Harmonising corporate governance framework for South African mining companies: King IV, companies act and the mining charter

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Topics Commercial & Corporate Law | Mining Law

30 Dec 2019

The BEE Commission’s report 2018, between 2017 and 2018, had no significant change in the levels of transformation, with black ownership reflecting a decline to 25.2% from 27% and current management control still sitting at 38% for black people. Accordingly, it is worthwhile analysing the South African corporate governance principles and the impact that the King IV codes have on mining companies, if these recommendations were to be effectively applied.

Mining companies operate in a complex environment which requires the company’s board to make difficult decisions to ensure short-term operations are aligned with long-term objectives. This balancing exercise, may require the boards of mining companies to view the establishment of corporate governance framework as a means-to-an-end, with the end being to assist the board in determining a strategy that will steer the company towards a direction of achieving it business purpose and as a means, the King IV principle, being viewed less as a matter of regulation and more as an enabling framework for a company to enable the company to operate more efficiently. In the mining industry, the legislative framework informs corporate governance and the level of board diversity within these corporate governance structures. From a mining company’s perspective, the Companies Act 71 of 2008, as amended (“the Companies Act”) read together with the Broad-Based Socio-Economic Empowerment Charter for the Mining and Minerals Industry, 2018 (“the Mining Charter”) illustrates how the voluntary application of King IV corporate governance principles trigger statutory obligations and consequences.

To capture the nuances of the King IV corporate governance principles within South African companies and the mining legislative framework, this article adopts the definition provided by Du Plessis, which corporate governance is:

“the process of controlling management and of balancing the interests of all internal stakeholders and other parties, who can be affected the corporation’s conduct in order to ensure responsible behaviour by corporations and to achieve the maximum level of efficiency and profitability of a corporation”.

The objective of this article is to argue that the harmonisation of the King IV corporate governance principles with the Companies Act and the Mining Charter legislative imperatives could offer a unique contribution towards establishing, for the boards of the mining companies, a practical generic framework that will reduce potential liabilities for non-compliance with legislative requirements and ensure that decisions are implemented efficiently and effectively.

Inter-relationship between King IV Corporate Governance, Company Law and Mining Legislation

In addition to the corporate social responsibility requirements in the Companies Act, the Mining Charter is an illustration of the increasing requirement for mining companies to invest in broader service activities which could have an effect on the board’s ability to balance their responsibility to the shareholders, to the company itself and their responsibility to the community within which it operates. To this end, the King IV corporate governance principles, with respect to stakeholders and boards process seeks, to ensure that the power is exercised in a balanced manner, the legal and regulatory obligations are complied with, and identified risk is managed. Also, this regulation process establishes mechanisms to hold the company accountable to its stakeholders and the society in which it operates.

The mining industry in South Africa is one of the most highly regulated and complex industries which require compliance to a number of laws and regulations, inter alia, and the most significant of which is the Constitution, the Mining Charter and the Companies Act. The Constitution because governance and exercise of corporate power may not be inconsistent with the Bill of Rights, the Mining Charter, because it is a statutory enactment for “effecting broad-based and meaningful transformation of the mining and minerals industry” and the Companies Act, as it empowers the board’s continuous independent oversight of material matters. Therefore, the value in harmonising corporate governance with legislation is that it can, if applied effectively, assist the board of a mining company to demonstrate the discharge of their fiduciary duties of skill, care and diligence.

Challenges for Effective Corporate Governance Implementation

Whilst the success of a diverse corporate governance structure has been well-documented and the King IV requirements emphasise the critical role that stakeholders play in the governance process, what remains as a barrier within the mining industry is the imbalance in the demographics of competitive board members within mining companies and therefore all aspects of board diversification must be evaluated. The important question remains whether King IV corporate governance principles address the legislative transformation agenda or whether the recommendation of a certain level of diversity in governance structures should be interpreted as indirectly addressing the transformation agenda.

The Companies Act and the Mining Charter in South Africa are legislative instruments used for the management of the relationship between the stakeholders and the company. In terms of this legislative framework, sustainability of a company does not only mean financial profitability, but its contribution to the greater society through non-financial initiatives such as transformation. It is for this reason that the Mining Charter requires a board composition reflective of the racial and gender demographics of South Africa and the ethos that the achievement of transformation in mining companies is attached to offices and positions being open to everyone under conditions of fair equality of opportunity in the mining industry. However, the BEE Commission notes that the inadequate disclosure of demographics of the boards on the integrated or annual reports of most entities poses a challenge on the analysis of transformation at management level, therefore transparency is a prerequisite for King IV principles to be effective.

Having regard to the above, there are many who argue that the King IV, as a voluntary code of corporate governance, it is not a sufficiently strong intervention that will adequately address the imbalance in the demographics of competitive board members or address the legislative transformation agenda, especially because it provides for flexibility around implementation.

It is argued, further, that King IV is principle-based and even with the “apply and explain” recommendation, companies can still potentially avoid applying these principles, only having to explain the non-compliance without specific consequences. Be that as it may, it would be a mistake to conclude that voluntary codes of governance carry no sanction when contravened, because notwithstanding the enacted legislative consequences, there are social and market related sanctions. The Companies Act is aligned to the King codes, even though the Companies Act is not explicit on the exact roles of those charged with governance. It does, however, provide guidance as to how board members are conduct themselves when in the role of a director in the form of Section 76 of the Companies Act.

Conclusion

Corporate governance and issues of transformation within boards remains an importance topic and this is why the mining regulations are continuously being amended to ensure compliance. A diversified governance structure in South Africa goes beyond the principles of corporate governance (as they impact a number of other key matters and legislative imperatives such as the broad-based economic empowerment scorecard used by the BEE Commission), the Companies Act and the Mining Charter are an illustration of South African politics intrusion in corporate boardrooms, more particularly, in determining corporate ownership and management structures.