CORPORATE GOVERNANCE - Home Page - Fasset · Web viewCorporate governance is the system or process by which companies, partnerships, close corporations and trusts are directed and

CORPORATE GOVERNANCE

FOREWORD

Fasset, as a public entity, is governed by the Public Finance Management Act and is also committed to ensuring that the recommendations of the King Reports are adhered to. In this regard a comprehensive set of policies have been designed and implemented in accordance with the Fasset Constitution and in support of Fasset's Sector Skills Plan and Business Plan. These policies contribute towards the effectiveness of corporate governance strategies and are in accordance with the Public Finance Management Act and King Reports.

Fasset has also undertaken to assist employers in its sector by developing guidelines on corporate governance and advice on how the strategies relating to corporate governance can be implemented. These guidelines have been published as a part of Fasset’s commitment to promoting the highest standards of corporate governance in South Africa.

This guideline document not only embraces the King recommendations, but goes beyond these principles in setting out the most important duties and responsibilities for all directors, trustees, sole proprietors, members and partners.

Fasset believes that these guidelines will assist employers in the sector in performing their duties and fulfilling their responsibilities. In addition to acting as a source of reference to newly appointed directors, members or trustees a review of the guidelines may identify new methods and ideas.

The guidelines have been prepared for Fasset, by our attorneys, Webber Wentzel Bowens. Should you have any suggestions and or questions with regard to corporate governance, please contact the corporate department at Webber Wentzel Bowens, the author of this document.

Cheryl JamesFassetBlackheath

W

November 2002

This publication has been prepared as a guideline and is not intended to be exhaustive. While the utmost care has been taken in the preparation of the publication, it should not be used or relied upon as a substitute for detailed advice or as a basis for formulating a business decision.

"Copyright 2002 Webber Wentzel Bowens"

The above notice serves as a warning to third parties that Webber Wentzel Bowens claims to be the proprietor of the copyright subsisting in the literary work. In the event of there being any infringement, it will impute knowledge on the infringing party and assist in recovering damages.

TABLE OF CONTENTSPART I.........................................................................................................................41. Introduction – what is corporate governance?..........................................4PART II........................................................................................................................62. Different types of enterprises......................................................................63. Sole proprietorships......................................................................................64. Partnerships....................................................................................................75. Close Corporations.........................................................................................86. Trusts...............................................................................................................87. Companies.....................................................................................................108. Director's duties and responsibilities.......................................................109. Director's duties in terms of the Companies Act....................................1210. Other obligations imposed on directors...................................................20PART III.....................................................................................................................2111. The King Reports of corporate governance.............................................2112. Corporations affected by the Code of Corporate Practices and Conduct ("the Code").............................................................................................................2113. Recommendations of King II.......................................................................23Appointment of directors......................................................................................24Director's remuneration and remuneration committee...................................25Board meetings.......................................................................................................26Board committees..................................................................................................27Annual reports and company meetings..............................................................27Risk management...................................................................................................28Internal control and audit committee.................................................................29Financial statements and the annual report......................................................29Transactions with directors and conflicts...........................................................3114. Integrated sustainability reporting...........................................................3215. Organisational integrity /Code of Ethics...................................................32PART IV.....................................................................................................................3316. Conclusion.....................................................................................................33USEFUL TELEPHONE NUMBERS FOR FASSET MEMBERS...................................37

1. PART I2. Introduction – what is corporate governance?

Corporate governance is the system or process by which companies, partnerships, close corporations and trusts are directed and controlled. Directors of the board, members of a close corporation and trustees of a trust are all responsible for the governance of their enterprise.

The concept of corporate governance has grown in prominence in recent times. In the wake of Enron, WorldCom, Adelphia Communications and an ever-lengthening litany of corporate malpractice scandals, finding new ways to protect average investors has become an international priority. It is, therefore, not surprising that corporate governance reform is gaining importance as a crucial mechanism for addressing the erosion of investor confidence.

It goes without saying that there is no single, universally appropriate, model of corporate governance. This principle is recognised in the King Report on Corporate Governance for South Africa 2002 ("King II"), which reiterates that:

"companies are governed within the framework of the laws and regulations of the country in which they operate. Communities and countries differ in their culture, regulation, law and generally the way business is done. In consequence, as the World Bank has pointed out, there can be no single generally applicable corporate governance model. Yet there are international standards that no country can escape in the era of the global investor. Thus, international guidelines have been developed by the Organisation for Economic Development Principles of Corporate Governance (OECD), the International Corporate Governance Network and the Commonwealth Association for Corporate Governance. The four primary pillars of fairness, accountability, responsibility and transparency are fundamental to all the international guidelines of corporate governance."1 (Our emphasis)

It follows that corporate governance can not be reduced to a set of pro-forma rules capable of mechanical application. It is, and should be, a flexible, tailor-made, multidimensional process to which a company, and many and varied individuals, submit themselves.

1 paragraph 23 on page 15

Many companies in the corporate arena today have a distinctive split between control and ownership. The need for corporate governance becomes ever increasing as directors are becoming more accountable to their shareholders and stakeholders.

Other enterprises such as trusts, close corporations, partnerships and sole proprietors do not necessarily have to ensure that they comply with the requirements of corporate governance due to their nature and composition. However, as will be discussed in a later part of this publication, it is suggested that these enterprises follow the broad, underlying principles of corporate governance recommended in King II.

The primary sources of law and regulation relating to corporate governance and director's duties comprise:

statute, particularly the Companies Act, the JSE Listings Requirements of the JSE and the Securities Regulation Code on Take-overs and Mergers. In addition, there is special-purpose legislation such as the Banks Act, 1990, the Long-term Insurance Act, 1998, the Short-term Insurance Act, 1998, the Financial Markets Control Act, 1989, the Stock Exchanges Control Act, 1985, the Unit Trusts Control Act, 1981 and the Public Finance Management Act, 1999;

the common law ;

the company’s articles of association; and

King II.

The first part of this publication will detail the common law and statutory duties and responsibilities of directors, sole proprietors, partners, members of close corporations and trustees whilst the second part of the publication will detail the recommendations laid down in the King Reports on corporate governance. It is our aim that this section will explain the principles of corporate governance in the South African context and provide practical guidance to the people who are responsible for ensuring good corporate governance in their enterprises.

PART II

3. Different types of enterprises

There are a variety of investment vehicles available to people interested in setting up commercial enterprises in South Africa. The forms of enterprises include:

sole proprietorships;

partnerships;

close corporations;

limited companies, public and private; and

business trusts.

In the paragraphs that follow, we will briefly explain the way in which each of these enterprises operate and more importantly, we will outline the duties and responsibilities of the people who control the specific enterprises.

4. Sole proprietorships

The sole proprietorship is usually a relatively small enterprise in which the capital of only one person, the proprietor, is invested.

As sole proprietors are single owner businesses, the business is operated with full personal risk. The sole proprietor’s estate is ultimately liable for all the commitments of the business.

Due to the fact that sole proprietors run their own affairs and are not accountable to shareholders, the principles of corporate governance applicable to the manager/ owner relationship are generally not applicable to the sole proprietor. In a later part of this report, we do however highlight the manner in which these entities can apply certain corporate governance principles to the conduct of their business.

5. Partnerships

A partnership is a legal relationship arising from an agreement between at least two, but usually not more than twenty persons, in terms of which each

contributes towards a business which is carried on in common with the object of obtaining mutual material benefit.2

A partnership does not have legal personality as it is simply a contractual association of persons and has no existence in law independent of its partners. Since a partnership does not exist as a separate legal persona, the partners are personally liable for its debts and they own the partnership estate.

Various rights and obligations in respect of partners arise from the partnership agreement. There are further rights and obligations which arise as consequences of a partnership. These include:

a duty of good faith between partners;

the duty to promote the interests of the partnership unselfishly;

a duty to disclose all information which affects the partnership;

a duty to make a contribution to the partnership; and

the duty to exercise reasonable care and expertise in the management of the business of the partnership.

Unlike a company, the partners owe duties to one another whereas directors owe duties to the company and its shareholders. In light of the absence of a partnership’s independent legal personality and the relationship that partners have with one another, corporate governance principles applicable to the internal management of an organisation may serve only as guidelines for good practice. In certain circumstances they will be neither applicable nor sufficiently extensive. However, those principles outlined in paragraphs 14 and 15 below, may be implemented.

6. Close Corporations

The introduction of the close corporation into our law in 1984 created a new form of business for small businessmen. The close corporation is a juristic person distinct from its members. The close corporation enjoys succession and its

2 HS Cilliers, Ml Benade, JJ Henning, JJ du Plessis, Pat, JSA Fourie, L de Kocker: Entrepreneurial Law at page 10

members have limited liability in respect of the corporation’s debts. The main source of law and regulation with regard to close corporations, is in terms of the Close Corporations Act, 1984.

Members of a close corporation stand in close relationships to one another but they owe fiduciary duties to the corporation as a separate legal persona. The Close Corporations Act sets out some of the fiduciary duties of members.

Each member of the close corporation must act honestly and in good faith and must exercise powers he or she has to manage or represent the corporation in its interests and for its benefit. A member should not exceed his or her powers. A member must further avoid a conflict between his or her interest and that of the corporation and may not derive any personal economic benefit from the corporation or anyone else, nor compete with its business activities.

7. Trusts

A trust is defined in the Trust Property Control Act as the arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed:

- to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement or for the achievement of the object stated in the trust instrument; or

- to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement or for the achievement of the object stated in the trust instrument,

but does not include the case where the property of another is to be administered by any person as executor, tutor or curator in terms of the Administration of Deceased Estates Act.

A trust is not a legal person. The assets, liabilities, rights and duties of the trust vest in the trustee. The primary source of law and regulation relating to a trust and the trustees duties, are in terms of the trust deed and the Trust Property Control Act.

The trustee is the person to whom the property is entrusted as administrator to manage it in accordance with the objects of the trust.

A trustee must comply, inter alia, with the following general duties:

he or she must comply with the duties as outlined in the trust document;

he or she must fulfil his or her duties impartially and in good faith;

in the performance of his or her duties and in the exercise of his or her powers, the trustee must act with care, diligence and skill which can reasonably be expected of a person who manages the affairs of another;3

he or she must take control of the trust assets and keep these clearly separate from his or her personal property;4

the trustee must preserve the trust property and keep it free from burdens such as liens;

he or she must manage the trust assets which are capable of producing an income in such a way that a reasonable return is obtained;

the trustee must maintain a proper account of trust funds and trust business, retain documents relating to the administration of the trust5 and render account of his or her administration of the trust when the Master of the High Court requests him to do so;6

8. Companies

Two types of limited liability companies are capable of being formed: public companies (whose shares may, but are not obliged to, be listed on the JSE

3 Section 9(1) of the Trust Property Control Act 57 of 19884 Section 10 and 11 of the Trust Property Control Act 57 of 19885 Section 17 of the Trust Property Control Act 57 of 19886 Section 16 of the Trust Property Control Act 57 of 1988

Securities Exchange South Africa ("the JSE")) and private companies. Both are created in terms of, and are governed by, the provisions of the Companies Act.

In the paragraphs that follow, we discuss in detail the duties and responsibilities of directors in terms of the common law and the Companies Act, 1973.

9. Director's duties and responsibilities

General

The duties of directors are regulated by their contracts with the company, statute, the memorandum and articles of association of the company and the common law.

Duties at common law

The duties that directors have, at common law can be summarised as follows:

Directors are required to act both lawfully and honestly in their official as well as personal capacities. Failure by a director to act lawfully will result in him being held criminally liable and also to being disqualified to act as a director either automatically or in terms of a court order.

Directors are also expected to act with care, skill and diligence when conducting the business of the company. Where a director fails to exercise the necessary skill, care and diligence required and as a result, he or she breaches the duty of care owed to a third party and the director may incur personal liability for any loss suffered as a result of the breach. Liability in this instance will be based either on delict, where a duty of care is owed to a third party, or on breach of contract, if there is a contract between the director and the company.

A director, from the time appointed or at the time he or she commences to act as such, stands in a fiduciary relationship to the company. A director may, amongst others, be held personally liable to the company for breach of his or her fiduciary duties.

A director's fiduciary duty comprises two separate and distinct duties, which in turn each comprise a number of further duties. These duties include:

the duty to exercise powers in good faith:

a director must exercise his or her powers in an independent and objective manner. He or she has a duty to do what he or she considers best serve the company's interests.

a director must further exercise his or her powers for the purpose for which they were given.

a director must act within the limits of authority. A director may not act outside the limits placed in his or her powers by the Companies Act, the common law and the company's memorandum and articles of association.

a director must observe any limitation of powers imposed on the company of which he or she is a director. When a director acts on behalf of a company he or she must do so within the scope of the company's objects and powers.

duty to avoid a conflict between personal interests and the interests of the company:

in general, a director must exercise judgment in an honest manner as to what is in the company's interests and must act for the benefit of all shareholders and disclose on request to all shareholders, certain information connected with the company;

a director must account to the company for profits made by reason of his or her directorship. This includes any gain or advantage made by a director while carrying out his or her duties as a director;

a director may not misappropriate or usurp a business opportunity which the company is pursuing or which the director is obliged to acquire for the company;

a director has a common law duty to disclose to the company any interest he or she has in a contract with the company. The rule at common law is that, unless the company's articles provide otherwise, a director may not, whether directly or indirectly, have an

interest in a contract with the company, unless a general meeting of the company approves the contract, following full disclosure.

10. Director's duties in terms of the Companies Act

In addition to the common law duties and any other duties or restrictions which may be imposed on directors in terms of statute or their contracts with the company, the Companies Act imposes obligations on directors of companies. The obligations imposed on directors in terms of the Companies Act, include:

Number of directors

Public companies must have at least two directors, whilst private companies are only required to have one director.

Until directors are appointed, every subscriber to the memorandum of a company, is deemed to be a director of the company.

Appointment of directors

The first directors of the company may be appointed by a majority of the subscribers to the memorandum.

Any person who, before the issue of a certificate to commence business, is appointed as a director of the company, shall:

sign and lodge with the company, his or her consent to act as a director, on a form CM27;

subscribe for the minimum number of qualification shares or lodge with the Registrar of Companies, a written agreement to acquire the shares.

Persons who are appointed as directors, after a company has been issued with a certificate to commence business must, within 28 days of appointment, sign and lodge with the company, their consent to act as a director of the company. This must be done on the prescribed form.

Disqualification from appointment

The following categories of persons are disqualified in terms of the Companies Act, from being appointed or acting as directors:

a body corporate;

a minor or any other person under legal disability;

any person who is the subject of any order under the Companies Act, which disqualifies them from being a director;

except with the authority of the Court:

an unrehabilitated insolvent;

any person removed from an office of trust on account of misconduct;

any person who has at any time been convicted of theft, fraud, forgery or uttering a forged document or any offence involving dishonesty or in connection with the promotion, formation or management of a company and has been sentenced therefor to imprisonment without the option of a fine or to a fine exceeding R100;

any person who is disqualified in terms of the company’s articles of association.

Removal from office

A company may, notwithstanding anything in its articles or memorandum or in any agreement between it and a director, remove a director from office before the expiration of their period of office. Removal from office can be done by passing an ordinary resolution. Special notice must be lodged with the company of any proposed resolution to remove a director from office.

A director who is affected by a proposed removal has the right to make representations with regard to his or her removal from office. The director is entitled to have his or her representations heard at the meeting which is convened for the purposes of proposing a resolution for the director’s removal.

Register of directors and officers

Every company must keep in one of the official languages of the country, a register of directors and officers of the company and secretaries which are corporate bodies. The Companies Act prescribes the particulars of each of the parties, that are to be entered into the register.

Loans to directors

Section 226 of the Companies Act imposes restrictions on the granting of loans to directors and the provision of security on behalf of directors.

Section 226 provides, that no company shall directly or indirectly make a loan to:

any director or manager of:

the company; or

its holding company; or

any other company which is a subsidiary of its holding company; or

any other company or other body corporate controlled by one or more directors or managers of the company or of its holding company or any other company which is a subsidiary of its holding company.

Main exemptions to Section 226 of the Companies Act

Loans made to a director or manager provided prior consent of the members of the company is obtained in the form of a special resolution.

Loans made to a director or manager in order that they meet expenditure incurred or to be incurred by him or her to perform duties in regard to the company. These loans require the approval of the company at a general meeting.

Loans made to employee share trusts as contemplated in section 38(2)(b) and (c) of the Companies Act.

Loans made bona fide to a director in the ordinary course of business of a company regularly carrying on the business of making loans.

Loans made to a director or manager of a subsidiary provided such director or manager is not also a director or manager.

Loans be made to a director or manager of the company for housing, with the approval of the company in general meeting.

Issue of shares

A director may not issue any shares of the company or debentures which are capable of being converted into shares, to a director or his or her nominees unless:

approval has been specifically given by the company in general meeting; or

allotted or issued under a contract underwriting such shares or debentures; or

such shares or debentures are allocated or issued in proportion to the director's existing holdings, on the same terms and conditions as have been offered to all the members or debenture holders of the company or to the members or debenture holders of the class or classes being allotted or issued; or

such shares or debentures are allotted or issued on the same terms and conditions as have been offered to members of the public.

A director who knowingly takes part in an allotment or issue of any shares in contravention of Section 221 and 222 may be liable to the company for losses as a result thereof. A director who contravenes Section 222 will also be guilty of an offence.

General administrative duties of directors

Directors must ensure that the company does not commence business before a certificate to commence business has been issued by the Registrar of Companies. Failure to do so is a criminal offence.

If requested to do so by the required number of members, the directors must call a general meeting, by issuing a notice to the members within 14 days of the lodging of the requisition. Any director or officer of a company who knowingly is party to a failure to convene a meeting as required, will be guilty of an offence.

In the absence of the approval of the company in general meeting, the directors may not dispose of the whole or the greater part of the company's undertaking or assets.

Directors must ensure that the notice convening a meeting to confirm or authorise a contract in which a director is materially interested, (whether directly or indirectly), states the full particulars of the interest of the relevant director. Failure to do so is a criminal offence.

Attendance registers

The directors of a company present at a directors' meeting must sign their names under the date of the meeting in an attendance register, which must be kept at the company's registered office, or at the office where it is made up. Failure to do so is a criminal offence.

Minute books

The directors are responsible for ensuring that minutes are kept of all meetings of directors or managers.

The minutes must be recorded in one of South Africa’s official languages.

Any resolution signed by directors or managers of the company, shall be deemed to be a minute of a meeting. The resolution must be entered into the minute book and noted at the next director’s meeting.

The minutes of a meeting must be signed by the chairman of that meeting or by the chairman of the following meeting.

The directors of a subsidiary company must ensure that the annual financial statements are made out to cover an accounting period ending on the same date as the period covered by the annual financial statements of its holding company.

When requested to do so by a company or its auditors, directors must give the necessary information regarding loans obtained from the company, for inclusion in the company's annual financial statements. Failure to do so is a criminal offence.

When requested in writing by the company or its auditors, the directors must give the prescribed information regarding their emoluments and pensions, within 21 days of the date of the request. Failure to do so is a criminal offence.

Director's names on letterheads

A company is not permitted to issue or send any trade catalogue, trade circular or business letter bearing the company's name, to any person in South Africa, unless the document states all the director's forenames, initials, surnames and nationalities if the directors are not South Africa.

A company is to publish its name and registration number on all its notices and official publications, which include all bills of exchange, promissory notes, endorsements, cheques, orders, delivery notes, letters, invoices, receipts and letters of credit.

Appointment of auditors

When the memorandum and articles of a company to be incorporated are lodged with the Registrar of Companies for registration, a written consent of a person accepting appointment as an auditor may be lodged simultaneously. The auditor will be deemed to have been appointed by the company at this point in time.

If the company does not appoint an auditor when it lodges the memorandum and articles with the Registrar, then an auditor must be appointed within 21 days after the incorporation of the company.

If the directors of a company fail to appoint an auditor, the Registrar may appoint an auditor on the company's behalf. In this case, each director will be guilty of an offence.

Appointment of a company secretary

The directors of a public company having a share capital must appoint a secretary. The secretary must be permanently resident in South Africa and have, in the opinion of the directors, the requisite knowledge and experience to carry out the duties of a secretary of a public company. The directors of a public company who fail to appoint a secretary after being ordered to do so by the Registrar of Companies shall be guilty of an offence

Accounting records

Every company is to keep, in one of South Africa's official languages, accounting records that are necessary to fairly represent the company's state of affairs and business and to explain its transactions and financial position. The records must include:

records showing the assets and liabilities of the company;

a register of fixed assets;

records containing entries from the day-to-day in sufficient detail of all cash received and its out and of the matters in respect of which receipts and payments take place;

records of all goods sold and purchased and (except in the case of ordinary retail trade) records showing the identity of the buyers and the sellers; and

statements of annual stocktaking.

The accounting records are to be kept at the registered office of the company or at such other place as the directors think fit. The records must be available for inspection

Financial statements

The directors of a company are responsible for producing annual financial statements in one of South Africa's official languages, each year.

The annual financial statements must consist of:

a balance sheet and income statement and the notes thereon or another attached document which provides the information required by the Companies Act;

a cash flow statement;

a director's report, which is to comply with the Companies Act; and

an auditor's report.

The contents of the annual financial statements must be approved by and are the responsibility of the directors.

The annual report must be approved by its directors and signed by at least two directors of the company or if there is only one director, by that director.

There are many and varied potential liabilities, both in common law and in statute, which could render a director to both criminal and civil liability. The Companies Act prevents a company from validly exempting or indemnifying directors of a company against negligence, default, breach of duty or breach of trust. It is however possible for a company to take out insurance against such liability. It is not clear whether such insurance will protect the company or the directors themselves.

11. Other obligations imposed on directors

A multitude of statutory provisions exist which impose obligations on directors in addition to the general fiduciary duties of all directors. Non-compliance with these statutory obligations may give rise to civil and criminal liability. Examples of these statutes include:

The Income Tax Act, 1962 , as amended;

The Pension Funds Act, 1956 as amended;

The Banks Act, 1990;

The Trust Property Control Act, 1988;

The Financial Institutions (Investment in Funds) Act, 1984.

PART III

12. The King Reports of corporate governance

The first King report on corporate governance ("King I") was released on 29 November 1994. The purpose of King I was to promote the highest standards of corporate governance in South Africa. The King Committee was formed at the instance of the Institute of Directors.

The King Committee was similar in concept to the Cadbury Committee in England. King's terms of reference were however wider. The King and Cadbury reports both considered financial reporting and accountability, good practice concerning the responsibility of directors, the case for audit committees, the principal responsibility of auditors and the links between shareholders, boards and auditors. In addition the King's terms of reference included a Code of Ethical Practice for South African enterprises and took account of special circumstances and of disadvantaged communities in South Africa.

The King Committee issued a detailed report on corporate governance, a series of recommendations and a Code of Corporate Practices and Conduct.

A number of recommendations in the King I were superseded by legislation in the social and political transformation in South Africa. Further, a dominant feature of business since 1994, was the emergence of information technology. In light of these factors as well as many others, the King Committee reviewed corporate governance standards and practices for South Africa against developments that took place after the publication of King I.

The Code of Corporate Practices and Conduct in King II replaced the Code of Good Corporate Practices and Conduct in King I, with effect from 1 March 2002.

13. Corporations affected by the Code of Corporate Practices and Conduct ("the Code")

The Code applies to:

companies with securities listed in the JSE Securities Exchange, South Africa;

banks, financial and insurance entities as defined in the various Financial Services Acts;

public sector enterprises and agencies that fall under the Public Finance Management Act and the Local Government: Municipal Finance Management Bill.

Although King II, including the Code, applies only to certain categories of business called "affected enterprises", it is suggested that all companies should, nevertheless, give due consideration to the application thereof.

As explained above, the concept of corporate governance applies mainly to companies as there is a need for the directors of a company to be accountable to its owners, that is the shareholders. However, in so far as the other enterprises are concerned, it is recommended that these enterprises comply with the seven characteristics of good corporate governance, as outlined in King II. These seven characteristics are:

discipline;

transparency;

independence;

accountability;

responsibility;

fairness; and

social responsibility7.

Adherence to the Code is voluntary, however the JSE Listings Requirements require listed companies to disclose in their annual reports a narrative statement of how the company has applied (or intends to apply) the principles set out in the Code. The statement must contain explanations enabling shareholders to evaluate how the principles have been applied and must address the extent of the company's compliance with the Code and the reason for any non compliance, indicating for what part of the relevant accounting period the non compliance occurred.

7 King Report on Corporate Governance issued by the Institute of Directors at pages 11 and 12

14. Recommendations of King II

In the paragraphs that follow, we outline the corporate governance recommendations contained in King II and some relevant statutory provisions contained in the Companies Act. This outline is not exhaustive and should be used only as a source of reference for directors and other interested parties.

Composition and role of the board of directors of a company

It is recommended that South African companies have a unitary board structure (as opposed to separate supervisory and management boards), with directors being appointed in terms of the provisions of the company's articles of association. A board of directors usually includes directors who are also senior employees of the company - these are usually referred to as “executive directors”.

The Companies Act requires every public company to have at least two directors and every private company to have at least one director. The JSE Listings Requirements provide for a minimum of four directors for a listed company. There is no maximum limit on the number of directors. A company's articles of association may provide for a minimum or maximum number of directors and for a means of determining such number.

A board of directors should be balanced between non-executive and executive directors. Although the role of non-executive directors are recognised, South African law does not recognise the distinction between the duties of executive and non-executive directors. Neither the Companies Act, nor the JSE Listings Requirements regulate the position of non-executive directors. However, King II recommends a balanced board comprised of executive and non-executive directors, preferably with a majority of non-executive directors, of whom sufficient should be independent of management. The principle, which is echoed in the Code of Corporate Practices and Conduct incorporated in the JSE Listings Requirements, is that the board should ensure that there is an appropriate balance of power and authority on the board, such that "no one individual or small group of individuals can dominate the board's decision making".

King II defines an executive director as an individual involved in the day-to-day management and/or in the full time salaried employment of the company

and/or its subsidiaries. A non-executive director is defined as an individual not involved in the day-to-day management and not a full time salaried employee of the company or its subsidiaries.

Non-executive directors are subject to the same duties and potential liabilities as executive directors.

The board of directors is ultimately responsible for ensuring that the business remains a going concern and that it achieves its objectives. It must therefore ensure that the company is controlled in an effective manner.

The Chairman and the Chief Executive Officer

The chairperson is responsible for the effective functioning of the board and the chief executive officer is responsible for the running of the company's business. There should be a clear distinction between these roles.

King II emphasises that there should be a clear division of responsibilities at the head of the company, ensuring a balance of power and authority, so that no one individual has "unfettered powers of decision making".

It is recommended that the chairperson or a sub-committee of the board should annually appraise the chief executive's performance. The results of such appraisal should also be considered by the remuneration committee to guide it in the evaluation of the performance and remuneration of the chief executive officer.

Appointment of directors

Usually, the articles of association of the company to provide that directors be appointed by the members in a general meeting. At common law, the appointment of a director comprises of his or her appointment by those duly authorised to do so, combined with his or her acceptance or consent to such appointment. King II recommends the establishment of a nomination committee comprised only of non-executive directors, the majority of whom should be independent, to recommend all new appointment of directors.

Unless otherwise provided in the articles of association of a company, or in terms of a separate contract between the company and the director, a director continues in office until his or her death, resignation or

disqualification. It is however suggested in King II that board continuity is imperative and that the board should put in place a programme ensuring staggered rotation of directors. King II recommends that an executive director's fixed term contract, if any, should not exceed three years. Also, provision is made in the JSE Code, for an executive director's service contract not to exceed five years. If a longer period is required, it is suggested that shareholder approval should be obtained. (It is understood that the five year period referred to in the JSE Code will be amended to three years during the first quarter of 2003).

King II further recommends a formal orientation program for newly appointed directors, in order to familiarise them with the company's structure, operation and plans. New directors must also, in terms of King II receive developmental and educational training in respect of their duties and responsibilities to the company.

Director's remuneration and remuneration committee

The remuneration of directors is determined in accordance with the provisions of the articles of association of the company, as well as any existing contracts between the directors and the company. It is proposed in King II that levels of remuneration should be sufficient to attract, retain and motivate executives of the quality required by the board and, furthermore, that performance related elements should constitute a substantial portion of the total remuneration packages of executives.

King II recommends that companies should establish a formal and transparent procedure for developing policy on executive and director remuneration and, furthermore, that companies should appoint a remuneration committee, comprised of exclusively or mainly of non-executive directors, to determine individual remuneration packages for each of the executive directors. No director should be involved in deciding his or her own remuneration. Non-executive director remuneration should be a matter for the board as a whole, to be approved by the shareholders in a general meeting.

Detailed statutory provisions regulate the disclosure of directors’ emoluments in the annual financial statements of the company. These include, for example, disclosure of the aggregate amount of the emoluments

received by the directors as a group (including basic salary, bonuses and performance related payments, sums paid by way of expense allowances, the estimated monetary value of other material benefits received, gains made on the exercise of share options, the amount of the pensions paid or receivable by directors and past directors and details of directors' service contracts).

The JSE Listings Requirements and King II require more detailed disclosure in relation to directors' emoluments. In particular, the annual financial statements of listed companies are required to contain an analysis in the aggregate and by individual directors, and distinguishing separately between executive and non-executive directors as separate groups, of emoluments paid during the last financial period by the company, or receivable by directors in their capacity as directors or otherwise (including fees for services as director, basic salary, bonuses and performance related payments, sums paid by way of expense allowance, any other material benefits received, contributions paid under any pension scheme, any commission, gain or profit-sharing arrangements and any share options (including their strike price, period when and at what price options have been exercised and any other relevant information)).

Board meetings

The board of directors should sit at least once a quarter. The frequency of meetings should however be determined with reference to specific circumstances within the company.

Board committees

King II recommends that board committees be established to aid the board and its directors in giving detailed attention to specific areas of the directors' duties and responsibilities.

The board or its directors should determine a policy for the frequency, purpose, conduct and duration of its meetings and those of the formally established committees.

There should be transparency and full disclosure from the board committee to the board, except where the committee has been mandated otherwise by the board.

At a minimum, each board should have an audit and a remuneration committee.

It is recommended that all board committees be chaired by an independent non-executive director.

The annual report should detail the composition of the committees (especially the remuneration, audit and nomination committee) as well as a description of the committee's responsibilities, the number of meetings held and other information that may be of relevance to the company's shareholders.

The board should regularly evaluate the board committees to ascertain their performance and effectiveness.

Annual reports and company meetings

The Companies Act provides for every company to hold an annual general meeting. Private companies may, however, by written approval of shareholders dispense with the obligation to do so.

The Companies Act provides that the annual general meeting shall deal with the matters assigned to it in the Companies Act and may deal with matters provided for in the articles of association of the company, or matters which may be dealt with by any general meeting of the company. The issues usually addressed at an annual general meeting include, for example:

the consideration of the annual financial reports. Shareholders are not entitled or required to approve the annual financial reports, but merely to consider them;

the election of directors (but not managers);

the selection or ratification of the selection of outside auditing firms;

the passing of special resolutions (if any);

the extension of a general authority to the directors to issue shares;

the approval of certain loans to directors;

the declaration or approval of dividends.

Certain transactions of the company may not be approved by the board, without reference to the shareholders. The JSE has specific requirements for Category I, II, III and IV transactions with Category I transactions (where the size of the transaction equates to 30 per cent or more of the capitalisation of the company or where 30% of new shares are issued as consideration) requiring approval by ordinary shareholder vote. Furthermore, provision is made for shareholder approval for executive and staff share option schemes. These issues may be dealt with at the annual general meeting.

King II emphasises the importance of the annual general meeting of listed companies as an opportunity to communicate with shareholders and to encourage shareholder activism and participation.

Risk management

King II suggests that the board has the responsibility to ensure that the company has implemented an effective ongoing process to identify risk, to measure its potential impact against a broad set of assumptions and to activate what is necessary to proactively manage these risks. It is, furthermore, recommended that a board committee should be appointed to assist the board in reviewing the risk management process and the risks facing the company.

Internal control and audit committee

King II requires that companies have an effective internal audit function that has the respect and co-operation of both the board and management. The objective of internal audit is to assist members of executive and senior management in the effective discharge of their duties and responsibilities. Where the board decides not to establish an effective internal audit function, full reasons must be disclosed in the company's annual report, with an explanation as to how assurance of effective internal controls, processes and systems will be maintained.

King II further requires that the audit committee should be comprised by a majority of independent non-executive directors. The majority of the members of the audit committee should have a financial background. It is further recommended that the chairperson of the audit committee be an independent non-executive director and not the chairman of the board. The audit committee should have written terms of reference that deal adequately with its membership, authority and duties. Companies should further, in their annual reports disclose whether or not the audit committee has adopted formal terms of reference and if so, whether the committee has satisfied its responsibilities for the year in compliance with its terms of reference. Membership of the audit committee should also be outlined in the annual report.

Financial statements and the annual report

In terms of the Companies Act, the accuracy of the annual financial statements of a company (which should achieve fair presentation in conformity with generally accepted accounting practice (GAAP)) is primarily the responsibility of the directors. If accounts are not reasonably accurate every director who is in default is potentially guilty of a criminal offence, unless such director is excused from liability in accordance with the provisions of the Act. Similarly if annual accounts are approved which do not conform to statutory requirements, every director who is a party to their approval and who knows that they do not comply or is reckless as to whether they comply is guilty of an offence.

Directors must prepare an annual directors' report with respect to, amongst other things, the state of affairs and business of the company. If a director fails to take all reasonable steps to comply with the provisions of the Companies Act in relation to the directors' report, he or she is guilty of an offence.

King recommends that directors should report on the following specific matters in their annual report8:

that it is the director's responsibility to prepare the financial statements that fairly represent the state of affairs of the company

8 King Committee on Corporate Governance, issued by Institute of Directors at page 40

as at the end of the financial year and the profit or loss and cash flows for that period;

that it is the director's responsibility to prepare the financial statements that fairly represent the state of affairs of the company as at the end of the financial year and the profit or loss and cash flows for that period;

whether the auditor is responsible for reporting on whether the financial statements are fairly presented;

whether adequate accounting records and an effective system of internal controls and risk management have been maintained;

whether appropriate accounting policies supported by reasonable and prudent judgements and estimates have been used consistently;

whether applicable accounting standards have been adhered to or, if there has been any departure in the interest of fair presentation, this must not only be disclosed and explained, but qualified;

whether there is no reason to believe the business will not be a going concern in the year ahead or an explanation of any reasons otherwise; and

whether the Code of Corporate Practices and Conduct has been adhered to or, if not, where there has not been compliance to give reasons.

Transactions with directors and conflicts

The common law provides that a director stands in a fiduciary position toward each company on whose board he or she serves. A director is obliged to display the utmost good faith towards the company, and in his or her dealings on its behalf, once he or she accepts an appointment as a director and may not place himself or herself in a position in which he or she has, or may have, a personal interest conflicting with his or her duty to act in the interests of the company. The failure by a director to comply with his or her fiduciary duties constitutes a breach of trust and gives rise to a claim by the company against the director.

Various provisions of the Companies Act regulate and restrict transactions between a company and its directors. The articles of association of a company may contain additional restrictions. Statutory provisions include a duty to disclose an interest in any contract or proposed contract with the company, the minuting of declarations of interest, as well as a prohibition on loans to, or security in connection with, transactions by directors.

The JSE Listings Requirements contain detailed provisions dealing with "related party" transactions, which provide certain safeguards against shareholders, directors and other related parties to a listed company taking advantage of their position. "Related party" transactions must be reported to the JSE, whereupon the JSE is entitled to require written notification to be given to shareholders and approval of the transaction by shareholders other than the related party shareholders and their associates.

15. Integrated sustainability reporting

King II recommends that every company should report, at least annually on the nature and extent of its social, transformation, ethical, safety, health and environmental management policies and practices. It is further recommended that the board must determine what is relevant for disclosure, having regard to the company’s special circumstances.9

It is further recommended that matters requiring specific consideration should include:

description of practices reflecting a committed effort to reducing workplace accidents, fatalities and occupational health and safety incidents against stated measurement targets and objectives and a suitable explanation where appropriate. This would cover the nature and extent of the strategy, plans and policies adopted to address and manage the potential impact of HIV/AIDS on the company activities;

reporting on environmental corporate governance;

policies defining social investment prioritisation and spending and the extent of initiatives to support black economic empowerment, in particular with regard to procurement practices and investment strategies;

9 King Committee on Corporate Governance, issued by Institute of Directors page 35

disclosure of human capital in areas such as the number of staff, with due regard on progress against equity targets, achievement of corporate training and development initiatives, age, employee development and financial investment.10

16. Organisational integrity /Code of Ethics

King II recommends that every company should engage its stakeholders in determining the company’s standards of ethical behaviour. The company should demonstrate its commitment to organisational integrity by codifying its standards in a code of ethics.11

PART IV

17. Conclusion

The Executive Summary of the King Committee on Corporate Governance, issued by the Institute of Directors in March 2002, sums up the concept of corporate governance, where it states:

"In summary, successful corporate governance in the world of the 21st

century requires companies to adopt an inclusive approach and not an exclusive approach. The company must be open to institutional activism and there must be greater emphasis on the sustainable or non-financial aspects of its performance. Boards must apply the tests of fairness, accountability, responsibility and transparency to all acts or omissions and be accountable to the company also but responsive and responsible towards the company's identified stakeholders. The correct balance between conformance with governance principles and performance in an entrepreneurial market economy must be found, but this will be specific to each company."

As many companies in the modern corporate arena, have a distinct split between control and ownership, the need for transparency and accountability to the stakeholders has increased. For these reasons, corporate governance is becoming more and more important.

Due to the nature of the other corporate entities which have been discussed above, there will not necessarily be a need for these entities to comply with

10 King Report on Corporate Governance, issued by Institute of Directors at pages 36 and 3711 King Report on Corporate Governance, issued by Institute of Directors at page 37

the requirements of corporate governance. However, in so far as they can, these enterprises should apply the principles of openness, honesty, fairness, accountability, responsibility and transparency in relation to all business dealings, but particularly with regard to the persons to whom they are required to report. These enterprises should also conduct their affairs, with due regard to the principles of corporate governance that relate to environmental, health and safety, economic empowerment and human capital development issues. It is also recommended that these enterprises codify their standards in a code of ethics.

The key aspects of corporate governance, recommended by King II can be summarised as follows:

The Board

should have a balance of executive and non-executive members;

should be honest and open in its disclosure to stakeholders;

should establish procedures to monitor risk assessment;

should conduct risk assessments;

should identify and establish internal control to match the company's level of risk;

should delegate the establishment and maintenance of internal control;

should establish and clearly define committees;

should establish at least a remuneration and audit committee.

The Chair

should have a distinct role from the chief executive officer.

Directors

should have a formal orientation program if newly appointed

new directors should receive developmental and educational training in respect of duties and responsibilities;

Director's remuneration

should be determined by a remuneration committee, comprised exclusively or mainly of non-executive directors;

no director should be involved in deciding his or her own remuneration;

non-executive remuneration should be decided by the board as a whole and approved by the shareholders in a general meeting.

Board meetings

should take place at least four times a year.

Board committees

should be established to aid the board and its directors in giving detailed attention to specific areas of directors' duties and responsibilities;

should be chaired by an independent non-executive director;

should be transparent and report to the board.

Internal control

companies are to have effective internal control that has the respect of the board and management;

an audit committee should be appointed that has a majority of non-executive members;

the majority of members on the internal audit committee should have a financial background

Conflicts of interest

directors have a duty to disclose an interest in any contract or proposed contract with the company;

the conflict should be minuted.

In our view, all businesses in Fasset's sector should design and adopt effective governance systems which incorporate a means for enforcement and accountability to stakeholders and/or other interested bodies, persons or entities. To assist businesses in overcoming this challenge, we suggest that the recommendations outlined in this publication be adapted to the specific business' needs and implemented by those who govern them.

USEFUL TELEPHONE NUMBERS

1. Fasset (011) 476-8570

2. Webber Wentzel Bowens (JHB) (011) 530-5000

3. Webber Wentzel Bowens (Cape Town) (021) 505-5000

4. Institute of Directors (JHB) (011) 643-8086

5. Institute of Directors (Cape Town) (021) 686-0158

6. Institute of Directors (Durban) (031) 566-2352

7. Institute of Directors (PE) (041) 365-1163

8. Department of Labour (Eastern Cape) (043) 701-3030

9. Department of Labour (Free State) (051) 505-6200

10. Department of Labour (Gauteng South) (011) 497-3218

11. Department of Labour (Gauteng North) (011) 309-5136

12. Department of Labour (Kwa-Zulu Natal) (031) 336-1545

13. Department of Labour (Mpumalanga) (013) 655-8700

14. Department of Labour (North West Province) (018) 387-8100/9

15. Department of Labour (Northern Cape) (053) 838-1500

16. Department of Labour (Limpopo Province) (015) 290-1607

17. Department of Labour (Western Cape) (021) 460-5104

18. CCMA (Eastern Cape) (043) 743-0826

19. CCMA (Free State) (051) 505-4400

20. CCMA (Gauteng) (011) 377-6600

21. CCMA (Kwa-Zulu Natal) (031) 362-2300

22. CCMA (Kwa-Zulu Natal – Richards Bay) (035) 789-0357/1415

23. CCMA (Mpumalanga) (013) 656-2800

24. CCMA (North West Province) (018) 464-0700

25. CCMA (Northern Cape Province) (053) 831-6780

26. CCMA (Northern Province) (051) 297-5010

27. CCMA (Western Cape) (021) 469-0111

28. Labour Court (Johannesburg) (011) 359-5800

(011) 403-4893

29. Labour Court (Cape Town) (021) 424-9035

30. Labour Court (Durban) (031) 301-0140

31. Labour Court (Port Elizabeth) (041) 586-4923

32. Registrar of Companies 0861 843 384

33. Auditor General (011) 842-4814

34. Department of Finance (Cape Town) (021) 464-6100

35. Department of Finance (Pretoria) (012) 315-5372

36. Department of Trade and Industry 0861 843 384

37. Johannesburg Stock Exchange (011) 520-7777

38. Receiver of Revenue (Bloemfontein) (051) 506-3000

39. Receiver of Revenue (Cape Town) (021) 460-2911

40. Receiver of Revenue (Durban) (031) 360-8911

41. Receiver of Revenue (East London) (043) 722-7270

42. Receiver of Revenue (Johannesburg) (011) 374-8000

43. Receiver of Revenue (Kimberley) (053) 831-2250

44. Receiver of Revenue (Port Elizabeth) (041) 505-7500

45. Receiver of Revenue (Pretoria) (012) 317-2000

46. South African Reserve Bank (Bloemfontein) (051) 403-7500

47. South African Reserve Bank (Cape Town) (021) 481-6700

48. South African Reserve Bank (Durban) (031) 310-9300

49. South African Reserve Bank (East London) (043) 707-3400

50. South African Reserve Bank (Johannesburg) (011) 240-0700

51. South African Reserve Bank (Port Elizabeth) (041) 501-6600

52. South African Reserve Bank (Pretoria) (012) 313-3911