Changes in King IV: The impact on companies’ approach to risk

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Dr. Len Konar, member of the King Committee on Corporate Governance presented the keynote address “Changes in King IV: the impact on Companies’ approach to Risk and Audit” at IsoMetrix’s King IV and its impact on Risk, Audit and Integrated Reporting Seminar on 9 February 2017

Objectives of King IV

“King IV encourages transparent and meaningful reporting for all stakeholders,” explained Dr. Konar. The King IV Report promotes governance as integral to running an organization (governing body) and delivering governance outcomes such as ethical culture, good performance, effective control, and legitimacy.

The King IV Report is accessible and fit for implementation across a variety of sectors and organizational types. It reinforces corporate governance as a holistic and interrelated set of arrangements to be understood and implemented in an integrated manner.

“King IV encourages transparent and meaningful reporting for all stakeholders,” said Dr. Konar. Corporate Governance is not solely concerned with structure and process, but also with ethical consciousness and conduct.

Why is King IV necessary?

Public Sector organizations struggle to meet citizens’ demands for service delivery because of corruption or incompetence. Important public sector institutions are rendered dysfunctional by the appointment of unsuitable officials; and some parastatals are deemed to have become vehicles for enrichment, according to Dr. Konar.

Dr. Konar explained, “Corporate governance, mindfully applied, is a fundamental part of the solution to these and other challenges. The key words here are mindfully applied, and this is where King IV hopes to make the most impact by linking governance more tightly to value creation and the achievement of desired outcomes.” Corporate governance is an ecosystem made up of public companies, SMEs, non-profit organizations, and institutional investors such as retirement funds and public sector entities.

Difference between King IV and King III

King IV’s principles and practices do not differ substantially from King III, the main difference between the two lies in King IV’s approach. “King IV follows an outcomes-based approach: ethical culture, good performance, effective control and legitimacy,” Dr. Konar emphasized. The key differences are as follows:

  • King IV addresses governing bodies and organizations
  • The application regime of King III was “apply or explain” whereas for King IV it is “apply and explain”
  • King IV addresses how to apply practices proportionally, something that King III only implied
  • King IV includes supplements to assist various types of organization to implement King IV. These organizations are municipalities, SMEs, SOEs, NPOs and retirement funds.

Dr. Konar went on to explain that the crux of the King IV report is ethical leadership. “Ethical leadership requires Integrity, Responsibility, Accountability, Fairness and Transparency (ICRAFT). It involves anticipating and preventing, or at least ameliorating, the negative consequences of the organization’s activities and outputs on the economy, society, and the environment, as well as on the capitals that it uses and effects.” This ethical leadership, transparency, in particular, are the keys to corporate success. “Sunshine is the best disinfectant.”

Read more about the King IV Report and ethical leadership

Good governance involves anticipating and preventing, or at least ameliorating, the negative consequences of the organization’s activities and outputs on the economy, society, and the environment, as well as on the capitals that it uses and effects.

King IV and Risk

Dr. Konar stressed that the pursuit of opportunity in the context of risk, appetite, and tolerance needs to be fully understood. “Risk is the effect of uncertainties on objectives. Risk Appetite defines the amount of risk you are willing to pursue. Risk Tolerance is your organization’s readiness to bear the risk. Setting appropriate boundaries for risk-taking is the core function of Risk Appetite and Risk Tolerance,” he explained. “Have you set an appetite or do you manage by the seat of your pants?”

Why is this important to consider in the context of the King IV Report? Dr. Konar explaines an organization’s appetite for risk is central to the way it does business. “The amount of risk accepted in pursuit of strategic goals will vary widely from business to business, depending on individual circumstances.”

Some factors that may affect risk appetite include:

  • Industry
  • External environment
  • Shareholders
  • Ownership structure
  • Organizational maturity.

According to Dr. Konar, “Risks tolerances may be aligned with balanced scorecard perspectives of the customer, financial, internal business processes, learning, and growth.” Dr. Konar also explained that risk tolerances can be categorized into a number of different kinds of risk:

  • Strategic risk: the risk of not identifying optimum strategies or of failing to execute those strategies
  • Credit risk: the risk of financial loss where a customer fails to meet their financial obligations
  • Market risk: the risk to profits from changes in market factors, such as foreign exchange rates, interest rates, commodity prices and equity prices
  • Operational risk: the risk that arises from inadequate or failed internal processes, people, and systems or from external events
  • Liquidity risk: the risk of not meeting payment obligations.

Dr. Konar suggested that governing bodies consider allocating the oversight of risk governance to a dedicated committee, or add it to the responsibilities of another committee as is appropriate for the organization. If the committees for audit and risk are separate, the governing body should consider joint membership of one or more members of both committees for more effective functioning. “The committee for risk governance should have executive and non-executive members, with a majority being non-executive members of the governing body.”

Dr. Konar recommended that governing bodies assume responsibility for the governance of risk by setting the direction for how risk should be approached and addressed in the organization. “Risk governance should encompass both the opportunities and associated risks to be considered when developing strategy; and the potential positive and negative effects of the same risk on the achievement of organizational objectives,” he explained.

The correct approach to risk is essential to ethical governance and aligning with the principles set out in the King IV Report. “The governing body should treat risk as integral to the way it makes decisions and executes its duties,” concluded Dr. Konar.