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 

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.

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19 Responses to “Difference between King III and King II Reports on Governance”
  1. Benita Steyn says:

    Gerhard: The focus of King III is on the importance of conducting business reporting annually in an integrated manner, i.e. putting the financial results in perspective by also reporting on:
    • how a company has, both positively and negatively, impacted on 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 in the year ahead.

    The King Committee continues to believe that there should be a code of principles and practices on a non-legislated basis. There are various approaches to a voluntary basis for governance compliance. Internationally, the ‘comply or explain’ principle has also evolved into different approaches: At the United Nations, for instance, it was ultimately agreed that the UN code should be on an ‘adopt or explain’ basis. In the Netherlands Code, the ‘apply or explain’ approach was adopted.

    King III also adopted the ‘apply or explain’ approach and its practical execution should be addressed as follows:
    It is the legal duty of directors to act in the best interests of the company. In following the ‘apply or explain’ approach, the Board of Directors, in its collective decision-making, could conclude that to follow a recommendation would not, in the particular circumstances, be in the best interests of the company.

    The board could decide to apply the recommendation differently or apply another practice and still achieve the objective of the overarching corporate governance principles of fairness, accountability, responsibility and transparency. Explaining how the principles and recommendations were applied, or if not applied, the reasons, results in compliance.

    In reality, the ultimate compliance officer is not the company’s compliance officer or a bureaucrat ensuring compliance with statutory provisions, but the stakeholders.

    Around the world, some of the principles of good governance are being legislated in addition to a voluntary code of good governance practice. In an ‘apply or explain’ approach, principles override specific recommended practices. However, some principles and recommended practices have been legislated and there must be compliance with the letter of the law. This does not leave room for interpretation.

    Also, what was contained in the common law is being restated in statutes. In this regard, perhaps the most important change is incorporation of the common law duties of directors in the Act. (In King III, ‘the Act’ refers to The Companies Bill, 2008 — a revision of the Companies Act, 1973 which have not been enacted yet at the time of the release of King III but nevertheless is referred to as ‘the Act’). This is an international trend. As a consequence, King III points to those matters that were recommendations in King II, but are now matters of law because they are contained in the Act. Besides the Act, there are other statutory provisions which create duties on directors and King III draws some of these statutes to the attention of directors.

    Gerhard, If you download the KING CODE OF GOVERNANCE FOR SA 2009, look on:
    –p9, under Heading 8. ‘Key aspects of this Report’ (leadership, sustainability and corporate citizenship);
    –p13, under Heading 10. ‘Emerging governance trends incorporated in the report’; and
    –p14, under Heading 11: ‘New Issues in the Report’ (where you will find a short summary on what is new in the 2009 Report).

    These are by no means the only differences between King II and III, but provide a few points to ponder.

  2. Benita Steyn says:

    A code of principles can only be as good as one’s ability to put it into practice. In the King Report on Governance for South Africa 2009, recommended practice is provided for the principles contained therein.

    Of specific interest to PRC readers would be the recommended practice for the principles stated in Chapter 8: Governing Stakeholder Relationships (p46-48) since stakeholder relationships provide a platform for the Board to take into account the concerns and objectives of the company’s stakeholders in its decision making. I have lifted out below a few of the most important practical recommendations.

    With regards to Principle 8.1: “The Board should appreciate that stakeholders’ perceptions affect a company’s reputation,” the recommended practice is the following:
    • The gap between stakeholder perceptions and the performance of the company should be managed and measured to enhance or protect the company’s reputation.
    • The company’s reputation and its linkage with stakeholder relationships should be a regular board agenda item.
    • The board should identify important stakeholder groupings.

    Re Principle 8.2: “The Board should delegate to management to proactively deal with stakeholder relationships”, the recommended practice is inter alia that:
    • Management should develop a strategy and formulate policies for the management of relationships with each stakeholder grouping.
    • The Board should oversee the establishment of mechanisms and processes that support stakeholders in constructive engagement with the company.
    • The Board should consider not only formal, but also informal, processes for interaction with the company’s stakeholders.

    Re Principle 8.3: “The Board should strive to achieve the appropriate balance between its various stakeholder groupings, in the best interests of the company”, the recommended practice is that the Board should take into account the legitimate interests and expectations of its stakeholders in its decision-making in the best interests of the company.

    Re Principle 8.5: “Transparent and effective communication with stakeholders is essential for building and maintaining their trust and confidence”, the recommended practice is:
    • Complete, timely, relevant, accurate, honest and accessible information should be provided by the company to its stakeholders whilst having regard to legal and strategic considerations.
    • Communication with stakeholders should be in clear and understandable language.
    • The Board should adopt communication guidelines that support a responsible communication programme.

    Am I the only one thinking that the above provides a window of opportunity for knowledgeable/ capable PR practitioners to institutionalize their strategic role in the organization? Is this much different from what many PR practitioners have been doing?

  3. ronald king says:

    i would like to have a bref summary on mains differences beteew king2 and king3

  4. Benita Steyn says:

    As I mentioned in my comment to Gerhard above (which indicates some of the focus areas of King III), start by looking at p14 of the KING CODE OF GOVERNANCE FOR SA 2009 (which can be downloaded from http://www.iodsa.co.za). Under Heading 11: ‘New Issues in the Report’ you will find a short summary on what is new in the 2009 Report. There are also other references in my comment you can look at.

    One of the differences is the emphasis in King III on Stakeholder Relationship Governance, as manifested by a separate chapter on the topic. You will find references and discussion of this in the post above and also at http://www.prconversations.com/?p=532 and at http://www.prconversations.com/?p=466.

    Another important difference is that King II applied to listed companies, financial institutions and public companies, while King III applies to all entities, regardless of their nature, size or form of incorporation. This is a considerable extension to the code’s former – limited – application. For the first time, all businesses are openly encouraged to adopt best practice corporate governance policies. This is “a business revolution of significant dimensions.” You can read more about this in the other posts I referred you to.

    You can also download ‘King’s Counsel’, the Executive Guide to King III by PriceWaterhouseCoopers in SA at http://www.pwc.com/za/en/index.jhtml – in Chapters 10-14 they provide their views on specific important issues. Inter alia the following:

    King III points to the need for an annual integrated report that focuses on the impact of the organisation in the economic, environmental and social spheres. It is indeed so that King II required companies to implement sustainability reporting as a core aspect of corporate governance and since 2002, sustainability reporting has become a widely accepted practice (with South Africa an emerging market leader in the field). However, sustainability reporting is in need of renewal in order to respond to:

    • The lingering trust deficit among civil society of the intentions and practices of big business.
    • Concerns among business decision makers that sustainability reporting is not fulfilling their expectations in a cost-effective manner.

    King III thus focuses on the importance of reporting annually on how a company has positively and negatively affected the economic life of the community in which it operates and how it intends to enhance its positive and eradicate its negative impacts in the year ahead.

    Some other new requirements introduced by King III include:
    • A statement by the audit committee to the board and shareholders on the effectiveness of internal financial controls to be included in the integrated report.
    • The consideration of the strategic role of IT and its importance from a governance perspective.
    • The positioning of internal audit as a strategic function that conducts a risk-based internal audit and provides a written assessment of the company’s system of internal control, including internal financial controls.
    • The governance of risk through formal risk management processes.

  5. Temba Munsaka says:

    Integrated Reporting is the only way to go for today’s firms and other organizations!!! The Zimbabwe Team must take a cue from King 3!

  6. Temba Munsaka says:

    Can someone help on how one can develop a corporate governance framework for a civil society organization?

  7. Benita Steyn says:

    Temba, I assume you are from Zimbabwe. If you are aware of any governance initiatives in your country, please share with us. You will understand if I say that we mostly hear of non-governance! For instance, Dr Jacob Chikuhwa’s book: “A Crisis of Governance – Zimbabwe”.

  8. Temba Munsaka says:

    Benita,

    Recently there was a stakeholder summit on the way forward as far as a National Code is concerned. We are in the process of coming up with committees to spear head the process, but I understand that the Steering Committee is already in place. King, himself graced us at the summit!!!

    Please help me on how best I can structure a governance framework for NGOs.

    Regards

    Temba

  9. Benita Steyn says:

    There is a Research Programme on “Governance and Civil Society” at the School of Political Science and Sociology, University of Innsbruck. The Co-ordinator is Prof. Dr. Gilg Seeber (email gilg.seeber@uibk.ac.at).

    You might try The United Nations Development Programme (UNDP). I don’t know in which arena your organisation works, but the UNDP has seven priority democratic governance areas. They are: Policy Support to Democratic Governance; Parliamentary Development; Electoral Systems and Processes; Justice and Human Rights; E-governance and Access to Information; Decentralization, Local Governance and Urban/Rural Development; Public Administration Reform and Anti-corruption. Their publication “A Guide to Civil Society Organizations working on Democratic Governance”, can be accessed from http://www.pogar.org/publications/other/undp/civsociety/CSO-Policy-Guide05e.pdf

    You might contact CHF International (who works world-wide) and might be able to assist you. They organise citizen groups as a mechanism to hold their governments transparent and accountable. They employ a unique method known as Participatory Action for Community Enhancement, PACE, to bring communities together to voice their needs while improving the environment for all community members. The programs are designed not only to improve infrastructure, but also to act as the catalyst to increase civic cooperation while engaging local governments to respond to the needs of its communities. There is more info at http://www.chfinternational.org/node/28011

    You could also extract those principles that would apply to a CSO from the King Report III. You can download it from http://www.idosa.co.za.

  10. Temba Munsaka says:

    Benita,

    Thank you so very much for the resources!

    Temba

  11. Benita Steyn says:

    Maybe I should explain that the people who are posting/ commenting on this blog are not in the field of governance, but in public relations (PR) — also called corporate communication by some and communication management by others. (That is why I don’t have a ready made doc for you). So why then did I write a post on governance?

    Because contemporary concepts such as governance, reputation, trust, legitimacy, transparency, socially responsible behavior and sustainable development are monopolizing strategic conversations in this century. These topics of societal discourse are increasingly becoming key strategic priorities/ imperatives for organizations. This is proven by the fact that you, who are working for an NGO, and I, who am a PR educator, share a common interest in ‘governance’. Also, the very fact that the title of King III this year is King Report on ‘Governance’ (and not ‘Corporate’ Governance like King II) is a further proof that governance is becoming an important topic for all organisations, and not only for corporates).

    The increasing importance of governance is providing a window of opportunity for public relations. The focus of my own research programme is on strategic PR. In the framework of a strategic role for PR, governance and the other concepts mentioned above are important societal ‘issues’ for organizations to consider, adapt to, act upon, and communicate about (both internal and external to the organization).

  12. Dear Temba,

    Excellent, issue you raise, my friend.

    A similar question was raised this morning in Rome by a good friend who is the president of Italy’s best organized ngo, stimulated by the potential implications of the King3 report on corporations.
    What about ngo’s? What about active citizenship associations? He asks…

    From a satellite, I would look at the issue first of all distinguishing if the organization already exists and is asking herself questions about governance, or if still does not exist and needs to be created.
    As you will surely detect, the thinking process changes as in the first case you must neatly understand what you are dealing with, and eventually introduce change or transformation; while in the second case you can begin, so to speak, zero based.

    Then I would suggest you decide whether you adopt an organizational perspective or a societal perspective.
    Once more, the consequences of either approach will be different.
    I am not fully convinced that they will be completely different as many claim, but somewhat certainly.

    Finally, you need to define the generic principles and specific applications paradigm.
    In this specific case, you must apply them to the issue of organizational governance which implies that there are some globally valid criteria (participation, decision making processes, outreach policies, donor, volunteer, employee relations for instance) to be adopted wherever you may be and at the same time and with equal relevance analyse the various governance components of specific territorial infrastructures in which you operate (institutional-legal; political, economic; sociocultural; active citizenship and media systems).

    I am sure that you may find many, many materials in the search function of Warren Feek’s (The Communicative Initiative) Drum Beat weekly newsletter

    Good luck

  13. Benita Steyn says:

    Re the differences between King II and III, the emphasis in King III is:

    • placed on a company being a “responsible corporate citizen,” with effective leadership focused on ethics and characterised by the values of responsibility, accountability, fairness and transparency.
    • on building a sustainable business, showing regard for economic, social and environmental impact of the company. Strategy, risk, performance and sustainability are regarded as inseparable.
    • on integrated reporting, i.e. a company should not only report on its financial performance but also its sustainability by disclosing the positive and negative impact that its operations have on stakeholders. This holistic approach will better enable stakeholders to make a more informed assessment of the value of a company.
    • on risk governance and management, and it is recommended that boards develop and implement a risk management policy and plan.
    • on boards taking account of legitimate stakeholder interests and expectations when making decisions in the best interests of the company. Stakeholders include any group that can affect the company’s operations or be affected by such operations.
    • on active stakeholders (e.g. institutional investors) being key to ensuring good (corporate) governance. A code should be developed for institutional investors recommending how they should engage with companies.
    • on an “apply or explain” approach (the latter requiring a greater consideration of how a principle or a recommended practice in King III could be applied) rather than the “comply or explain” approach of King II.

  14. Lutendo says:

    changes in basic philosophical premises between king3 & king2 report

  15. Faith Dikobe says:

    where can I find information about the new concepts added to the King3 report as compared to the King2 report?

  16. Benita Steyn says:

    If you read this post and all my comments on it with care, you will see that I already spelled out most of the differences between King 2 and 3. In my comment of October 1, I provided references to my two other posts on the King Reports that also provided some of the differences. In this same comment I provided the web address of the Institute of Directors in South Africa where you can read the original documents and some commentaries on it.

  17. Estelle de Beer says:

    Benita did an excellent job of explaining the differences between King II and King III. I also want to refer anyone interested in more information on the topic, to the Institute of Directors of SA for a copy of the King II and King III reports. One can peruse their website and contact their Centre for Corporate Governance in this regard.

    King III has as its main focus three “pillars”, namely Governance, Sustainability and Strategy. The chapters of the Report address these dimensions from different perspectives. Responsible leadership, ethics and integrated reporting are also contemporary topics that come to mind. Although all of the above have been raised in King II, it is explained in more detail in King III.

    The most significant development for communication professionals would certainly be the separate chapter on stakeholder relationship governance (Chapter 8: Governing Stakeholder Relationships). For the first time the inclusive approach to stakeholder relationship management is explained in more detail than usual and principles on how stakeholder relationships can be managed in a corporate governance context, are provided. This should create the necessary awareness among business, government and civil society in South Africa, of the role that responsible communication and reputation management can play in the development, implementation, and monitoring of strategies.

    The two paragraphs below are quoted directly from the King III Report and explain the importance of the inclusive approach to corporate governance. Although this is not the only significant philosophical approach in the document, it is the most important one for communication practitioners to take note of:

    “The King III Report on Governance for South Africa seeks to emphasise the inclusive approach of governance. 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 interests 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 (King III 2009:13).

    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 interest of the shareholder or any other stakeholder may be afforded precedence based on what is believed to serve the best interests 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 (King III 2009:13).”

    The above principles are explained in more detail in Chapter 8 of the Report and Practice Notes are also currently being written, that will explain how these principles can be applied in practice.

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