SOUTH AFRICA

By Julia Wittenburg

King II Report on Corporate Governance

After releasing a draft report for public comment in 2001, the King Committee issued a second code of corporate practices and conduct, the King Report on Corporate Governance for South Africa 2002 in March 2002. The King Committee, which was formed at the request of the Institute of Directors in Southern Africa, first offered its recommendations to bring South Africa's governance standards in line with international practice, in a report that was released in November 1994. The new corporate governance code is effective for companies whose financial years start after March 1, 2002. Consequently, a number of companies have started to comply with the requirements of the report over the past year, and most notably over the fourth quarter of 2002, traditionally South Africa's proxy season.

Among important changes introduced by the King II report, is the classification of directors into executive directors, non-executive directors, and independent directors in the annual report. The report also recommends that a majority of the board be non-executive directors, and that the chairperson be an independent non-executive. In addition to recommending the establishment of audit and remuneration committees, as proposed by the 1994 King Report, the King II Report goes on to recommend that companies establish other committees that are responsive to the nature of their business. These committees include "governance," "information technology," "risk," "environmental, safety, and health," "nomination," "investment," and "employment equity." The report also recommends the disclosure of director attendance at board meetings and board committee meetings.

Before the publication of the King II Report in 2002, director fees needed only be published in aggregate, with separate listings only for director fees and fees paid to directors for managerial services. Any further breakdown in the aggregate fees paid was provided at a company's discretion. The King II Report now recommends the disclosure of director remuneration on an individual basis, including details of earnings, share options, as well as all other benefits. In respect to auditor compensation, the King II Report encourages the separation of consulting services from auditing services and suggests separate disclosure for non-audit fees. As with many other markets, most South African companies currently engage their auditors in non-audit related activities.

In respect to the meeting notice, South African companies are now requested to provide a full explanation regarding the effects of any special resolution proposed at the meeting. In addition, the King II Report also recommends that each company provide a brief CV of each director standing for reelection at the meeting. While only a small number of South African companies have complied with these recommendations in 2002, these proposals are likely to be adapted by the JSE and become listing requirements in 2003.

In addition to reviewing the recommendations of the 1994 report, which have now been partly superseded by new legislation, the new King Report also issues recommendations regarding social and ethical accounting, auditing, and reporting, as well as regarding safety, health, and environment. The King II Report recommends that every company report at least once a year on the "nature and extend of its social, transformation, ethical, safety, health, and environmental management policies and practices." This includes the potential impact of HIV/AIDS on the company's activities. In the same context, the JSE is expected to release guidelines on AIDS reporting by 2003, in order to require listed companies to disclose the measures they are taking to address the impact of the disease. This would make South Africa the first country in the world to make AIDS reporting a listing requirement.