Focus on King IV

We assessed key governance areas against King IV’s envisioned outcomes (‘ethical culture’, ‘effective control’, ‘good performance’ and ‘legitimacy’) and categorised expected outcomes as either ‘primary’ or ‘secondary’. For example, a focus on organisational ethics to promote an ethical culture as a primary outcome with good performance as a secondary outcome. We anticipate that applying the recommended practices to our focus areas – organisational ethics, group governance framework, stakeholder engagement, combined assurance and fair and responsible remuneration – will benefit ‘ethical culture’ and ‘legitimacy’ outcomes the most, followed by noteworthy benefits to ‘good performance’. These expected outcomes reinforce the Board’s view that an ethical culture and a good reputation are essential to building a sustainable business.

An initial assessment in early 2017 indicated that we already apply the most significant aspects of the principles and majority of the underlying recommended practices. Of the 400 practices, 80% had been fully applied, 15% partially applied, 2% not applied and 3% not yet applicable.

Principles 14 and 16 (respectively covering remuneration governance and stakeholder inclusiveness) recorded relatively higher percentages in the ‘partially applied’ category.

From March 2017, our remedial efforts were aimed mainly at updating our Board Charter, committees’ terms of reference and other governance documents and processes. We moved from 80% fully applied to 87% by the end of the third quarter.

Below we summarise our progress on the selected focus areas and what remains to be done.

Assessment against King IV What we have done and next steps
Ethical conduct
The Board, through our Social and Ethics Committee, is responsible for overseeing ethics and ethical conduct in the Group. Other Board committees oversee conduct-related matters, such as internal and external fraud and forensic investigations (monitored by the Group Audit and Compliance Committee and the Directors’ Affairs Committee).

We surveyed our employees’ impression of our culture and the state of ethics in the organisation, and the Board received a detailed report in the last quarter of 2017. The Group’s code of conduct was approved in November 2017 and applies to all employees in the Group. Similarly, we implemented a supplier code of conduct. We enhanced the Social and Ethics Committee’s oversight role of the conduct risk and reputation risk frameworks, the supplier due diligence framework, and the conflicts of interest policy.

The Social and Ethics Committee was briefed on the application of the whistle blowing process in the Group in the first quarter of 2018, including the systems and processes used to support the reporting and assurance provided on disciplinary and grievance information.

Group governance framework
King IV recommends that a holding company should apply an agreed group-wide governance framework. An existing memorandum of understanding governs the relationship between the Group Chairman and the chairmen of the subsidiary bank boards. In order to fully apply the recommended practice, we require a governance framework with greater Group-wide coverage.

In developing the Group governance framework, our memorandum of understanding has been expanded (i) in scope to deal with all subsidiary entities; and (ii) in mandate to deal with the process of approving Group policies, proportionality in relation to subsidiary entities’ application of King IV, mandate limits, and the responsibilities that Board committees will undertake on behalf of the subsidiary entities. We will continue to gather input from the various stakeholders, and the Group and subsidiary boards will approve and adopt the framework in the latter part of 2018.

Stakeholder relationships
The Social and Ethics Committee assists the Board in overseeing stakeholder relationships. The Group generally has a stakeholder-inclusive approach; however, we have an opportunity to enhance this. We operate a decentralised stakeholder management model where relevant executives define the engagement approach including mechanisms, frequency of engagement, issue management, reporting and dispute management.

Our Balanced Scorecard contextualises key matters raised by our stakeholders, and we address these further in the sections on governance and remuneration as well as in our stakeholder management approach in our GRI report.

The foundational elements for stakeholder relationship management exist in our governance structure, with varying levels of maturity. We are:

  • developing a new Group-level stakeholder engagement policy;
  • reviewing governance structures, including executive-level accountability for each stakeholder group;
  • annually reviewing our identified stakeholder groups, and prioritising key matters;
  • developing stakeholder management methodologies; and
  • formalising centralised reporting on stakeholder activities and outcomes, including the development of measurement tools, to determine the effectiveness of engagement activities.

Management will table an integrated stakeholder management approach (with relevant policies, strategic direction and internal and external reporting) to our Board for deliberation and approval in 2018.

Fair and responsible remuneration
King IV requires increased disclosure around remuneration, requiring us to expand on how we address and approach remuneration throughout the Group. To achieve this we must revise our reward/remuneration policy to more comprehensively (i) address the principles of fair and responsible remuneration; (ii) address the approach to remuneration Group-wide; and (iii) incorporate all the elements of remuneration that are offered in the organisation.

The objectives/philosophy disclosed in the integrated report should evidence a more comprehensive remuneration policy together with these practices.

The RemCo terms of reference was updated to ensure organisation-wide coverage of remuneration matters. Our revised remuneration policy, to be approved in 2018, will define a strategic approach to remuneration benefits including fair and responsible executive management remuneration in relation to overall employee remuneration; and the elements of, and mix of, remuneration that are offered in the organisation.

Our remuneration report aims to provide more transparent disclosures including our responses to key concerns and recommendations of shareholders as well as the approach to shareholder voting on remuneration at the annual general meeting. Our current policy disclosure is linked to high-level statements of intent however, going forward the main provisions of the policy will be disclosed. We have introduced and disclosed a single aggregated annual remuneration number for each executive and are investigating the methodology of disclosure of awards at fair value.

Combined assurance
A more comprehensive combined assurance model is being developed to ensure coverage of all key risks across the three lines of defence.

Although no gaps were specifically identified, (i) the combined assurance process is a work in progress; and (ii) assurance of external reports with a framework (identifying qualifying external reports, levels of assurance, and provider of assurance in respect of each) is required.

In addition to legislative or regulatory requirements, we are determining the appropriate type/level of assurance to support the integrity of each external report. We developed a framework for external reporting, identifying the combination of internal and external assurance providers per report. The Board or committee will be in a position to determine the effectiveness of the assurance process applied to each external report and issue a statement on the integrity of such report accordingly. Effective from the first financial results publication on 1 March 2018, the detail of the assurance provided on each report issued will be published within each report.

Phase two of the process involves identification of reports outside of the regular reporting suite (such as to regulators) which may fall within the ambit of this King IV recommendation.

Application of Principle 17
This principle is designed for application by institutional investors. Our asset/investment management businesses – Absa Asset Management, Absa Alternative Asset Management and Absa Multi Management – have assessed their policies and practices against this principle and confirmed that they are generally compliant, with certain areas requiring improvement. Absa Asset Management and Absa Alternative Asset Management are signatories to the United Nations Principles for Responsible Investment (UN PRI) and subscribe to the Code for Responsible Investing in South Africa (which is based on the UN PRI), while Absa Multi Management is working towards the same by the end of 2018. Furthermore, we will review other businesses which may touch on the asset management value chain.
View our King IV review here.