For two centuries we have followed the traditional approach to the governance of companies in pursuit of a single bottom line – profit above all else. This is no longer acceptable to stakeholders who now want information on the triple bottom line – the social, economic and environmental aspects of companies. That thread runs through both King III and the new Companies Act.
It is no surprise that many of the concepts in King III mirror the Companies Act, 2008. For example, public and state-owned entities are required under the new regime to constitute social and ethics committees to monitor compliance by the company with laws relating to labour, empowerment, the environment, health and consumer relationships. This is an innovative body that has never been seen before. The committee must comprise of at least three directors or prescribed officers. One of them must be a director who is not involved in the company’s business, and was not so involved within the previous three financial years. If the board of a public or state-owned company fails to comply with these provisions, the Companies and Intellectual Property Commission (the “Commission”) may convene a shareholders meeting, calling on the shareholders to appoint the committee. Each director who is party to the failure to appoint the committee may be held personally liable for the costs incurred by the Commission in taking these steps.
Shareholders are granted broader rights of access to company information under the Companies Act. Any shareholder may request sight of the company’s memorandum of incorporation, register of members, directors’ records, reports to annual meetings and annual financial statements. The request must be made on the prescribed form and handed to the company. There is little room for companies to refuse such a request. The company must accede to the request within 14 business days. Any attempt to frustrate the request may amount to an offence.
King III applies to all entities, irrespective of their size or nature of their business. But it relies on self-regulation rather than legislation (such as the Companies Act) which can be directly enforced in our courts. There is no body that is mandated to enforce King III. However, there are instances in which public interest companies and parastatals are obliged to comply. In terms of the JSE listings requirements, a listed company is contractually bound to comply with King III and any failure to do so amounts to a breach of the listings requirements. This is a rather round about enforcement mechanism but, in short, listed companies will have no option but to comply with King III or be subjected to the wrath of the JSE. King III is drafted on an “apply or explain” basis which requires management to explain how the principles of the code were applied, or if not applied, the reasons for not complying. If an entity does not comply, the reasons behind that decision will have to be fully explained to stakeholders. This is different to the previous King codes which were underpinned by a “comply or explain” theory.
South African companies will need to consider the provisions of King III, and take it and the Companies Act seriously. A company may be fined for failure to comply with the Companies Act. The Commission may issue a compliance notice to any person who has contravened the Act, requiring the person concerned to cease, correct or reverse any action in contravention. Administrative fines for failure to comply with the Act are based on the annual turnover of the guilty company, but the fine must not exceed the greater of 10 per cent of the company's turnover for the period that the company failed to comply with the notice or a maximum of R1 million. Although these fines may appear to be harsh, the decision whether to impose a fine ultimately rests with the courts and the Commission will not be entitled to impose fines randomly.
There has been a definite change in the theme of corporate law - a departure from the self-interested shareholder model where profitability is key, to a stakeholder model that takes the interests of a broader group of interested parties into account, including employees of the company and the environment in which the company operates.