Compliance Flashcards
Principle 13 on Compliance
The governing body should govern compliance with applicable laws and adopted, non-binding rules, codes and standards in a way that supports the organisation being ethical and a good corporate citizen
Recommended practices: compliance
• The governing body should assume responsibility for the governance of compliance with applicable laws and adopted, non-binding rules, codes and standards by setting the direction for how compliance is approached and addressed in the organisation
• The governing body should approve policy that articulates and gives effect to its direction on compliance, and that identifies non-binding rules, codes and standards that the organisation has adopted
• The governing body should delegate to management the responsibility for implementation and execution of effective compliance management
• The governing body should exercise on-going oversight of compliance and, in particular, oversee that it results in the following:
a. Compliance being understood not only for the obligations that it creates, but also for the rights and protections that it affords
b. Compliance management taking a holistic view of how applicable laws and non-binding rules, codes and standards relate to one another
c. Continual monitoring of the regulatory environment and appropriate responses to changes and developments
• The governing body should consider the need to receive periodic independent assurance on the effectiveness of compliance management
• The following should be disclosed in relation to compliance:
a. An overview of the arrangements for governing and managing compliance
b. Key areas of focus during the reporting period
c. The actions taken to monitor the performance of compliance management and how the outcomes were addressed
d. Planned areas of future focus
• Material or repeated regulatory penalties, penalties or fines for contravention of, or non-compliance with, statutory obligations, whether imposed on the organisation or on members of the governing body or officers, should be disclosed
Corporate governance practices that the JSE has made compulsory for listed companies
i. There must be a policy evidencing a clear balance of power and authority at board level, to ensure that no one director has unfettered powers of decision-making
ii. The issuer must have an appointed CEO and a chairman, and these positions must not be held by the same person. The chairman must either be an independent non-executive director (NED), or the issuer must appoint a lead independent director, in accordance with the King Code
iii. All issuers must, in accordance with the King Code, appoint an audit committee, a committee responsible for remuneration and a social and ethics committee
iv. A brief CV of each director must be provided in respect of a new listing. A brief CV for each director standing for election or re-election at a general meeting or the AGM should accompany the notice of the general meeting or AGM
v. The capacity of each director must be categorised as executive, non-executive or independent
vi. All issuers must have an executive financial director
vii. All issuers must appoint a company secretary in accordance with the Companies Act and should apply the recommended practices in the King Code
viii. The board of directors or the nomination committee must have a policy on the promotion of gender diversity at board level
ix. The board of directors or the nomination committee must have a policy on the promotion of race diversity at board level
x. The remuneration policy and the implementation report must be tabled every year for separate non-binding advisory votes by shareholders of the issuer at the AGM
Responsibility for compliance
- The board should regularly monitor compliance with laws and other rules, codes and standards
- The responsibility for compliance with laws and regulations is usually that of operating or line management (as stated in recommended practice 3 of Principle 13)
- The task of monitoring compliance will vary depending on the nature of a company’s business. Some monitoring activities are closely linked with the operations while others may be the responsibility of internal audit or compliance officers
- In most companies the board receives its reports on compliance from the company secretary
Companies Act compliance
• Unlike its predecessor, the new Act does not categorise all breaches of its provisions as ‘offences’ which carry criminal penalties, but only those which are particularly serious in nature, such as the publication of false or misleading financial information
• Instead, it uses alternative enforcement mechanisms such as:
a. Compliance notices, which the CIPC may serve on companies or individuals who appear to have contravened the Act, calling on them to comply or rectify the contravention
b. Personal liability of directors and prescribed officers for losses or damages to the company resulting from their actions in breach of the Act
c. Liability of those responsible for untrue statements in a prospectus
d. Liability of any person contravening any provision of the Act to any other person for loss or damage suffered as a consequence of that contravention
Competition law
• The main purposes of the Competition Act are:
a. to prohibit anti-competitive practices, which are described as ‘restrictive practices’ or ‘abuse of dominance’
b. to control mergers and acquisitions so as to ensure that they do not result in a lessening in the level of competition in the economy
c. to establish a Competition Commission, a Competition Tribunal and a Competition Appeal Court
d. to provide for investigative and adjudication proceedings, enforcement and penalties
• The Competition Commission has the task of investigating complaints and dealing with firms that may have committed prohibited practices
• The Competition Tribunal hears matters referred to it (matters of dispute) by the Competition Commission and adjudicates on the case
• Any appeals (arising from the decision of the Tribunal) may be made to the Competition Appeal Court and thereafter to the Supreme Court of Appeal
• Restrictive practices include both horizontal (with competitors) and vertical (with suppliers or customers) agreements that lessen competition. Price-fixing, cartels, market division, discussing prices with competitors, price discrimination and retail price maintenance all fall foul of the law.
• Several factors exacerbate the risks of anti-competitive behaviour:
a. Until recently, many of the actions that are now illegal were general practice in South Africa and were frequently carried out under marketing systems that were established by or sanctioned by government
b. Although South Africa has had legislation to encourage competition for many years, it was ineffectual and poorly enforced
c. The actions which render companies liable for large fines are often carried out by individuals at a relatively low level in the managerial hierarchy, who would be unknown to members of the board and who may not appreciate the implications of their actions
d. Many actions that at face value do not appear to be anti-competitive, have in practice been found to contravene the Act
• Boards should take steps to ensure that their companies’ business practices do not contravene the Competition Act and that may include:
a. carrying out a thorough investigation of the business and all its practices to determine whether any potential contraventions exist
b. apply to the Commission for leniency in respect of any contraventions that are discovered
c. amend or adapt business practices to ensure future compliance with the law
d. provide training to all members of staff who may be in a position to contravene the Act
• The Commission also hears applications for approval of mergers and acquisitions
• Mergers fall into three categories: small mergers that do not need approval, intermediate mergers that require the approval of the Commission, and large mergers that need the sanction of the Tribunal
• The thresholds determined in terms of the Act are as follows:
a. Lower threshold
Combined turnover or asset values of both firms Turnover or asset value of target firm
R600m R100m
b. Upper threshold
R6,6b R190m
• The thresholds are applied as follows:
a. A merger which does not meet the criteria for either an intermediate or large merger, is classified as a small merger and does not require approval by the authorities
b. A merger which exceeds the lower thresholds but not the upper thresholds, both in regard to the combined turnover or assets of the two firms, and in regard to the turnover or assets of the target firm is classified as an intermediate merger
c. A merger which exceeds the upper thresholds, both in regard to the combined turnover or assets of the two firms, and in regard to the turnover or assets of the target firm is classified as a large merger
d. A merger which exceeds the upper thresholds in regard to one set of criteria but falls between the upper and lower thresholds in regards to the other, is classified as an intermediate merger
Personal liability of directors and prescribed officers
• in the name of the company, signed anything on behalf of the company, or purported to bind the company or authorise the taking of any action by or on behalf of the company, despite knowing that he or she had no authority to do so
• persisted and went along with any action or decision despite knowing that it amounts to reckless trading
• been a party to any action or failure to act despite knowing that the act or omission was calculated to defraud a creditor, employee or shareholder of the
company
• signed, consented to, or authorised the publication of any financial statements that were false or misleading, or a prospectus that contained false or misleading information
•been present at a meeting, or participated in the making of a decision, and failed to vote against a decision to issue any unauthorised shares or securities, to issue options for unauthorised shares or securities, to provide financial assistance to a director or any person without complying with the requirements of the Act and the Memorandum of Incorporation, to approve a distribution that was contrary to the requirements of the Act, or for the company to acquire any of its own shares, or the shares of its holding
company, or make an allotment despite knowing that the acquisition or allotment was contrary to the requirements of the Act.
Compliance for listed companies
• All companies with securities listed on the JSE must comply with the JSE Listings Requirements
• Apart from their main function of regulating the markets operated by the JSE, these requirements reinforce good principles of corporate governance by requiring all listed companies to explain in their annual integrated reports how they have applied the King Code, through the application of the King Code disclosure and application regime
• King IV provides the following in respect of its ‘apply and explain’ regime:
a. Apply principles – all principles are phrased as aspirations and ideals that organizations should strive for in their journey towards good governance and realising the governance outcomes. The principles are basic and fundamental to good governance, and application thereof is assumed
b. Explain principles – explanation should be provided in the form of a narrative account, with reference to practices that demonstrate application of the principle. The explanation should address which recommendations or other practices have been implemented and how these achieve or give effect to the principles
c. What should be disclosed on the application of King IV – specific disclosure recommendations are included under each principle of the King IV Code. These recommendations are intended as guidance and a starting point for disclosure on the particular principle. The detail of information to be provided in the narrative should be guided by materiality, and should enable stakeholders to make informed assessment of the quality of the organisation’s governance
