July 16, 2003
Johannesburg Securities Exchange Requires Compliance with King II and Global Reporting Initiative
by William Baue with Graham Sinclair
Companies listed on the Johannesburg Securities Exchange will soon have to comply with King II
corporate governance codes as well as Global Reporting Initiative guidelines.
As of September 1, 2003, all companies listed on the Johannesburg Securities Exchange (JSE) will have to comply with
codes created in 2002 by the second King Report on Corporate Governance for South Africa, otherwise
known as King II. These codes not only address core corporate governance issues, such as director
independence and splitting CEO from Chair positions, but also require the use of Global Reporting Initiative (GRI) guidelines for
disclosing social and environmental performance. This development places the JSE at the forefront
of stock exchanges worldwide in terms of promoting socially responsible investment (SRI) criteria.
"The King II Report is a very well conceived code, for any country--it is
comprehensive, relevant and progressive," said William Frater, a senior analyst at Cape Town-based
Frater Asset Management. Frater Asset
Management is one of the few investment firms in South Africa that specializes in SRI.
King Committee on Corporate Governance wrote the first King Report, which was hailed
internationally as a seminal work on corporate governance, in 1994, well before the governance
meltdowns at Enron, WorldCom, and the like. The committee wrote King II directly within the
context of these failures, as well as some spectacular governance collapses by South African
companies such as Leisurenet, Regal Bank, and Retail Apparel Group.
In the U.S., there is
a legal requirement under the Sarbanes-Oxley Act that CEOs vouch for financial statements' accuracy
with their signature. The JSE's requirement that directors certify statements made in compliance
with King II is a not a legal responsibility.
"This demonstrates the difference between
more principles-based reporting systems that are prevalent on the Eastern side of the Atlantic and
more rules-based systems used in North America," Mr. Frater told SocialFunds.com. "The JSE's
system encourages directors to perform in the spirit of the code rather than simply applying the
tick box approach, which frequently results in legalistic smoke and mirrors that give shareholders
and other stakeholders a false sense of security."
"While one system promotes the
employment of an army of lawyers to find the best possible ways around a plethora of laws, the
other involves employing an army of consultants to address how the principles will be best applied
to an organization," Mr. Frater added.
For example, King II stipulates the separation of
CEO from Chair positions, an action that several top South African companies, such as Old Mutual,
Anglo American, and Anglo Platinum, have already undertaken.
Reporting on the impact of
HIV/AIDS, perhaps the most pressing issue facing South Africa, presents a greater challenge,
especially in terms of quantification. Despite seeming like a tall order, companies such as Impala
Platinum, New Africa Capital and Anglo Gold have published specific calculations regarding the
impact of HIV/AIDS on their operations.
"The JSE will require companies to report on what
they are doing about the epidemic, but not on the possible effects that it might have on both the
demand and supply side performance of a company," said Mr. Frater.
The ambitious nature
of the JSE listing requirements may create some problems. On the positive side, ten of the 226
companies around the world that subscribe to the GRI standard of financial reporting are South
African, including Barlowworld, Eskom, Goldfields, and Pretoria Portland Cement. In addition, over
100 major companies in South Africa, including South African Breweries, SASOL, and Umgeni Water,
use some or all of the GRI guidelines in shaping their sustainability reports.
though, the robustness of the GRI guidelines may counteract their intended effect.
has very specific reporting indicators [and] really requires quite advanced reporting processes and
systems to get the right flow of accurate and regular information," said Justin Smith of
environmental law and sustainability services at legal advisor Edward Nathan and Friedland.
"[S]mall and medium companies are quite intimidated by all of these standards and codes, and often
don't implement them due to cost or because they think they can operate 'under the radar.'"
Mr. Frater added another dimension to this concern.
"The governance requirements are
difficult for an emerging company to satisfy, and thus could present a barrier to entry for
companies seeking new listings on the exchange," said Mr. Frater. "However, the extensive nature
of adherence to the code, and the multifaceted way in which it will alter corporate culture,
present significant challenges to even the largest and most prepared companies."