Chapter 7: Applications of the legislative and regulatory framework Flashcards
The King III Report places great emphasis on:
- Leadership
- Sustainability
- Corporate citizenship.
The following governance trends are incorporated in the King III report:
- Alternative dispute resolution: It is suggested that alternative dispute resolution will enable business to preserve business relationships by speedily resolving problems.
- Risk based internal audit: This will enable companies to place more reliance upon internal controls, which internal audit will verify/assure.
- IT governance: IT governance is important as it is a major operational risk.
- Shareholders and remuneration: The policy for the remuneration of non-executive directors of the board must be authorised by shareholders before implementation.
- Evaluation: The board of directors, the board committees and individual directors should be evaluated, annually.
Listing authorities are normally concerned with:
- The production of relevant business and financial information on the issue of shares
- The process by which shares are offered to potential shareholders and the price is set for the issue of shares
- Continuing production and dissemination of business and financial information on a timely basis on companies with listed securities
- The continuing conduct of the market in listed securities with a view to ensuring that the market is fair to all participants, and that the pricing process is fair and reasonable
- Rules to ensure that companies with listed securities and connected parties continue to behave in a manner that does not conflict with other objectives of the listing authority.
The Consumer Protection Act, No. 68 of 2008 (CPA)
(a) establishing a legal framework for the achievement and maintenance of a consumer market that is fair, accessible, efficient, sustainable and responsible for the benefit of consumers generally;
(b) reducing and ameliorating any disadvantages experienced in accessing any supply of goods or services by consumers
(c) promoting fair business practices;
(d) protecting consumers from
(e) improving consumer awareness and information and encouraging responsible and informed consumer choice and behaviour
(f) promoting consumer confidence, empowerment, and the development of a culture of consumer responsibility, through individual and group education, vigilance, advocacy and activism;
(g) providing for a consistent, accessible and efficient system of consensual resolution of disputes arising from consumer transactions; and
(h) providing for an accessible, consistent harmonised, effective and efficient system of redress for consumers.
“Fundamental consumer rights” are defined under the headings:
- Right of equality in the consumer market
- Consumer’s right to privacy
- Consumer’s right to choose
- Right to disclosure and information
- Right to fair and responsible marketing
- Right to fair and honest dealing
- Right to fair, just and reasonable terms and conditions
- Right to fair value, good quality and safety
- Suppliers’ accountability to consumers
Within balanced mandates this may include the extent to which the manager is allowed to depart from the benchmark strategic asset allocation at any time. Other restrictions, applying to all mandates, might include:
- Asset classes that are entirely prohibited
- Limitations on the use of assets and asset classes, such as a prohibition on the speculative use of derivatives
- Maximum permissible holdings in individual assets or asset classes
- Prohibitions on “self-investment” in the sponsor’s own securities
- Ethical or social limitations.
Effective decision-making:
Decisions should only be taken by persons or organisations with the skills, information and resources necessary to take them effectively.
Clear objectives:
Trustees should set out an overall investment objective for the fund that:
• Represents their best judgement of what is necessary to meet the fund’s liabilities
• Takes account of their attitude to risk, specifically their willingness to accept underperformance due to market conditions.
Focus on asset allocation:
Strategic asset allocation decisions should receive a level of attention that fully reflects the contribution they can make towards achieving the fund’s investment objective. Decision-makers should consider a full range of investment opportunity, not excluding from consideration any major asset class. Asset allocation should reflect the fund’s own characteristics, not the average allocation of other funds.
Expert advice:
Contracts for actuarial services and investment advice should be opened to separate competition. The fund should be prepared to pay sufficient fees for each service to attract a broad range of kinds of potential providers.
Explicit mandates:
Trustees should agree, with both internal and external investment managers, an explicit written mandate covering agreement between trustees and managers on:
• An objective, benchmark(s) and risk parameters that, together with all the other mandates, are coherent with the fund’s aggregate objective and risk tolerances
• The manager’s approach in attempting to achieve the objective
• Clear time scales of measurement and evaluation.
Appropriate benchmarks: Trustees should:
- Explicitly consider, in consultation with their investment managers, whether the index benchmarks they have selected are appropriate
- If setting limits on divergence from an index, ensure that they reflect the approximations involved In index construction and selection
- Consider explicitly, for each asset class invested, whether active or passive management would be more appropriate given the efficiency, liquidity and level of transaction costs in the market concerned
- Where they believe active management has the potential to achieve higher returns both targets and risk controls that reflect this, giving managers the freedom to pursue genuinely active strategies.
Performance measurement:
Trustees should arrange for measurement of the performance of the fund and should make formal assessment of their own procedures and decisions as trustees. They should also arrange for a formal assessment of performance and decision-making delegated to advisers and managers.
A “Statement of Investment Principles” should set out:
- Who is taking which decisions, and why this structure has been selected
- The fund’s investment objective
- The fund’s planned asset allocation strategy, including projected investment returns on each asset class, and how the strategy has been arrived at
- The mandates given to all advisers and managers
- The nature of the fee structures in place for all advisers and managers, and why this set of structures has been selected
Regular reporting:
Trustees should publish their Statement of Investment Principles and the results of their monitoring of advisers and managers, and send them annually to members of the fund. The Statement should explain why the fund has decided to depart from any of these principles.
