AUE2602
NOTES
, lOMoARcPSD|18222662
LESSON 1.1
BACKGROUND OF CORPORATE GOVERNANCE IN SOUTH
AFRICA
INTRODUCTION
The Industrial Revolution began in Britain in the 18th century from 1760 to 1840 and from there
spread to other parts of the world (https://www.britannica.com/). During the Industrial Revolution
businesses grew from entities owned and managed by the same person into large organisations
in which the owners (shareholders) and management (executive directors) were separate
parties. Currently in most countries, the shareholders appoint the directors in a company to
manage their investment in the company. This is also known as principal-agent theory, where
the shareholders are the principals and the directors are the agents. Accordingly, it became
necessary for the development of guidelines for how the directors and managers of a company
should act to protect and manage the interest of the shareholders and other stakeholders. This
led to the concept of corporate governance.
Statements like the following have been made regarding corporate governance:
“The King Commission describes Corporate Governance simply as ‘the system by which
companies are directed and controlled’.” (King 1994)
In this topic you will learn about corporate governance in South Africa, with specific reference
to the King IV Report on Governance.
King I, II and III had their foundation in ethical and effective leadership. King IV is also based
on these foundations but was drafted to make it more easily applicable to all organisations to
include public and private, large and small, for-profit and non-profit organisations (King IV
2016:6).
The fourth King Report on Corporate Governance in South Africa (King IV), issued by the
Institute of Directors in Southern Africa, is South Africa’s definitive corporate governance code.
King IV envisions good governance as the achievement of four outcomes: ethical culture, good
performance, effective control and legitimacy. These outcomes may be achieved by adherence
to King IV’s 16 governance principles and their accompanying recommended practices. While
compliance with King IV is voluntary, the listing requirements compel issuers to implement
certain of its recommendations, with the balance to be adopted in accordance with King IV’s
“apply and explain” disclosure regime.
You can find the King IV Code at this link:
https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-
E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf
, lOMoARcPSD|18222662
What is agency theory?
Agency theory is used to understand the relationships between agents and principals. This
leads to the principal-agent problem. The principal-agent problem occurs when the interests of
a principal and agent come into conflict. Companies should seek to minimise these situations
through solid corporate policy. The different interests of principals and agents may become a
source of conflict, as some agents may not perfectly act in the principal's best interests. The
resulting miscommunication and disagreement may result in various problems and discord
within companies. Incompatible desires may drive a wedge between each stakeholder and
cause inefficiencies and financial losses. This leads to the principal-agent problem.
STUDY MATERIAL
• The King IV Report (2016:3–7, 20–38) [What does (2016:3-7) mean? – It means go to
King IV, pages 3 to 7].
• Richard, Roets, Adams, Jonck & West (2023:4/2–4/16) [What does (2023:4/2)
mean? – It means go to chapter 4 of the prescribed textbook, page 2]
Note: Whenever this icon is displayed it means that you will have to go to study
references in the prescribed study material. This will include either one or both prescribed
textbooks Auditing notes for South African students and/or the SAICA student handbook (or the
electronic version). You then need to read the specific pages or paragraphs as indicated and
prepare your own summaries/study notes from this for further studying and revision at a later
stage.
Part 2 of the King IV Report (2016:20–38) contains the fundamental concepts and
philosophy on which King IV is based, the distinguishing features of King IV and how the
various developments in corporate governance, locally and internationally, since King III came
into effect in 2009, have influenced the principles and practices in the Code.
The philosophy of King IV is focused on
• companies’ role and responsibility in society
• corporate citizenship
• sustainable development
• stakeholder inclusivity and responsiveness
• integrated reporting and integrated thinking
This philosophy is centred on three paradigm shifts in corporate governance:
• from financial capitalism to inclusive capitalism
• from short termism to long-term sustainability
• from silo reporting to integrated reporting
You will notice that King IV brings a more refined focus in terms of the obligation of the
organisation (to be accountable and transparent) as well as the accountability of the company
as a broader stakeholder within the broader society. King IV deliberately talks about ubuntu, an
African concept that implies “I am because you are”. Therefore there should be common
purpose to all human endeavours (including corporate endeavours), based on service to
humanity.
, lOMoARcPSD|18222662
To illustrate the philosophy of ubuntu: A successful businessman in Polokwane, South
Africa, showed ubuntu by buying 100 sewing machines at an auction, which he then made
available to men and women in the community who were interested in starting tailoring
businesses but did not have the necessary capital. He honoured their dignity by making a
simple verbal agreement that they would pay him for the machines once there were
sufficient profits to begin interest-free payments. This is typical of ubuntu consciousness
and still occurs widely both in rural South Africa and among African communities in urban
areas.
It is now time for your first activity to reflect on what you have learnt thus far. Try do this activity
on your own without consulting other learning material to assess whether you have mastered
this part of the lesson. On submission of your answer, the solution will be released to you to
reflect on.
ACTIVITY 1
Define good corporate governance and briefly explain in your own words why it is important to
society that companies operate within a framework of good corporate governance.
How did you find this activity? If your answer (which you provided from your own understanding)
did indeed capture the facts mentioned above, then you are ready to proceed to the next section
of this lesson. If, however, you notice that your answer did not fully capture the information
provided in the guidelines, then you need to go back to the discussion of the term “corporate
governance”.
ACTIVITY 2
The basis of any code on corporate governance can be legislated (a set of rules), or voluntary
(principles and practices), or a combination of both. The King IV Report identifies these two
bases as “comply or else” or “comply or explain” and describes a further variation of the latter,
i.e. “apply and explain” (Richard et al 2023:4/4).
Explain in your own words what the concept “apply and explain” means. Do you think that this
allows directors to avoid adhering to principles of good corporate governance?
ACTIVITY 3
Discuss in your own words what you understand by stakeholder inclusivity.
ACTIVITY 4
Describe what it means for an organisation to be an integral part of society.
NOTES
, lOMoARcPSD|18222662
LESSON 1.1
BACKGROUND OF CORPORATE GOVERNANCE IN SOUTH
AFRICA
INTRODUCTION
The Industrial Revolution began in Britain in the 18th century from 1760 to 1840 and from there
spread to other parts of the world (https://www.britannica.com/). During the Industrial Revolution
businesses grew from entities owned and managed by the same person into large organisations
in which the owners (shareholders) and management (executive directors) were separate
parties. Currently in most countries, the shareholders appoint the directors in a company to
manage their investment in the company. This is also known as principal-agent theory, where
the shareholders are the principals and the directors are the agents. Accordingly, it became
necessary for the development of guidelines for how the directors and managers of a company
should act to protect and manage the interest of the shareholders and other stakeholders. This
led to the concept of corporate governance.
Statements like the following have been made regarding corporate governance:
“The King Commission describes Corporate Governance simply as ‘the system by which
companies are directed and controlled’.” (King 1994)
In this topic you will learn about corporate governance in South Africa, with specific reference
to the King IV Report on Governance.
King I, II and III had their foundation in ethical and effective leadership. King IV is also based
on these foundations but was drafted to make it more easily applicable to all organisations to
include public and private, large and small, for-profit and non-profit organisations (King IV
2016:6).
The fourth King Report on Corporate Governance in South Africa (King IV), issued by the
Institute of Directors in Southern Africa, is South Africa’s definitive corporate governance code.
King IV envisions good governance as the achievement of four outcomes: ethical culture, good
performance, effective control and legitimacy. These outcomes may be achieved by adherence
to King IV’s 16 governance principles and their accompanying recommended practices. While
compliance with King IV is voluntary, the listing requirements compel issuers to implement
certain of its recommendations, with the balance to be adopted in accordance with King IV’s
“apply and explain” disclosure regime.
You can find the King IV Code at this link:
https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-
E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf
, lOMoARcPSD|18222662
What is agency theory?
Agency theory is used to understand the relationships between agents and principals. This
leads to the principal-agent problem. The principal-agent problem occurs when the interests of
a principal and agent come into conflict. Companies should seek to minimise these situations
through solid corporate policy. The different interests of principals and agents may become a
source of conflict, as some agents may not perfectly act in the principal's best interests. The
resulting miscommunication and disagreement may result in various problems and discord
within companies. Incompatible desires may drive a wedge between each stakeholder and
cause inefficiencies and financial losses. This leads to the principal-agent problem.
STUDY MATERIAL
• The King IV Report (2016:3–7, 20–38) [What does (2016:3-7) mean? – It means go to
King IV, pages 3 to 7].
• Richard, Roets, Adams, Jonck & West (2023:4/2–4/16) [What does (2023:4/2)
mean? – It means go to chapter 4 of the prescribed textbook, page 2]
Note: Whenever this icon is displayed it means that you will have to go to study
references in the prescribed study material. This will include either one or both prescribed
textbooks Auditing notes for South African students and/or the SAICA student handbook (or the
electronic version). You then need to read the specific pages or paragraphs as indicated and
prepare your own summaries/study notes from this for further studying and revision at a later
stage.
Part 2 of the King IV Report (2016:20–38) contains the fundamental concepts and
philosophy on which King IV is based, the distinguishing features of King IV and how the
various developments in corporate governance, locally and internationally, since King III came
into effect in 2009, have influenced the principles and practices in the Code.
The philosophy of King IV is focused on
• companies’ role and responsibility in society
• corporate citizenship
• sustainable development
• stakeholder inclusivity and responsiveness
• integrated reporting and integrated thinking
This philosophy is centred on three paradigm shifts in corporate governance:
• from financial capitalism to inclusive capitalism
• from short termism to long-term sustainability
• from silo reporting to integrated reporting
You will notice that King IV brings a more refined focus in terms of the obligation of the
organisation (to be accountable and transparent) as well as the accountability of the company
as a broader stakeholder within the broader society. King IV deliberately talks about ubuntu, an
African concept that implies “I am because you are”. Therefore there should be common
purpose to all human endeavours (including corporate endeavours), based on service to
humanity.
, lOMoARcPSD|18222662
To illustrate the philosophy of ubuntu: A successful businessman in Polokwane, South
Africa, showed ubuntu by buying 100 sewing machines at an auction, which he then made
available to men and women in the community who were interested in starting tailoring
businesses but did not have the necessary capital. He honoured their dignity by making a
simple verbal agreement that they would pay him for the machines once there were
sufficient profits to begin interest-free payments. This is typical of ubuntu consciousness
and still occurs widely both in rural South Africa and among African communities in urban
areas.
It is now time for your first activity to reflect on what you have learnt thus far. Try do this activity
on your own without consulting other learning material to assess whether you have mastered
this part of the lesson. On submission of your answer, the solution will be released to you to
reflect on.
ACTIVITY 1
Define good corporate governance and briefly explain in your own words why it is important to
society that companies operate within a framework of good corporate governance.
How did you find this activity? If your answer (which you provided from your own understanding)
did indeed capture the facts mentioned above, then you are ready to proceed to the next section
of this lesson. If, however, you notice that your answer did not fully capture the information
provided in the guidelines, then you need to go back to the discussion of the term “corporate
governance”.
ACTIVITY 2
The basis of any code on corporate governance can be legislated (a set of rules), or voluntary
(principles and practices), or a combination of both. The King IV Report identifies these two
bases as “comply or else” or “comply or explain” and describes a further variation of the latter,
i.e. “apply and explain” (Richard et al 2023:4/4).
Explain in your own words what the concept “apply and explain” means. Do you think that this
allows directors to avoid adhering to principles of good corporate governance?
ACTIVITY 3
Discuss in your own words what you understand by stakeholder inclusivity.
ACTIVITY 4
Describe what it means for an organisation to be an integral part of society.
