV/King_IV_Report_draft.pdf)
Various local and international developments in corporate governance, including in relation to integrated thinking and integrated reporting, remuneration, development of board roles and responsibilities and related board structures, and stakeholder engagement practices have prompted the need to update King III. King IVTM is open for comment until 15 May 2016. Any individual or organisation can submit comments using the electronic portal on the Institute of Directors in Southern Africa’s website (http://www.iodsa.co.za/page/KingIVcommentary).
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What is King IVTM proposing regarding stakeholders and stakeholder engagement?
An outcomes-based approach drives the organisation’s achievement of the King IVTM Principles. The intended result is an implementation approach that ought to be both more practical and impact-focused.
As Illustration of this approach, King IVTM guides the governing body’s approach to discharging its responsibilities relating to strategy and policy, and oversight and disclosure, adopting the stakeholder-inclusive model of governance (Principle 5.1). This approach supports the wider concept of sustainable development.
Accordingly, applying the outcomes-based approach, the governing body should design and adopt governance practices to discharge its governance responsibilities relating to stakeholder relationships in such a way that supports achievement of the King IVTM Principles, and the outcome of protecting and building trust in the organisation, its reputation and legitimacy.
The following King IVTM principles are of key relevance:
Performance and Value Creation (Chapter 2)
Principle 2.1 Strategy, implementation and performance
The governing body should lead the value creation process by appreciating that strategy, risk and opportunity, performance and sustainable development are inseparable elements.
Principle 2.2 Reports and Disclosure
The governing body should ensure that reports and other disclosures enable stakeholders to make an informed assessment of the performance of the organisation and its ability to create value in a sustainable manner.
Stakeholder Relationships (Chapter 5)
Principle 5.1 Stakeholders
As part of its decision-making in the best interests of the organisation, the governing body should ensure that a stakeholder-inclusive approach is adopted, which takes into account and balances their legitimate and reasonable needs, interests and expectations.
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The governing body of the organisation is thus expected to lead the organisation in use of the stakeholder-inclusive approach to drive adoption of a holistic value creation strategy for the organisation. This includes approving the policies and processes management develops to support implementation of that strategy.
Board members are able to offer a fresh perspective on the value creation alternatives available to the company. This is a much needed change from the case where boards may in some cases have been passive recipients of management’s five-year rolling strategic plans, or have perhaps tended to rely solely on management to assess those value creation alternatives and the selected strategy.
Shareholder activism
King IVTM includes a new Governance Principle for institutional investors as the holders of beneficial interests in company securities:
Principle 5.2 Shareholders
The governing body of an institutional investor should ensure that the organisation responsibly exercises its rights, obligations, legitimate and reasonable needs, interests and expectations, as holder of beneficial interest in the securities of a company.
King IVTM recognises the development of increased shareholder activism and the key role shareholders play in promoting good governance.
As explained in the introduction to King IVTM, the revised code recognises the paradigm shift in corporate thinking from financial capitalism to inclusive capitalism, as a key perspective driving holistic value creation.
Draft King IVTM encourages the governing boards of companies and company shareholders to develop a common understanding of what value creation entails and how performance is measured and rewarded. This is in the interest of promoting sound corporate governance practices that support sustainable, long term value creation, and shared prosperity.
In effect, members of the governing body will need to adopt an activist mind-set. By following a routine practice of maintaining stakeholder dialogue, including with shareholders and lenders as capital providers, the management team is able to understand and test whether stakeholders are supportive of the organisation’s strategy for long-term value creation.
King IVTM recommends that the governing body of an institutional investor should provide strategic direction on responsible investment, and ensure it approves policy that provides for adoption of recognised responsible investment practices and principles.
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Integration of the stakeholder-inclusive model
King IVTM includes greater emphasis of, and guidance on deploying the stakeholder-inclusive model by the organisation and its governing body.
It follows its predecessor code in advocating the stakeholder-inclusive model and explains it in greater detail. It explains that this model answers the question “to whom is a governing body accountable” from a different perspective than other models of corporate governance such as the “enlightened shareholder” model. Specifically, it acknowledges the governing body’s key duty to balance the legitimate and reasonable needs, interests and expectations of all the organisation’s material stakeholders in its decision-making, in context of its overall fiduciary duty to always make decisions and act in the best interests of the organisation. Within this approach it is recognised that the governing body may give precedence to the interests of shareholders or any other stakeholder grouping based on what it believes will best serve the interests of the organisation at a given point in time, and depending on the circumstances.
An enhanced definition of “stakeholder” is included. There are also new definitions of internal and external stakeholders, as King IV’s recommended practices differentiate between these two stakeholder groups in some respects.
Governance of stakeholder relationships
King IVTM proposes a fresh approach to governance of stakeholder relationships, and guides governing bodies to ensure that stakeholder-inclusivity considerations feature throughout the organisation’s governance systems and processes.
With a focus on enhancing the accessibility of the King IVTM Principles for a variety of entities, the updated code reduces the number of principles addressing stakeholder relationships to just two. Principle 5.1 is an overarching principle for governance of all stakeholder relationships. Principle 5.2 separately addresses responsibilities of institutional investors as shareholders of companies.
The recommended practices on governance of stakeholder relationships are rationalised to 32 practices under draft King IVTM (23 specifically address shareholder relationships and responsibilities of shareholders).
Similar to King III, King IVTM recognises the importance of proactive engagement with the organisation’s stakeholders, and effective and transparent stakeholder communications. It recommends that the governing body should ensure that it approves policy that articulates its strategic direction in stakeholder relationships and that provides for adoption of appropriate standards and frameworks to give effect to the approved policy.
Among new recommended practices identified for oversight of management of stakeholder relationships are having policies and processes in place to measure quality of stakeholder relationships, and appropriate responses to the results.
The governing body’s oversight of this area should also extend to the organisation’s assessment of the influence of digitisation and automation on its future workforce requirements, and possible impacts on its employees and society.
What are the key areas of difference from King III1?2
1Available at: http://www.iodsa.co.za/?page=KingIV
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King III introduced an emphasis on the resolution and management of disputes and King IVTM elaborates further on dispute resolution as an established element of good governance. It recommends that dispute resolution mechanisms and associated processes be addressed in standard terms and conditions of the organisation’s contractual arrangements with employees and other stakeholders, as part of the organisation’s overall stakeholder relationship management plan.
Recommended Practices for Group Governance (for companies in a group structure)
King IVTM sets out a comprehensive set of recommended practices addressing group governance.
Firstly, the board of a holding company should ensure a group governance framework is in place to address relationships and the exercise of authority and power among companies in the group structure.
Further recommended practices are included addressing various areas of challenge commonly encountered in design and implementation of group governance policies.
• The group governance framework should provide for recognition of the separate and independent juristic personalities of each company in the group, and the legal duties of each director to the company to whose board the director is appointed.
• The board of the holding company should oversee that the agreed framework is implemented and adequately maintained across the group, as part of discharging its legal duties to the holding company.
• Boards of the subsidiary companies in the group (as separate legal entities) should consider and approve the extent of the adoption and implementation of policies and procedures of the holding company by the subsidiary company, and disclose this information in their external reporting.
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Adoption of stakeholder-inclusivity ought to form part of the governing body’s practices applied in its ethical leadership of the organisation, and governance oversight of the organisation’s strategy, policy, oversight and disclosure practices. This means adoption of stakeholder engagement practices that transition beyond communication to where value is extracted and created through enduring relationships.
The concept should also permeate the activities of board committees. King IVTM recommends that the role and functions of the governing body’s Social and Ethics Committee (where established) should extend to upholding, monitoring and reporting on stakeholder inclusivity. However the practices and activities of other board committees will also likely contribute significantly to achieving the same outcome.
King IVTM does not advocate or endorse any specific stakeholder engagement standards within its recommended practices for governance of stakeholder relationships and shareholder relationships – i.e. beyond recommending that the approved policy that articulates is strategic direction on stakeholder relationships should provide for adoption of the appropriate standards and frameworks to give effect to the policy.
This affords the organisation flexibility in selecting among frameworks and standards as appropriate to the organisation and the governing body’s approved stakeholder relationship strategy. Implicitly however,
it is recommended that the approved policy should identify the adopted framework and standards. Examples of such frameworks and standards are the AccountAbility AA1000 Stakeholder Engagement Standard 20151 and the Global Reporting Initiative (GRI)’s G4 Sustainability Reporting Guidelines2.
An area that requires consideration is the recommended practice of ensuring the organisation’s reports and other disclosures enable stakeholders to make an informed assessment of the performance of the organisation and its ability to create value in a sustainable manner. Reporting the organisation’s performance on value creation is guided by the IIRC’s Integrated Reporting Framework3.
Practical design and implementation of internal processes and IT systems for internal and external reporting of appropriate and relevant Key Performance Indicator (KPI) information requires significant investment.
How will the King IVTM proposals affect your organisation and its governing body?3Governing bodies will need to take cognisance of structural adjustments that may be required to ensure the integration of the stakeholder-inclusive model throughout governance structures and processes.
¹ Available at: http://www.accountability.org/images/content/8/7/875/AA1000SES%202015.pdf. AccountAbility first introduced the principle of inclusivity in the AA1000 Framework Standard published in 1999, and defined the term to mean the participation of stakeholders in developing and achieving an accountable and strategic response to sustainability. The Standard defined stakeholder engagement to mean a tool that organisations use to help them achieve inclusivity.
² Available at: https://www.globalreporting.org/standards/g4/Pages/default.aspx
3 Available at: http://integratedreporting.org/resource/international-ir-framework/
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Ideally the reporting of KPI information to reflect the organisation’s performance in overall value creation should:
• Reinforce the organisation’s culture and values in context of the design and implementation of its approved value creation strategy, and
• Reflect the governing body’s orientation to decision-making that supports a long-term view of performance and value creation.
The OECD Code explains further that “corporations should recognise that the contributions of stakeholders constitute a valuable resource for building competitive and profitable companies. It is, therefore, in the long-term interest of corporations to foster wealth-creating co-operation among stakeholders. The governance framework should recognise the interests of stakeholders and their contribution to the long-term success of the corporation.”
What are the main benefits of these proposals?
A key benefit of the restructure code is its accessibility and wider applicability to a variety of organisations.
The focus is placed on achieving the stated principles in order to realise specific targeted outcomes, with the desired overall impact being improved corporate responsibility.
4Paying attention to the long-term interests of the organisation is a fundamental duty of the governing body. Draft King IVTM gives focus to achieving the outcomes of sustainable performance and value creation, and protecting and building trust in the organisation, and its reputation and legitimacy – reflected in the draft Code’s principles and recommended practices to give effect to stakeholder-inclusiveness (Chapter 2), and to encourage sound stakeholder relationships (Chapter 5).
The approach in draft King IVTM aligns with international best practice as set out in the G20/OECD Principles of Corporate Governance, which state the following main principle on the role of stakeholders in Corporate Governance:
“The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.”
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What questions should the governing body of an organisation be asking/considering in relation to draft King IVTM?• ➢Is the organisation’s strategic plan geared to achieve sustainable long-term performance and value creation,
taking account of the legitimate and reasonable needs, interests and expectations of its stakeholders?
• ➢Is the governing body satisfied that the organisation’s adoption of this strategic focus is pervasive throughout the organisation, including the “tone at the top”?
• ➢Is there need for adjustments to support this strategic focus, including for example changing the format of meetings of the governing body to enhance its ability to exercise governance oversight responsibilities in line with this strategic focus?
• ➢Has the governing body approved policy for the organisation that articulates its strategic direction on stakeholder relationships, including adopting appropriate standards and frameworks aligned with best practice to give effect to that policy?
• ➢Does the organisation disclose its structures and processes for stakeholder relationship management, including mechanisms for monitoring and assessing quality thereof, and the key focus areas during the relevant reporting period?
• ➢Does the board understand the governance priorities of the company’s key stakeholders, and of its key shareholders?
• ➢[Governing bodies of institutional investors] Does the governing body ensure the investor organisation responsibly exercises its rights, obligations, legitimate and reasonable needs, interests and expectations, as holder of beneficial interest in the securities of its investees?
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EY stakeholder relationship specialists are able to assist you in responding to the IODSA and the King Committee on the draft King IVTM, and in assessing the adequacy of your organisation’s current stakeholder relationship management systems and processes and stakeholder reporting practices.
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EY Governance, Integrated Reporting and Sustainability Services
Governance • Designing board structures
• Board inductions
• Board effectiveness
• Board culture assessments
• Review of risk governance effectiveness
• Alignment of risk and monitoring systems
• Integrated governance reporting
• Application of governance requirements/best practices in the sector context
Governance of Remuneration
• Advice on developing the organisation’s ‘strategy-remuneration’ chain; the remuneration philosophy and related remuneration policy to achieve alignment between pay and performance; the organisation’s performance measures linked to total value creation
• Review of remuneration disclosure in the integrated annual report
• Assessing compliance with statutory disclosure requirements for remuneration in the annual report.
Integrated Reporting
• Excellence in Integrated Reporting Awards
• On-site briefings on the International Integrated Reporting Council’s <IR> Framework and on applying the Framework
• <IR> benchmark reports
• Gap analysis against GRI G4 Guidelines, IIRC Framework and local and international best practice and peers
• Facilitation of the materiality determination process
• Assistance with writing sustainability or integrated reports
• Assistance with design of processes and systems to support implementation of integrated assurance
• Bespoke training and development
Sustainability
• Advice on design of reporting and reporting systems to communicate value creation in the triple context (King IV)
• Assistance with KPI identification and design, and systems design to support KPI reporting
• Assurance reports for non-financial information reporting in the sustainability report or the integrated report
• Policy advice on sustainable development
Stakeholder relationship management and engagement
• Advice on application of stakeholder engagement frameworks
• Design of stakeholder communications policy and related processes
• Facilitation for implementation of stakeholder engagement framework (policy, process and procedures)
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Name: Joanne Henstock Title: Governance and Integrated Reporting LeaderTel: +27 11 502 0364Mobile: +27 60 526 2960Email: [email protected]
Name: Thomas van ViegenTitle: Associate DirectorTel: +27 11 502 0424Email: [email protected]
Want to learn more?
We want to hear from youContact me today to set up a King IVTM briefing session with your board.
Name: Kelly GillmanTitle: Senior ManagerTel: +27 21 443 0473Mobile: +27 83 269 8726Email: [email protected]
EY’s Excellence in Integrated Reporting Awards 2015A survey of integrated reports of South Africa’s top 100 JSE-listed companies
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ED no. NONE This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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