The King IV Report on Corporate Governance for South Africa (“King IV”) is a set of guidelines for the governance structures and operations of companies and now retirement funds, in South Africa. King IV replaces the guidelines set out in King III and is effective in respect of financial years commencing on or after 1 April 2017.
King IV reduces the 75 principles set out in King III, to 17 and where the application of the principles is assumed; entities are required to exercise the “apply and explain” principle, unlike the King III code which made provision for an “apply or explain” principle.
Amongst supplements specifically applicable to other organisations and sectors, King IV provides a supplement that focuses specifically on the retirement funds industry given that such funds play such a significant role in the institutional investor industry. This applies to all retirement funds in accordance with their definitions in the Income Tax Act, No. 58 of 1962, as amended:
- Pension funds;
- Provident funds;
- Preservation funds; and
- Retirement annuity funds
In the King IV introduction, the retirement fund supplement furnishes the following macro view and benefits of corporate governance in the retirement fund industry context:
- Retirement funds are an important part of the institutional investor industry, which consists of retirement funds, insurance companies as well as custodians, nominees and service providers who act under mandate in respect of any investment decisions and activities.
- Retirement funds play an important role in the overall system of governance, where they make investment decisions and have rights as shareholders. The way in which these decisions are made and rights are exercised, either reinforce or weaken the corporate governance of the companies that they invest in. Also, these funds owe fiduciary duties to their members and therefore need to be well-governed and the principles of responsible investing applied, in the quest for long-term, sustainable returns.
- Retirement funds that follow and mandate responsible investing, wield significant power for the enhancement of the checks and balances that are essential for an overall effective ecosystem of corporate governance and the creation of value. In King IV, following responsible investing principles and practices is put forward as part and parcel of the good governance of retirement funds.
A summary of the principles is as follows:
- Principle 1
The Board of Trustees should lead ethically and effectively.
- Principle 2
The Board of Trustees should govern the ethics of the fund in a way that supports the establishment of an ethical culture.
- Principle 3
The Board of Trustees should ensure that the fund is and is seen to be a responsible corporate citizen.
- Principle 4
The Board of Trustees should appreciate that the fund’s core purpose, its risks and opportunities, strategy, business model, performance and sustainable development, are all inseparable elements of the value creation process.
- Principle 5
The Board of Trustees should ensure that reports issued by the fund enable stakeholders to make informed assessments of the fund’s performance and its short, medium and long-term prospects.
- Principle 6
The Board of Trustees board should serve as the focal point and custodian of corporate governance in the fund.
- Principle 7
The Board of Trustees should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to execute its governance role and responsibilities objectively and effectively.
- Principle 8
The Board of Trustees should ensure that its arrangements for delegation within its own structures, promote independent judgment and assist with balance of power and the effective execution of its duties.
- Principle 9
The Board of Trustees should ensure that the evaluation of its own performance and that of its committees, its chair and its individual members, support continued improvement in its performance and effectiveness.
- Principle 10
The Board of Trustees should ensure that the appointment of and delegations to management contribute to role clarity and the effective exercise of authority and responsibilities.
- Principle 11
The Board of Trustees should govern risk in a way that supports the fund in setting and achieving its strategic objectives.
- Principle 12
The Board of Trustees should govern technology and information in a way that supports the fund setting and achieving its strategic objectives.
- Principle 13
The Board of Trustees should govern compliance with applicable laws and adopted, non-binding rules, codes and standards in a way that supports the fund being an ethical and responsible corporate citizen.
- Principle 14
The Board of Trustees should ensure that the fund remunerates fairly, responsibly and transparently, to promote the achievement of strategic objectives and positive outcomes in the short, medium and long term.
- Principle 15
The Board of Trustees should ensure that assurance fosters an effective control environment, therefore supporting the integrity of information for internal decision-making and of the fund’s external reports.
- Principle 16
In the execution of its governance role and responsibilities, the Board of Trustees should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the fund over time.
- Principle 17
The Board of Trustees should ensure that responsible investment is practiced by the fund to promote the good governance and the creation of value by the companies in which it invests.
The Board of Trustees should consider the above principles in conjunction with the Code for Responsible Investing in South Africa (CRISA), as well as the Financial Services Board Circular PF 130 (PF 130) which King IV refers to, being complementary to the code.
As far as retirement funds are concerned, I do believe that any enhancements to the governance requirements that are in the best interests of fund members, are positive and should be embraced by the board and its service providers (in assisting the board to meet its objectives). However, guidelines should not become so onerous that meeting said requirements leads to an increase in costs, which essentially negates any benefit of what the guidelines are aiming to achieve.
So, while governance is important from the perspective of protecting member interests, any governance guidelines introduced, should not in any way, lead to a reduction of potential annuity income during retirement. The reality is that as governance requirements increase, so do administrative costs, the industry and Boards of Trustees therefore need to identify and implement innovative ways of playing the balancing act aside from simply drafting a strategy document.