Guidance from King IV September 2020

By JUSTINE KRIGE AND ZAHRAH EBRAHIM, Published in COVID-19 Company Law

It is now more than five months since government announced a National State of Disaster in response to the COVID-19 pandemic and shortly thereafter, a nationwide lockdown of all "non-essential" industries. This has caused a massive disruption to our economy. It has wreaked havoc on business owners and employees. The fallout, and the challenges that come with it, will endure for some time. The disruption can, however, present new opportunities and prove a catalyst for change.

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The King IV Report on Corporate Governance recognises that organisations are a key component of South African society. It defines corporate governance as "the exercise of ethical and effective leadership by the governing body towards the achievement of defined governance outcomes: ethical culture, good performance, effective control, and legitimacy". It is, however, well acknowledged that in the time of a global crisis, such as COVID-19, it is anything but business as usual. The governance principles set out in King IV will thus need to be reconsidered and recalibrated.

A time like this calls for business leaders to use their experience and judgement to reimagine the traditional business landscape and give life to this new normal. In response to this, the King Committee, together with the Institute of Directors South Africa, has published a guidance paper titled "Responsible Leadership in Responding to COVID-19". The discussion paper does not remove the responsibility of those organisations from being legally required to comply with King IV or the JSE requirements. Rather, it seeks to highlight certain key areas which may now require additional and specific attention, and aims to assist businesses to navigate a world during and post COVID-19. Below are some of the most important elements.

Ethical leadership

COVID-19 has shocked business leaders into action, and made them carefully consider their current values and assess whether they are appropriate in light of the changing market and, most importantly, whether they will be supportive of a post COVID-19 economy. Hopefully this will encourage businesses, both small and large, to look inwards and formulate their own unique solutions to the fundamental changes in the business environment. Organisations will need to:

  1. ensure that their response is in line with their values;
  2. where appropriate, engage with employees, customers, suppliers, the surrounding community, government and other stakeholders; and
  3. consider implementing programmes to assess, address and resolve the societal impacts of the pandemic.

Steering an organisation through a crisis is no easy task and organisations will need to consider whether they have the necessary skills in-house to navigate the course, or whether external guidance and support is necessary.

Human capital

One of the most critical components of a successful business is the people. This is why the preservation of human capital, in terms of their skills, experience and institutional knowledge, is key to an organisation's ability to demonstrate resilience through the current pandemic and in a post COVID-19 environment. As a minimum, responsible leaders should be:

  1. focusing on the health and safety of employees;
  2. considering succession plans for senior members;
  3. investing in multi-skilling, cross-skilling and upskilling;
  4. providing technological support and adaptive methods of working; and
  5. ensuring that there is sufficient oversight and that productivity measures exist to assist with determining clear output requirements.

Performance and Oversight

Not only has COVID-19 brought an entirely new set of risks, which seem to change daily, it has forced many organisations to consider the impact that this pandemic is having on their cash flow, and the assessment of their business's long term (and, in some cases, short term) ability to continue as a going concern.

Depending on the particular industry, business operations may have ceased completely, supply chains may have been interrupted, and projected financial income may be left unrealised. For many, this will have a significant and dire long-lasting financial effect. Organisations have been forced to evaluate the opportunities and risks thoroughly across the business. Some risks may be easily mitigated, others may require fundamental revision. This exercise might require repeated assessment over shorter periods, particularly given the need for flexibility to respond to changing governmental regulations.

Communication

Communicate, communicate, communicate! In the midst of a crisis, there is nothing more essential than building a relationship of trust between the organisation, the employees and its stakeholders. One of the easiest ways to do this is honest communication, which brings about collaboration and mutual support. Never underestimate the transformative nature of communication which is frequent and transparent.

Strategy and recovery

It is important to realise that change can be good. Traditional markets are undergoing significant changes and current business models may no longer function in the way they were originally intended. This is going to force businesses to embrace something new and uncertain. Governing bodies are encouraged to have serious discussions about their business models and whether these remain valid or need to be adapted to take advantage of the new opportunities. Those organisations with clear proactive strategies and flexible recovery plans will likely be the most resilient.

Legal considerations

Lastly, being alive to the legal impacts of the COVID-19 pandemic on a business or organisation is critical. These include:

  • ensuring that the organisation is still a going concern and not trading recklessly, in order to prevent directors and other office bearers from being held personally liable.
  • ensuring compliance with the regulations issued, pursuant to the Disaster Management Act.
  • understanding the impact of the pandemic on the organisation's various contractual obligations, how areas of non-compliance can be appropriately addressed, and how available legal remedies can mitigate losses and future risk.
  • understanding and evaluating any litigation risks and the alternative dispute resolution mechanisms in terms of which these can be resolved.
  • ensuring that the organisation properly understands any existing insurance coverage and how this may aid the organisation, as well as the opportunity to obtain further insurance coverage, if needed.
  • understanding the legal obligations owed to employees, customers, suppliers and other stakeholders.
  • understanding the duties of the governing body and management as leaders of the organisation, ensuring that those duties are fulfilled, and that those tasked with fulfilling them are accountable.
  • understanding the extent to which the organisation may be deviating from compliance with key permits, internal policies and legislation, and the potential legal impact of any deviations. Legal advice should be sought should there be areas of particular concern.

It is clear that the extent to which organisations are impacted by COVID-19 will vary across sectors of the economy and civil society. The roadmap for survival, however, remains the same – those who prioritise socially responsible survival rather than survival at all costs, will likely succeed. A balance must ultimately be struck between business sustainability and compliance with corporate governance principles to achieve ethical and effective leadership.

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Krige is a Director and Ebrahim an Associate designate with Cliffe Dekker Hofmeyr.