Reporting and Communication

Question 1

Principle 5 of the King IV Code states that ….

Answer 1

the governing body should ensure that reports issued by the organization enable stakeholders to make informed assessments of the organization’s performance and its short, medium and long-term prospects

Question 2

What is the general approach taken by King IV with regards to communicating with stakeholders?

Answer 2

It is that the governing body should oversee the publication of such reports and information as are required to

• comply with legal requirements
• meet the legitimate and reasonable information needs of material stakeholders

Question 3

What does Section 5 of the Companies Act stipulate in the event of a conflict between the Companies Act any other legislation?

Answer 3

it stipulates that the provisions of the Companies Act will prevail

Question 4

What exceptions are they where other legislation will override the Companies Act?

Answer 4

• In the case of listed companies, the listing requirements will prevail
• if there is a conflict between the requirements of the Companies Act and any of the PFMA, the Public Audit Act, or other legislation listed in s 5, the listed legislation will prevail

Question 5

What does the IFRS contain?

Answer 5

The IFRS contain a comprehensive set of rules for both measurement and disclosure of accounting information

Question 6

What does the term ‘measurement’ describe?

Answer 6

it describes how the financial position, results of operations and cash flows should be computed and recorded

Question 7

What does the term ‘disclosure’ refer to?

Answer 7

it refers to the nature and extent of information which should be presented in the financial statements and the manner of that presentation

Question 8

What does the ‘going concern’ concept mean for a company?

Answer 8

it presumes that there is no intention to liquidate the enterprise and that, by implication, it has adequate resources to sustain it at least to the next reporting date

Question 9

General communication principles

Answer 9

• It is essential that boards recognise that they are dealing with a variety of stakeholders in a company, and not merely the shareholders, but also employees, creditors and the general public
• In communicating with these stakeholders, some general principles that were stated in King II Report and which still apply are that:
a. the board has a duty to present a balanced and understandable assessment of the company’s position
b. the quality of information should be based on principles of openness and substance over form
c. reporting should address material matters of significant interest and concern to all stakeholders
• An annual integrated report can be used as a vehicle to connect the more detailed information in other reports and address, in a complete and concise manner, the matters that could affect the company’s ability to create value, as a standalone report
• The requirement to prepare an integrated report applies to all entities which fall within the ambit of the King Report, and will thus in principle apply to the small, owner managed company in the same way as it does to a major global company with a multitude of shareholders
• However the concept of proportionality introduced into King IV implies that smaller entities cannot be expected to produce an integrated report on the same scale as annual reports of major listed companies
• According to the King IV Code, implementing King IV on a proportional basis means that the principles find application as they stand; they embody the aspirations of, and are fundamental to the journey towards good governance. The practices as recommended in the King Code, however, are positioned at the level of leading practices and may therefore not be suitable and appropriate for all organizations. Practices are meant to be scaled in accordance with the following proportionality considerations particular to the organisation:
a. size of turnover and workforce
b. resources
c. extent of complexity of activities, including impact on the triple context in which it operates
• The integrated report is not the only means of communication with stakeholders. In the case of listed companies, half-yearly interim reports must be produced and announcements of significant events that are likely to have a material impact on the share price of a listed entity may have to be made on the Stock Exchange News Service (SENS)

Question 10

Section 29 (1) of the Companies Act

Answer 10

If a company provides any financial statements, including any annual financial statements, to any person for any reason, those statements must—

a. satisfy the financial reporting standards as to form and content, if any such standards are prescribed;
b. present fairly the state of affairs and business of the company, and explain the transactions and financial position of the business of the company;
c. show the company’s assets, liabilities and equity, as well as its income and expenses, and any other prescribed information;
d. set out the date on which the statements were produced, and the accounting period to which the statements apply; and
e. bear, on the first page of the statements, a prominent notice indicating—
i. whether the statements—
(aa) have been audited in compliance with any applicable requirements of this Act;
(bb) if not audited, have been independently reviewed in compliance with any applicable requirements of this Act; or
(cc) have not been audited or independently reviewed; and
ii. the name, and professional designation, if any, of the individual who prepared, or supervised the preparation of, those statements.

Question 11

Specific disclosures on financial statements

Answer 11

• The date on which the financial statements were produced and the period to which they apply
• The first page of the statements must bear a prominent notice indicating whether the statements were audited, independently reviewed or neither; and the name and professional designation of the person who prepared or supervised the preparation of the financial statements
• In the case of annual financial statements, extensive disclosures are required in respect of the remuneration of directors and officers
• Details must be given of special resolutions and any shares issued for cash

Question 12

Directors’ exposure

Answer 12

• Directors face potential exposure if financial statements issued by the company prove to be misleading, materially false, or fail to comply with s 29(1) – i.e. fair representation, compliance with accounting standards, disclosure of assets and liabilities, etc.
• Section 29 (6) provides that any person who is knowingly party to the preparation, approval, dissemination or publication of such financial statements is guilty of an offence and the penalty on conviction is a fine and/or imprisonment of up to 10 years

Question 13

Section 28 of 2008 Companies Act: Accounting records

Answer 13

A company must keep accurate and complete accounting records in one of the official languages of the Republic—
i. as necessary to enable the company to satisfy its obligations in terms of this Act or any other law with respect to the preparation of financial statements;
ii. including any prescribed accounting records, which must be kept in the prescribed manner and form
A company’s accounting records must be kept at, or be accessible from, the registered office of the company
Certain records are accessible to shareholders including the MOI, directors’ register, reports to annual meetings, as well as the notice and minutes of these meetings and the securities register
The records that are required to be kept in terms of the Act must be retained for 7 years

Question 14

Audit

Answer 14

• An audit provides an independent attestation as to the quality of the financial information presented, thus giving assurance to external users as to the reliability of that information
• Instead of requiring that all companies should have their annual financial statements audited, the 2008 Companies Act now only requires an audit for public and state-owned companies, and for specific categories of companies, as prescribed by regulation
• In terms of Regulation 28, the prescribed companies are:
a. any company which, in the ordinary course of business, holds assets in a fiduciary capacity for a broad group of persons who are not related to the company and the aggregate value of such assets at any time during the financial year exceeds R5 million
b. any non-profit company, if it was incorporated
i. directly or indirectly by the state, an organ of state, a state-owned company, an international entity, a foreign state entity or a company; or
ii. primarily to perform a statutory or regulatory function in terms of any legislation, or to carry out a public function at the direct or indirect initiation or direction of an organ of the state, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function
c. any other company whose public-interest score in that financial year exceeds 350, or the score is at least 100, if its financial statements were internally compiled
• An independent review of the annual financial statements is required for private companies where the public-interest score is at least 100 but is below 350, where it must be done by a registered auditor
• If the public-interest score is below 100, the review may be done by a person who qualifies to be appointed as an accounting officer under the Close Corporations Act
• An independent review is NOT required in the case of private companies where all the shareholders are also directors (and can therefore get the information they want)

Question 15

Directors’ assertions

Answer 15

The 2002 Code recommended that directors should state that:

a. it is their responsibility to prepare financial statements fairly presenting the state of affairs of the company
b. the auditor is responsible for reporting on whether fair presentation has been achieved
c. adequate accounting records and internal controls and risk management have been maintained
d. appropriate accounting policies, supported by reasonable and prudent judgements and estimates have been used consistently
e. applicable accounting standards have been adhered to or, in the event of a departure in the interests of fair presentation, this is disclosed, explained and quantified
f. King IV Code on Corporate Governance has been adhered to or, in the event of non-compliance, reasons provided

Question 16

Principle 16 on stakeholder relationships

Answer 16

In the execution of its governance role and responsibilities, the governing body should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time

Question 17

Comment on King IV’s stakeholder-inclusive approach

Answer 17

• King IV advocates a stakeholder-inclusive approach in which the governing body takes account of the legitimate and reasonable needs, interests and expectations of all material stakeholders in the execution of its duties in the best interests of the organisation over time
• By following this approach, instead of prioritising the interests of the providers of financial capital, the governing body gives parity (equality) to all sources of value creation, including among others, social and relationship capital as embodied by stakeholders
• Stakeholder inclusivity involves the balancing of interests over time by way of prioritising and, in some cases, trading off interests. A decision on how to achieve this balance is made on a case by case basis as current circumstances and demands require, but should always be done in the best interests of the organisation over the longer term

Question 18

Recommended practices: stakeholder relationships

Answer 18

a. The governing body should assume responsibility for the governance of stakeholder relationships by setting the direction for how stakeholder relationships are approached and conducted in the organisation
b. The governing body should approve a policy that articulates and gives effect to its direction on stakeholder relationships
c. The governing body should delegate to management the responsibility for implementation and execution of an effective stakeholder relationship management
d. The governing body should exercise on-going oversight of stakeholder relationship management and, in particular, oversee that it results in the following:
i. Methodologies for identifying individual stakeholders and stakeholder groupings
ii. Determination of material stakeholders based on the extent to which they affect, or are affected by, the activities, outputs and outcomes of the organisation
iii. Management of stakeholder risk as an integral part of organisation-wide risk management
iv. Formal mechanisms of engagement and communication with stakeholders, including the use of dispute resolution mechanisms and associated processes
v. Measurement of the quality of material stakeholder relationships, and appropriate responses to the outcomes

Question 19

Recommended practices: shareholder relationships

Answer 19

• The board should oversee that the company encourages proactive engagement with shareholders, including engagement at the AGM of the company
• All directors should be available at the AGM to respond to shareholders’ queries on how the board executed its governance duties
• The board should ensure that the designated partner of the external audit firm attends the AGM
• The board should ensure that shareholders are equitably (fair and impartial) treated, and that the interests of minority shareholders are adequately protected
• The minutes of the AGMs of listed companies should be made publicly available

Question 20

Recommended practices: relationships within a group of companies

Answer 20

• The board of the holding company should assume responsibility for governance across the group by setting the direction for how the relationships and exercise of power within the group should be approached and conducted
• The board of the holding company should approve a group governance framework that articulates and gives effect to its direction on relationships and the exercise of authority across the group
• The adoption and implementation of the policies, structures and procedures of the holding company is a matter for consideration and approval by the subsidiary company as a separate legal entity. The board of the holding company should therefore ensure that the boards of its subsidiaries are included in the development of the group governance framework
• The board of the holding company should ensure that the group governance framework does not conflict with the memoranda of incorporation, delegations of authority, shareholder agreements, board charters, board committee terms of engagement, and related policies and agreements within the group
• The board of the holding company should ensure that the group governance framework recognises each subsidiary within the group as a separate and independent juristic person to whom its directors owe fiduciary duties
• The board of the holding company should ensure that the group governance framework addresses governance matters as is appropriate for the group, including the following:
a. Delineation of the rights and role of the holding company
b. If applicable, delegation of certain responsibilities by the board of a subsidiary to a board committee of the holding company, without abdicating accountability, and subject to agreed reporting and information-sharing arrangements
c. The extent to which governance and operational policies of the holding company have been adopted by subsidiary companies in the group
• The board of the holding company should ensure that the agreed group governance framework is implemented across the group
• The holding company should disclose an overview of the group governance framework that is implemented across the group
• The subsidiary company should disclose what responsibilities it has delegated to board committees of the holding company and the extent to which it has adopted the policies and procedures of the holding company

Question 21

Managing stakeholder relationships

Answer 21

• Management of stakeholder relationships is something that has to be delegated to management, as recommended in King IV
• Thus, management should:
a. develop a strategy
b. develop suitable strategies for the management of relations with all stakeholder groupings
c. establish mechanisms and processes supporting constructive engagement between the company and its stakeholders
• The governing body should exercise oversight of all the above
• There are potential benefits from a healthy relationship with stakeholders and engagement with stakeholders could provide information not only about the views of stakeholders, but also as to external events, market conditions, technological advances and trends or issues
• Nevertheless, there are some limitations to engaging with stakeholder groups and these are:
i. The information derived from engagement with stakeholders may be anecdotal, self-interested or unreliable and the company should therefore use it with circumspection
ii. The company should not allow itself to get into a position of permitting interference or undue influence in the running of the company
iii. The company should not go into the other extreme of using legal or other processes to block engagement with stakeholders
iv. The company should take care to ensure, as far as practicable, even-handedness between the various classes of stakeholder, and within classes of stakeholder; relationships can be damaged and trust destroyed if it is felt that some stakeholders are privy to information which is being withheld from others
• The best interest of the company remains the paramount consideration in stakeholder management

Question 22

Dealing with shareholders

Answer 22

• In the interest of healthy management, shareholders should be encouraged to attend the annual general meeting and other company meetings
• The board needs to take seriously its responsibilities with regard to the AGM, and avoid the practice in the past of turning these into a swift formality, over in matter of minutes. The AGM presents an opportunity to discuss the affairs of the company generally and deal comprehensively with the questions raised by shareholders. It is therefore important to ensure good attendance by directors and the chairs of the committees should be present in order to answer questions relating to their responsibilities
• The board needs to appreciate that formal processes such as the AGM need not be the only mechanism for dealing with shareholders, and that informal processes such as direct contact, websites, advertising and press releases should be considered. This will depend on whether the company is listed or not, and on the number of shareholders
• Care must be taken when dealing with information that is price sensitive. In principle, this information should be shared with all stakeholders as soon as possible, and, with regards to shareholders, the board needs to be aware of insider trading rules
• The board needs to be aware of the rights that the shareholders enjoy under the Companies Act and in terms of common law
• JSE Listings Requirements relating specifically to disclosures regarding shareholders. These entail
(a) Firstly, an analysis of the shareholder spread for each class of listed securities, split between public and non-public shareholders, with a further analysis of the latter, and
(b) secondly, disclosure of any major shareholders, being those interested in 5% or more of any class of shares

Question 23

United Nation’s Principles for Responsible Investing (PRI)

Answer 23

• We will incorporate ESG (economic, social and governance) issues into investment analysis and decision-making processes
• We will be active owners and incorporate ESG issues into our ownership policies and procedures
• We will seek appropriate disclosure of ESG issues by the entities in which we invest
• We will promote acceptance and implementation of the Principles within the investment industry
• We will work together to enhance our effectiveness in implementing the Principles
• We will each report on our activities and progress towards implementing the Principles

Question 24

IoDSA CRISA principles (Code for Responsible Investing in South Africa)

Answer 24

• An institutional investor should incorporate sustainability issues, including economic, social and governance, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries
• An institutional investor should demonstrate an acceptance of ownership responsibilities in its investment arrangements and investment activities
• Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles and CRISA and other codes and standards applicable to institutional investors
• An institutional investor should recognise the circumstances and relationships that hold a potential for conflicts of interest and should proactively manage these when they occur
• Institutional investors should be transparent about the content of their policies, how the policies are implemented and how CRISA is applied to enable stakeholders to make informed assessments

Question 25

Communicating with stakeholders

Answer 25

• According to King III, transparent and effective communication is essential for building and maintaining stakeholders’ trust and confidence
• This entails determining who the stakeholders are, determining their reasonable information needs and determining processes to meet those needs. In this regard factors to be taken into account would include legal requirements, issues of confidentiality, competitively sensitive information, etc.
• Policies should be directed at ensuring that information would be provided proactively and in a manner that is complete, timely, relevant, accurate, honest and accessible
• Thus is determining the policy recommended as part of Principle 16 of King IV, the board should adopt communication guidelines which will incorporate these considerations and define respective responsibilities of the board and management
• For example, it is important that there should be clarity as to who acts as spokesperson for the company. In general this should be done by the chief executive, or a company spokesperson acting under the authority of the chief executive
• It is also desirable that there be good feedback mechanisms. Not only will this be useful in managing the company, but also in providing the board with an independent check on how the company is truly perceived by key stakeholders
• It is also important for there to be processes in place to deal with rapidly and sensitively with any crisis. Two recommendations of King IV flow from this:-
a. Firstly, there should be formal mechanisms for engagement and communication with stakeholders, including the use of dispute resolution mechanisms and associated processes, and
b. Secondly, there should be measurement of the quality of material stakeholder relationships, and appropriate response to the outcomes
• Social media is also an important tool for engagement with stakeholders. It is therefore important that clear guidelines be provided to employees officially representing the company, but also to all employees on some aspects of the private use of social media
• Due to the rapidity of the dissemination of information through social media platforms, it will be prudent for the board to ensure that management has a contingency plan for dealing with a major social media incident

Question 26

Dispute resolution

Answer 26

• According to King IV, a dispute resolution process should be regarded as an opportunity not only to resolve the dispute at hand, but also to but also to maintain and enhance the social and relationship capital of an organisation
• Accordingly, King IV recommends that dispute-resolution mechanisms and associated processes be adopted and implemented as part of the overall management of stakeholder relationships
• Despite the existence of a dispute between a company and any of its stakeholders, it is intended that the resolution of the dispute must be done in a manner that preserves the underlying relationship