Tuesday, April 16, 2024

Corporate Governance and Reporting

In Botswana, Public Interest Entities (PIEs) (as defined by Section 22 of the Financial Reporting Act, 2010, the Act) are required to comply with Section 5g of the Act with respect to corporate governance. The section sets out one of the principal objectives of the Botswana Accountancy Oversight Authority (BAOA) as “to promote high standards of corporate governance and compliance with professional ethics”.

However, the section does not specify which corporate governance code entities should use. Consequently, the BAOA Board approved South Africa’s King III and its successor codes for BAOA to use when benchmarking PIEs corporate governance practices. Therefore , the use of the King series is not mandatory but recommended as entities can use other codes which are equally robust and that include practically all the recommended best practice corporate governance elements and principles, and as required by applicable laws, rules and codes.

Following the results of corporate governance reviews that BAOA has undertaken to date, we have decided to issue material on the subject to support good corporate governance practices by PIEs in Botswana.

“Apply or explain” versus “Comply or explain”

King III adopts the “apply or explain” approach which premise is based on the voluntary aspect of the code. According to King III, the “apply or explain” principle places the responsibility of which principle to apply or not apply on the Board taking into account the fact that the Board, as a collective, is the ultimate custodian of corporate governance. Therefore, a Board could conclude, “to follow a recommendation would not, in the particular circumstances, be in the best interests of the company”.

The Board could apply a recommendation differently or apply another practice and still achieve the intended objective of fairness, accountability, responsibility, and transparency.  King III further adds that under this approach, entities are expected to explain how the principles and recommendations were applied or if not applied, the reasons, results in compliance. King IV has moved to “apply and explain” which requires entities to provide an explanation of which recommended or other practices have been implemented and how these achieve or give effect to the principle”.

The most common principle to compliance is the “comply or explain” principle, which according to King III has been adopted by 56 countries in the Commonwealth and 27 states in the EU including the UK. The meaning of this principle can be found in the UK’s Corporate Governance Code which requires the explanation in the “comply or explain principle” to “set the background, provide a clear rationale for the action the company is taking and explain the impact that the action has had”. Australia’s Corporate Governance Principles and Recommendations uses a very similar principle which they call the “if not, why not” approach. The principle says that if a Board considers that a recommendation is not appropriate to its particular circumstances, it is entitled not to adopt it-however, it must explain why is has not adopted the recommendation.

Botswana Stock Exchange listed companies

The Botswana Stock Exchange has made it mandatory for all listed entities to comply with King III as it states that “listed companies are required to comply with the King III code”. Therefore, compliance with King III is not a choice for such entities.

Custodian of corporate Governance

According to King III, the custodian of corporate governance is the Board. Consequently, decisions such as which corporate governance code to use and which principles to apply or not to apply and explain rest with the Board. The Australian Stock Exchange Council states that “which governance practices a listed entity chooses to adopt is fundamentally a matter for its Board of directors..”.

Conclusion

For PIEs in Botswana, compliance with good corporate governance is a legal requirement under the Financial Reporting Act,2010. Except for listed entities which are mandated to comply with King III, other entities can choose other codes which are as robust as the King III code. The Board is the ultimate custodian of corporate governance and consequently is responsible for the choice of the code of corporate governance and decisions surrounding which recommended practices to comply with together with the related disclosures.

Innocent Munjanja is BAOA Director – Technical

RELATED STORIES

Read this week's paper