This blog focuses on two of the five remaining chapters of the Code on Corporate Governance (The Code). We will look at the chapters at a high level to understand the make-up of the Code.
Chapter 5 – Information management and disclosure
The Code stipulates that disclosure is necessary for the company to remain trustworthy in the eyes of its stakeholders and to attract investment. It then contains principles and recommendations regarding Information and Management and also recommendations for the Integrated Report.
Information and management principles
The board is tasked with ensuring that regular, accurate, complete, timely, reliable, easy to understand and relevant material is made available to all shareholders and directors without compromising the confidentiality and commercial sensitivity of such material. The board should establish systems that allow for managing the company’s information assets and the performance of its data functions. They also have to formulate business continuity programmes addressing the company’s information recovery requirements.
The principles specify the information that should be disclosed and encourage companies to understand and manage the risks, benefits and constraints of ICT in relation to disclosure of information. They highlight who should receive information, the form it should take and the ideal type of information they should receive, the principles also address the timing of the information to not compromise its relevance.
Recommendations
The company should have a written policy on disclosure. The Code contains what the disclosure should include material information on such as financial and operating results of the company, company’s objectives and governance structures and policies. The disclosure should also cover comments of the Board on the adequacy of the internal controls of the company.
The Code recommends that shareholders who hold, whether directly or indirectly, more than 5% of the issued share capital be disclosed as well as whether the company complied with this Code during the accounting period and reasons for the failure if the company did not apply the Code.
Integrated and Sustainability Reporting
Integrated Reporting incorporates a company’s strategy, governance, financial performance and future outlook in one report. The report also contains environmental, social and governance issues which impact on the company’s operations.
Responsibility for ensuring that information which must be disclosed in terms of the law and the Code is disclosed in an integrated manner, a suitable framework for use by management and ensuring that a formal process is in place for publishing this report is placed with the Board.
Recommendations
The integrated report should be prepared annually containing adequate information about the company’s operations, sustainability issues, financial results and results of its operations and cash flow projections. The report ensure that organisations have policies in place to determine the initiatives and strategies to cover environmental and social activities as these will need to be disclosed.
It should describe how the company made its money by reporting on the positive and negative impact of its operations on its stakeholders. Insight into the organisation’s relationships with its key stakeholders and its understanding of their needs should also be disclosed. Th report should provide concise, reliable information that is material to assessing the organisation’s ability to create, and sustain value in the short, medium and long term.
The recommended disclosure channel is that the Chief Executive Officer and management of the company should report to the Board and the Board to its shareholders. Deviations from this channel must be disclosed by the Board to the shareholders and reasons for the deviation.
Chapter 6 – Corporate conflict prevention and resolution
The Code notes that corporate conflicts are inherent in business and as such, when they occur, they should be resolved inexpensively and timeously.
Principles
Corporate conflict prevention and resolution must be based on the provisions of the Law and best practice codes. The Board is responsible for corporate conflict prevention and resolution and review and may establish a Corporate Conflict Resolution (CCR) committee to assist in this regard.
The principles also highlight ideal dispute resolution mechanisms and distinguishing between processes of dispute resolution and the institutions that provide dispute resolution services. The Code prohibits insider trading and abusive self-dealing.
Recommendations
The Code recommends that any conflict which arises be identified at a very early stage and be resolved effectively, expeditiously and efficiently. Controlling shareholders should comply with applicable laws and regulations in exercising their rights as investors and should be prevented from damaging the rights and interests of the company.
Personal interests of company directors, officers or employees must not take precedence over those of the company and its stakeholders. A company must establish mechanisms, procedures and systems whereby majority of minority shareholders can trigger dispute resolution mechanisms to resolve conflicts between minority and controlling shareholders and also between the company and its shareholders.
Hiring of the company’s external auditors for non-audit services is discouraged and external auditors should not be members of the Board. The Code says it is inappropriate to divert corporate funds, assets of profits to political causes. Company personnel must avoid situations that compromise their impartiality. It details the ideal composition of the board as well as the remuneration committee.
Time available for the resolution of a dispute, principle and precedent, business relationships, expert recommendation, confidentiality and rights and interests are factors that should be considered in selecting a dispute resolution process. To avoid prejudice, resolutions of corporate conflicts however reached should be respected by the parties and implemented expeditiously.
The Code is structured in such a manner that it details, as much as possible, principles for good practice as well as recommendations for implementing the principles. In the penultimate edition of this series, next week, we will finish off the remaining three chapters of the Code.