The Centre for Environmental Rights has submitted comments on the Draft King IV Report on Corporate Governance for South Africa 2016 (King IV).
As with all other comments submitted to the Institute of Directors of Southern Africa (IODSA) as part of the King IV Public Commentary process, our comments were submitted using the IODSA online commenting platform, and are available for download from the IODSA website.
Many problems with voluntary governance and sustainability initiatives
Without derogating from the extremely valuable contribution that the King Code has made to corporate governance in South Africa, the work of the CER has highlighted the many problems associated with voluntary governance codes and voluntary sustainability initiatives.
The findings of the CER’s 2015 report Full Disclosure: the truth about corporate environmental compliance in South Africa showed that in many cases company directors who claim compliance with the King Code, thereby enhancing the reputation and good standing of their companies, are in fact responsible for actions that are at best unsustainable, and at worst unlawful.
Full Disclosure showed that many companies which have regularly been hailed as shining examples for their approach to managing environmental, social and governance factors have in fact committed serious breaches of environmental laws. Furthermore, the information provided by these companies to their shareholders about these non-compliances, and about their environmental impacts in general, is either misleading or so minimal as to make it impossible to validate purported commitments to sound environmental management.
Code should penalise environmental law violations
In our view, the fact that the King Code leaves the determination of materiality in relation to environmental disclosures in the discretion of company directors is problematic. As we irrefutably demonstrated in Full Disclosure, if company directors are not explicitly required to disclose information about breaches of environmental laws, they will almost always not do so. The fact that the Draft Code does not require them to disclose all findings of environmental violations means that they can continue to hide this essential information from stakeholders, while still claiming to be leaders in corporate governance.
The requirement in King IV to only disclose “material or repeated regulatory penalties, sanctions or fines for contraventions of, or non-compliance with, statutory obligations” is not sufficient to ensure that companies disclose violations of environmental laws. The South African environmental regulatory regime does not use a system of administrative penalties in terms of which a regulator can impose a large fine on a company for breaches of environmental laws. Environmental management inspectors conduct inspections of company operations in order to identify violations.
SA companies hardly ever receive large fine for breaking environmental laws
These violations are then dealt with by way of compliance notices and directives, and as a last resort, using criminal prosecution, an extremely cumbersome process with relatively small maximum fines available. In South Africa, therefore, a company will hardly ever receive a large fine for breaking environmental laws, regardless of the gravity of its offences.
As a result, using financial penalties as an indication of materiality in this context is entirely ineffective. Allowing companies to decide whether or not to disclose breaches of environmental laws based on this requirement will therefore continue to enable them to hide serious actual and potential environmental liabilities from shareholders.
All non-compliance should be disclosed
We have accordingly recommended to the King Committee that King IV should include a requirement that companies disclose not only penalties and fines in their annual reports, but also non-compliance findings pursuant to compliance monitoring inspections by environmental regulators.
The CER is a non-profit organisation and an environmental rights law firm that helps communities defend their right to a healthy environment. It does this by advocating and litigating for transparency, accountability and compliance with environmental laws.
Source: Centre for Environmental Rights