KING REPORT ON GOVERNANCE FOR SOUTH …

1 Draft REPORT on GOVERNANCE for SOUTH Africa February 25, 2009. DRAFT CODE OF GOVERNANCE . PRINCIPLES FOR SOUTH AFRICA - 2009. king COMMITTEE ON GOVERNANCE . 2009 Institute of Directors in Southern Africa. All rights reserved Page 1. THE BUSINESS LEADERS. Preface February 25, 2009. COPYRIGHT. INSTITUTE OF DIRECTORS IN SOUTHERN AFRICA. Copyright in this publication titled Draft REPORT on GOVERNANCE for SOUTH Africa , and the Draft Code of GOVERNANCE Principles , rests with the Institute of Directors in Southern Africa. Apart from the extent reasonably necessary for the purposes of research, private study, personal or private use, criticism, review or the reporting of current events as permitted in the Copyright Act (No.)

2 98 of 1978), no portion may be reproduced by any process without written permission and acknowledgment of source. Written comments on the REPORT and the Code should be submitted on 25 April 2009 and should be sent to: Lindie Engelbrecht Chief Executive Institute of Directors in Southern Africa PO BOX 908. Parklands, 2121. SOUTH Africa E-mail: The Practice Notes supporting the REPORT and then Code will be released on the 1st of September 2009.. contact us 2009 Institute of Directors in Southern Africa. All rights reserved Page 2. Table of content February 25, 2009. Preface 6. The need for king III 6. The GOVERNANCE framework 7. Corporate GOVERNANCE and the financial crisis 9. The new constitution of commerce 9.

3 The link between GOVERNANCE principles and law 10. Legislation 11. Key principles of this REPORT 12. Emerging GOVERNANCE trends incorporated in the REPORT 16. Language, gender and terminology 19. Application of the code 19. Effective date 19. Appreciation 20. Chapter 1: Boards and directors 21. Role and function of the board 21. Composition of the board 30. Board appointment processes 36. Director development 36. Company secretary 37. Performance assessment 39. Board committees 41. Group boards 42. Remuneration of directors 43. 2009 Institute of Directors in Southern Africa. All rights reserved Page 3. Preface February 25, 2009. Chapter 2: Corporate citizenship: leadership, integrity and responsibility 52.

4 Chapter 3: Audit committees 59. Membership and resources of the audit committee 59. Responsibilities of the audit committee 61. Internal assurance providers 67. External assurance providers 70. Reporting 71. Chapter 4: Risk management 73. Responsibility for risk management 74. Risk assessment 80. Risk identification 82. Risk quantification and response 82. Assurance over the risk management process 84. Disclosure 86. Key risks facing the modern company 87. Chapter 5: Internal audit 96. The need for and role of internal audit 96. Internal audit's approach and plan 99. Internal audit's status in the company 100. Chapter 6: Integrated sustainability reporting and disclosure 103. Transparency and accountability 103.

5 Methods and timing of reporting 104. Chapter 7: Compliance with laws, regulations, rules and standards 107. Chapter 8: Managing stakeholder relationships 110. Introduction 110. Dispute resolution 121. 2009 Institute of Directors in Southern Africa. All rights reserved Page 4. Preface February 25, 2009. Chapter 9: Fundamental and affected transactions 128. Introduction 128. Bibliography 134. Research references 135. 2009 Institute of Directors in Southern Africa. All rights reserved Page 5. Preface February 25, 2009. Preface 1. The need for king III. The third REPORT on GOVERNANCE in SOUTH Africa ( king III) became necessary because of the anticipated new Companies Act (hereafter the Act)1 and changes in international GOVERNANCE trends.

6 This REPORT was compiled by the king committee with the assistance of the king subcommittees. On the advice of Sir Adrian Cadbury, the king Committee has been retained even though only three members of the committee formed in 1992 remain on the present king Committee. In giving his advice, Sir Cadbury pointed out the evolutionary nature of corporate GOVERNANCE - various commissions were held in England under people other than Sir Cadbury after the Cadbury REPORT was issued. Following the Cadbury REPORT were the Greenbury, Hampel, Turnbull, Smith and Higgs Reports. These were combined and the UK GOVERNANCE code is now known as the Combined Code. Following Sir Cadbury's advice, the committee continues to be known as the king Committee and the king code has become an internationally recognised brand.

7 There are nine subcommittees for king III, namely boards and directors; audit committees; risk management; internal audit; integrated sustainability reporting; compliance with laws, regulations, rules and standards; managing stakeholder relationships; fundamental and affected transactions and business rescue. Six researchers worked on king III, together with the subcommittees of 79 people. Lindie Engelbrecht, Chief Executive of the Institute of Directors of Southern Africa, acted as the convener of the chairmen of the subcommittees. Michael Katz checked all the legal aspects contained in the REPORT . The remits of the subcommittees as well as the names of the chairmen and the members of the subcommittees are given in an attachment to this REPORT .

8 We have endeavoured, as with king I and king II, to be at the forefront of GOVERNANCE internationally. We believe this has been achieved because of the focus on the importance of reporting annually on: how a company has both positively and negatively affected the economic life of the community in which it operated during the year under review; and how the company intends to enhance those positive aspects and eradicate or ameliorate the negative aspects on the economic life of the community in which it will operate in the year ahead. 2009 Institute of Directors in Southern Africa. All rights reserved Page 6. Preface February 25, 2009. As with king I and II, none of the members received remuneration.

9 The only value driver for members was service in the best interest of SOUTH Africa Inc. 2. The GOVERNANCE framework The GOVERNANCE of corporations can be on a statutory basis, as a code of principles and practices, or a combination of the two. The United States of America has chosen to codify a significant part of its GOVERNANCE in an act of Congress known as the Sarbanes-Oxley Act (SOX). This statutory regime is comply or else'. In other words, there are legal sanctions for non-compliance. There is an important argument against the comply or else' framework: a one size fits all'. approach cannot logically be suitable because the scales of business carried out by companies vary to such a large degree.

10 The cost of compliance is burdensome, both in time and money. Further, the board and the management become focused on compliance rather than the business of the enterprise. It is the duty of the board of a trading enterprise to undertake risk for reward and to try to improve the economic value of a company. If the board follows a narrow focus on compliance, the board's responsibility towards enterprise and its ultimate responsibility, namely performance, may be diluted. The cost of compliance by American companies with section 404 of SOX, which deals with the verification of internal controls, is estimated at $264bn since the inception of SOX in 2002. The total cost to the American economy of complying with SOX is more than the total write-off of Enron, World Com and Tyco combined.