Chapter 7: Corporate governance and King III

Question 1

Define corporate governance.

Answer 1

Corporate governance refers to those principles and procedures underlying the way in which companies and other organisations should be directed and controlled and originate from the division of ownership and control in a company and the need to clarify the roles and responsibilities of the board of directors and the management of a company.

Question 2

Name and describe the four fundamental principles on which good governance rests.

Answer 2

Good governance rests on four fundamental principles:
 Fairness: Fairness means that the interests of all the stakeholders must be taken into account. The stakeholders refer to any group affected by the company’s operations including for example, employees, suppliers and the community in which a company operates.
 Accountability: Accountability refers to the ability of a board to explain and justify its actions.
 Responsibility: responsibility refers to the obligation of the board to take good care of the assets, investments and interests of the stakeholders.
 Transparency: Transparency implies disclosure of the company’s financial, risk, social and environmental performance.

Question 3

Name the three principles underlying the philosophy of the King III report.

Answer 3

The philosophy underlying King III is concerned with three principles:
 Effective leadership characterised by the four fundamental principles of fairness, accountability, responsibility and transparency as well as the concept of ubuntu, a South African concept that includes mutual support and respect, interdependence, unity, collective work and responsibility.
 Sustainability which implies conducting an entity’s operations in such a manner that existing needs are met while taking into consideration the economic life of the community and the impact of its operations on future generations. A company is expected to be a responsible citizen that must, in an integrated manner, take the following into consideration when formulating strategy, risk and performance: social, environmental and economic issues. A company must therefore not only report on sustainability, but its performance must be sustainable.
 Corporate citizenship based on the Constitution that imposes responsibilities on individuals and corporate entities alike to ensure that people can rely on the realisation of fundamental rights.

Question 4

The King III principles apply only to listed companies.

Answer 4

False - King III applies to any entity and not only listed companies, the voluntary nature of the Code is especially important since it is not possible to have one set of rules that applies equally to all the variants of corporate life.