AUE2602 ASSIGNMENT1 PREP 2022
SEMESTER 2.
AUE2602 PREPARATION FOR ASSIGNMENT 1 2022 SECOND SEMESTER
1.1 Background of Corporate Governance in South Africa
INTRODUCTION
The Industrial Revolution began in Britain in the 18th century from 1760 to 1840 and from
there spread to other parts of the ...
,AUE2602 PREPARATION FOR ASSIGNMENT 1 2022 SECOND SEMESTER
1.1 Background of Corporate Governance in South Africa
INTRODUCTION
The Industrial Revolution began in Britain in the 18th century from 1760 to 1840 and from
there spread to other parts of the world (https://www.britannica.com/). ; During the
Industrial Revolution businesses grew from entities owned and managed by the same
person into large organisations in which the owners (shareholders) and management
(executive directors) were separate parties. Currently in most countries, the shareholders
appoint the directors in a company to manage their investment in the company. This is also
known as principal-agent theory, where the shareholders are the principals and the directors
are the agents. Accordingly, it became necessary for the development of guidelines for how
the directors and managers of a company should act to protect and manage the interest of
the shareholders and other stakeholders. This led to the concept of corporate governance.
Statements like the following have been made regarding corporate governance:
“The King Commission describes Corporate Governance simply as ‘the system by which
companies are directed and controlled’.” (King 1994)
In this topic you will learn about corporate governance in South Africa, with specific
reference to the King IV Report on Governance.
King I, II and III had their foundation in ethical and effective leadership. King IV is also based
on these foundations, but was drafted to make it more easily applicable to all organisations
to include public and private, large and small, for-profit and non-profit organisations (King
IV 2016:6).
The fourth King Report on Corporate Governance in South Africa (King IV), issued by
the Institute of Directors in Southern Africa, is South Africa’s definitive corporate governance
code. King IV envisions good governance as the achievement of four outcomes: ethical
culture, good performance, effective control and legitimacy. These outcomes may be
achieved by adherence to King IV’s 16 governance principles and their accompanying
recommended practices. While compliance with King IV is voluntary, the listing
requirements compel issuers to implement certain of its recommendations, with the balance
to be adopted in accordance with King IV’s “apply and explain” disclosure regime.
Agency theory is used to understand the relationships between agents and principals. This
leads to the principal-agent problem. The principal-agent problem occurs when the interests
of a principal and agent come into conflict. Companies should seek to minimise these
situations through solid corporate policy. The different interests of principals and agents may
become a source of conflict, as some agents may not perfectly act in the principal's best
interests. The resulting miscommunication and disagreement may result in various problems
and discord within companies. Incompatible desires may drive a wedge between each
stakeholder and cause inefficiencies and financial losses. This leads to the principal-agent
problem.
STUDY MATERIAL
· The King IV Report (2016:3–7, 20–38) [What does (2016:3-7) mean? – It means go to
King IV, pages 3 to 7].
· Richard, Roets, Adams, West (2021:4/2–4/16) [What does (2021:4/2) mean? – It
means go to chapter 4 of the prescribed textbook, page 2]
Note: Whenever this icon is displayed it means that you will have to go to study
references in the prescribed study material. This will include either one or both prescribed
textbooks Auditing notes for South African students and/or the SAICA student handbook (or
the electronic version). You then need to read the specific pages or paragraphs as indicated
and prepare your own summaries/study notes from this for further studying and revision at
a later stage.
Part 2 of the King IV Report (2016:20–38) contains the fundamental concepts and
philosophy on which King IV is based, the distinguishing features of King IV and how the
various developments in corporate governance, locally and internationally, since King III
came into effect in 2009, have influenced the principles and practices in the Code.
, The philosophy of King IV is focused on
• companies’ role and responsibility in society
• corporate citizenship
• sustainable development
• stakeholder inclusivity and responsiveness
• integrated reporting and integrated thinking
This philosophy is centred on three paradigm shifts in corporate governance:
· from financial capitalism to inclusive capitalism
· from short termism to long-term sustainability
· from silo reporting to integrated reporting
You will notice that King IV brings a more refined focus in terms of the obligation of the
organisation (to be accountable and transparent) as well as the accountability of the
company as a broader stakeholder within the broader society. King IV deliberately talks
about ubuntu, an African concept that implies “I am because you are”. Therefore there
should be common purpose to all human endeavours (including corporate endeavours),
based on service to humanity.
To illustrate the philosophy of ubuntu: A successful businessman in Polokwane, South Africa,
showed ubuntu by buying 100 sewing machines at an auction, which he then made
available to men and women in the community who were interested in starting tailoring
businesses but did not have the necessary capital. He honoured their dignity by making a
simple verbal agreement that they would pay him for the machines once there were
sufficient profits to begin interest-free payments. This is typical of ubuntu consciousness
and still occurs widely both in rural South Africa and among African communities in urban
areas.
It is now time for your first activity to reflect on what you have learnt thus far. Try do this
activity on your own without consulting other learning material to assess whether you have
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