Board committees

Question 1

Which companies does Regulation 43 of the Companies Act apply?

Answer 1

listed public companies
state-owned companies
any other company that has a ‘public interest’ score of above 500 points in two of the previous 5 years

Question 2

Section 72 (8) of the Companies Act provides that the social and ethics committee is entitled to
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Answer 2

• require from any director or prescribed officer of the company any information or explanation necessary for the performance of the committee’s functions
• request from any employee of the company any information or explanation necessary for the performance of the committee’s functions
• attend any general shareholders’ meeting
• receive all notices of and other communication relating to any general shareholders’ meeting
• be heard at any general shareholders’ meeting on any part of the business of the meeting that concerns the committee’s functions

Question 3

Companies calculate their public interest score by awarding one point for each
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Answer 3

• average number of employees during the year
• number of millions of rands of liabilities at the financial year end
• number of millions of rands of turnover during the financial year
• number of individuals with an interest in a profit company’s securities, or of members of non-profit company at the financial year end

Question 4

The functions of the social and ethics committee as given under Regulation 43(5) of the Companies Act

Answer 4

To monitor the company’s activities, having regard to any relevant legislation, other legal requirements or prevailing codes of best practice, with regard to matters relating to:
a) Social and economic development, including the company’s standing in terms of the purposes and goals of:
i. the 10 principles set out in the United Nations Global Compact Principles
ii. the OECD recommendations regarding corruption
iii. The Employment Equity Act
iv. The Broad-Based Black Economic Empowerment Act
b) Good corporate citizenship, including the company’s
i. Promotion of equality, prevention of unfair discrimination and reduction of corruption
ii. Contribution to the development of the communities in which its activities are predominantly conducted, or within which its products or services are predominantly marketed
iii. Record of sponsorship, donations and charitable giving
c) The environment, health and public safety including the impact of the company’s activities and of its products or services
d) Consumer relationships, including the company’s advertising, public relations and compliance with consumer protection laws
e) Labour and employment, including
i. The company’s standing in terms of the International Labour Organization Protocol on decent work and working conditions
ii. The company’s employment relationships, and its contribution towards the educational development of its employees
To draw matters within its mandate to the attention of the board, as occasion requires
To report, through one of its members, to the shareholders at the company’s annual general meeting, on the matters within its mandate

Question 5

What is the purpose of the audit committee?

Answer 5

it is to provide additional focus on financial issues that are vital to the company but which often cannot be fully examined by the main board because of the shortage of time available to the board

Question 6

Statutory duties of the audit committee

Answer 6

To nominate, for appointment as auditor of the company under Section 90, a registered auditor who, in the opinion of the audit committee, is independent of the company
To determine the fees to be paid to the auditor and the auditor’s terms of engagement
To ensure that the appointment of the auditor complies with the provisions of the Companies Act and any other legislation relating to the appointment of auditors
To determine, subject to the provisions of this Chapter, the nature and extent of any non-audit services that the auditor may provide to the company, or that the auditor must not provide to the company, or a related company
To pre-approve any proposed agreement with the auditor for the provision of non-audit services to the company
To prepare a report, to be included in the annual financial statements for that financial year
- describing how the audit committee carried out its duties
- stating whether the audit committee is satisfied that the external auditor was independent of the company
- commenting in any way the committee considers appropriate on the financial statements, the accounting practices and the internal financial control of the company
To receive and deal appropriately with any concerns or complaints whether from within or outside the company, or on its own initiative relating to:
- the accounting practices and internal audit of the company
- the content or auditing of the company’s financial statements
- the internal financial controls of the company
- any related matter
To make submissions to the board on any matter concerning the company’s accounting policies, financial control, records and reporting
To perform such other oversight functions determined by the board

Question 7

State section 72 (1) to (4) of the Companies Act with regards to board committees

Answer 7

Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the board of a company may:

• appoint any number of committees of directors, and
• may delegate to any committee any of the authority of the board

Except to the extent that the Memorandum of Incorporation of a company, or a resolution establishing a committee, provides otherwise, the committee:

• may include persons who are not directors of the company, but
  
  • any such person must not be ineligible or disqualified to be a director, in terms of section 69, and
  • no such person has a vote on a matter to be decided by the committee

The creation of a committee, delegation of any power to a committee, or action taken by a committee, does not alone satisfy or constitute compliance by a director with the required duty of a director to the company, as set out in section 76

The Minister may, by regulation, prescribe that a company or categories of companies, must appoint a social and ethics committee, if it is desirable in the public interest, having regard to:

• its annual turnover
• the size of its workforce, or
• the nature and extent of its activities

Question 8

What does King IV require the boards to consider with respect to the composition of committees?

Answer 8

Effective collaboration between committees through appropriate cross-membership
A balanced distribution of power, so that no individual has the ability to dominate decision-making
Each committee, as a whole, should have the necessary knowledge, skills, experience and capacity to execute its duties effectively
Each committee should have a minimum of 3 members, subject to applicable legal provisions
Members of the executive and senior management should be invited to attend committee meetings either by a standing invitation or on an ad hoc basis to provide pertinent information and insights in their areas of responsibility
The chair of the board should not be a member of the audit committee

Question 9

State the recommended terms of reference and powers of each committee

Answer 9

The terms of reference and powers of each committee should be in writing and approved by the board, and they should, at a minimum, deal with the following:

• the composition of the committee and, if applicable, the process and criteria for the appointment of any committee members who are not members of the governing body
• the committee’s overall role and associated responsibilities
• delegated authority with respect to decision-making
• the tenure of the committee
• when and how the committee should report to the board and others
• the committee’s access to resources and information
• the meeting procedures to be followed, and
• the arrangements for evaluation of the committee’s performance

Question 10

Comment on the King IV Code’s recommendations regarding the risk committee

Answer 10

King IV recommends that the governing body should consider allocating the oversight of risk governance to a dedicated committee, or adding it to the responsibilities of another committee (often the audit committee), as is appropriate for the organisation
There are two reasons why the risk management function should not report to the audit committee, but should be monitored by a separate risk committee, and these are:
- Firstly, as a consequence of the composition of the (audit) committee, the function will often have financial focus when risk management should correctly extend far beyond the finances of a company
- Secondly, the audit committee should act as an independent oversight body
The role of the committee is to perform an oversight function. In doing so, it should consider the risk policy and plan, determine the company’s risk appetite and risk tolerance, ensure that risk assessments are performed regularly, monitor the whole risk management process, and receive assurance from internal and external assurance providers regarding the effectiveness of the risk management process.
It is important to note that these responsibilities are performed by the risk committee on behalf of the board. Ultimately the board remains responsible for the final approval of the risk policy and risk management.
The purpose of the committee is to enable the board to give risk management the attention it deserves by providing a forum for the detailed consideration of risks facing the company and the measures adopted to avoid or manage those risks
If the committees for audit and risk are separate, the governing body should consider for one or more members to have joint membership of both committees for more effective functioning
The committee for risk governance should have executive and non-executive members, with a majority being non-executive members of the governing body
The chairperson of the committee should be a non-executive director. The chair of the board may chair this committee.

Question 11

The purpose, composition and responsibilities of the remuneration committee

Answer 11

The purpose of the remuneration committee is to ensure that directors are appropriately rewarded for their work in a manner that will ensure, as far as possible, the recruitment, retention and appropriate motivation of people with the skills that the company needs
It is essential that management’s remuneration is structured to ensure that their actions are directed towards the long-term benefit of stakeholders
The remuneration committee should (only) consist of non-executive directors of whom a majority, including the chair, should be independent
The remuneration committee members should be completely independent from the organisation’s management, and they should not have any personal interest in the outcome of the remuneration committee’s decision
The main requirement is that the members of the committee should have a broad business experience and a good knowledge of the company, its executives and business strategy
One of the most important responsibilities of the members of the committee is to be up to date with appropriate levels, structuring methods and types of remuneration offered in the environment that the organisation operates
Sound financial acumen is extremely important for members of the committee to be able to appreciate what the likely impact on the company will be of the committee’s remuneration decisions, particularly with respect to long-term performance-based remuneration
As the remuneration committee consists of non-executive directors, it is inappropriate for it to recommend the basis of remuneration of non-executive directors. This should be a matter for the board as a whole and ultimately requires approval by special resolution of shareholders in a general meeting
The committee should consider all aspects, including both fixed and variable pay, as well as pension arrangements and benefits in kind

Question 12

State section 94(2) of the Companies Act in relation to the appointment of an audit committee

Answer 12

a) At each annual general meeting, a public company or state-owned company, or other company that has voluntarily determined to have an audit committee as contemplated in section 34(2), must elect an audit committee comprising at least three members, unless—
i. the company is a subsidiary of another company that has an audit committee; and
ii. the audit committee of that other company will perform the functions required under this section on behalf of that subsidiary company.
b) The first members of the audit committee may be appointed by—
i. the incorporators of a company; or
ii. the board, within 40 business days after the incorporation of the company

Question 13

State section 94(4) of the Companies Act in relation to the membership of the audit committee

Answer 13

Each member of the audit committee of a company must:

a) be a director of the company, who satisfies any applicable requirements prescribed in terms of subsection (5);
b) not be—
i. involved in the day-to-day management of the company’s business or have been so involved at any time during the previous financial year;
ii. a prescribed officer, or full-time employee, of the company or another related or inter-related company, or have been such an officer or employee at any time during the previous three financial years; or
iii. a material supplier or customer of the company, such that a reasonable and informed third party would conclude in the circumstances that the integrity, impartiality or objectivity of that director is compromised by that relationship; and
c) not be related to any person who falls within any of the criteria set out in paragraph (b).

Question 14

What is the Combined Assurance Model

Answer 14

A combined assurance model incorporates and optimizes all assurance services and functions so that, taken as a whole, these enable an effective control environment, support the integrity of information used for internal decision-making by management, the governing body and its committees, and supports the integrity of the organization’s external reports

Question 15

State the recommended practices for assurance set out in the King IV Code

Answer 15

The governing body should assume responsibility for assurance by setting the direction concerning the arrangements for assurance services and functions. The governing body should delegate to the audit committee, if in place, the responsibility for overseeing that those arrangements are effective in achieving the following objectives:
a. Enabling an effective control environment
b. Supporting the integrity of information used for internal decision-making by management, the governing body and its committees
c. Supporting the integrity of external reports
• The governing body should satisfy itself that a combined assurance model is applied which incorporates and optimizes the various assurance services and functions so that, taken as a whole, these support the objectives for assurance
• The governing body should oversee that the combined assurance model is designed and implemented to cover effectively the organization’s significant risks and material matters, through a combination of the following assurance service providers and functions, as is appropriate for the organization:
a. The organisation’s line functions that own and manage risks
b. The organisation’s specialist functions that facilitate and oversee risk management and compliance
c. Internal auditors, internal forensic fraud examiners and auditors, safety and process assessors and statutory actuaries
d. Independent external assurance service providers such as external auditors
e. Regulatory inspectors
• The governing body and its committees should assess the output of the organisation’s combined assurance with objectivity and professional scepticism, and by applying an enquiring mind, form their own opinion on the integrity of information and reports, and the degree to which an effective control environment has been achieved

Question 16

Discuss the role provided by internal assurance providers on the management of fraud and corruption

Answer 16

a. The efficacy of the control system will be enhanced if basic principles of internal control are in place and enforced, such as division of duties, clear limits of authority, regular taking of leave, monthly reconciliations and adequate management oversight
b. However, while these procedures will protect against fraud and corruption of employees in general, they will be less effective where fraud and/or corruption are taking place at an executive level, particularly if there is collusion
c. The audit committee should be alert to factors which may signal potential for fraud and corruption, such as inadequate systems, poor background checks on new employees, failure to take leave, over-reliance on particular employees, evidence of lavish lifestyles of employees, etc.
d. These factors will vary according to the level of employee, e.g. there will be more incentive for collusion with competitors where employees are remunerated according to profit performance than at a more junior level where such incentives are not available
e. While it is the task of internal audit to unearth fraud and corruption, and not the audit committee itself, the committee needs to be asking the right questions and probing the findings of internal audit

Question 17

Discuss the role provided by internal assurance providers on the management of whistle-blowing

Answer 17

a. To assist in the combating of fraud and corruption, the audit committee should ensure that arrangements within the company facilitate the raising of concerns by staff and external whistle-blowers about possible improprieties, their investigation and follow-up
b. This responsibility is echoed in s 94 (7) (g) of the Companies Act which requires the audit committee to receive and deal appropriately with complaints
c. As whistle-blowing is potentially hazardous for the informant, organizations need to have protective measures in place, anonymity needs to be ensured, and within the organisation there needs to be a culture that encourages and, where appropriate, openly commends the reporting of fraud and other irregularities
d. Section 159(4) of the Companies Act affords some protection for whistle-blowers by providing that any person who makes such disclosures
i. Has qualified privilege in respect of the disclosure, and
ii. Is immune from any civil, criminal, or administrative liability for that disclosure
e. The reporting of the alleged misdemeanour may be handled through an external party in order to preserve anonymity
f. The audit committee should ensure that all tip-offs are reported to it, as well as the outcomes, including the remedying of any control deficiencies, and any disciplinary or legal actions taken

Question 18

What is a reportable irregularity?

Answer 18

A reportable irregularity means an unlawful act or omission by management which is likely to cause material loss to the company, shareholders or creditors, is fraudulent or amounts to theft, or represents a material breach of fiduciary duty

Question 19

Management as an assurance provider: Competence of the company’s finance function

Answer 19

a) The first line of defence and the first phase of combined assurance against the risk of inaccurate financial or other information must be the company’s own management, in particular its finance function
b) The King IV Code sets out certain disclosures that the audit committee should make in addition to those relating to its statutory duties and these include:
i. the committee’s views on the effectiveness of both the chief financial officer and the finance function
ii. the committee’s views on the effectiveness of the design and implementation of internal financial controls
iii. the committee’s views on the nature and extent of any significant weaknesses in the design, implementation or execution of such controls that resulted in material financial loss, fraud, corruption or error

Question 20

Management as an assurance provider: Significant issues of accounting measurement and disclosure

Answer 20

• It is important for the audit committee to examine the company’s accounting policies thoroughly to ensure that they are appropriate to its business and satisfy the needs of its stakeholders
• It is the audit committee which should consider and make recommendations to the board regarding proposed changes in accounting policies and in the level of disclosure
• The audit committee, in applying its collective mind to accounting matters, should be alert to:
  i. Any unusual policies, policies which rely on fine distinctions of interpretation for their legitimacy or those that require significant judgement in their application
  ii. Incentives which may exist which require management to report in a particular manner
  iii. Assumptions and judgements underlying application of accounting policies, and the sensitivity of figures to these assumptions and judgements
  iv. The audit committee’s own view on the competence of the finance function, such intangible matters as their sense of the level of integrity set by the chief financial officer, whether the approach tends to be conservative or aggressive, and the degree to which the chief financial officer has a good handle on the control system and the figures which it produces

Question 21

King IV Code recommended practices: audit committee

Answer 21

• The governing body of any organisation that issues audited financial statements should consider establishing an audit committee, the role of which should be to provide independent oversight of, among others:
a) The effectiveness of the organisation’s assurance functions and services, with particular focus on combined assurance arrangements, including external assurance service providers, internal audit and finance function, and
b) The integrity of the annual financial statements and, to the extent delegated by the governing body, other external reports issued by the organisation
• A statutory audit committee has the power to make decisions regarding its statutory duties, and is accountable for its performance in this regard. In addition to its statutory duties, the governing body may delegate other responsibilities to the audit committee, such as the approval of the annual financial statements, but the governing body remains ultimately accountable for such delegated responsibilities
• If the governing body delegates risk governance to the audit committee, the audit committee should satisfy itself that it dedicates sufficient time to this responsibility
• Whether or not the governance of risk is delegated to the audit committee, the audit committee should oversee the management of financial and other risks affecting the integrity of external reports issued by the organisation
• The members of the audit committee should, as a whole, have the necessary financial literacy, skills and experience to execute their duties effectively
• All members of the audit committee should be independent, non-executive members of the governing body
• The governing body should appoint an independent, non-executive member to chair the audit committee
• The audit committee should meet annually with the internal and external auditors respectively, without management being present, to facilitate an exchange of views and concerns that may not be appropriate for discussion in an open forum
• In addition to the required statutory disclosures and the disclosures recommended above, the following should also be disclosed in relation to the audit committee:
a. A statement as to whether the audit committee is satisfied that the external auditor is independent of the organisation. The statement should specifically address:
i. The policy and controls that address the provision of non-audit services by the external auditor, and the nature and extent of such services rendered during the financial year
ii. The tenure of the external audit firm and, in the event of the firm having been involved in a merger or acquisition, including the tenure of the predecessor firm
iii. The rotation of the designated external audit partner
iv. Significant changes in the management of the organisation during the external audit firm’s tenure which may mitigate the attendant risk of familiarity between the external auditor and management
b. Significant matters that the audit committee has considered in relation to the annual financial statements, and how these were addressed by the committee
c. The audit committee’s views on the quality of the external audit, with reference to audit quality indicators such as those that may be included in inspection reports issued by external regulators
d. The audit committee’s views on the effectiveness of the chief audit executive and the arrangements for internal audit
e. The audit committee’s views on the effectiveness of the design and implementation of internal financial controls, and on the nature and extent of any significant weaknesses in the design, implementation or execution of internal financial controls that resulted in material financial loss, fraud, corruption or error
f. The audit committee’s views on the effectiveness of the CFO and the finance function

Question 22

Statutory requirements of the audit committee

Answer 22

• All public companies and state-owned companies must have an audit committee
• Other types of companies may elect to appoint an audit committee, however the provisions of the Companies Act pertaining the audit committee will only apply to these companies to the extent provided for in their respective Memorandums of Incorporation
• There are other types of businesses not necessarily conducted through companies where there is a further statutory requirement for an audit committee, notably banks, insurance companies and medical schemes
• Companies that are legally required to have an audit committee must appoint one at each annual general meeting. This is a function of the shareholders and not the board. This enables the shareholders to have direct control over who has their interests in the areas of financial reporting and control
• The audit committee must consist of at least three members who must be independent. It is not enough that they are non-executive directors. The committee members must also, collectively, possess the minimum qualification requirements, to be prescribed by the Minister of Trade and Industry
• At least one-third of the members must have the qualifications or experience in economics, law, corporate governance, finance, accounting, commerce, industry, public affairs or human resources management. Thus on a three-member committee, a solitary human resources practitioner would provide the qualifications for the purposes of the Act. However, for the functions that the audit committee will typically be required to perform, this would prove inadequate
• In case of group of companies, it is conceivable to have many subsidiaries that are public companies that require their own audit committee. The Act has a provision that allows the functions of the audit committee to be performed by a single committee, i.e. that of a parent company (s 94 (2) (a) and (b))
• The appointment of an audit committee as a creation of statute does not absolve the board of its responsibilities in relation to the matters handled by the audit committee. Section 94 (10) explicitly states that neither the appointment nor the duties of the audit committee reduce the responsibilities of the board or directors of a company, except with respect to the appointment, fees and terms of engagement of the auditors

Question 23

Meetings of the audit committee

Answer 23

• The chair will set the agenda for the audit committee meetings, assisted by the company secretary
• The chair will also decide upon the timing and frequency of the meetings. It is normal to hold three meetings in a year but the timing and frequency will vary from company to company. Two meetings in a year may suffice for some companies while for larger companies there may be as many as four or more
• What is important is that statutory reporting obligations are met and that the meetings are held according to an agreed programme
• The first meeting is a planning meeting at which the planned audit coverage by both the internal and external audits will be discussed, as well as the extent to which the external auditors plan to rely on the work of internal auditors
• The first meeting is an appropriate occasion to agree budgets for the year ahead, and to determine and pre-approve the nature and extent of non-audit services that may be provided by the auditors, and any particular areas of audit emphasis that the committee members wish to have in light of their assessment of risk
• In case of larger companies, an interim audit may be conducted prior to the year end, requiring another audit committee meeting to discuss the results of the interim audit
• A final meeting takes place to discuss the completed audit for the year and the presentation of annual financial statements
• Issues of accounting disclosure and the need, if any, for the auditors to report to directors or the board will be discussed
• The final internal and external audit findings on matters relating to internal controls, risk management and the financial statements will also be dealt with
• It is also at this meeting that the audit committee will assess the performance of the external auditors, and decide whether to recommend their re-appointment having duly considered the reports that the auditors are obliged to provide regarding IRBA’s inspection and any legal action
• It is best practice for the audit committee to meet separately without management being present, with the internal and external auditors, ensuring that it is fully briefed on all significant issues, and to provide the auditors with an opportunity to express any concerns they may have, which might have been awkward to raise in the presence of management
• The audit committee will discuss and approve the content of its report to shareholders at the annual general meeting

Question 24

Recommended practices: Responsible corporate citizenship

Answer 24

• The governing body should assume responsibility for corporate citizenship by setting the direction for how it should be approached and addressed by the organisation
• The governing body should ensure that the organisation’s responsible corporate citizenship efforts include compliance with the Constitution of South Africa (including the Bill of Rights), the law, leading standards and adherence to its own codes of conduct and policies
• The governing body should oversee that the organisation’s core purpose and values, strategy and conduct are congruent with it being a responsible corporate citizen
• The governing body should oversee and monitor, on an on-going basis, how the consequences of the organisation’s activities and outputs affect its status as a responsible corporate citizen

Question 25

Recommended practices: Organisational ethics

Answer 25

• The governing body should assume responsibility for the governance of ethics by setting the direction for how ethics should be approached and addressed by the organisation
• The governing body should approve codes of conduct and ethics policies that articulate and give effect to its direction on organisational ethics
• The governing body should ensure that the codes of conduct and ethics policies:
a. encompass the organisation’s interaction with both internal and external stakeholders and the broader society
b. address the key ethical risks of the organisation
• The governing body should ensure that the codes of conduct and ethics policies provide for arrangements that familiarise the employees and other stakeholders with the organisation’s ethical standards. These arrangements should include:
a. publishing the organisation’s codes of conduct and policies on the organisation’s website, or on other platforms or through other media as is appropriate
b. the incorporation by reference, or otherwise, of the relevant codes of conduct and policies in supplier and employee contracts
c. including the codes of conduct and ethics policies in employee induction and training programmes
• The governing body should delegate to management the responsibility for implementation and execution of the codes of conduct and ethics policies
• The governing body should exercise on-going oversight of the management of ethics and, in particular, oversee that it results in the following:
a. Application of the organization’s ethical standards to the processes for the recruitment, evaluation of performance and rewarding of employees, as well as the sourcing of suppliers
b. Having sanctions and remedies in place for when the organisation’s ethical standards are breached
c. The use of protected disclosure or whistle-blowing mechanisms to detect breaches of ethical standards and dealing with such disclosures appropriately
d. The monitoring of adherence to the organisation’s ethical standards by employees and other stakeholders through, among others, periodic independent assessments

Question 26

Nomination committee, its purpose, role and associated responsibilities

Answer 26

• The purpose of a nomination committee is to ensure that the board of directors consists of a balanced team with all the skills and attributes needed by the company
• To do this, it considers the need for new directors, searches for candidates and recommends new directors to the main board
• The nomination committee should consist of non-executive directors of whom a majority, including the chair, should be independent
• The JSE no longer prescribes that listed companies must appoint a nomination committee, but does require that listed companies adopt race and gender diversity policies for the board
• The nomination committee should meet at least twice a year, but by its nature will need to meet less often than the other governance committees
• The committee’s functions are to review, assess and make recommendations to the main board on the following matters:
a. Board composition
b. Succession
c. New appointments
d. Evaluation of performance and re-appointments
e. Committee composition

Question 27

Principle 15 of the King IV Code on assurance

Answer 27

The governing body should ensure that assurance services and functions enable an effective control environment, and that these support the integrity of information for internal decision-making and of the organisation’s external reports