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Sustainability and Social Responsibility: Regulation and Reporting pp 55–80Cite as

CSR, Corporate Governance, and the King Reports

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Abstract

CSR has not been embedded in the South African corporate conscience to the extent that it has, for example, in developed countries. However, the last decade or so has seen significant leaps in this regard. This is mainly due to the release of the authoritative Reports of the King Commission on corporate governance and specifically the King II and King III Reports. This contribution examines the CSR content in these Reports in order to provide guidance to businesses on the issue of CSR.

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Notes

  1. 1.

    In this context, King II represents the second step in the evolutionary process of corporate governance in South Africa.

  2. 2.

    Legislative developments in the area of labour law (such as the Labour Relations Act 66 of 1995 and the Employment Equity Act 75 of 1997), environmental law (such as the National Environmental Management Act 107 of 1998) and commercial law (statutory amendments to the Companies Act 61 of 1973).

  3. 3.

    Legislative interventions such as the Insider Trading Act 135 of 1998, the Public Finance Management Act 1 of 1999 and amendments to the Banks Act 94 of 1994. For a discussion of these legislative advancements, see IoD (2002a).

  4. 4.

    West (2006) is of the opinion that it appears as if the principle of accountability as identified in the Report is applicable to shareholders only, and not to other stakeholders.

  5. 5.

    The reference to accountability and responsibility corresponds with the key principles of social responsibility as identified by the ISO (2010).

  6. 6.

    The shareholder supremacy approach identifies shareholders as the only grouping with a legitimate interest in the business. King II stipulates that this approach is not in line with the international approach to corporate governance, where inclusivity is one of the foundations. According to King II (IoD 2002a), one of the reasons for the rejection of this approach is to be found in the fact that a company “becomes a separate persona in law and no person whether natural or juristic can be owned”.

  7. 7.

    The inclusive approach advocated in King II received further endorsement in the King Report on Governance for South Africa—2009 (Miles and Jones 2009; Gstraunthaler 2010; West 2006; Esser 2009). For a discussion of the inclusive approach, see Kloppers (2012).

  8. 8.

    Who, according to Reed (2002: 239), “are the primary object of social and economic development and who not infrequently suffer negative development effects from irresponsible corporate practice”.

  9. 9.

    Although environmental and social aspects are referred to as non-financial matters, it should be stressed that these aspects have very real financial consequences. The reference to “non-financial” merely serves to distinguish these aspects from the traditional financial bottom line.

  10. 10.

    According to Mervyn King, the chairperson of the King Committee, as quoted by Barrier (2003: 73) “[t]here’s some suggestion that certain aspects of the recommendations in King II should be legislated—in other words, be compulsory for all companies. Business is a difficult matter, and those who run it can’t have the prescience to envisage what is going to happen from day to day, so they need flexibility in the process associated with administering their companies. To have the rigidity of a statute doesn’t make sense”.

  11. 11.

    The Johannesburg Securities Exchange Limited (JSE) does, however, require listed companies to disclose their compliance (or lack thereof) with the recommendations in King II through the use of a narrative statement which would enable shareholders and potential investors to evaluate the company’s application of the principles of corporate governance (JSE Listing Requirements par 7.F.5; Esser and Coetzee 2004; Deloitte and Touche n/a).

  12. 12.

    King II does, however, identify shareholder activism as an important enforcement mechanism which can be utilised by shareholders to ensure the implementation of the recommendations contained in King II (IoD 2002a). For a discussion on King II, corporate governance and shareholder activism, see Rademeyer and Holtzhausen (2003), where the authors refer to a variety of mechanisms available to shareholders in terms of the Companies Act 61 of 1973 through which concerns about corporate governance can be raised.

  13. 13.

    It should be noted that in many instances the reason for following the voluntary, self-regulatory approach is found in legal frameworks which do not make sufficient provision for the control of corporate activities. As a result of this inadequate legal framework, business sectors “almost have no other choice than starting the process of corporate governance reform in a voluntary self-regulatory manner” (Rossouw 2005: 98).

  14. 14.

    For a discussion of the requirement of integrated sustainability Reporting, see par 2.5.2.

  15. 15.

    King II follows the “comply or explain” approach, where those entities which fall within its scope of application are required to comply or provide justification for non-compliance (Aka 2007). A much more flexible approach of “apply or explain” is followed in King III. For a discussion of this approach, see par 3.5.

  16. 16.

    King II became applicable to identified business enterprises with financial years commencing on or after 1 March 2002.

  17. 17.

    Although the focus of King II is on companies, other legal entities used to conduct business should take note of the content and adapt and apply the recommendations to the extent that the recommendations could guide their business management.

  18. 18.

    The other characteristics of good governance according to King II are discipline, transparency, independence, accountability, responsibility, and fairness (IoD 2002b).

  19. 19.

    Except for listed companies for which compliance with King II is a listing requirement.

  20. 20.

    Despite the fact that no enforcement authority is established, various legal mechanisms exist to enforce the principles of corporate governance which overlap with existing legal principles. Such principles include the director’s fiduciary duties and the duty to act with care and skill as well as other statutorily imposed duties. Contravention of these duties would subject the director to criminal as well as civil prosecution.

  21. 21.

    The term “sustainability” in this context is derived from “sustainable development” which is defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (IoD 2002a: 91).

  22. 22.

    King II refers to various defining characteristics of good corporate citizenship, which includes corporate governance (managing businesses in a responsible and accountable fashion), respect for human rights, environmental responsibility, and community engagement through the promotion of collaborative partnerships (IoD 2002a).

  23. 23.

    This issue is also one of the issues which a company’s social and ethics committee is now required to monitor. See Kloppers (2013).

  24. 24.

    Compliance with this requirement would also be in line with the board’s responsibility to have proper risk management systems in place (as required by paragraph 3 of the Code). HIV/AIDS represents a potential risk to any business. It requires dedicated attention from management.

  25. 25.

    This requirement reflects the indicator on the BEE scorecard referring to preferential procurement. For a discussion of the BEE scorecard, see Kloppers (2012).

  26. 26.

    The issue of equal representation in the workplace is addressed in the Employment Equity Act, which specifically requires an employer to draft an employment equity plan which provides an outline of how it intends to achieve proper racial representation in all levels of employment.

  27. 27.

    A company’s contribution to BEE will be evident from the points which it has achieved on the BEE scorecard.

  28. 28.

    The other two categories of socially responsible investment referred to are positive and negative screening, and shareowner advocacy and corporate engagement. In terms of the first of these, positive screening is used to identify companies with a good CSR record, while negative screening refers to criteria used to exclude companies with unacceptable CSR track records. “Shareowner advocacy and corporate engagement” refers to “the process of using shareowner influence to help bring about corporate social and environmental change” (IoD 2002a: 118). Community investment is not only one of the seven legal principles of CSR, but also features very prominently in the ISO Guidance.

  29. 29.

    In July 2011, the Institute of Directors of Southern Africa released the Code for Responsible Investing in South Africa 2011 (CRISA), which is intended to provide guidance to institutional investors on responsible investing. This Code builds on the recommendation of King II to integrate environmental, social, and governance considerations into investment decision making (IoD CRISA 4) and is aimed at institutional investors as asset owners (such as pension funds or insurance companies). The Code is based on the following five principles: Principle 1: An institutional investor should incorporate sustainability (which is defined as “the ability of a company to conduct its operations in a manner that meets existing needs without compromising the ability of future generations to meet their needs. Sustainability includes managing the impact that the business has on the life of the community…” (IoD n/a: 9), considerations into its investment analysis and investment; Principle 2: An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities; Principle 3: Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of CRISA and other Codes and standards applicable to institutional investors; Principle 4: An institutional investor should recognise the circumstances and relationships that hold a potential for conflicts of interest and should proactively manage these when they occur; and Principle 5: Institutional investors should be transparent about the content of their policies, how the policies are implemented, and how CRISA is applied to enable stakeholders to make informed assessments (IoD n/a).

  30. 30.

    Although these are labelled as non-financial issues, they have potentially significant financial implications for the company.

  31. 31.

    For a discussion of the GRI guidelines, see Kloppers (2012). These principles include reliability, relevance, and clarity.

  32. 32.

    According to King II (IoD 2002a: 6) “[T]he inclusive approach recognises that stakeholders such as the community in which the company operates, its customers, its employees and its suppliers need to be considered when developing the strategy of a company”.

  33. 33.

    “The modern approach is for a board to identify the company’s stakeholders, including its shareowners” (IoD 2002a: 7).

  34. 34.

    “A company is likely to experience indirect economic benefits such as improved productivity, and corporate reputation by taking those factors into consideration” (IoD 2002a: 12).

  35. 35.

    “… companies in South Africa must recognise that they co-exist in an environment where many of the country’s citizens disturbingly remain on the fringes of society’s economic benefits” (IoD 2002a: 18).

  36. 36.

    The voluntary nature of initiatives gives rise to the inability of government to enforce them.

  37. 37.

    Regarding Reporting on social issues, the authors found that companies did Report on issues of occupational health and safety, employment equity, and BEE. The reason for Reporting in these areas is to be found in the fact that these disclosures are required by law and that companies are merely complying with their legal obligations (Sonnenberg and Hamann 2006). This problem is not unique to South Africa, however. On the international front, Gray (2001: 13) writes “the quality of attestation to social and environmental Reports is woefully poor”, while with reference to the UK, Sittle (2002: 349) notes that “there are significant distortions and omissions of information concerning ethical issues in current U.K. Reporting systems”. Laufer (2003: 254) concludes that “simply relying on the integrity of corporate representations should seem increasingly naïve to those inside and outside the SRI community”.

  38. 38.

    71 of 2008.

  39. 39.

    For a discussion on the synergies and interaction between King III and the 2008 Companies Act, see King (2010). For an enlightened discussion of governance issues in terms of the new Companies Act, see Deakin (2010), Olson (2010), Katz (2010), and Du Plessis (2010).

  40. 40.

    Regarding governance, it should be noted that since King III is based on a voluntary approach, compliance with it will result in compliance with the Act, but that compliance with the prescriptions of the Act does not necessarily imply compliance with King III (King 2010).

  41. 41.

    Institutional investors’ commitment to corporate governance is evident from the fact that institutional investors are willing to pay a substantial premium for companies with strong corporate governance policies (Picou and Rubach 2006; Newell and Wilson 2002).

  42. 42.

    These three environments are commonly referred to as the 3Ps.

  43. 43.

    In this regard, Gstraunthaler argues that corporate governance “might be used as a tool to enhance the legitimacy of companies” (Gstraunthaler 2010).

  44. 44.

    One of the key features of accountability is that once it is established who is accountable to whom and what they are liable to account for, it should be established what the standards are against which accountable actions are to be measure. [For a general discussion of accountability under the new Companies Act, see Ncube (2010)]

  45. 45.

    The recommendations contained in the King III Report became effective on 1 March 2010.

  46. 46.

    When the definition of CSR in King III is compared to the definition provided by the ISO Guidance, the similarities are evident. Both of these leading instruments regard CSR as the acceptance of responsibility (accountability) for the impacts that a business’ decisions and actions have on society and the environment. Both of these instruments further establish the link between CSR and sustainable development and identify the important role of businesses in contributing to sustainable development. Further, both of the definitions place a strong emphasis on the role of stakeholders and the fact that the legitimate interests of stakeholders have to be taken into account in business decisions and actions.

  47. 47.

    For an overview of definitions provided for CSR, see par 3.2.

  48. 48.

    Although the definition could not refer to itself, the impact of King III is such that reference should be made to decisions and activities that are in compliance with applicable law and consistent with national and international norms of behaviour. King III represents an important step towards establishing national norms of behaviour for businesses.

  49. 49.

    The American Sarbanes-Oxley Act of 2002, which is aimed at preventing financial scandals such as the Enron or World Com scandals, follows the “comply or else” approach (IoD 2009a, b). This act follows the government regulation approach to governance instead of the voluntary self-regulation approach advocated by King III (Esser 2009; Good 2009).

  50. 50.

    In the context of CSR, the “apply or explain” approach is also favoured by the Indian Government. In terms of s 135(5) of the Indian Companies Bill, 2011 certain companies are required annually to contribute at least 2% of the average net profits of the company made during the financial years preceding the current financial year to activities identified in its CSR policy. The section continues to state that if a company fails to spend the prescribed percentage, the board should provide reasons for not spending the amount. Companies should “apply” the section or “explain” the failure to do so without any further sanctions.

  51. 51.

    The exception to this rule is the board of the JSE. Since compliance with King III is non-optional for listed companies, the board of the JSE will act as an overseeing regulatory body responsible for ensuring compliance.

  52. 52.

    It should be noted that although King III relies on self-regulation, certain aspects contained therein might be included in legislation or industry-specific requirements, thus requiring compliance. In this regard, South Africa is one of the first countries requiring companies listed on the JSE to show their compliance with King III in order to maintain their listing. Listed companies are now required to Report in an integrated manner instead of Reporting on financial and sustainability issues in separate Reports (SAPA 2010).

  53. 53.

    In this context, “board” refers to the “functional responsibility of those charged with governance” in a business and does not necessarily imply a board of directors (IoD 2009b: 19). Due to the fact that the agricultural enterprises referred to in this thesis are all companies, the reference to “board” will imply a board of directors.

  54. 54.

    See Kloppers (2013) for a discussion of the requirements relating to social and ethics committees.

  55. 55.

    See par 1 above.

  56. 56.

    The King III Code recommends that the board should promote the stakeholder-inclusive approach of governance and that all decisions and actions taken by the board should be based on the values of good corporate governance as identified by the King III Report (IoD 2009a), i.e. responsibility, accountability, fairness, and transparency (IoD 2009b).

  57. 57.

    The United Nations Global Compact (UNGC) is an excellent example of a voluntary initiative containing accepted principles aimed at guiding business behaviour.

  58. 58.

    This notion of compliance with legislation and other governance instruments is repeated in Principle 6 of the King III Code, which will be discussed below.

  59. 59.

    S 1(a) of the Constitution (South Africa 1996).

  60. 60.

    The recommended practice for Principle 6.1 is that businesses must comply with all applicable legislation—the use of the word must makes this, a legal requirement. Practices which would result in good governance but which are not legally required are identified by the use of the word “should”, while the use of the word “may” refers to a practice that could be considered (IoD 2009b).

  61. 61.

    In this regard, the King III Code recommends that compliance should be an ethical imperative where the board understands the context of the law and how various pieces of legislation relate to one another (IoD 2009b).

  62. 62.

    This statement reiterates two important theoretical underpinnings of CSR—the stakeholder approach and corporate citizenship.

  63. 63.

    The recommended practice according to the King III Code is that a business should in the first instance identify its main stakeholder groups, establish what these stakeholder groups’ perceptions of the business are, and based on these perceptions continue to manage the business’ reputation (IoD 2009b).

  64. 64.

    Also see Esser (2009).

  65. 65.

    Principles 8.2, 8.3 and 8.5 respectively of the King III Report (IoD 2009a).

  66. 66.

    As recommended by the King III Code 49.

  67. 67.

    This approach is reflected in the regulations addressing the social and ethics committee. The committee is under an obligation to also monitor and Report on matters related to social development.

  68. 68.

    The business should have measures in place to insure the integrity of the Report though the use of controls enabling the business to verify the content of its integrated Report (IoD 2009b).

  69. 69.

    For a discussion of these principles, see paragraph 2 of the Framework.

  70. 70.

    For a discussion of these principles, see paragraph 3 of the Framework.

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Authors and Affiliations

  1. North-West University (Potchefstroom Campus), Potchefstroom Campus, Potchefstroom, South Africa

    Henk Kloppers

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  1. Isenberg School of Management , University of Massachusetts Amherst , Amherst, MA, Massachusetts, USA

    Graham Gal

  2. Isenberg School of Management , University of Massachusetts Amherst , Amherst, Massachusetts, USA

    Orhan Akisik

  3. Isenberg School of Management, University of Massachusetts Amherst , Amherst, Massachusetts, USA

    William Wooldridge

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Kloppers, H. (2018). CSR, Corporate Governance, and the King Reports. In: Gal, G., Akisik, O., Wooldridge, W. (eds) Sustainability and Social Responsibility: Regulation and Reporting. Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application. Springer, Singapore. https://doi.org/10.1007/978-981-10-4502-8_3

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