By Professor Mervyn King
Chairman of the IRC of SA and Chairman Emeritus of the IIRC
In South Africa the common law has always been that directors owe their duties and responsibilities to the company. Notwithstanding, during the 20th century directors in South Africa were caught up with the primacy of the shareholder model and many times made business judgment calls in the best interests of the shareholders rather than for the long term health of the company.
Likewise in the UK the common law was always that directors owed their duties to the company, but in the 20th century there was a move to have an enlightened shareholder approach which resulted in the amendment of the UK Companies Act, namely section 172. This section provided that directors owed a duty to …promote the success of the company for the benefit of its members as a whole, while having regard to a host of issues to discharge their duties, namely:
- The likely consequences of any decision in the long term;
- The interests of the company’s employees;
- The need to foster the company’s business relationships with suppliers, customers and others;
- The impact of the company’s operations on the community and the environment;
- The desirability of the company maintaining a reputation for higher standards of business conduct; and
- The need to act fairly as between members of the company.
You will see that this was a departure from acting in the best interests of the company by rather promoting the interests of members while having regard to numerous factors. Some have even argued that jurisprudentially and grammatically the Act has moved to the primacy of the shareholder because the first part of Section 172 trumps the matters to which directors have to have regard.
To be accountable is the obligation of an organisation to account for its activities, accept responsibility for them and to report the results in a transparent manner. A critical question in the context of reporting is who is the most appropriate entity within the corporate architecture to discharge the duty of accountability in the corporate world? After all, the purpose of reporting is to help discharge the duty of accountability. The answer to this question is the informed board.
So it can be said that the Board is the most informed party in the organisation with stakeholders being less informed parties. For the Board to discharge its duty of accountability it must share information with stakeholders – in clear language. The informed board cannot discharge its duty of accountability by doing two silo’ed reports, financial and sustainability, and then leave it to less informed stakeholders to decide what challenges and uncertainties the company is likely to encounter in pursuing its strategic objectives and the potential implications for its business model and future performance. Integrated information is called for.
In South Africa the common law has always been that directors owe their duty to the company and this has been enshrined in Section 76(3) of the Companies Act. Directors are accountable to the company and through the company to all its stakeholders. Thus in King IV in Principle Five it is stated: The governing body should ensure that reports issued by the organisation enables stakeholders to make informed assessments of the organisation’s performance and its short, medium and long term prospects.
King IV has adopted the International <IR> Framework’s definition of an integrated report and the IRC of South Africa has adopted the International <IR> Framework as best practice guidance on preparing an integrated report. The integrated report, as defined in the International <IR> Framework, is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.
The purpose, as per the International <IR> Framework, is to explain to providers of financial capital how an organisation creates value over time, which contains both financial and non-financial information but it is for the benefit of all stakeholders. An important consideration here is that financial capital is widely defined in the International <IR> Framework. The providers of financial capital are defined as equity and debt-holders and others who provide financial capital, both existing and potential, including lenders and other creditors. This includes the ultimate beneficiaries of investments, the collective asset owners and asset wealth fund managers. Other creditors include suppliers and service providers who do so on credit. Consequently even in a narrow reading of the International <IR> Framework the providers of financial capital as an audience includes shareholders, lenders of money, bond-holders, other financial instruments, suppliers, customers and service providers. All of these fall under the definition of providers of financial capital.
The purpose of reporting is exactly as set out in Principle Five of King IV to enable less informed stakeholders to make informed assessments of the organisation’s performance and its short, medium and long term prospects.