CORPORATE GOVERNANCE

FOREWORD

Fasset, as a public entity, is governed by the Public Finance Management Act and is also
committed to ensuring that the recommendations of the King Reports are adhered to. In
this regard a comprehensive set of policies have been designed and implemented in
accordance with the Fasset Constitution and in support of Fasset's Sector Skills Plan and
Business Plan. These policies contribute towards the effectiveness of corporate
governance strategies and are in accordance with the Public Finance Management Act
and King Reports.

Fasset has also undertaken to assist employers in its sector by developing guidelines on
corporate governance and advice on how the strategies relating to corporate governance
can be implemented. These guidelines have been published as a part of Fasset’s
commitment to promoting the highest standards of corporate governance in South Africa.

This guideline document not only embraces the King recommendations, but goes beyond
these principles in setting out the most important duties and responsibilities for all
directors, trustees, sole proprietors, members and partners.

Fasset believes that these guidelines will assist employers in the sector in performing
their duties and fulfilling their responsibilities. In addition to acting as a source of
reference to newly appointed directors, members or trustees a review of the guidelines
may identify new methods and ideas.

The guidelines have been prepared for Fasset, by our attorneys, Webber Wentzel Bowens.
Should you have any suggestions and or questions with regard to corporate governance,
please contact the corporate department at Webber Wentzel Bowens, the author of this
document.
Cheryl James
Fasset
Blackheath
November 2002

W
This publication has been prepared as a guideline and is not intended to be
exhaustive. While the utmost care has been taken in the preparation of the
publication, it should not be used or relied upon as a substitute for detailed advice or
as a basis for formulating a business decision.

"Copyright 2002 Webber Wentzel Bowens"

The above notice serves as a warning to third parties that Webber Wentzel Bowens
claims to be the proprietor of the copyright subsisting in the literary work. In the
event of there being any infringement, it will impute knowledge on the infringing
party and assist in recovering damages.
TABLE OF CONTENTS

PART I.............................................................................................................................7

1. Introduction – what is corporate governance?..............................................................7

PART II............................................................................................................................8

2. Different types of enterprises........................................................................................9

3. Sole proprietorships.....................................................................................................9

4. Partnerships.................................................................................................................9

5. Close Corporations.....................................................................................................10

6. Trusts.........................................................................................................................11

7. Companies.................................................................................................................12

8. Director's duties and responsibilities...........................................................................13

9. Director's duties in terms of the Companies Act.........................................................15

10. Other obligations imposed on directors ...................................................................23

PART III.........................................................................................................................24

11. The King Reports of corporate governance..............................................................24

12. Corporations affected by the Code of Corporate Practices and Conduct ("the Code")
.......................................................................................................................................24

13. Recommendations of King II.....................................................................................26

Appointment of directors................................................................................................27

Director's remuneration and remuneration committee...................................................28

Board meetings.............................................................................................................29

Board committees.........................................................................................................29

Annual reports and company meetings.........................................................................30

Risk management.........................................................................................................31

Internal control and audit committee..............................................................................31

Financial statements and the annual report...................................................................32

Transactions with directors and conflicts.......................................................................33

14. Integrated sustainability reporting.............................................................................34
King II recommends that every company should report, at least annually on the nature
and extent of its social, transformation, ethical, safety, health and environmental
management policies and practices. It is further recommended that the board must
determine what is relevant for disclosure, having regard to the company’s special
circumstances................................................................................................................34
15. Organisational integrity /Code of Ethics....................................................................35

PART IV........................................................................................................................35

16. Conclusion................................................................................................................35

USEFUL TELEPHONE NUMBERS...............................................................................39

1. Fasset........................................................................................................................39

2. Webber Wentzel Bowens (JHB).................................................................................39

3. Webber Wentzel Bowens (Cape Town)......................................................................39

4. Institute of Directors (JHB).........................................................................................39

5. Institute of Directors (Cape Town)..............................................................................39

6. Institute of Directors (Durban).....................................................................................39

7. Institute of Directors (PE)...........................................................................................39

8. Department of Labour (Eastern Cape).......................................................................39

9. Department of Labour (Free State).............................................................................39

10. Department of Labour (Gauteng South)...................................................................39

11. Department of Labour (Gauteng North)....................................................................39

12. Department of Labour (Kwa-Zulu Natal)...................................................................39

13. Department of Labour (Mpumalanga).......................................................................39

14. Department of Labour (North West Province)...........................................................39

15. Department of Labour (Northern Cape)....................................................................39

16. Department of Labour (Limpopo Province)...............................................................39

17. Department of Labour (Western Cape).....................................................................39

18. CCMA (Eastern Cape)..............................................................................................39

19. CCMA (Free State)...................................................................................................39

20. CCMA (Gauteng)......................................................................................................39

21. CCMA (Kwa-Zulu Natal)...........................................................................................39

22. CCMA (Kwa-Zulu Natal – Richards Bay)..................................................................39

23. CCMA (Mpumalanga)...............................................................................................39

24. CCMA (North West Province)...................................................................................39

25. CCMA (Northern Cape Province).............................................................................39

26. CCMA (Northern Province).......................................................................................39

27. CCMA (Western Cape).............................................................................................39

28. Labour Court (Johannesburg)...................................................................................39

29. Labour Court (Cape Town).......................................................................................39

30. Labour Court (Durban).............................................................................................39

31. Labour Court (Port Elizabeth)...................................................................................39

32. Registrar of Companies............................................................................................39

33. Auditor General........................................................................................................39

34. Department of Finance (Cape Town).......................................................................39

35. Department of Finance (Pretoria).............................................................................39

36. Department of Trade and Industry ...........................................................................39

37. Johannesburg Stock Exchange................................................................................40

38. Receiver of Revenue (Bloemfontein)........................................................................40

39. Receiver of Revenue (Cape Town)..........................................................................40

40. Receiver of Revenue (Durban).................................................................................40

41. Receiver of Revenue (East London).........................................................................40

42. Receiver of Revenue (Johannesburg)......................................................................40

43. Receiver of Revenue (Kimberley).............................................................................40

44. Receiver of Revenue (Port Elizabeth).......................................................................40

45. Receiver of Revenue (Pretoria)................................................................................40

46. South African Reserve Bank (Bloemfontein)............................................................40

47. South African Reserve Bank (Cape Town)...............................................................40

48. South African Reserve Bank (Durban)......................................................................40

49. South African Reserve Bank (East London).............................................................40

50. South African Reserve Bank (Johannesburg)...........................................................40

51. South African Reserve Bank (Port Elizabeth)...........................................................40

52. South African Reserve Bank (Pretoria).....................................................................40

 PART I
1. Introduction – what is corporate governance?

Corporate governance is the system or process by which companies,

partnerships, close corporations and trusts are directed and controlled. Directors
of the board, members of a close corporation and trustees of a trust are all
responsible for the governance of their enterprise.

The concept of corporate governance has grown in prominence in recent times.

In the wake of Enron, WorldCom, Adelphia Communications and an ever-
lengthening litany of corporate malpractice scandals, finding new ways to
protect average investors has become an international priority. It is, therefore,
not surprising that corporate governance reform is gaining importance as a
crucial mechanism for addressing the erosion of investor confidence.

It goes without saying that there is no single, universally appropriate, model of

corporate governance. This principle is recognised in the King Report on
Corporate Governance for South Africa 2002 ("King II"), which reiterates that:

"companies are governed within the framework of the laws and

regulations of the country in which they operate. Communities and
countries differ in their culture, regulation, law and generally the way
business is done. In consequence, as the World Bank has pointed out,
there can be no single generally applicable corporate governance
model. Yet there are international standards that no country can
escape in the era of the global investor. Thus, international guidelines
have been developed by the Organisation for Economic Development
Principles of Corporate Governance (OECD), the International Corporate
Governance Network and the Commonwealth Association for Corporate
Governance. The four primary pillars of fairness, accountability,
responsibility and transparency are fundamental to all the international
guidelines of corporate governance."1 (Our emphasis)

It follows that corporate governance can not be reduced to a set of pro-forma

rules capable of mechanical application. It is, and should be, a flexible, tailor-
made, multidimensional process to which a company, and many and varied
individuals, submit themselves.

1
paragraph 23 on page 15
Many companies in the corporate arena today have a distinctive split between
control and ownership. The need for corporate governance becomes ever
increasing as directors are becoming more accountable to their shareholders and
stakeholders.

Other enterprises such as trusts, close corporations, partnerships and sole

proprietors do not necessarily have to ensure that they comply with the
requirements of corporate governance due to their nature and composition.
However, as will be discussed in a later part of this publication, it is suggested
that these enterprises follow the broad, underlying principles of corporate
governance recommended in King II.

The primary sources of law and regulation relating to corporate governance and
director's duties comprise:

• statute, particularly the Companies Act, the JSE Listings Requirements of the
JSE and the Securities Regulation Code on Take-overs and Mergers. In
addition, there is special-purpose legislation such as the Banks Act, 1990, the
Long-term Insurance Act, 1998, the Short-term Insurance Act, 1998, the
Financial Markets Control Act, 1989, the Stock Exchanges Control Act, 1985,
the Unit Trusts Control Act, 1981 and the Public Finance Management Act,
1999;

• the common law ;

• the company’s articles of association; and

• King II.

The first part of this publication will detail the common law and statutory duties
and responsibilities of directors, sole proprietors, partners, members of close
corporations and trustees whilst the second part of the publication will detail the
recommendations laid down in the King Reports on corporate governance. It is
our aim that this section will explain the principles of corporate governance in
the South African context and provide practical guidance to the people who are
responsible for ensuring good corporate governance in their enterprises.

PART II
2. Different types of enterprises

There are a variety of investment vehicles available to people interested in

setting up commercial enterprises in South Africa. The forms of enterprises
include:

• sole proprietorships;

• partnerships;

• close corporations;

• limited companies, public and private; and

• business trusts.

In the paragraphs that follow, we will briefly explain the way in which each of
these enterprises operate and more importantly, we will outline the duties and
responsibilities of the people who control the specific enterprises.

3. Sole proprietorships

The sole proprietorship is usually a relatively small enterprise in which the

capital of only one person, the proprietor, is invested.

As sole proprietors are single owner businesses, the business is operated with
full personal risk. The sole proprietor’s estate is ultimately liable for all the
commitments of the business.

Due to the fact that sole proprietors run their own affairs and are not
accountable to shareholders, the principles of corporate governance applicable
to the manager/ owner relationship are generally not applicable to the sole
proprietor. In a later part of this report, we do however highlight the manner in
which these entities can apply certain corporate governance principles to the
conduct of their business.

4. Partnerships

A partnership is a legal relationship arising from an agreement between at least

two, but usually not more than twenty persons, in terms of which each
 contributes towards a business which is carried on in common with the object of
obtaining mutual material benefit.2

A partnership does not have legal personality as it is simply a contractual

association of persons and has no existence in law independent of its partners.
Since a partnership does not exist as a separate legal persona, the partners are
personally liable for its debts and they own the partnership estate.

Various rights and obligations in respect of partners arise from the partnership
agreement. There are further rights and obligations which arise as
consequences of a partnership. These include:

• a duty of good faith between partners;

• the duty to promote the interests of the partnership unselfishly;

• a duty to disclose all information which affects the partnership;

• a duty to make a contribution to the partnership; and

• the duty to exercise reasonable care and expertise in the management

of the business of the partnership.

Unlike a company, the partners owe duties to one another whereas directors owe
duties to the company and its shareholders. In light of the absence of a
partnership’s independent legal personality and the relationship that partners
have with one another, corporate governance principles applicable to the
internal management of an organisation may serve only as guidelines for good
practice. In certain circumstances they will be neither applicable nor sufficiently
extensive. However, those principles outlined in paragraphs 14 and 15 below,
may be implemented.

5. Close Corporations

The introduction of the close corporation into our law in 1984 created a new form
of business for small businessmen. The close corporation is a juristic person

2
HS Cilliers, Ml Benade, JJ Henning, JJ du Plessis, Pat, JSA Fourie, L de Kocker: Entrepreneurial Law at page
10
 distinct from its members. The close corporation enjoys succession and its
members have limited liability in respect of the corporation’s debts. The main
source of law and regulation with regard to close corporations, is in terms of the
Close Corporations Act, 1984.

Members of a close corporation stand in close relationships to one another but

they owe fiduciary duties to the corporation as a separate legal persona. The
Close Corporations Act sets out some of the fiduciary duties of members.

Each member of the close corporation must act honestly and in good faith and
must exercise powers he or she has to manage or represent the corporation in
its interests and for its benefit. A member should not exceed his or her powers.
A member must further avoid a conflict between his or her interest and that of
the corporation and may not derive any personal economic benefit from the
corporation or anyone else, nor compete with its business activities.

6. Trusts

A trust is defined in the Trust Property Control Act as the arrangement

through which the ownership in property of one person is by virtue of a trust
instrument made over or bequeathed:

- to another person, the trustee, in whole or in part, to be

administered or disposed of according to the provisions of the trust
instrument for the benefit of the person or class of persons designated in the
trust instrument or for the achievement or for the achievement of the object
stated in the trust instrument; or

- to the beneficiaries designated in the trust instrument, which

property is placed under the control of another person, the trustee, to be
administered or disposed of according to the provisions of the trust
instrument for the benefit of the person or class of persons designated in the
trust instrument or for the achievement or for the achievement of the object
stated in the trust instrument,

but does not include the case where the property of another is to be
administered by any person as executor, tutor or curator in terms of the
Administration of Deceased Estates Act.
 A trust is not a legal person. The assets, liabilities, rights and duties of the trust
vest in the trustee. The primary source of law and regulation relating to a trust
and the trustees duties, are in terms of the trust deed and the Trust Property
Control Act.

The trustee is the person to whom the property is entrusted as administrator to

manage it in accordance with the objects of the trust.

A trustee must comply, inter alia, with the following general duties:

• he or she must comply with the duties as outlined in the trust

document;

• he or she must fulfil his or her duties impartially and in good faith;

• in the performance of his or her duties and in the exercise of his or her
powers, the trustee must act with care, diligence and skill which can
reasonably be expected of a person who manages the affairs of another;3

• he or she must take control of the trust assets and keep these clearly
separate from his or her personal property;4

• the trustee must preserve the trust property and keep it free from
burdens such as liens;

• he or she must manage the trust assets which are capable of

producing an income in such a way that a reasonable return is obtained;

• the trustee must maintain a proper account of trust funds and trust
business, retain documents relating to the administration of the trust 5 and
render account of his or her administration of the trust when the Master of
the High Court requests him to do so;6

7. Companies

Two types of limited liability companies are capable of being formed: public
companies (whose shares may, but are not obliged to, be listed on the JSE
3
Section 9(1) of the Trust Property Control Act 57 of 1988
4
Section 10 and 11 of the Trust Property Control Act 57 of 1988
5
Section 17 of the Trust Property Control Act 57 of 1988
6
Section 16 of the Trust Property Control Act 57 of 1988
 Securities Exchange South Africa ("the JSE")) and private companies. Both are
created in terms of, and are governed by, the provisions of the Companies Act.

In the paragraphs that follow, we discuss in detail the duties and responsibilities
of directors in terms of the common law and the Companies Act, 1973.

8. Director's duties and responsibilities

General

The duties of directors are regulated by their contracts with the company,
statute, the memorandum and articles of association of the company and the
common law.

Duties at common law

The duties that directors have, at common law can be summarised as follows:

• Directors are required to act both lawfully and honestly in their official
as well as personal capacities. Failure by a director to act lawfully will result
in him being held criminally liable and also to being disqualified to act as a
director either automatically or in terms of a court order.

• Directors are also expected to act with care, skill and diligence when
conducting the business of the company. Where a director fails to exercise
the necessary skill, care and diligence required and as a result, he or she
breaches the duty of care owed to a third party and the director may incur
personal liability for any loss suffered as a result of the breach. Liability in
this instance will be based either on delict, where a duty of care is owed to a
third party, or on breach of contract, if there is a contract between the
director and the company.

• A director, from the time appointed or at the time he or she

commences to act as such, stands in a fiduciary relationship to the company.
A director may, amongst others, be held personally liable to the company for
breach of his or her fiduciary duties.

• A director's fiduciary duty comprises two separate and distinct duties,

which in turn each comprise a number of further duties. These duties
include:
• the duty to exercise powers in good faith:

• a director must exercise his or her powers in an independent

and objective manner. He or she has a duty to do what he or she
considers best serve the company's interests.

• a director must further exercise his or her powers for the

purpose for which they were given.

• a director must act within the limits of authority. A director may

not act outside the limits placed in his or her powers by the
Companies Act, the common law and the company's memorandum
and articles of association.

• a director must observe any limitation of powers imposed on

the company of which he or she is a director. When a director acts
on behalf of a company he or she must do so within the scope of the
company's objects and powers.

• duty to avoid a conflict between personal interests and the

interests of the company:

• in general, a director must exercise judgment in an honest

manner as to what is in the company's interests and must act for
the benefit of all shareholders and disclose on request to all
shareholders, certain information connected with the company;

• a director must account to the company for profits made by

reason of his or her directorship. This includes any gain or
advantage made by a director while carrying out his or her duties as
a director;

• a director may not misappropriate or usurp a business

opportunity which the company is pursuing or which the director is
obliged to acquire for the company;

• a director has a common law duty to disclose to the company

any interest he or she has in a contract with the company. The rule
at common law is that, unless the company's articles provide
 otherwise, a director may not, whether directly or indirectly, have an
interest in a contract with the company, unless a general meeting of
the company approves the contract, following full disclosure.

9. Director's duties in terms of the Companies Act

In addition to the common law duties and any other duties or restrictions which
may be imposed on directors in terms of statute or their contracts with the
company, the Companies Act imposes obligations on directors of companies.
The obligations imposed on directors in terms of the Companies Act, include:

Number of directors

• Public companies must have at least two directors, whilst private

companies are only required to have one director.

• Until directors are appointed, every subscriber to the memorandum of

a company, is deemed to be a director of the company.

Appointment of directors

• The first directors of the company may be appointed by a majority of

the subscribers to the memorandum.

• Any person who, before the issue of a certificate to commence

business, is appointed as a director of the company, shall:

• sign and lodge with the company, his or her consent to act as a
director, on a form CM27;

• subscribe for the minimum number of qualification shares or lodge with

the Registrar of Companies, a written agreement to acquire the shares.

• Persons who are appointed as directors, after a company has been

issued with a certificate to commence business must, within 28 days of
appointment, sign and lodge with the company, their consent to act as a
director of the company. This must be done on the prescribed form.

Disqualification from appointment

The following categories of persons are disqualified in terms of the Companies
Act, from being appointed or acting as directors:

• a body corporate;

• a minor or any other person under legal disability;

• any person who is the subject of any order under the Companies Act,
which disqualifies them from being a director;

• except with the authority of the Court:

• an unrehabilitated insolvent;

• any person removed from an office of trust on account of misconduct;

• any person who has at any time been convicted of theft, fraud, forgery
or uttering a forged document or any offence involving dishonesty or in
connection with the promotion, formation or management of a company
and has been sentenced therefor to imprisonment without the option of
a fine or to a fine exceeding R100;

• any person who is disqualified in terms of the company’s articles of

association.
Removal from office

• A company may, notwithstanding anything in its articles or

memorandum or in any agreement between it and a director, remove a
director from office before the expiration of their period of office. Removal
from office can be done by passing an ordinary resolution. Special notice
must be lodged with the company of any proposed resolution to remove a
director from office.

• A director who is affected by a proposed removal has the right to make

representations with regard to his or her removal from office. The director is
entitled to have his or her representations heard at the meeting which is
convened for the purposes of proposing a resolution for the director’s
removal.

Register of directors and officers

Every company must keep in one of the official languages of the country, a
register of directors and officers of the company and secretaries which are
corporate bodies. The Companies Act prescribes the particulars of each of the
parties, that are to be entered into the register.

Loans to directors

• Section 226 of the Companies Act imposes restrictions on the granting

of loans to directors and the provision of security on behalf of directors.

• Section 226 provides, that no company shall directly or indirectly make

a loan to:

• any director or manager of:

• the company; or

• its holding company; or

• any other company which is a subsidiary of its holding

company; or
 • any other company or other body corporate controlled by one or more
directors or managers of the company or of its holding company or any other
company which is a subsidiary of its holding company.

Main exemptions to Section 226 of the Companies Act

• Loans made to a director or manager provided prior consent of the

members of the company is obtained in the form of a special resolution.

• Loans made to a director or manager in order that they meet

expenditure incurred or to be incurred by him or her to perform duties in
regard to the company. These loans require the approval of the company at
a general meeting.

• Loans made to employee share trusts as contemplated in section 38(2)

(b) and (c) of the Companies Act.

• Loans made bona fide to a director in the ordinary course of business

of a company regularly carrying on the business of making loans.

• Loans made to a director or manager of a subsidiary provided such

director or manager is not also a director or manager.

• Loans be made to a director or manager of the company for housing,

with the approval of the company in general meeting.

Issue of shares

• A director may not issue any shares of the company or debentures

which are capable of being converted into shares, to a director or his or her
nominees unless:

• approval has been specifically given by the company in general

meeting; or

• allotted or issued under a contract underwriting such shares or

debentures; or

• such shares or debentures are allocated or issued in proportion to the

director's existing holdings, on the same terms and conditions as have
 been offered to all the members or debenture holders of the company or
to the members or debenture holders of the class or classes being
allotted or issued; or

• such shares or debentures are allotted or issued on the same terms

and conditions as have been offered to members of the public.

• A director who knowingly takes part in an allotment or issue of any

shares in contravention of Section 221 and 222 may be liable to the company
for losses as a result thereof. A director who contravenes Section 222 will
also be guilty of an offence.

General administrative duties of directors

• Directors must ensure that the company does not commence business
before a certificate to commence business has been issued by the Registrar
of Companies. Failure to do so is a criminal offence.

• If requested to do so by the required number of members, the directors

must call a general meeting, by issuing a notice to the members within
14 days of the lodging of the requisition. Any director or officer of a company
who knowingly is party to a failure to convene a meeting as required, will be
guilty of an offence.

• In the absence of the approval of the company in general meeting, the

directors may not dispose of the whole or the greater part of the company's
undertaking or assets.

• Directors must ensure that the notice convening a meeting to confirm

or authorise a contract in which a director is materially interested, (whether
directly or indirectly), states the full particulars of the interest of the relevant
director. Failure to do so is a criminal offence.

Attendance registers
The directors of a company present at a directors' meeting must sign their
names under the date of the meeting in an attendance register, which must be
kept at the company's registered office, or at the office where it is made up.
Failure to do so is a criminal offence.

Minute books

• The directors are responsible for ensuring that minutes are kept of all
meetings of directors or managers.

• The minutes must be recorded in one of South Africa’s official

languages.

• Any resolution signed by directors or managers of the company, shall

be deemed to be a minute of a meeting. The resolution must be entered into
the minute book and noted at the next director’s meeting.

• The minutes of a meeting must be signed by the chairman of that

meeting or by the chairman of the following meeting.

• The directors of a subsidiary company must ensure that the annual

financial statements are made out to cover an accounting period ending on
the same date as the period covered by the annual financial statements of its
holding company.

• When requested to do so by a company or its auditors, directors must

give the necessary information regarding loans obtained from the company,
for inclusion in the company's annual financial statements. Failure to do so is
a criminal offence.

• When requested in writing by the company or its auditors, the directors

must give the prescribed information regarding their emoluments and
pensions, within 21 days of the date of the request. Failure to do so is a
criminal offence.
Director's names on letterheads

• A company is not permitted to issue or send any trade catalogue, trade

circular or business letter bearing the company's name, to any person in
South Africa, unless the document states all the director's forenames, initials,
surnames and nationalities if the directors are not South Africa.

• A company is to publish its name and registration number on all its

notices and official publications, which include all bills of exchange,
promissory notes, endorsements, cheques, orders, delivery notes, letters,
invoices, receipts and letters of credit.

Appointment of auditors

• When the memorandum and articles of a company to be incorporated

are lodged with the Registrar of Companies for registration, a written consent
of a person accepting appointment as an auditor may be lodged
simultaneously. The auditor will be deemed to have been appointed by the
company at this point in time.

• If the company does not appoint an auditor when it lodges the

memorandum and articles with the Registrar, then an auditor must be
appointed within 21 days after the incorporation of the company.

• If the directors of a company fail to appoint an auditor, the Registrar

may appoint an auditor on the company's behalf. In this case, each director
will be guilty of an offence.

Appointment of a company secretary

• The directors of a public company having a share capital must appoint

a secretary. The secretary must be permanently resident in South Africa and
have, in the opinion of the directors, the requisite knowledge and experience
to carry out the duties of a secretary of a public company. The directors of a
public company who fail to appoint a secretary after being ordered to do so
by the Registrar of Companies shall be guilty of an offence

Accounting records
 • Every company is to keep, in one of South Africa's official languages,
accounting records that are necessary to fairly represent the company's state
of affairs and business and to explain its transactions and financial position.
The records must include:

• records showing the assets and liabilities of the company;

• a register of fixed assets;

• records containing entries from the day-to-day in sufficient detail of all

cash received and its out and of the matters in respect of which receipts
and payments take place;

• records of all goods sold and purchased and (except in the case of
ordinary retail trade) records showing the identity of the buyers and the
sellers; and

• statements of annual stocktaking.

• The accounting records are to be kept at the registered office of the

company or at such other place as the directors think fit. The records must
be available for inspection

Financial statements

• The directors of a company are responsible for producing annual

financial statements in one of South Africa's official languages, each year.

• The annual financial statements must consist of:

• a balance sheet and income statement and the notes thereon or

another attached document which provides the information required by
the Companies Act;

• a cash flow statement;

• a director's report, which is to comply with the Companies Act; and

• an auditor's report.
 • The contents of the annual financial statements must be approved by
and are the responsibility of the directors.

• The annual report must be approved by its directors and signed by at

least two directors of the company or if there is only one director, by that
director.

There are many and varied potential liabilities, both in common law and in
statute, which could render a director to both criminal and civil liability. The
Companies Act prevents a company from validly exempting or indemnifying
directors of a company against negligence, default, breach of duty or breach of
trust. It is however possible for a company to take out insurance against such
liability. It is not clear whether such insurance will protect the company or the
directors themselves.

10. Other obligations imposed on directors

• A multitude of statutory provisions exist which impose obligations on

directors in addition to the general fiduciary duties of all directors. Non-
compliance with these statutory obligations may give rise to civil and
criminal liability. Examples of these statutes include:

• The Income Tax Act, 1962 , as amended;

• The Pension Funds Act, 1956 as amended;

• The Banks Act, 1990;

• The Trust Property Control Act, 1988;

• The Financial Institutions (Investment in Funds) Act, 1984.

PART III

11. The King Reports of corporate governance

The first King report on corporate governance ("King I") was released on 29
November 1994. The purpose of King I was to promote the highest standards of
corporate governance in South Africa. The King Committee was formed at the
instance of the Institute of Directors.

The King Committee was similar in concept to the Cadbury Committee in

England. King's terms of reference were however wider. The King and Cadbury
reports both considered financial reporting and accountability, good practice
concerning the responsibility of directors, the case for audit committees, the
principal responsibility of auditors and the links between shareholders, boards
and auditors. In addition the King's terms of reference included a Code of Ethical
Practice for South African enterprises and took account of special circumstances
and of disadvantaged communities in South Africa.

The King Committee issued a detailed report on corporate governance, a series

of recommendations and a Code of Corporate Practices and Conduct.

A number of recommendations in the King I were superseded by legislation in

the social and political transformation in South Africa. Further, a dominant
feature of business since 1994, was the emergence of information technology.
In light of these factors as well as many others, the King Committee reviewed
corporate governance standards and practices for South Africa against
developments that took place after the publication of King I.

The Code of Corporate Practices and Conduct in King II replaced the Code of
Good Corporate Practices and Conduct in King I, with effect from 1 March 2002.

12. Corporations affected by the Code of Corporate Practices and Conduct

("the Code")

The Code applies to:

• companies with securities listed in the JSE Securities Exchange, South Africa;

• banks, financial and insurance entities as defined in the various Financial

Services Acts;
 • public sector enterprises and agencies that fall under the Public Finance
Management Act and the Local Government: Municipal Finance Management
Bill.

Although King II, including the Code, applies only to certain categories of
business called "affected enterprises", it is suggested that all companies should,
nevertheless, give due consideration to the application thereof.

As explained above, the concept of corporate governance applies mainly to

companies as there is a need for the directors of a company to be accountable to
its owners, that is the shareholders. However, in so far as the other enterprises
are concerned, it is recommended that these enterprises comply with the seven
characteristics of good corporate governance, as outlined in King II. These seven
characteristics are:

• discipline;

• transparency;

• independence;

• accountability;

• responsibility;

• fairness; and

• social responsibility7.

Adherence to the Code is voluntary, however the JSE Listings Requirements

require listed companies to disclose in their annual reports a narrative statement
of how the company has applied (or intends to apply) the principles set out in the
Code. The statement must contain explanations enabling shareholders to
evaluate how the principles have been applied and must address the extent of
the company's compliance with the Code and the reason for any non
compliance, indicating for what part of the relevant accounting period the non
compliance occurred.

7
King Report on Corporate Governance issued by the Institute of Directors at pages 11 and 12
13. Recommendations of King II

In the paragraphs that follow, we outline the corporate governance

recommendations contained in King II and some relevant statutory provisions
contained in the Companies Act. This outline is not exhaustive and should be
used only as a source of reference for directors and other interested parties.

Composition and role of the board of directors of a company

• It is recommended that South African companies have a unitary board

structure (as opposed to separate supervisory and management boards),
with directors being appointed in terms of the provisions of the company's
articles of association. A board of directors usually includes directors who
are also senior employees of the company - these are usually referred to as
“executive directors”.

• The Companies Act requires every public company to have at least two
directors and every private company to have at least one director. The JSE
Listings Requirements provide for a minimum of four directors for a listed
company. There is no maximum limit on the number of directors. A
company's articles of association may provide for a minimum or maximum
number of directors and for a means of determining such number.

• A board of directors should be balanced between non-executive and

executive directors. Although the role of non-executive directors are
recognised, South African law does not recognise the distinction between the
duties of executive and non-executive directors. Neither the Companies Act,
nor the JSE Listings Requirements regulate the position of non-executive
directors. However, King II recommends a balanced board comprised of
executive and non-executive directors, preferably with a majority of non-
executive directors, of whom sufficient should be independent of
management. The principle, which is echoed in the Code of Corporate
Practices and Conduct incorporated in the JSE Listings Requirements, is that
the board should ensure that there is an appropriate balance of power and
authority on the board, such that "no one individual or small group of
individuals can dominate the board's decision making".

• King II defines an executive director as an individual involved in the

day-to-day management and/or in the full time salaried employment of the
 company and/or its subsidiaries. A non-executive director is defined as an
individual not involved in the day-to-day management and not a full time
salaried employee of the company or its subsidiaries.

• Non-executive directors are subject to the same duties and potential

liabilities as executive directors.

• The board of directors is ultimately responsible for ensuring that the

business remains a going concern and that it achieves its objectives. It must
therefore ensure that the company is controlled in an effective manner.

The Chairman and the Chief Executive Officer

• The chairperson is responsible for the effective functioning of the board

and the chief executive officer is responsible for the running of the
company's business. There should be a clear distinction between these roles.

• King II emphasises that there should be a clear division of

responsibilities at the head of the company, ensuring a balance of power and
authority, so that no one individual has "unfettered powers of decision
making".

• It is recommended that the chairperson or a sub-committee of the

board should annually appraise the chief executive's performance. The
results of such appraisal should also be considered by the remuneration
committee to guide it in the evaluation of the performance and remuneration
of the chief executive officer.

Appointment of directors

• Usually, the articles of association of the company to provide that

directors be appointed by the members in a general meeting. At common
law, the appointment of a director comprises of his or her appointment by
those duly authorised to do so, combined with his or her acceptance or
consent to such appointment. King II recommends the establishment of a
nomination committee comprised only of non-executive directors, the
majority of whom should be independent, to recommend all new
appointment of directors.
 • Unless otherwise provided in the articles of association of a company,
or in terms of a separate contract between the company and the director, a
director continues in office until his or her death, resignation or
disqualification. It is however suggested in King II that board continuity is
imperative and that the board should put in place a programme ensuring
staggered rotation of directors. King II recommends that an executive
director's fixed term contract, if any, should not exceed three years. Also,
provision is made in the JSE Code, for an executive director's service contract
not to exceed five years. If a longer period is required, it is suggested that
shareholder approval should be obtained. (It is understood that the five year
period referred to in the JSE Code will be amended to three years during the
first quarter of 2003).

• King II further recommends a formal orientation program for newly

appointed directors, in order to familiarise them with the company's
structure, operation and plans. New directors must also, in terms of King II
receive developmental and educational training in respect of their duties and
responsibilities to the company.

Director's remuneration and remuneration committee

• The remuneration of directors is determined in accordance with the

provisions of the articles of association of the company, as well as any
existing contracts between the directors and the company. It is proposed in
King II that levels of remuneration should be sufficient to attract, retain and
motivate executives of the quality required by the board and, furthermore,
that performance related elements should constitute a substantial portion of
the total remuneration packages of executives.

• King II recommends that companies should establish a formal and

transparent procedure for developing policy on executive and director
remuneration and, furthermore, that companies should appoint a
remuneration committee, comprised of exclusively or mainly of non-
executive directors, to determine individual remuneration packages for each
of the executive directors. No director should be involved in deciding his or
her own remuneration. Non-executive director remuneration should be a
matter for the board as a whole, to be approved by the shareholders in a
general meeting.
 • Detailed statutory provisions regulate the disclosure of directors’
emoluments in the annual financial statements of the company. These
include, for example, disclosure of the aggregate amount of the emoluments
received by the directors as a group (including basic salary, bonuses and
performance related payments, sums paid by way of expense allowances,
the estimated monetary value of other material benefits received, gains
made on the exercise of share options, the amount of the pensions paid or
receivable by directors and past directors and details of directors' service
contracts).

• The JSE Listings Requirements and King II require more detailed

disclosure in relation to directors' emoluments. In particular, the annual
financial statements of listed companies are required to contain an analysis
in the aggregate and by individual directors, and distinguishing separately
between executive and non-executive directors as separate groups, of
emoluments paid during the last financial period by the company, or
receivable by directors in their capacity as directors or otherwise (including
fees for services as director, basic salary, bonuses and performance related
payments, sums paid by way of expense allowance, any other material
benefits received, contributions paid under any pension scheme, any
commission, gain or profit-sharing arrangements and any share options
(including their strike price, period when and at what price options have been
exercised and any other relevant information)).

Board meetings

The board of directors should sit at least once a quarter. The frequency of
meetings should however be determined with reference to specific
circumstances within the company.

Board committees

• King II recommends that board committees be established to aid the

board and its directors in giving detailed attention to specific areas of the
directors' duties and responsibilities.

• The board or its directors should determine a policy for the frequency,
purpose, conduct and duration of its meetings and those of the formally
established committees.
 • There should be transparency and full disclosure from the board
committee to the board, except where the committee has been mandated
otherwise by the board.

• At a minimum, each board should have an audit and a remuneration

committee.

• It is recommended that all board committees be chaired by an

independent non-executive director.

• The annual report should detail the composition of the committees

(especially the remuneration, audit and nomination committee) as well as a
description of the committee's responsibilities, the number of meetings held
and other information that may be of relevance to the company's
shareholders.

• The board should regularly evaluate the board committees to ascertain

their performance and effectiveness.

Annual reports and company meetings

• The Companies Act provides for every company to hold an annual

general meeting. Private companies may, however, by written approval of
shareholders dispense with the obligation to do so.

• The Companies Act provides that the annual general meeting shall deal
with the matters assigned to it in the Companies Act and may deal with
matters provided for in the articles of association of the company, or matters
which may be dealt with by any general meeting of the company. The issues
usually addressed at an annual general meeting include, for example:

• the consideration of the annual financial reports. Shareholders are not

entitled or required to approve the annual financial reports, but merely
to consider them;

• the election of directors (but not managers);

• the selection or ratification of the selection of outside auditing firms;

• the passing of special resolutions (if any);

 • the extension of a general authority to the directors to issue shares;

• the approval of certain loans to directors;

• the declaration or approval of dividends.

• Certain transactions of the company may not be approved by the

board, without reference to the shareholders. The JSE has specific
requirements for Category I, II, III and IV transactions with Category I
transactions (where the size of the transaction equates to 30 per cent or
more of the capitalisation of the company or where 30% of new shares are
issued as consideration) requiring approval by ordinary shareholder vote.
Furthermore, provision is made for shareholder approval for executive and
staff share option schemes. These issues may be dealt with at the annual
general meeting.

• King II emphasises the importance of the annual general meeting of

listed companies as an opportunity to communicate with shareholders and to
encourage shareholder activism and participation.

Risk management

• King II suggests that the board has the responsibility to ensure that the
company has implemented an effective ongoing process to identify risk, to
measure its potential impact against a broad set of assumptions and to
activate what is necessary to proactively manage these risks. It is,
furthermore, recommended that a board committee should be appointed to
assist the board in reviewing the risk management process and the risks
facing the company.

Internal control and audit committee

• King II requires that companies have an effective internal audit

function that has the respect and co-operation of both the board and
management. The objective of internal audit is to assist members of
executive and senior management in the effective discharge of their duties
and responsibilities. Where the board decides not to establish an effective
internal audit function, full reasons must be disclosed in the company's
 annual report, with an explanation as to how assurance of effective internal
controls, processes and systems will be maintained.

• King II further requires that the audit committee should be comprised

by a majority of independent non-executive directors. The majority of the
members of the audit committee should have a financial background. It is
further recommended that the chairperson of the audit committee be an
independent non-executive director and not the chairman of the board. The
audit committee should have written terms of reference that deal adequately
with its membership, authority and duties. Companies should further, in their
annual reports disclose whether or not the audit committee has adopted
formal terms of reference and if so, whether the committee has satisfied its
responsibilities for the year in compliance with its terms of reference.
Membership of the audit committee should also be outlined in the annual
report.

Financial statements and the annual report

• In terms of the Companies Act, the accuracy of the annual financial

statements of a company (which should achieve fair presentation in
conformity with generally accepted accounting practice (GAAP)) is primarily
the responsibility of the directors. If accounts are not reasonably accurate
every director who is in default is potentially guilty of a criminal offence,
unless such director is excused from liability in accordance with the
provisions of the Act. Similarly if annual accounts are approved which do not
conform to statutory requirements, every director who is a party to their
approval and who knows that they do not comply or is reckless as to whether
they comply is guilty of an offence.

• Directors must prepare an annual directors' report with respect to,

amongst other things, the state of affairs and business of the company. If a
director fails to take all reasonable steps to comply with the provisions of the
Companies Act in relation to the directors' report, he or she is guilty of an
offence.

• King recommends that directors should report on the following specific

matters in their annual report8:

8
King Committee on Corporate Governance, issued by Institute of Directors at page 40
 • that it is the director's responsibility to prepare the financial
statements that fairly represent the state of affairs of the company
as at the end of the financial year and the profit or loss and cash
flows for that period;

• that it is the director's responsibility to prepare the financial

statements that fairly represent the state of affairs of the company
as at the end of the financial year and the profit or loss and cash
flows for that period;

• whether the auditor is responsible for reporting on whether the

financial statements are fairly presented;

• whether adequate accounting records and an effective system of

internal controls and risk management have been maintained;

• whether appropriate accounting policies supported by reasonable

and prudent judgements and estimates have been used
consistently;

• whether applicable accounting standards have been adhered to or,

if there has been any departure in the interest of fair presentation,
this must not only be disclosed and explained, but qualified;

• whether there is no reason to believe the business will not be a

going concern in the year ahead or an explanation of any reasons
otherwise; and

• whether the Code of Corporate Practices and Conduct has been

adhered to or, if not, where there has not been compliance to give
reasons.

Transactions with directors and conflicts

• The common law provides that a director stands in a fiduciary position

toward each company on whose board he or she serves. A director is obliged
to display the utmost good faith towards the company, and in his or her
dealings on its behalf, once he or she accepts an appointment as a director
and may not place himself or herself in a position in which he or she has, or
may have, a personal interest conflicting with his or her duty to act in the
 interests of the company. The failure by a director to comply with his or her
fiduciary duties constitutes a breach of trust and gives rise to a claim by the
company against the director.

• Various provisions of the Companies Act regulate and restrict

transactions between a company and its directors. The articles of association
of a company may contain additional restrictions. Statutory provisions
include a duty to disclose an interest in any contract or proposed contract
with the company, the minuting of declarations of interest, as well as a
prohibition on loans to, or security in connection with, transactions by
directors.

• The JSE Listings Requirements contain detailed provisions dealing with

"related party" transactions, which provide certain safeguards against
shareholders, directors and other related parties to a listed company taking
advantage of their position. "Related party" transactions must be reported to
the JSE, whereupon the JSE is entitled to require written notification to be
given to shareholders and approval of the transaction by shareholders other
than the related party shareholders and their associates.

14. Integrated sustainability reporting

• King II recommends that every company should report, at least annually on the
nature and extent of its social, transformation, ethical, safety, health and
environmental management policies and practices. It is further recommended
that the board must determine what is relevant for disclosure, having regard to
the company’s special circumstances.9

• It is further recommended that matters requiring specific consideration should

include:

• description of practices reflecting a committed effort to reducing

workplace accidents, fatalities and occupational health and safety
incidents against stated measurement targets and objectives and a
suitable explanation where appropriate. This would cover the nature and
extent of the strategy, plans and policies adopted to address and
manage the potential impact of HIV/AIDS on the company activities;

9
King Committee on Corporate Governance, issued by Institute of Directors page 35
 • reporting on environmental corporate governance;

• policies defining social investment prioritisation and spending and the

extent of initiatives to support black economic empowerment, in
particular with regard to procurement practices and investment
strategies;

• disclosure of human capital in areas such as the number of staff, with

due regard on progress against equity targets, achievement of corporate
training and development initiatives, age, employee development and
financial investment.10

15. Organisational integrity /Code of Ethics

• King II recommends that every company should engage its stakeholders in

determining the company’s standards of ethical behaviour. The company
should demonstrate its commitment to organisational integrity by codifying
its standards in a code of ethics.11

PART IV

16. Conclusion

• The Executive Summary of the King Committee on Corporate

Governance, issued by the Institute of Directors in March 2002, sums up the
concept of corporate governance, where it states:

"In summary, successful corporate governance in the world of the 21st

century requires companies to adopt an inclusive approach and not an
exclusive approach. The company must be open to institutional activism
and there must be greater emphasis on the sustainable or non-financial
aspects of its performance. Boards must apply the tests of fairness,
accountability, responsibility and transparency to all acts or omissions and
be accountable to the company also but responsive and responsible towards
the company's identified stakeholders. The correct balance between
conformance with governance principles and performance in an
entrepreneurial market economy must be found, but this will be specific to
each company."

10
King Report on Corporate Governance, issued by Institute of Directors at pages 36 and 37
11
King Report on Corporate Governance, issued by Institute of Directors at page 37
• As many companies in the modern corporate arena, have a distinct
split between control and ownership, the need for transparency and
accountability to the stakeholders has increased. For these reasons,
corporate governance is becoming more and more important.

• Due to the nature of the other corporate entities which have been
discussed above, there will not necessarily be a need for these entities to
comply with the requirements of corporate governance. However, in so far
as they can, these enterprises should apply the principles of openness,
honesty, fairness, accountability, responsibility and transparency in relation
to all business dealings, but particularly with regard to the persons to whom
they are required to report. These enterprises should also conduct their
affairs, with due regard to the principles of corporate governance that relate
to environmental, health and safety, economic empowerment and human
capital development issues. It is also recommended that these enterprises
codify their standards in a code of ethics.

• The key aspects of corporate governance, recommended by King II can

be summarised as follows:

• The Board

• should have a balance of executive and non-executive members;

• should be honest and open in its disclosure to stakeholders;

• should establish procedures to monitor risk assessment;

• should conduct risk assessments;

• should identify and establish internal control to match the

company's level of risk;

• should delegate the establishment and maintenance of internal

control;

• should establish and clearly define committees;

• should establish at least a remuneration and audit committee.

• The Chair
 • should have a distinct role from the chief executive officer.

• Directors

•should have a formal orientation program if newly appointed

•new directors should receive developmental and educational

training in respect of duties and responsibilities;

• Director's remuneration

• should be determined by a remuneration committee,

comprised exclusively or mainly of non-executive directors;

• no director should be involved in deciding his or her own

remuneration;

• non-executive remuneration should be decided by the board

as a whole and approved by the shareholders in a general
meeting.

• Board meetings

• should take place at least four times a year.

• Board committees

• should be established to aid the board and its directors in

giving detailed attention to specific areas of directors' duties
and responsibilities;

• should be chaired by an independent non-executive director;

• should be transparent and report to the board.

• Internal control

• companies are to have effective internal control that has the

respect of the board and management;

• an audit committee should be appointed that has a majority of

non-executive members;
 • the majority of members on the internal audit committee should
have a financial background

• Conflicts of interest

• directors have a duty to disclose an interest in any contract or

proposed contract with the company;

• the conflict should be minuted.

In our view, all businesses in Fasset's sector should design and adopt effective
governance systems which incorporate a means for enforcement and
accountability to stakeholders and/or other interested bodies, persons or
entities. To assist businesses in overcoming this challenge, we suggest that the
recommendations outlined in this publication be adapted to the specific
business' needs and implemented by those who govern them.
 USEFUL TELEPHONE NUMBERS

1. Fasset (011) 476-8570

2. Webber Wentzel Bowens (JHB) (011) 530-5000
3. Webber Wentzel Bowens (Cape Town) (021) 505-5000
4. Institute of Directors (JHB) (011) 643-8086
5. Institute of Directors (Cape Town) (021) 686-0158
6. Institute of Directors (Durban) (031) 566-2352
7. Institute of Directors (PE) (041) 365-1163
8. Department of Labour (Eastern Cape) (043) 701-3030
9. Department of Labour (Free State) (051) 505-6200
10. Department of Labour (Gauteng South) (011) 497-3218
11. Department of Labour (Gauteng North) (011) 309-5136
12. Department of Labour (Kwa-Zulu Natal) (031) 336-1545
13. Department of Labour (Mpumalanga) (013) 655-8700
14. Department of Labour (North West Province) (018) 387-8100/9
15. Department of Labour (Northern Cape) (053) 838-1500
16. Department of Labour (Limpopo Province) (015) 290-1607
17. Department of Labour (Western Cape) (021) 460-5104
18. CCMA (Eastern Cape) (043) 743-0826
19. CCMA (Free State) (051) 505-4400
20. CCMA (Gauteng) (011) 377-6600
21. CCMA (Kwa-Zulu Natal) (031) 362-2300
22. CCMA (Kwa-Zulu Natal – Richards Bay) (035) 789-0357/1415
23. CCMA (Mpumalanga) (013) 656-2800
24. CCMA (North West Province) (018) 464-0700
25. CCMA (Northern Cape Province) (053) 831-6780
26. CCMA (Northern Province) (051) 297-5010
27. CCMA (Western Cape) (021) 469-0111
28. Labour Court (Johannesburg) (011) 359-5800

(011) 403-4893
29. Labour Court (Cape Town) (021) 424-9035
30. Labour Court (Durban) (031) 301-0140
31. Labour Court (Port Elizabeth) (041) 586-4923
32. Registrar of Companies 0861 843 384
33. Auditor General (011) 842-4814
34. Department of Finance (Cape Town) (021) 464-6100
35. Department of Finance (Pretoria) (012) 315-5372
36. Department of Trade and Industry 0861 843 384
37. Johannesburg Stock Exchange (011) 520-7777
38. Receiver of Revenue (Bloemfontein) (051) 506-3000
39. Receiver of Revenue (Cape Town) (021) 460-2911
40. Receiver of Revenue (Durban) (031) 360-8911
41. Receiver of Revenue (East London) (043) 722-7270
42. Receiver of Revenue (Johannesburg) (011) 374-8000
43. Receiver of Revenue (Kimberley) (053) 831-2250
44. Receiver of Revenue (Port Elizabeth) (041) 505-7500
45. Receiver of Revenue (Pretoria) (012) 317-2000
46. South African Reserve Bank (Bloemfontein) (051) 403-7500
47. South African Reserve Bank (Cape Town) (021) 481-6700
48. South African Reserve Bank (Durban) (031) 310-9300
49. South African Reserve Bank (East London) (043) 707-3400
50. South African Reserve Bank (Johannesburg) (011) 240-0700
51. South African Reserve Bank (Port Elizabeth) (041) 501-6600
52. South African Reserve Bank (Pretoria) (012) 313-3911