THE latest King report on corporate governance warns against independent directors receiving share options as incentives, and emphasises the need for more disclosure and transparency on executive remuneration.
Mervyn King, on releasing the final version of the third King report, said yesterday share incentives could influence directors to align their interests with executives and impair their objectivity.
“Although permitted by the new Companies Act, the chairman and other nonexecutive directors should not receive share options or other incentives geared to share price or performance as these might influence them to align their interests too closely with executives,” King said.
“They might also be seen to impair objectivity.
“Internationally renewed focus had been placed on the remuneration of executives.”
The UK’s doyen of corporate governance, Sir Adrian Cadbury, paid tribute to King for his outstanding contribution to corporate governance, which he said was lauded and respected internationally. “King’s authority and experience in this field is unquestionable.”
Cadbury commended the King report for the “thorough and comprehensive manner in which it covers risk management”.
“There are a number of questions, which have arisen in the UK where boards failed to discharge their responsibility to stakeholders. Their strategies were unsustainable. They weren’t aware that toxic assets would end up on their own balance sheets. They didn’t understand the complexity of financial instruments.”
The new code also recommended the disclosure of all remuneration paid to executives in the remuneration reports of companies, and also the naming of the top three highest paid nondirectors of companies. These would include senior managers.
Mike Bourne, Ernst & Young’s professional practice director for the Africa region, welcomed provisions for approval by shareholders for remuneration policy.
“Some directors are paid an enormous amount of money and don’t really add any value to a company. It is true that some are paid massive amounts but they do add their value.”
King said the report also clarified the position of a lead independent nonexecutive director.
If a company appointed a chairman who did not meet all criteria for independence, or being a nonexecutive, it should be prepared to justify its decision under the code, he said.
The lead director could assist the board with conflicts of interest.
King said sustainability issues had gained importance internationally since the publication of the second King report in 2002. The United Nations had published the Global Compact and the Principles for Responsible Investment.
“We recommend integrated reporting to enable stakeholders to better assess the value of the company.” He said the integrated report should have sufficient information to record how a company had both positively and negatively affected the economic life of the community in which it operated.
The third King report also recommended companies make use of alternative dispute resolution when necessary. “Very few companies have dispute resolution mechanisms in place when it comes to their customers and suppliers.”
The report also contained recommendations on information technology governance, where risk had become complex in a more technologically advanced world.
King said a new corporate governance code recommending principles and guidelines for institutional investors was also on the cards.
temkins@bdfm.co.za