This document discusses board governance practices in South Africa, with three key points: 1. South Africa has adopted a stakeholder-focused model of governance outlined in King IV, requiring boards to consider the interests of all stakeholders, not just shareholders. This is assessed through integrated reporting on financial, manufactured, intellectual, human, natural, and social capital. 2. CalPERS provides an example of an active shareholder model from the US, engaging with underperforming companies to improve long-term value creation by focusing on environmental, governance, human capital, and risk management practices. Studies found engaged companies significantly outperformed peers after engagement. 3. Even with strong governance, issues can still arise. The document

1. Board Governance in South Africa
Stakeholder Focus and Integrated Reporting
Social Issues in Accounting Governance and Regulations Class
Craig Foltin, Assistant Professor of Accounting in the Monte Ahuja College of Business
James T Deiotte CPA JD
Cleveland State University

2. CONTEXT AROUND GOVERNANCE IN EMERGING
MARKETS
Understanding the constantly changing landscape of evolving stakeholders in Africa

3. • Zimbabwe (Rhodesia) gained official
independence as Zimbabwe on 18
April 1980.
• Largely peaceful handover of power
• 80s – consolidation of power and
violence imposed on opposition
party
• 1988 - change in the constitution
• 1990 - deterioration in economy
• Seizure of white-owned farms,
impacting food costs
• Continued acceleration of the
deterioration of economy and
collapse of currency
• Exodus of talent

4. • South Africa’s path
– 1994 – Mandela
• Historical transfer of power
• Political versus industrial/private sector transition
– Today
• Impact of Zuma presidency on ANC
– Elections and regions loss of control
– Loss of faith
– Birth of EFF and empowerment of Julius Malema

5. Context to appreciate
the challenge
• Youngest continent in the world
• Newest democracies
• Institutions nearly all destroyed
• Educational
• Regulatory
• Judicial
• Leadership in place and remaining
• Appreciate the impact of apartheid and
colonialism affect

6. Why I believe in Africa – I believe in its people!
• It is the youngest!
• It is the newest and just learning
how to manage through
democracies
• Values and beliefs around family
and generations
• Values around community
• The energy
• Unbelievable resilience

7. Resilience
creates the
opportunity to
let go and to
leapfrog
developed
economies and
systems

8. MODELS OF GOVERNANCE
Focus on Global Models and looking at the US Model as applied by CalPERS

9. Global governance models and
comparisons
Emerging markets
(China and South Africa)
Stakeholder-centric
State participation in financing is
extensive
Government regulates markets Evolving stakeholder involvement
Political, family and treasury
composition
Communitarian
(Japan and Germany)
Stakeholder focused
Financing is from banks and
suppliers
Legislation mandates governance
Two-tier board (labor influences
supervisory and management
Composition includes labor and
banks
Anglo American
(US, UK and Canada)
Shareholder primacy Financing is from capital markets
Markets impact governance
choices
Single board structure
Composition is non-executive
directors and independent
directors

10. US Model Foundation focused on Primacy
• US Model Boards
– Shareholder Primacy Theory
• Shareholder primacy should guide board decisions
– The board’s role is to preserve and develop shareholder value
– A corporation is organized and carried on primarily for the benefit of
– shareholders
• Stakeholders impact company performance!
• If you have too many stakeholders involved (e.g. employees, customers,
suppliers, and community) value can be destroyed

11. Example: How CALPERS defines
governance and engagement
• California Public Employees' Retirement System (CalPERS) believes long-term value creation requires effective
management of three forms of capital: financial, physical, and human.
• Our Corporate Engagement Program is underpinned by this belief. It's our view that improved alignment of
interest between long-term shareowners and companies will enable the Fund to fulfill its fiduciary duty to
achieve sustainable risk-adjusted returns.
• There are four main drivers in the corporate engagement program:
– Environmental practices, including but not limited to climate change and natural resource availability
– Governance practices, including but not limited to alignment of interests
– Human capital practices, including but not limited to fair labor practices, health and safety, responsible
contracting, and diversity
– Risk management practices
Source: https://www.calpers.ca.gov/page/investments/governance/corporate-engagements/focus-list-program

12. Measured impact of CalPERS engagement
with poorly performing companies
• … the evidence is equally clear that many corporate assets are
poorly managed and that resources spent on identifying and
rectifying those cases can create substantial opportunity and
premium returns for active shareholders.
• For the three years prior to the “initiative date”, the engaged
companies produced returns that averaged 38.91% below the
Russell 1000 Index on a cumulative basis, and 36.13% below the
respective Russell 1000 sector indices. For the five years after the
“initiative date,” the average engaged companies produced excess
returns of 12.27% above the Russell 1000 Index and 8.90% above
the respective Russell 1000 sector indices on a cumulative basis.
From Update to The “CalPERS Effect” on Targeted Company Share Prices by
Andrew Junkin, CFA, CAIA, Managing Director March 19, 2015

13. GOVERNANCE – SOUTH AFRICA
Board focus and reporting on multiple sources and forms of corporate capital

14. Governance under the law and King IV
Companies Act
• The King Code is non-legislative!
• South African law, in general, comprises common
and statutory laws.
• Such laws, through trial, are modified through
interpretation , thus creating judicial precedent.
• Judges of the various divisions of the High Courts of
South Africa have made reference to the King
Report and Code so that King Code is part of South
Africa’s common law.
• As a consequence, due to evolution in common and
statutory law many of the principles are now
embodied in the Companies Act.
King IV Code
• King IV was released by the Institute of Directors in
Southern Africa on November 1, 2016, and took
effect for companies listed on the Johannesburg
Stock Exchange on April 1, 2017.
• King IV Codes reflects a stakeholder-inclusive
approach.
• Under the King Codes a corporate board considers
the reasonable and legitimate needs, interests, and
expectations of all material stakeholders in the best
long-term interests of the organization.

15. Application of King IV
• South African listed companies have to abide by the principles and practices of King IV
which were incorporated in the JSE Listings Requirements
• King IV is a voluntary code for unlisted companies (e.g. privately held enterprises, including
non-for-profit organizations)
• Companies Act – Board defense of ‘business judgement’
– Eroded by non-compliance or adoption of King Code
• King IV versus III
– King III – if you opted to NOT apply certain rules you needed to explain why you did not apply the
rule.
– King IV – you need to explain applicability of all rules, whether or adopted or not, and explain
your understanding and applicability of the rule. In other words, articulate the believed
outcome.
• What is powerful is the reporting that is reflective in stakeholder accountability!

16. King IV Principles
• Sustainability
• Corporate social
responsibility
(CSR)
• Investor services
• Audit function
• Independent audit
group
• Effective policies and
procedures – with tone
and training from top
• Monitor and testing of
controls
• Systems
• Timely reporting
• Talent management
• Values
• Code of conduct
• Self-dealing
prohibitions
• Conflicts
• Transparency
• Whistle blowing
• Ethics
• FCPA Ethical
culture
Performance
and value
creation
Trust, good,
reputation
and
legitimacy
Adequate
and effective
control
Board oversight demands
 Effective governance
 Oversight on strategic
direction
 Oversight of determination
of risk appetite and
balanced considerations
 Oversight of internal
controls

17. Impact of Governance
Measured through integrated reporting
• Integrated reporting began in 2009
• The board needs to show that it appreciates that
“strategy, risk, performance, and sustainability are
inseparable”
• Companies must prepare an integrated report to
reflect this.
• Because the principles are included in the Listings
Requirements of the Johannesburg Stock Exchange
(JSE), listed companies were required to prepare an
integrated report or explain why they were not doing
so.
• The integrated report identifies, measures and
balances the six capitals of a company:
• Financial capital,
• Manufactured capital,
• Intellectual capital
• Human capital,
• Natural capital,
• Social and relationship capital. All decision
making within an organization involves balancing
the six capitals.
Source:https://www.pwc.co.za/en/assets/pdf/integrated-
report2017.pdf

18. Integrated report
• Reporting focuses on the broader shareholder
group
• Notice the priorities
• Strategy
• Governance
• Financial
• EY conducts an annual program
• Excellence in Integrated Reporting
• Companies are evaluated as whether Excellent (Top 10),
Good, Average and Progress to be made
• See http://www.integratedreportingsa.org/ircsa/wp-
content/uploads/2017/08/EY-EIR-2017_Final.pdf

19. ISSUES FACING ENTERPRISES TODAY
Even with great governance – bad things still happen. Why?

20. 1. King IV and applicability to foreign
direct investment
• 600 US Companies invested in
South Africa – is application of
King IV required?
• Do companies create integrated
financial statements and reports?

21. 2a. King IV and board responsibilities
Fraud > Ethics > Mistakes
• The letter
– ‘behavior like a man’
– Big Mistakes
– Consequences
– Sorry
– Never meant to cause any harm

22. 2b. King IV and board responsibilities
• Defining Governance – is there a conflict in law or code
between South Africa, Germany and the Netherlands
• Corporate parent is a Dutch enterprise (Registered office is
Amsterdam, the Netherlands)
• Global business office is located in Stellenbosch, South
Africa
• Steinhoff International Holdings N V (Steinhoff N V) is listed
on the Frankfurt Stock Exchange (FSE)
• Steinhoff shares on the main board of the Johannesburg
Stock Exchange (JSE) ended in 2015; Steinhoff N.V.
maintained a secondary listing on the JSE
• Majority of Steinhoff’s revenues are generated outside
South Africa (60% in Europe)
• Steinhoff plans to continue expanding into new markets. Its
acquisition of Pepkor earlier in 2015 provides expansion
opportunities in Africa and Europe, while the existing
infrastructure and footprint allow it to accelerate its
expansion into Europe.

23. 2c. King IV and board responsibilities
• Fiduciary responsibilities are absolute
• What happens when a mistake is found to be a fraud and such fraud was
undertaken by a member of the board?
• By law, all company directors have fiduciary responsibilities as individuals.
• Standards – directors must act in good faith towards the company by ensuring
that they always act in the organization's best interests, and that they have a
duty of care, skill and diligence.
• Directors must also abide by King IV (the governance code) which provides that that
the board, together and as a collective, has a responsibility to each other and the
company
• Responsibility for compliance with laws and standards remains with the entire
board.
• Take away – a boards responsibility is immense! Although board members are
not operationally involved, it’s still the board’s responsibility to ensure that
things are done properly.

24. 3. Gupta and South African Banks
• News media obtains affidavit
• Plea for protection from one of the largest
financial institutions in Africa
• Plea sent to the High Court in Pretoria appealing
for protection
– Against extensive political pressure it came under
from the ANC, Cabinet ministers and Oakbay after its
closed the company’s accounts.
– It was revealed that Oakbay had lobbied an
international shareholder of Standard Bank claiming
that it had illegally colluded with other banks
• Motivations in closing the accounts were racist.

25. 4. Guptas and KPMG
• King III/IV and KPMG South Africa
• A highly publicized KPMG client cutting ties was
Sasfin. In September 2017, the company announced
that it dropped KPMG as its JSE sponsor as well as its
auditor after 18 years over concerns over good
governance stemming from the Gupta saga and its
fumble on the SARS "rogue unit" report.
• Thought to consider fraud is an illegal action that
requires a lapse in ethical judgement; however, ethical
lapses are not necessarily fraud.
– Does governance help detect the existence of
fraud?
– If so, can it prevent it?

26. 5. King IV and Technology Governance
King IV
• IT governance under King IV emphasizes that governance should
focus on technology and information as separate issues, not one.
• This is a significant departure from King III, which focused on
technology rather than information.
• Governing bodies will now have to set the direction for how the
organization will achieve good governance of technology and
information.
• This will include awareness-raising sessions or workshops with
management and the staff.
• King IV even requires that service providers have good IT
governance, and places an added responsibility on you to evaluate
their compliance.
• Companies will be required to conduct an Intellectual Property
Audit to protect your intellectual property assets.
• The board will be required to conduct an IT governance
assessment that assesses the gaps, and makes recommendations
as well. This will include briefing staff, assessing the technologies in
use, and possibly changing processes as well.
Legislative approach to personal data
• Date of enactment was 2013
• Still awaiting a date of commencement –
• EU rolling out GDPR in May 2018 (POPI on steroids)
Source: KPMGhttps://home.kpmg.com/za/en/home/insights/2016/05/where-we-are-
in-the-popi-journey.html)

27. Even in the US…
• WSJ article – McKinsey is big in
bankruptcy – and highly secretive
– By Gretchen Morgenson and Tom
Corrigan April 27, 2018
• Advisors to Alpha Natural Resources
• Split company into two enterprises
– Secured lenders received new
company with most profitable mines
– Unsecured, including pensioners and
environmental claims received the
remaining mines
• McKinsey retirement assets invested in a
fund (Whitebox) that invested in one of
the two companies – guess which one?