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July 16, 2003
Johannesburg Securities Exchange Requires Compliance with King II and Global Reporting Initiative
by William Baue with Graham Sinclair
Companies listed on the Johannesburg Securities Exchange will soon have to comply with King II
corporate governance codes as well as Global Reporting Initiative guidelines.
SocialFunds.com --
As of September 1, 2003, all companies listed on the Johannesburg Securities Exchange (JSE) will have to comply with
codes created in 2002 by the second King Report on Corporate Governance for South Africa, otherwise
known as King II. These codes not only address core corporate governance issues, such as director
independence and splitting CEO from Chair positions, but also require the use of Global Reporting Initiative (GRI) guidelines for
disclosing social and environmental performance. This development places the JSE at the forefront
of stock exchanges worldwide in terms of promoting socially responsible investment (SRI) criteria.
 "The King II Report is a very well conceived
code, for any country--it is comprehensive, relevant and progressive," said William Frater, a
senior analyst at Cape Town-based Frater Asset
Management. Frater Asset Management is one of the few investment firms in South Africa that
specializes in SRI.
The King Committee on Corporate Governance wrote the first King
Report, which was hailed internationally as a seminal work on corporate governance, in 1994, well
before the governance meltdowns at Enron, WorldCom, and the like. The committee wrote King II
directly within the context of these failures, as well as some spectacular governance collapses by
South African companies such as Leisurenet, Regal Bank, and Retail Apparel Group.
In the
U.S., there is a legal requirement under the Sarbanes-Oxley Act that CEOs vouch for financial
statements' accuracy with their signature. The JSE's requirement that directors certify statements
made in compliance with King II is a not a legal responsibility.
"This demonstrates the
difference between more principles-based reporting systems that are prevalent on the Eastern side
of the Atlantic and more rules-based systems used in North America," Mr. Frater told
SocialFunds.com. "The JSE's system encourages directors to perform in the spirit of the code
rather than simply applying the tick box approach, which frequently results in legalistic smoke and
mirrors that give shareholders and other stakeholders a false sense of security."
"While
one system promotes the employment of an army of lawyers to find the best possible ways around a
plethora of laws, the other involves employing an army of consultants to address how the principles
will be best applied to an organization," Mr. Frater added.
For example, King II
stipulates the separation of CEO from Chair positions, an action that several top South African
companies, such as Old Mutual, Anglo American, and Anglo Platinum, have already undertaken.
Reporting on the impact of HIV/AIDS, perhaps the most pressing issue facing South Africa,
presents a greater challenge, especially in terms of quantification. Despite seeming like a tall
order, companies such as Impala Platinum, New Africa Capital and Anglo Gold have published specific
calculations regarding the impact of HIV/AIDS on their operations.
"The JSE will require
companies to report on what they are doing about the epidemic, but not on the possible effects that
it might have on both the demand and supply side performance of a company," said Mr. Frater.
The ambitious nature of the JSE listing requirements may create some problems. On the positive
side, ten of the 226 companies around the world that subscribe to the GRI standard of financial
reporting are South African, including Barlowworld, Eskom, Goldfields, and Pretoria Portland
Cement. In addition, over 100 major companies in South Africa, including South African Breweries,
SASOL, and Umgeni Water, use some or all of the GRI guidelines in shaping their sustainability
reports.
Ironically, though, the robustness of the GRI guidelines may counteract their
intended effect.
"GRI has very specific reporting indicators [and] really requires quite
advanced reporting processes and systems to get the right flow of accurate and regular
information," said Justin Smith of environmental law and sustainability services at legal advisor
Edward Nathan and Friedland. "[S]mall and medium companies are quite intimidated by all of these
standards and codes, and often don't implement them due to cost or because they think they can
operate 'under the radar.'"
Mr. Frater added another dimension to this concern.
"The governance requirements are difficult for an emerging company to satisfy, and thus could
present a barrier to entry for companies seeking new listings on the exchange," said Mr. Frater.
"However, the extensive nature of adherence to the code, and the multifaceted way in which it will
alter corporate culture, present significant challenges to even the largest and most prepared
companies."
©
SRI World Group, Inc. All Rights Reserved.
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