Principles, not rules: thanks to codes drafted under Mervyn King, South Africa has taken the lead in defining corporate governance in broadly inclusive terms - Interview

Internal Auditor, August, 2003 by Michael Barrier

IN 1994, THE YEAR THAT SOUTH AFRICA ENDED WHITE-MINORITY RULE and elected Nelson Mandela president, South African businesses underwent a more subdued but highly significant transition of their own. That year, a committee headed by Mervyn King, a corporate lawyer and former High Court judge, issued the "King Report on Corporate Governance." King I, as it is now known, incorporated a code of corporate practices and conduct that looked beyond the corporation itself, taking into account its impact on the larger community.

A second King Committee report--known inevitably as King II--was issued in 2002, taking this inclusive approach considerably further. "There is a growing weight of expectation on organizations to operate as good corporate citizens," the report says. "This is because of the influence they exercise on the lives of so many individuals. Each organization is the sum of its stakeholders, such as its shareowners, customers, employees, suppliers, and the communities within which it operates. It depends on them--individually and collectively--for the goodwill required to sustain its operations."

King spoke recently with Internal Auditor about King I and II and about how the South African initiatives compare with efforts to improve corporate governance in the United States.

Mr. King, the first King report was issued in 1994, during the momentous change in South Africa's government from white-minority rule to black-majority rule. What prompted that report and your involvement in it?

By 1991, there was a realization in South Africa that our previously disadvantaged fellow citizens were going to be in a new democratic society and would be moving from limited involvement in the economy into the mainstream. They had no experience with that, and there was nothing written down to guide them. There was also no guide as to how a board should treat stakeholders other than shareholders. I had practiced as a corporate lawyer for many years in South Africa, and I had sat on many boards. The Institute of Directors [in South Africa] and the Johannesburg Stock Exchange, as it was then called [now the JSE Securities Exchange], got together and asked me to chair a committee that was assembled to look at these issues.

The main item we discussed was, considering the special circumstances in the country, how to approach corporate governance in the new South Africa. Rather than focusing just on the financial aspects of governance, like the United Kingdom's 1992 Cadbury Code, we went for an integrated approach that looked at stakeholders as a whole who were linked through the company, and at how the board should deal with those stakeholders. It was the first time anyone had taken an integrated approach in articulating governance guidelines.

We decided to do King II because the governance of corporations is a dynamic thing. It doesn't stand still, and there were huge global developments from the time we published King I to the time we did King II. Companies around the world had learned over the years to approach reporting on an integrated basis, addressing social, economic, and environmental matters.

For the most part, King II doesn't seem to directly address the issues that led to the creation of King I.

We recommended in King I that companies engage in what became known as affirmative action. We set down guidelines in King I in an appendix as to how that should be carried out. Between 1994 and the publication of King II, the South African government passed the Employment Equity Act, which actually addressed the issue in its statutes, so it was unnecessary to deal with that in King II.

How has the South African government responded to King I and II?

The short answer is that there's been a positive reaction. However, there's been one response to which I'm opposed. There's some suggestion that certain aspects of the recommendations in King II should be legislated--in other words, be compulsory for all companies. Business is a difficult matter, and those who run it can't have the prescience to envisage what is going to happen from day to day, so they need flexibility in the processes associated with. administering their companies. To have the rigidity of a statute doesn't make business sense.

And how have South African companies responded to King I and King II?

Like all orchards, the corporate governance orchard in South Africa has a few diseased trees, but it is very healthy overall. That is not just my impression; it is the perception, for example, of American institutions that invest in South Africa because they believe that our country is among the best--if not the best--when it comes to corporate governance of emerging economies.

The JSE has adopted the King principles in its revised listing requirements. Parastatals [large state-owned enterprises] and the larger private companies are adhering to the main principles. Market forces dictate this.

In the United States, there has been a lot of criticism of efforts to draw up even more detailed rules, especially from overseas where many people believe that a principle-based approach is more effective.