AUE2602 - Corporate Governance in Accountancy (AUE2602)
Institution
University Of South Africa (Unisa)
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AUE2602 - Corporate Governance in Accountancy (AUE2602)
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AUE2602 Summary and
Notes
TOPIC 1: CORPORATE GOVERNANCE AND STATUTORY MATTERS
1.1: THE BACKGROUND OF CORPORATE GOVERNANCE IN SOUTH AFRICA
Essentially King IV was introduced to keep South Africa abreast with local and international developments in
international corporate governance since King III was issued, and, as with the three previous King Reports, to
provide guidance to organisations which is relevant to the current world economic, environmental and social
situation. The drafting of King IV took place in the context of organisations having to contend with an increasingly
dynamic and demanding external environment. In this environment, good corporate governance is essential if an
organisation is to achieve prosperity for itself and the broader society.
In the forward to the King IV Report, the King committee makes the point that the 21st Century has been
characterised by fundamental changes in both business and society and that new global realities are severely
testing the leadership of companies and other organisations. These realities include:
A growing societal inequality
Climate change
Over-consumption of natural resources
Geological tensions
Stakeholder expectations and transparency
Rapid advancements in technology
Less stable financial systems
Increased corruption
Objectives of King IV (in the context of a company)
Promote responsible corporate governance as integral to running the company and delivering
governance outcomes such as
o an ethical culture
o good performance
o effective control o
legitimacy
Broaden (increase) the acceptance of the King IV Report by making it accessible and fit for
implementation across a variety of sectors and organisational types.
Reinforce corporate governance as a holistic and interrelated set of arrangements to be understood and
implemented in an integrated manner.
Encourage transparent and meaningful reporting to stakeholders.
Present corporate governance as concerned with not only structure and process, but also with ethical
consciousness and behaviour.
,In broad terms King IV expresses the role and responsibilities of the board as follows
Steers and sets strategic direction
Approves policy and plans to effect the strategy
Oversees and monitors implementation and execution of
the plan by management
Ensures accountability for organisational performance by
means of inter alia reporting and disclosing
Ethical leadership Good corporate governance is about ethical and effective leadership.
Ethical leadership is an embodiment of the ethical values of
Responsibility – those that will lead the company, e.g. the board must assume responsibility for the
running of the company, i.e. assuming the duties of setting strategy, approving policy, overseeing and
monitoring management and ensuring accountability. The board may delegate duties to management but
it remains accountable for ensuring that the duty is properly carried out
Accountability – those that are responsible must be held accountable. For example, the board should be
held accountable by the company’s stakeholders for the decisions and actions it takes. Accountability
cannot be delegated or abdicated. Note that the board should be accountable to all stakeholders, not only
the shareholders.
Fairness – the board should ensure that it balances its decisions, the legitimate and reasonable needs, interests
and expectations of the company’s material stakeholders with the best interests of the company.
Equitable and responsible treatment for all should be the manifestation of fairness.
Transparency – in the context of ethical leadership this means that the board conducts and accounts for
its decision making and business activities in an open, unambiguous and truthful manner (as opposed to
being underhand and secretive).
Integrity – in the context of corporate governance, this requires that individuals, e.g. directors, are
capable of thinking and acting in an objective manner, and that they are not swayed by pressure from
others to act contrary to how they themselves believe they should act. Directors should exercise
objective, unfettered judgement.
Competence – a director should have the ability, knowledge and skills to fulfil the obligations and
responsibilities of a director.
,Effective leadership: This is about achieving strategic objects and positive outcomes in an ethical manner, that is by
embracing ethical leadership. Effective leadership is goal orientated and ethical. If corruption is the foundation on
which the company’s success is built, that success cannot be regarded as being a result of effective leadership. It
may be effective in generating massive profits for the shareholders and the perpetrators, but in the long run
corruption eats away at the fabric of society and is not a sustainable manner of conducting business in the medium
or long term.
1.2: STATUTORY MATTERS
1.2.1: STANDARDS OF DIRECTORS CONDUCT
A director of a company must
Not use the position of director, or any information obtained whilst acting as a director
To gain an advantage for himself or any other person other than the company (or its wholly owned
subsidiary) or
Knowingly cause harm to the company (or a subsidiary of the company)
Communicate to the board at the earliest practicable opportunity, any information that comes to his
attention, unless he reasonably believes that the information is
Immaterial to the company or
Generally available to the public or known to the directors or unless
He is bound not to disclose that information by a legal or ethical obligation of confidentiality
Exercise the powers and functions of director
In good faith and for a proper purpose
In the best interests of the company
With the degree of care, skill and diligence reasonably expected of a director.
To ensure that he has exercised his powers and functions in compliance with the above, a director should take
reasonably diligent steps to be informed about any matter to be dealt with by the directors
Should have had a rational basis for making a decision and believing that the decision was in the best
interests of the company
Is entitled to rely on the performance of
Employees of the company whom the director reasonably believes to be reliable and
competent o Legal council, accountants or other professionals retained by the company
o Any person to whom the board may have reasonably delegated authority to perform a board
function
o A committee of the board of which the director is not a member, unless the director has reason to
believe that the actions of the committee do not merit confidence
Is entitled to rely on information, reports, opinions recommendations made by the above mentioned
persons.
, 1.2.2: LIABILITY OF DIRECTORS AND PRESCRIBED OFFICERS
A director may be held liable
In terms of the common law for a breach of fiduciary duty for any loss, damages or costs sustained by the
company as a consequence of any breach by the director of his duty to the company
o Failing to disclose a personal financial interest
o Using the position of director to gain advantage for himself or harm the company
o Failing to act in good faith and for a proper purpose
o Failing to act in the best interests of the company
In terms of the common law relating to delict for any loss, damages or costs sustained by the company as
a result of any breach of the director of
o The duty to act with the necessary degree of care, skill and diligence
o Any provision of the Act not specifically mentioned in section 77
o Any provision of the Memorandum of Incorporation.
A director may be held liable to the company for any loss, damage or costs arising as a direct or indirect
consequence of the director
Acting for the company despite knowing that he lacked authority
Agreeing to carry on business knowing that to do so was “reckless”
Being party to an act or omission despite knowing that it was calculated to defraud a creditor, employee
or shareholder, or that the act or omission had another fraudulent purpose
Having signed, or consented to the publication of a document e.g. Financial statements, prospectus,
which was false, misleading or untrue, despite knowing the publication to be so
Being present at a meeting, or participating in the taking of a decision and failing to vote against
The issuing of unauthorized shares, securities or the granting of options, whilst knowing the shares,
securities or options were not authorized
The issuing of authorized shares, despite knowing that the issue was inconsistent with the Act
The provision of financial assistance to any person including a director (as defined) whilst
knowing that the financial assistance was in contravention of the Act or MOI
A resolution approving a distribution (as defined) whilst knowing the distribution was in
contradiction of the Act (Only applies if liquidity/solvency test is not satisfied, and it was
unreasonable at the time to think the test would be satisfied.)
The acquisition by a company of its own shares, whilst knowing that the acquisition was contrary
to the Act
An allotment (of securities) whilst knowing that the allotment was contrary to the Act.
1.2.3: INDEMNIFICATION AND DIRECTORS' INSURANCE
Any provision of an agreement, the MOI or rules, or a resolution of a company, is void if it directly or
indirectly seeks to relieve a director of any of that director’s duties in respect of
o Personal financial interests or
o The standards of directors conduct or
o Liability arising from Sec 77 (e.g. Fiduciary duty, breach of good faith, any provisions of the Act or
MOI).
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