Difference between King III and King II Reports on Governance
The King Report on Governance for South Africa 2009 and the King Code of Governance Principles (King III) plus the Practice Notes that support it, were released at the beginning of September. According to Toni Muzi Falconi, “it constitutes a dramatic acceleration of the growth of our profession. Can we now prove to be up to the challenge?”
In March this year, just after the draft King III Report was published for comment, I invited Estelle de Beer from the University of Pretoria to give PRC readers a ‘behind the scenes’ view of the process of how Stakeholder Relationships came to be a separate chapter in King III.
In a recent comment on PRC to that initial post, the question was posed by Gerhard Dreyer on how the King II and King III Reports differ. I have invited Estelle back to PRC to answer Gerhard’s question. Here is her answer:
<I was a member of the Compliance and Stakeholder Relationship Committee that was responsible for writing Chapter 6 on Compliance with laws, codes, rules and standards and Chapter 8 on Governing Stakeholder Relationships. I can therefore only comment in detail about these two chapters regarding the difference between King II and King III.
However, I can mention that areas that received a lot more attention in King III than in King II are risk management and IT on which separate chapters were written. Integrated Reporting and Sustainability (Chapter 9) also received more attention in King III, as did Ethical Leadership and Corporate Citizenship (Chapter 1). More background information on King III can be found in the comprehensive Introduction and Background section to the Report.
Compliance to laws, codes, rules and standards was covered in King II and is now also covered in King III. As in King II, the “spirit” of this Chapter is not one of a tick-box approach for organisations to comply in a legalistic manner. The approach is one of encouraging organisations to go beyond mere compliance to acting as a good corporate citizen. The Introduction and Background to the Report explains this approach in more detail.
Governing Stakeholder Relationships
Although the inclusive approach to governance was emphasised in King I and King II, it is explained in more detail in King III with the inclusion of a separate chapter (for the first time), Chapter 8, on Governing Stakeholder Relationships.
In the Introduction and Background to King III the following is stated about stakeholder engagement and the approach to Chapter 8:
“It is recognised that in what is referred to as the ‘enlightened shareholder’ model as well as the ‘stakeholder inclusive’ model of corporate governance, the Board of Directors should also consider the legitimate interests and expectations of stakeholders other than shareholders. The way in which the legitimate interests and expectations of stakeholders are being treated in the two approaches is, however, very different:
- In the ‘enlightened shareholder’ approach the legitimate interests and expectations of stakeholders only have an instrumental value. Stakeholders are only considered in as far as it would be in the interest of shareholders to do so.
- In the case of the ‘stakeholder inclusive’ approach, the Board of Directors considers the legitimate interests and expectations of stakeholders on the basis that this is in the best interests of the company, and not merely as an instrument to serve the interests of the shareholder”.
What this means in practice is that in the ‘stakeholder inclusive’ model, the legitimate interests and expectations of stakeholders are considered when deciding in the best interests of the company. The integration and trade-offs between various stakeholders are then made on a case-by-case basis, to serve the best interests of the company. The shareholder, on the premise of this approach, does not have a predetermined place of precedence over other stakeholders. However, the interests of the shareholder or any other stakeholder may be afforded precedence based on what is believed to serve the best interest of the company at that point. The best interests of the company should be interpreted within the parameters of the company as a sustainable enterprise and the company as a responsible corporate citizen. This approach gives effect to the notion of redefining success in terms of lasting positive effects for all stakeholders as explained above.
The principles in Chapter 8 address the following (explained in more detail in the Report):
Principle 8.1: The Board should appreciate that stakeholders’ perceptions affect a company’s reputation.
Principle 8.2: The Board should delegate to management to proactively deal with stakeholder relationships.
Principle 8.3: The Board should strive to achieve the appropriate balance between its various stakeholder groupings, in the best interests of the company.
Principle 8.4: Companies should ensure the equitable treatment of shareholders.
Principle 8.5: Transparent and effective communication with stakeholders is essential for building and maintaining their trust and confidence.
Principle 8.6: The Board should ensure disputes are resolved as effectively, efficiently and expeditiously as possible.
The relevance of the above for communication practitioners is that it illustrates, for the first time, the expectations that the Board now has of the reputation, stakeholder relationships and communication functions in the organisation. The abovementioned Principles and the guidelines in the Report can be used as objectives in communication strategies, while the Practice Notes that are now being written, can be used when implementing a communication strategy.
The strong focus on stakeholder relationships opens up numerous opportunities for research in the area of how Boards should approach their responsibility for the governance of stakeholder relations and how this can be delegated to the communication function. The demand-delivery loop of the shared expectations between the Board (and senior management) and the communication department forms the core of this approach.
I want to thank Toni for contributing to the King III Draft debate on ‘Managing Stakeholder Relationships’ through his comments on our initial PRC post in March. Toni inter alia suggested that the focus should move from “Managing” to “Governing” Stakeholder Relationships. I brought his views to the attention of the IOD’s King Committee and, based on his comments, the draft chapter on ‘Managing Stakeholder Relationships’ was renamed ‘Governing Stakeholder Relationships’ in the final King III Report.
Since this concept is now addressed in academic and business circles, it is clear that it is regarded as an important contemporary approach to stakeholder relationships and that it is what will be expected of the communication strategist in future>.
With regards to Estelle’s comment in the previous paragraph, I am attaching 3 slides (enterprise strategy) from a presentation I delivered in Milan last year (Euprera Conference 2008) on the strategic role of PR/Corporate Communication in Enterprise Strategy development and Enterprise Governance. The presentation was based on the dissertation of one of my master’s students at the Cape Peninsula University of Technology in Cape Town, Lynne Niemann.