ICYMI - 🔔 After the Bell: King V — a new crown, same old kingdom

The new version of the King Code, King V, is out for public comment. It’s a curious moment for the code because, for me, it constitutes one of those dual-perspective occasions. You don’t have to be an outright cynic to conclude that the code is honoured in the breach. And quite often, that breach is extremely, extremely breachy.

You don’t even have to cite the obvious (think Steinhoff, McKinsey, Bain, AYO, Tongaat, every SOE known to humankind), you can bring it right up to today: Barloworld, Exxaro. And those are only the companies that have thrust their way into the public eye.

So, what does one conclude in that case? You could argue, well, things would have been worse without the code. Or you could argue that the code is trying to make a difference in difficult circumstances. Or you could argue that it is making a difference but the bad apples are so bad that the whole picture is skewed.

On the other hand, you could argue, the code is a kind of political-cover intervention, designed to make it look as though corporate South Africa is doing the right thing, but actually, it is carrying on regardless — ticking a few boxes here and there in what is essentially a public relations exercise.

The basic problem — or from the opposite point of view, the basic utility of the code — is that the sanctions are so lightweight that the effect is muted. I mean, what does “Apply and Explain”, introduced in King IV, actually mean? It means, in my cynical view, you need to come up with some dubious reason that will be vaguely convincing for doing something egregious.

The drafters of King V are obviously aware of these challenges and have tried to meet them by tightening the rules slightly, but keeping the fundamental structure in place. Hence, King V remains essentially a voluntary code, as it has been from the start. But King V introduces stricter independence guidelines for board members, requiring a majority of non-executive directors; mandatory cooling-off periods for retired CEOs before they can become board chairs; and a specific nine-year limit for independent directors to avoid entrenchment.

Great! This is going to be a big wake-up call (one hopes). A study by the executive search firm Spencer Stuart in 2023 found that the average tenure of executive and non-executive directors was 6.1 years. But it also found the range spanned from 5.6 to 16 years. A Unisa study, released in 2020, cited a PwC report which found that 27% of non-executive directors on boards of JSE-listed companies had served for nine years or longer. I suspect there is going to be a lot of “applying and explaining” happening over the next year or so, perhaps more explaining that applying.

How else has the code changed? In many ways: the code requires businesses to actively align with national development goals, environmental sustainability and social transformation, which is generally a stronger stance than many Western codes. There is even a new reference to “ubuntu”, the very South African affirmation of human interconnectedness and collective wellbeing. The result is a code that focuses on community impact, unlike many European codes which focus more strongly on investor protection.

The new code also claims to be simpler, with the 17 principles outlined in the 2016 code now reduced to 12. It achieves this simplification by broadening some of the principles, so for example, the ethics and leadership principles that were separate in the 2016 code are combined into a single ethical leadership principle. Likewise, the risk and compliance principles that were separate have been integrated into a single governance principle. Does this make an enormous difference? Honestly, I don’t think so.

There is one big-ish change and that is on the very touchy topic of pay equity. King IV required companies to consider internal pay equity, but did not set mandatory measures or require them to disclose CEO-to-worker pay ratios.

The new version is a little more specific, saying the governing body should ensure that the remuneration policy “addresses organisation-wide remuneration”. That includes provision for “appropriate response to the wage gap by ensuring that there are arrangements and remuneration design principles that ensure that the remuneration of executive management is fair and responsible within the context of overall employee remuneration in the organisation”.

But as far as I can see, as I have said, it does not explicitly mandate the disclosure of specific pay ratios. In that sense, the code is weaker, for example, than the US Securities and Exchange Commission requirement that listed companies disclose the ratio of their CEOs’ total compensation to that of the median employee. UK-listed companies with more than 250 employees are required to do the same thing, as are certain companies in some other jurisdictions too.

The new code keeps the current structure on the separate non-binding advisory votes by shareholders on the remuneration policy and the remuneration disclosure. If either or both votes failed to achieve 75% adoption, the governing body should explain the “steps taken to address shareholders’ concerns”. Not to be too sarcastic, but it’s an enormous relief that there will be “steps taken”, although one would like to know what kind of “steps” will be taken. Are we talking big steps, small steps, lots of steps, mincing steps?

Overall, arguing against, and perhaps even for, the King Codes is a bit like arguing against motherhood and apple pie. I mean, who can possibly be against them? (The answer to that question might be: well, Maga for a start!) The question is, do they work? In the SA context, the answer is “not really”. That is the question that needs to be addressed, rather than tinkering with the code, however valuable that may be.

This post first appeared in Daily Maverick here :