The latest King (IV) Report on Corporate Governance for SA, 2016 (King IV) refers to certain “paradigm shifts in the corporate world”, including a shift from short-term capital markets to long-term, more sustainable capital markets. By popular demand, the King IV Report has been drafted to make it more easily applicable to all types of organisations, be they public or private, large or small, for- profit or not-for-profit.
The King IV Report has introduced “sector supplements” for the first time and part 6.4 of the Report is entitled “Supplement for Retirement Funds, which means that retirement fund governance has been directly addressed by the King Committee for the first time. This Supplement is applicable to all South African retirement funds, including pension, provident, preservation and retirement annuity funds.
The King IV Report has also moved from an “apply or explain” to “apply and explain” model and has reduced the 75 principles in King III to 17 basic principles. For any institutional investor to substantiate a claim that it practices good governance, it must be able to demonstrate the implementation and practice of all 17 basic principles. The Supplement translates those principles into the retirement funding context.
The Supplement makes the point that retirement funds make investment decisions and have rights as shareholders, and that the way in which their decisions are made and their rights are exercised, can reinforce or weaken the corporate governance of the companies in which those retirement funds invest. King IV proposes responsible investment principles and practices as part of the good governance of retirement funds. It specifically makes mention of the opportunity for retirement funds in South Africa to subscribe to the Code for Responsible Investing in South Africa (CRISA), a voluntary code applicable to institutional investors, in addition to their boards’ statutory fiduciary duties under the Pension Funds Act, and the guidance offered in Circular PF130, which represents the Registrar of Pension Funds’ requirements in respect of corporate governance in the pension funds industry.
The 17 principles in King IV, all applicable to retirement funds, cover ethical governance and the role of the board in being responsible corporate citizens, especially in the board’s utilisation of environmental, social and governance factors in their investment decisions. The Supplement recommends that the performance of a retirement fund include delivering targeted investment returns without irresponsible risk–taking, and managing expenses to maximise value for money. The Supplement emphasises the importance of the composition of the board of a retirement fund as well as the evaluation of its performance, noting that the board must contain members with the necessary expertise and experience. It addresses delegations and outsourcing, noting that delegation of responsibilities to a third party does not absolve the board from accountability.
Although King IV is not binding on retirement funds it is undeniably “applicable” in the sense that it can be readily applied in a practical manner to the management, oversight and governance of retirement funds, especially since its content has been explicitly ‘unpacked’ in the Supplement. It does not replace Circular PF130, which retains its relevance. It does, however, create a useful aspirational standard against which to measure board performance, especially by boards which are keen to measure and evaluate, and thereby improve, their own performance.
For the time being King IV does not set legal standards against which a court or other tribunal could readily measure the lawfulness or wrongfulness of board members’ conduct, but it will undoubtedly have an influence in giving some clearer expression to what amounts to reasonable conduct by a reasonable trustee.
The fact that the Supplement refers almost exclusively to CRISA – which is a private, voluntary initiative among other similar initiatives – is a little surprising and limiting but that in no way detracts from the undeniable value of CRISA as a set of relevant, best practice guiding principles. However, retirement funds should also consider the material available from similar organisations, including UNPRI, the Sustainable Returns Project, the European Sustainable Investment Forum and its affiliate, the South African Sustainable Investment Forum, among others.
David Geral is the Partner, Banking and Financial Services Regulatory, Bowmans South Africa.