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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.

The 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 "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.

Ironically, though, the robustness of the GRI guidelines may counteract their intended effect.

"GRI 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."


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