King Report III on Corporate Governance institutionalises Stakeholder Relationship Management

In January 2009, King Report III will appear in South Africa, having been written by a committee of 90 members. One of them is Estelle de Beer from the University of Pretoria. If you are wondering what a PR academic is doing on this Committee, it might just be because Estelle is doing her doctoral thesis on Corporate Governance, Sustainability and Strategy. 

To understand the significance of the title of this post, some background on Corporate Governance (summarised from the recently completed master’s degree of one of my students, Lynne Niemann): In May 1991, the Financial Reporting Council (its chairman Sir Adrian Cadbury), the London Stock Exchange and the accountancy profession in the UK set up a Committee on the Financial Aspects of Corporate Governance (a number of concerns regarding the accountancy practices of prominent companies in the UK having led to its establishment). The Committee defined corporate governance as the system by which companies are directed and controlled. Its work thus focused on these functions of a company’s board, as well as the role of its auditors.

The Committee viewed the responsibility of the Board as not only operating the company within the frameworks set by laws and regulations, but needing to take into account its environmental and social impacts as well. In December 1992, the Cadbury report was published in the UK as the first in-depth statement on corporate governance and a model for sound practice worldwide, its main recommendations dealing with the division of responsibilities among top management to ensure that the decision-making power was not delegated to one person alone.

In South Africa in 1994, a Committee headed by Judge Mervyn King issued the King Report on Corporate Governance, which later became known as King I. This report incorporated a code of corporate practice and conduct that went beyond the corporation and its financial matters, taking into account the organisation’s impact on the larger community. Almost a decade later, in 2002, the King Committee released yet another report known as King II, which took the inclusive approach to business even further.

The premise of King II is that there are increasing expectations for organisations to operate as good corporate citizens, due in part to the influence organisations have on the lives of stakeholders such as customers, employees, suppliers and communities, and on the environment. Organisations depend on these stakeholders, individually and collectively, for the goodwill required to sustain their operations and for maintaining their license to operate. “All organisations operate within the broader society and the natural environment. What an organisation can and cannot do in terms of its strategy is not only constrained by legislation, government policies and regulatory requirements but also by what is considered ethical and in accordance with the expectations of stakeholder and societal standards”. As such, organisational strategy development necessitates a sound understanding of social and environmental responsibility, sustainability, stakeholder engagement and the Triple Bottom Line.

Seven characteristics, or principles, of good corporate governance are listed in King II namely discipline, transparency, independence, accountability, responsibility, fairness and social responsibility. King II recommends that every organisation should report at least annually on the nature and extent of its social, transformation, ethical, safety, health and environmental management policies and practices, while stakeholder reporting is also important. Specific consideration should be given to the development of a code of ethics and issues such as HIV/Aids, the environment, social responsibility and human capital development.

The inclusive approach to corporate governance portrayed in King II recognises that stakeholders such as the community in which the organisation operates, its customers, its employees, and its suppliers need to be considered when developing the strategic intent of the organisation. As such, the inclusive approach requires that the purpose of the organisation be defined; the values by which the organisation will carry out its activities be identified; and it be communicated to all stakeholders. In essence, these three factors should be combined in developing strategies to achieve the organisation’s financial and non-financial goals in aiming to be sustainable in the long-run”.

Against this background, I am now quoting a comment made by Estelle de Beer, extracted from Toni’s post on Institutionalisation, re developments in South Africa on Corporate Governance and Stakeholder Management:

“In my experience, senior management now realises that the proper management of the Communication Function can make a strategic difference to the Triple Bottom Line. To illustrate how open senior management in South Africa is to the fact that our discipline can make a difference, the King Report III on Corporate Governance in SA (due to appear in January 2009) will have a separate chapter on Stakeholder Relationship Management (my direct involvement with the writing of the Report has led to senior managers realising that a proactive approach to managing relationships and communication is much better than a reactive one).

Although changing the perceptions of senior management about the strategic role of the Communication Function in the organisation is a slow process, communication managers in South Africa can now go to the C-suite with a document that will back up the validity of their discipline in business in general. After many years the results of the Excellence Study have paid off handsomely in practice, with the shared expectations between senior management and the communication function now being enshrined in the King Report III in a chapter on Stakeholder Relationship Management”.

Any comments on this development in South Africa? Or on the relationship between PR/Communication Management and Corporate Governance? Are you wondering what the heck the two have to do with each other –then please say so. Or if you think they do, then please tell us why or how.

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13 Replies to “King Report III on Corporate Governance institutionalises Stakeholder Relationship Management

  1. Dixie, as you will see in the sources I provided above, many of the recommendations of King I had since been superseded by legislation e.g. the Labour Relations Act of 1995, the Employment Act of 1998 and various amendments to the Companies Act of 1973. The legislation is now of course enforceable.

    King II applies to all companies listed on the JSE Securities Exchange South Africa, banks and financial insurance entities as well as public sector enterprises, and has been adopted as part of the listing requirements of the JSE.

    The latter is also true of King III. So while in principle it relies on self-regulation rather than legislation (that can be enforced in court) and also there is no body that is mandated to enforce King III nor is there any sanction for non-compliance, there are however instances in which public interest companies and parastatals are obliged to comply. In terms of the JSE Listing Requirements, a listed company is contractually bound to adopt King III and any failure to do so would amount to a breach of the Listing Requirements. This is a round-about enforcement mechanism for listed companies since they will have no option but to follow King III or they will be in trouble with the JSE.

    Please also see Estelle de Beer’s remark re compliance to laws, codes, rules and standards in my post titled Difference between King III and King II Reports on Governance.

    Furthermore, the Introduction and Background to the King III Report (available on the Website of the Institute of Directors explains in more detail the “apply or explain” approach. Organisations are thus encouraged to go beyond mere compliance to acting as a good corporate citizen.

  2. thank you all for being so helpful.
    Will the aspects stipulated in the report be enforceable especially from the HR Department in the organisation.

  3. Dixie: King II was approached differently from King 1 since the issues that led to the creation of King I in 1994 (the necessity for companies to engage in affirmative action) was addressed by the employment Equity Act in South Africa before King II came about.

    While King I incorporated a code of corporate practices and conduct that looked beyond the company itself (taking into account its impact on the larger community), King II (2002) took this inclusive approach considerably further by referring to the increasing expectations for organizations to operate as good corporate citizens. The failure of organisations such as LeisureNet, Regal Treasury Private Bank, Saambou and Unifer in South Africa highlighted the growing opinion that the proper governance of companies will become as crucial to economies as the proper governing of countries.

    It is important to note that the principles laid out in the King II Report are recommendations that should not be legislated for, but instead need to be established and entrenched as accepted practice within society in order to cultivate a spirit of integrity for compliance with good corporate governance.

    Also emphasized in King II was disclosure, e.g. significant events that could be negative or positive, and that could affect the price of the shares and how stakeholders–suppliers, for example–deal with the company, should be disclosed.

    King II also recognized the importance of internal auditors in qualitative governance. Judge Merwyn King himself said that board members couldn’t know everything about the company and had to ensure that they did not rely only on the information fed to them by company executives, but had to test the quality of that information from other sources such as internal auditors. He suggested that the internal auditor have a functional reporting line to the chairman of the audit committee and the chairman of the board. The internal auditor may report to the chief executive officer, but there must be an open-door policy to the chairmen of the audit committee and board.

    In my opinion (since this is a blog on public relations), it is the role of senior public relations practitioners to play the role of ‘internal auditor’ and ‘objective outsider’ by keeping both top management and the board informed on issues of strategic importance by supplying strategic intelligence (information that is interpreted with regard to the specific organisation) both on the internal and external environment.

    Re the issue of the enforcement of corporate governance guidelines, King II places the primary responsibility for conformance with governance standards on the board and individual directors of the particular company’s board, by means of a kind of ‘peer-pressure’ system instead of placing the onus of enforcement on governmental authorities. King II highlights the role of internal and external stakeholders – individuals or organisations that have a direct link to the company, such as shareowners, employees, suppliers, auditors and financiers – in monitoring the company’s compliance with principles of good governance. The role of regulators (in South Africa, for instance, the JSE Securities Exchange, the Financial Services Board, and the Registrar of Banks) is to ensure that the necessary framework of legislation is in place and applied systematically, ensure enforcement of the legislation under their control, rather than to police individual companies’ boardroom activities.

    In order to better understand how King II was approached, it is useful to note the changes from King II to King III.

    Since I have focused on the aspects of interest to a blog on public relations, you can look at the following sources (referred to above) to get a more comprehensive view: ‘Principles, not rules’ as well as ‘King II: the buck stops with business leaders’.

  4. Sorry, I will welcome follow up comments via my email: those who have engaged on this have given me the energy to join the debate. I am not sure how compliance to King II (and yet to come King III) can bew enforced on organisation who do not really and fully practice what is preached here.

  5. This is very interesting articulation of what organisations have to do to comply with King reports, in terms of Corporate Governance. In the past, the organisations were only concerned with the bottom line: how that bottom line was achieved did not really matter as long as people in the hierarchy were going to receive their fat bonuses. The King report talks to issues of partcipation of stakeholders, viz. employees, community (within which the organisation operates), suppliers, management, shareholders, etc: the relationship within this group of people has to be managed. Presently, in some circles, this is not happening; unions (and activists like me) are still constrained by lack of transparency, inclusivity, respect for human dignity, authoritarianist practices where people see themselves as the only people on earth, others are just machines. I have seen PR employees treated as image builders, carrying the flag for their superiors; I have seen communication employee being organisation shields that protect them from media attacks: representing good than bad publicity. therefore, stakeholder relationship management and participation of PR/Communications members in organisational decision-making and strategic direction is long overdue.

  6. It’s good to hear from you, Ronel! I know that you have been carrying a heavy load (as Head of the Dept of Marketing and Communication Management at the Univ of Pretoria (UP), Chair of the School of Management Sciences and to boot, roving Ambassador for UP to all corners of the earth). But because of this, you have a global perspective to add (and it would be healthy to have some other perspectives on SA)!

    The Centre for Corporate Governance (in close cooperation with the field of Communication Management) is an exciting development, that I watch with interest.

    Something that might be interesting (if you have the inclination), is to share with us some views on current political communication in SA. (I know it used to be one of your specialties at UNISA).

  7. Toni, Estelle, Benita

    I have decided to become more active in these PRConversations. Time has been a very scarce commodity for me the past few years, but our discipline and practice is becoming more important in the current global environment. We have succeeded with Estelle de Beer’s PhD-topic in corporate governance and stakeholder engagement (as academics) to form closer relationships with the corporate environment in SA as well as globally. But we are also in the process of working towards the first phases of establishing a Centre for Corporate Governance at the University of Pretoria. We have the backing of the UP Executive and the buy-in of Judge Mervyn King, the Institute of Directors as well as numerous others captains of industry. The University of Pretoria aims to make the said centre a Centre of Excellence where interdisciplinary academic programmes, training courses, business research, environmental scanning, scenario planning for future trends, et cetera will be presented and managed. The intention is to launch this centre together with the completion of the King III Report.

    With regards to the institutionalisation of public relations, the following might be applicable in the developing world in the years: the resurgence of the power of political communication, diplomacy and persuasion; a scrutiny of the professionalisation of public relations; a regionalisation of public relations education, and a globalisation of public relations accreditation.

  8. First of all, here is King II’s definition of corporate governance since it provides the link to PR/communication management that Estelle and I saw in 2002 when the Report appeared. Many around us did not. Even Prof Gustav Puth, my mentor of many years, said to me: “Why are you so excited? This is a matter for company boards.” But we did not agree.

    King II defined corporate governance as “…the building of a balance between economic and social goals and between individuals and communal goals, with the aim being to align as closely as possible the interest of individuals, organisations and society”. This definition is not shared by all. Those with a narrow view of corporate governance see it as the formal system of accountability of the board of directors to shareholders (i.e. more financially oriented). Others take a broader view, seeing corporate governance as the informal and formal relationships between the organisation and its stakeholders; and the impact of the organisation on society in general (more non-financially oriented). Ultimately, good corporate governance is aimed at helping business rebuild their legitimacy and is a way to foster social cohesion between business and society.

    Now, if one’s managerial worldview for PR propels you in seeing PR as ”a communication function of management through which organisations adapt to, alter, or maintain their environment for the purpose of achieving organisational goals” (Long & Hazelton, 1987) and also see the strategic contribution of PR mainly being focused on the social and environmental components of the Triple Bottom Line, then PR is much concerned with “assisting organisations to both formulate and achieve socially acceptable goals, thus achieving a balance between commercial imperatives and socially responsible behaviour” (Kitchen, 1997). Now ain’t this awfully close to King II’s definition of corporate governance?

    With regards to Kristen’s question whether stakeholder relations have not always been important. Yes and no. The definition of ‘always’ depends on how old you are! Like Toni, I believe in learning from the historical context to understand the present before one can hope to change things in the future. Therefore, I am going to disclose (without Toni’s permission) that he and I were already out of nappies and listening to Elvis in the early sixties when the economist Friedman won the Nobel Prize.

    What is the relevance of this? Friedman was the one who coined the phrase that ‘the business of business is business.’ This portrayed the institutionalised ‘shareholder approach’ to the role of business in society (prevalent for many decades to come), namely that social issues or politics are not the concerns of business people, that the social responsibility/ ethical duty of business is to maximise its profits (bound only by legal restrictions), and that shareholders are the only important stakeholders (a view that still clings to the wallpaper in many boardrooms even today, especially if the board members are ‘bean counters’ i.e. financially trained — at least in South Africa, if not more widespread).

    A few souls started to see the light in the late 60s/early 70s, culminating in the ‘social responsibility approach’ to business in society, in which business was seen to be an actor in the environment that should respond to social pressures and demands, and stakeholders were increasingly thought of in terms of morality, ethics and social responsibility.

    By the early 1980s there was a shift from the idea that organisations ‘should’ be socially responsible to ‘how’ they should respond to business-related social issues (the ‘corporate social responsiveness approach’ to business in society). The trend throughout the 1980s and into the 1990s to make the concerns for social and ethical issues more pragmatic led to ‘corporate social performance (CSP).’

    But it was Freeman, in 1984, who placed the spotlight on the importance of stakeholders to business. (Therefore, in my view, ‘always’ started now. This would explain Kristen’s view, since she and Freeman probably saw the light of day at around the same time!!) According to Freeman, managers had to undergo a major conceptual shift in how they saw the organisation and its multilateral relationships with stakeholder groups — perceiving stakeholders not only as those individuals/groups that MANAGEMENT thinks have some stake in the firm but also those that THEMSELVES think they have a stake in the firm. (I think this is the foundation of modern day stakeholder relationship and issues management on which much of PR rests, and provides the justification for its very existence).

    Freeman also pointed out that shareholders have an ‘equity’ stake (and thus formal voting power); customers, employees and suppliers an ‘economic’ stake (and thus economic power); and single issue groups (and government) an ‘influencer’ stake (and thus political power). So Kristen, investor relations is increasingly taking care of stakeholders with an equity stake, and marketing of those with an economic stake. In my country employee communication has ‘always’ been managed by PR so I think we have a clear internal ‘stake’. I therefore want to agree with you that our uncontestable (external) stake lies with non-commercial stakeholders. (As practical advice, I always say to my students that there is a myriad of stakeholders out there. If you have a competent investor relations and marketing division who don’t want your assistance, leave shareholders and customers alone and focus on all those souls who do want attention. But always let marketing and investor relations know that you can assist with the drop of a hat).

    The stakeholder approach was followed by the ‘issues management approach’ that also started in the 80s – the analysis of societal issues and trends considered important because the values and beliefs of key stakeholders are derived from broader societal influences, which can create opportunities or threats to organisations’ revenue growth and profit prospects. (This is an acknowledgement of the growing importance of those stakeholders with an ‘influencer’ stake).

    The ‘corporate community approach’ to the role of business in society became prevalent (in the Knowledge economy) during the 1990’s and onwards, with the organisation being viewed as a socio-economic system and stakeholders are recognised as partners who create value through collaborative problem solving — creating wealth by integrating stakeholders into a productive whole (a so-called ‘corporate community’). I think many of us see PR’s ‘economic’ (rather than financial) contribution to the Triple Bottom Line here, but since we cannot prove it (yet), I don’t want to dwell on it now.

    To lift out important points from the epistle above:

    • The approach of individual Board members with regards to the role of business in society could be any of the above. But in the Boardroom they have to reach some kind of consensus. A separate chapter on stakeholder management in King III finally and formally acknowledges the death of the shareholder approach and the growing influence of society on organisational decision making, i.e. of those stakeholders with an influencer stake and ‘political’ power (whose management/ governance is up for grabs).

    • The Board ‘manages management’ (to coin Toni’s def of corporate governance). Because of society’s insistence on good corporate governance, I think the Board’s influence is currently growing rather than receding. They give direction with regards to organisational priorities. So if they acknowledge the growing importance of ALL stakeholders in a direction setting document such as the King Report (which in SA is followed kind of slavishly and even has influence outside our borders), the inclusive approach to stakeholders is in the process of being ‘institutionalised’.

    • However, there is a difference in acknowledging stakeholder importance and following a two-way communication approach with stakeholders (synonymous to many of us in PR). But boards are lagging in this respect—they are much into stakeholder ‘reporting’, which is one-way communication. And it is here that the ‘window of opportunity’ lies for PR. Boards are groping in the dark as to how exactly stakeholders are to be governed (managed). The PR domain has a long history of stakeholder/ communication management and can provide many of the answers. But it has to be offered. PR is not going to be asked for it. (It is here that the role of the PR ‘strategist’ comes into play).

    Please note that my views are strongly influenced by the situation in South Africa. Maybe in some of your countries two-way communication with stakeholders is institutionalised at Board level and they openly acknowledge the contribution that PR can make. In my country it is not so. Here they have (finally) formally acknowledged stakeholder relationship management—that is the good news. But as Estelle says, they don’t relate it to PR—that is the bad news!

    However, this does not seem to be the case only in South Africa. If you go and listen to the pre-conference interviews on the Euprera website, Prof Invernizzi says that PR does not feature in the titles of senior communication executives in Italy. Prof Graeme Sterne says that in his latest study in New Zealand, 53% of PR managers/executives report to top management, but PR does not feature in the title of a single one of them. So it is not academia that is ‘hiving off’ PR. It is practice itself. And the reason—Boards probably do not relate PR to stakeholder management. And if we don’t do something about this by acquiring knowledge of strategic PR/communication management and offering it where it is now desperately needed, there will be no future for PR—at least not the way I see its potential (but probably for those who are happy providing technical support to other functions).

  9. It seems to me that stakeholder relations have always been important. So important, in fact, that several stakeholders traditionally have entire departments devoted to them: customer stakeholders are served by marketing/customer relations departments and employees by internal communications/HR departments. What seems to be new is the recognition of other groups as also being key for the organization.

    Does that make PR the “Non-commercial external stakehodlers” department? It hardly rolls off the tongue, but it helps me achieve some clarity to play with such terms in order to better understand the overlapping circles of reponsibility for communication and stakeholder relations. I look forward to reading the report.

  10. Benita and Tony

    (I wish I had more time to reply in detail. I promise I will do so later in the week.)

    You have taken the discussion on the institutionalisation of “public relations” forward in quantum leaps. I fully agree with both of you and Tony has captured the essence of what organisations are currently requiring in terms of stakeholder relationship management and reporting/communication very well.

    The business world in SA is fast accepting the importance of the business and/in society paradigm, with its resultant stakeholder relationship management perspective. The only problem they experience now is how to integrate this “strange” phenomenon into their business models and processes (In my opinion this is what we should do more research about.). In the past, managers associated the “PR people” with the technical functions of PR – now they must include the same people in strategic discussions about stakeholder relationship management. They find this difficult to do.

    The concepts of communication management, reputation risk and stakeholder relationship management, among others, have become so important in SA organisations, that encrouchment from company secretaries and the internal auditors is a real danger.

    When the King Report III appears (and everything goes as planned with the new chapter on Stakeholder Relationship Management) there will be a strong focus on our discipline and what we can offer. Senior communication practitioners now have the opportunity to come to the table and to show management that we can add strategic value to the triple bottom line.

    King III will spell out the expectations that management have of what should be done in terms of stakeholder relationship management. It will be up to us to decide if we want to take up this challenge. If we don’t, we should not complain if the company secretaries and the internal auditors jump at the opportunity to take our seat in the C-suite.

  11. Benita, I had heard from Ronel Rensburg about Estella’s direct contribution to the imminent King Report and, specifically, that stakeholder relationship management (i.e. public relations in one of its more recent reincarnations) is considered a fundamental strategic function of corporate governance.

    This is truly a huge step forward for us and I can’t wait to read the report.

    As for your description of the term governance, I also stumbled on it for the first time back in the early nineties when Clinton’s VP Al Gore spearheaded the NPR project (which became better known as ‘Reinventing Government’), hailed at the time by reformers world wide as the blueprint for effective government for the 21st century.

    NPR jargon repeatedly used the term governance, and I interpreted it in the sense that -coming from the public sector and therefore not wanting to use the term management…. presumed to derive from the private sector and therefore ‘politically incorrect’…- reformers chose governance (good) as different from government (bad), but really meant management (impolitical).

    Then, only a few months later, I learned that in the UK -as you say in your post- the private sector had also begun to use the same term with intensity, particularly in the financial and legal sub-communities, implying that while management was too top-downish (bad), governance implied more external participation to an organization’s decision making processes (good).

    Again, I was somewhat baffled and concluded that, in the public sector as well as in orivate organizations, governance basically implies the management of management.

    If this is so, then the King report elevates the function of management of stakeholder relationships (i.e. public relations) to the management of management level of the organization.
    And this is excellent news.

    And now some ideas based on some experience…

    The company I work for, Methodos, a management consultancy, has been explicitly operating in this area since 2003, when we were asked by the Italian subsidiary of a major multinational, and by one of Italy’s major corporations to produce their first ever triple bottom line reports.

    These two assignments obliged us to carefully analyse specific expectations of specific stakeholders (light years before stakeholder engagement became just another buzzword) and to retrieve data, facts, initiatives from all sorts of internal as well as external sources… and subsequently report if, what, when, how and -if not- why not, the organization had lived up to those expectations in the past year, and what it planned to do about it.

    This early experience made us realise that the corporate social responsibility debate which was and very much still is focussed on certainly not irrelevant issues such as:

    °how socially conscious organizations should be to be more effective;

    °whether csr policies should belong to the public relations and communication function, to the CEO or to another dedicated function (audit, legal, hr…);

    °whether the practice shouldn’t be defined as corporate sustainability or even as (this sounds more macho..) corporate durability, which supposedly underlines the organizations’ desire to eternity, while also paying lip service to the French reluctance to use the term sustainability….

    ……should not instead focus on the sweeping concept of responsibility i.e. governance i.e. the responsible management of management.

    Which leads to the open and frank admission that management is not frequently responsible and needs to become so.

    We have since developed a horizontal approach to raise organizational awareness to the business and societal value of responsibility across the whole organization.

    We have devised systems to evaluate the levels of this awareness before and after amongst key internal publics; to set and measure improvements and, of course, to report on progress achieved or not achieved, to all key internal and external stakeholders.

    It is a very tough battle, but there are a growing number of organizations in Europe who begin to walk this talk and, certainly, public relations and communication directors are fully engaged in the process…

    ….but -similarly to their other peer managers from other key functions- only once they have fully realized that many of their day-to-day non CSR driven communicative behaviours for which they are directly accountable are in fact often irresponsible.
    In the past they had never detected these as such and have since adopted a ‘if it works why fix it’ or a ‘business as usual’ approach.

    This implies of course specific responsible communication audits and even adding a fourth bottom line to reporting procedures.

    And this because if an organization’s communication constitutes in itself a specific and detectable behaviour, while also representing to stakeholder publics most of the other organizational behaviours (i.e. economic, environmental and social performances), then it would only seem natural for organizations to report on these communicative behaviours.

    Summing it up, in my view a major step forward in the institutionalization process of a public relations and communication function lies, therefore, not so much in the ownership of the planning and execution of an organization’s responsibility policies and programs (as many seem to aspire to), but much more so in the more specific monitoring and reporting all of its communicative behaviours.

    Jon White indicated in a research he did a few years ago, that even the most powerful communication director does not manage more than 10/15% of these, and most colleagues I speak with from various countries and organizations tend to agree.

    A fantastic opportunity to exercise reflexive and educational strategic skills while facilitating responsible communicative behaviours throughout the organization.

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