CorporateGovernance &King3

1 At first glance, King 3appears to be similar to theprevious King 2 , there aresignificant differences, manyof them aspirational, whichwill have practicalimplications for boards,directors, management,assurance providers 3 summary and implicationsIn this King 3 summary document, we have provided an interpretation of thesignificant changes as well as a quick reference guide. KPMG interprets some ofthe changes and related implications as follows:ApplicabilityKing 3 applies to all entities regardless of the manner and form of incorporationor establishment and whether in the public, private or non-profit sectors. Implications:KPMG anticipates that entities and stakeholders will require adeeper understanding of governance in order to decide how governanceprinciples and practices should be adopted and implemented in their particularentity the one size does not fit all consequence.

2 This will necessitateeducation, dialogue, decisions and disclosure. Apply or explain versus Comply or explain King 3 has opted for the more flexible apply or explain approach to its principlesand recommended practices. In the United Kingdom, the Combined Code, whichis based on the comply or explain principle, requires London listed companies tostate their compliance with the principles and then explain if there is non-compliance to any of the detailed provisions supporting the principle. In SouthAfrica, under King 3, entities are required to make a statement as to whether ornot they apply the principles and then to explain their practices. It is relevant toothat King 3 states Each principle is of equal importance, consequently substantial application of this Code and Report does not achieve compliance. Implications:South African entities will have to consider the recommendedprinciples in King 3, state what theirs are, and explain if and why they differ fromthe King 3 recommendations.

3 This softer approach to governance disclosure ismore flexible, but may be open to abuse if entities fail to justify their deviationsfrom the King 3 Report s recommended principles. Only the sophisticated readerand those well-versed in governance will be able to discern deviations from therecommended principles in the disclosure. Potentially, this could expose adirector to liability in the event that statements of adherence to principles aremade but the best practices are not followed and are not Governance& King 3 ADVISORYS ustainabilityThere is increased emphasis onsustainability and its inseparableinterface with strategy and 3 calls for integrated reporting(reporting of financial information withsustainability issues of social,economic and environmental impacts)and recommends that the auditcommittee engage an externalassurance provider to provideassurance over material aspects of thesustainability reporting in theintegrated.

4 The skill set of the auditcommittee will have to includemember/s proficient in , integrated reporting mayrequire registered auditors andassurance providers who can provideassurance on both the financialcomponents and the sustainabilityaspects of reporting. This is likely toimpact the external audit engagement,opinion and associated costs, as wellas director liability in the event inclusivemodelKing 3 follows an inclusive approach tostakeholders, whereby the legitimateinterests of stakeholders ( , suppliers, customers,regulators, environment, community,etc) are considered and recognisedover and above solely theshareholders interests, in a mannerwhich befits the long termsustainability of the :The board should identifyimportant stakeholder groupings andmanagement will have to engage withthem to ascertain legitimateexpectations.

5 Communication with allstakeholders will be important and willbe reflected in the integrated anticipate the current common roleof the Investor Relations Manager todevelop towards that of a StakeholderRelations Manager .Board compositionKing 3 requires boards to becomprised of a majority of non-executive directors, of whom themajority should be independent. Everyyear the directors who are classified asindependent should have theirindependence assessed by the board,particularly those that have been onthe board for longer than nine results should be :Boards may encounterdifficulty in having sufficientindependent, suitably skilled anddemographically acceptable consequence will be theincreased time required bynon-executive directors to dischargetheir governance responsibilities on the effectiveness of thecompanies system of internal will impact on both the cost ofdirectors and management committeecomposition and dutiesKing 3 requires an independent andsuitably skilled audit committee,appointed by the shareholders.

6 Thiscommittee also has statutory duties interms of the Companies Act71 of 2008, apart from the board ofdirectors. The duties of the auditcommittee are extensive and includeoverseeing integrated reporting,external audit, internal audit, the riskmanagement process and the financefunction effectiveness. Part of itsfunction in relation to risk managementis to oversee the IT risks and fraudrisks as they relate to financialreporting and the internal financialcontrols, and this includes reportingto the board on the effectivenessthereof. The board in turn has toreport on the effectiveness of thesystem of internal :Whilst King 3 supportsthe unitary board principle, it could beargued that South Africa is movingtowards a two-tiered governancestructure with boards and auditcommittees both having statutoryresponsibilities. This is pertinentwhere, in the event of conflict, theaudit committee s decisions will prevailover the boards in areas where theformer has legislative anticipates that auditcommittees will have to look carefullyat their composition in order to havesufficient proficiency in all the areas offinancial reporting, sustainability, riskmanagement (including IT and fraudrisks), internal financial controls, auditprocesses and corporate law.

7 Morespecialists may be co-opted asattendees and advisors onto auditcommittees who, whilst not beingdirectors, will have all theresponsibilities and liabilities of being adirector in terms of the CompaniesAct 71 of expect that many auditcommittees may need support inrelation to the following: Integrated reporting and levels ofindependent assurance How the combined assuranceframework addresses all significantrisks The practicalities of how the riskcommittee works with the AuditKing 3 requires companies to establishan internal audit function whichprovides assurance over the company sgovernance, risk management andinternal controls. Internal audit will berequired to provide a writtenassessment of the system of internalcontrols and risk management to theboard, as well as a written assessmentof the internal financial controls to theaudit committee.

8 (King 3 differs fromSarbanes-Oxley in that no attestation isrequired from external auditors oninternal controls on financial reporting).Implications:Internal audit may requiremore resources to provide assuranceon the system of internal control andrisk management to the in practice, many internalaudit functions take care not toduplicate the work of external auditand thereby do not provide assuranceon exclusively internal financialcontrols. Internal audit will have todetermine the basis and methodologyby which it can provide a writtenassessment on the internal financialcontrols to the audit committee goingforward. The audit committee will haveto ensure that internal audit is properlyresourced and has sufficient managementUnder King 3, risk managementremains important and more detailedguidance is given on how it is to beaccomplished.

9 The board is responsiblefor the governance of risk anddisclosure, and management isresponsible for the risk managementdesign, implementation and monitoringof the risk management :Boards will have to spendmore time on risk will have to integrate riskmanagement more fully into therunning of business. The disclosure ofkey risks will require articulation andstakeholder governanceKing 3 highlights the role of ITgovernance and the board s recommendationsare :This is a new and expandedarea for King. More resources,management and director time will berequired to address IT governance andthe related procedures and practices. ITgovernance will impact the riskmanagement, assurance and 3 states that compliance shouldform an integral part of the riskmanagement function and thatcompanies should considerestablishing a compliance :There may be an increaseddemand for compliance officers and therole and positioning of the function willhave organisational structure andreporting implications.

10 Companies willalso have to incorporate compliancemethodologies into the riskmanagement and combined , disclosureand shareholders votesKing 3 requires disclosure of theremuneration of each individual directorand the top three most highly paidemployees. Guidance is given onremuneration policy and practices,including that non-executive directorsshould not receive share options. King 3recommends that the remuneration policybe put to the shareholders for a non-binding advisory vote, and that the boardshould determine the remuneration of theexecutive directors in line with the :Companies may beconcerned about the effect of disclosureon both executive remunerationnegotiations in terms of stayingcompetitive with global standards ofremuneration for highly mobile executivetalent, as well as the impact that it couldhave on labour relations DisputeResolution (ADR)There is advocation of enforceableADR clauses in contracts so as toefficiently resolve disputes accordingto parties needs, rather than just theirlegal rights and.