The new reality of corporate governance is that capitalisation of companies has changed. From the providers of capital being the wealthy families of the world, the individual has become the provider of capital indirectly through pension funds. A beneficial download of dematerialised scrip indicates throughout the world that on the great stock exchanges, the major shareholder is, in fact, the pension fund.

The evolution of corporate reporting
The other change in corporate governance is that corporate reporting is not what it used to be. The stakeholder is a much wider body than it was in the 18th and 19th centuries and the first half of the 20th century. The individual has become not only the provider of capital, but also the customer and citizen of the country in which the company operates. If each citizen expects his or her neighbour to act as a good citizen, so today stakeholders expect companies to be and to be seen to be good corporate citizens.

Boards today have to take account of the legitimate expectations and interests of all the stakeholders linked to the company, which includes the shareholders. The importance of this is illustrated in the economic value of a company as opposed to its book value. The market capitalisation of a company on a stock exchange is never equal to book value. If it is, it is purely coincidental. The reason is that the investor makes an assessment of issues such as some calculation of future earnings, brand, goodwill, reputation of management, reputation of the board, the quality of governance, the sustainability of the business and to what extent the company has taken account of the non-financial aspects pertinent to the business of the company.

Has the company been able to report how it has impacted both positively and negatively on the community in which it has operated? Has it given its stakeholders forward-looking information so that they can make a more informed assessment of the economic value of the company?

Governance, strategy and sustainability
Further, governance, strategy and sustainability have become inseparable. In debating and approving the long-term strategic plan of the company, the board can no longer ignore sustainability issues pertinent to the business of the company. For example, a board would be failing in its duty if its business was the manufacture of beverages and it ignored the risk of water, which has become the scarcest commodity on planet earth. In consequence, King III has recommended integrated reporting and that internal audit has to be risk-centric, rather than compliance-centric.

Internal audit needs to understand the long-term strategic plan of the company and the risk factors of that plan. Only in this way can the Corporate Audit Executive assess whether the controls of the business are adequate or not.

In recognising that some ninety-odd companies listed on the JSE Securities Exchange of South Africa have executive chairmen, King III has proposed that those companies have lead independent directors, so when the executive chairman is conflicted, the lead independent director can adopt the role of chairman or mediate the conflict.

A new focus on IT security
The advance of information technology is evidenced by the fact that IT governance and IT security was not specifically dealt with in King II, which was issued in 2002. Today it has become a critical factor in good governance. IT security is important because most companies do not have chief information officers and internal programers and consequently use outside service providers. This increases risk to the company, because confidential information is outside the portals of the company.

Dispute resolution
Another reality of corporate governance is that the judicial system has not kept up with commerce. Commerce is carried on in a flat, borderless world and capital moves 24/7 with the click of a mouse. Consequently, part of a director’s duty of care today is to make sure that when a dispute arises, those disputes are resolved as expeditiously, efficiently and effectively as possible. This can only be done with an adequate dispute resolution clause in major procurement contracts. This is recommended in King III and a precedent clause will be included in the practice notes of King III.

Global best practice
In regard to share options, America and Canada insist that directors, executive and non-executive, receive share options, whereas the EU and the Commonwealth countries have inclined to non-executive directors not receiving share options, because from the outside looking in, it appears to dilute their objectivity. King II recommended share options provided it was approved by shareholders in general meeting. This recommendation has been followed in the new Companies Act, but King III has followed the trend of the EU and Commonwealth countries, which are our major trading partners, and recommended that share options should not be granted after 31 March 2010, when King III becomes operative.

Because of the millions of stakeholders linked to companies which have become the medium with the greatest pool of human and monetary capital in the world, King III contains a chapter on stakeholder relationships.

In conclusion, the new reality of corporate governance is that companies have to take account of financial capital provided by shareholders, human capital provided by employees, natural capital provided by land, air and water and social capital provided by the community and society in which the company operates.