On Thursday last week, Mervyn King, who donated his name to SA’s first two corporate governance codes, held the first “strategy” meeting with those who will be the architects of a third instalment of the King Committee’s codes.

However, it is a process with a different motivation from that of its predecessors. The committee is being spurred into action by the prospect of a draconian new set of laws governing company directors. It is on the back foot, rather than at the vanguard of SA’s governance system.

In an interview at private equity specialist Brait’s headquarters in Fricker Road, Sandton, King details how the new code is necessary in light of the new Companies Act – the punishing draft of which has already sent shivers down the spines of many directors.

“As soon as that comes out [in its final form], then King 2 becomes outdated for SA directors,” he says.

The draft Companies Act was published earlier this year, and the final draft may be out before year-end, though it will become law only in 2010.

However, this draft law includes a chapter on governance, transforming a code that has been voluntary until now into compulsory practice.

King believes this is a dangerous path to tread.

“King 2 is a guide and it’s a comply-or-explain regime, and if you don’t comply but you explain why, that is in fact compliance… but once you put in place an inflexible structure, you’ve got a problem, and that’s the problem they have run into in America with [the] Sarbanes-Oxley [Act], where you comply or you go to jail,” he says.

Indeed, a flip through the draft Companies Act would induce palpitations among the typical conscientious non executive director.

There are no fewer than 24 sections in the new draft act detailing directors’ liabilities, ranging from how to punish lies in a company prospectus to ethereal requirements on “shareholders’ rights”.

King himself believes the act’s efforts to “codify” directors’ duties and try to define “independence” are the wrong way to go.

“Why don’t they just write in the act: to be a director, you must continue to breathe? Because if you and I are directors of a company, we must act independently, and if we don’t, we’re not acting [properly] as directors, we’re acting dishonestly,” he says.

King Committee member Nigel Payne says that given the new liabilities heaped on directors in the draft, “anyone would be a fool to be a non executive director” under the regime in the new bill. For a start, directors can be sued in their personal capacity for virtually any loss that is suffered due to a company’s actions.

Also, “the current draft Companies Act, for example, could result in many companies finding that large chunks of their board and audit committees won’t comply with the law because these directors won’t be considered independent”.

For example, the draft act says a director cannot be considered independent if any of his family has any shares in that company – even if this is unbeknown to him.

The sort of draconian liabilities contained in the act serve to heighten the schism of views on governance: that legislation should police governance, or that codes should be voluntary. The King process is now seen almost as a competitor to the Companies Bill.

One person who was on earlier King committees says: “My reading [of the efforts to produce King 3 ] is that it is more of a defensive thing – almost [challenging] the wisdom of the new Companies Act provisions.”

He asks whether this is a “constructive approach or just a case of certain businessmen and lawyers seeking to challenge the merits of the new Companies Act. I’ve got a nasty feeling it’s the latter.”

Under this theory, the decision to begin drafting King 3 before the new Companies Act is finalised could be seen as an effort to influence the final direction of the legislation.

The new Companies Act is likely to be finalised only by the end of this year, at the earliest, and many of the new King code drafters are of the view that there is no need to “legislate corporate governance”, and would favour a slackening of the bill’s punishing provisions.

King, as you would expect, says the committee is not trying to lobby, pointing out that King 3 will be published at least three months after the final draft of the Companies Act is due to be released.

“I’ll never be that, I promise you,” he says. “King 3 will be very forward looking. Whatever comes out in the act, we will have to put in the new code that directors have to do this, and it’s no good criticising it’. [On other issues, we will say] you don’t have to do this, but we suggest it is a good guideline’,” he says.

He points to new features that will be considered by the King 3 drafters, such as “information technology governance”, and a bigger focus on “sustainability”.

King himself says he doesn’t believe big changes are needed, saying “I don’t see” any gaping holes.

So, if the real changes will happen because the Companies Act compels them, why is there a need for a King 3 at all? Especially if it doesn’t address issues such as the often farcical interpretation of independence, or the fact that directors can sit on a board for 22 years, as Mike Levett has done at Barloworld, and still claim to be “independent non executive directors”? Equally, Elisabeth Bradley is still considered an “independent” Standard Bank director after 21 years on the bank’s board.

King is adamant that “independence” cannot be a “tick-box” thing, because “independence is a state of mind”. He himself has been on JD Group’s board for 12 years and is still considered independent.

University of Cape Town professor Geoff Everingham – one of those on a King 3 subcommittee – says one shouldn’t expect something “quite as fundamental as King 2″.

“It may simply be a matter of finding areas where there are gaps, such as the definition of independent directors,” he says. But Everingham believes the King codes have had an impact, despite their voluntary nature, pointing to the fact that executive chairmen have all but disappeared.

“Of course, tenure of directors will be discussed, as I can see the hazard of certain directors getting sucked into the cosiness of sitting on a board for so long that they lose their independence. But independent directors still have to get on with the rest of the board,” he says.

However, the disclosure of executive pay, and the establishment of “remuneration committees”, hasn’t exactly done anything to stem the high salaries being carted home by fat-cat bosses.

If anything, salaries and share options have gained pace.

Everingham says there is “no evidence that the presence of nonexecutive directors on boards has done anything to contain the growth in executive pay, and if anything, it goes the other way”.

Philip Armstrong, one of the most respected members of earlier King committees, who now heads the World Bank’s governance forum from Washington, says: “My only concern is that there is a sense of corporate governance fatigue in the business sector.

“One has to be sure that King 3 will bring practical value and benefits in this environment.”

Armstrong isn’t involved in this version, but he says the issues of executive pay and benefits and how companies report on future prospects are likely to be scrutinised by international investors.

He refers to the US, where the Securities & Exchange Commission now tells companies to write their reports in plain English, and provide a comprehensive assessment of all kinds of compensation received – from the company jet to a chauffeur.

Perhaps King 3 will demand further salary disclosure, looking beyond the directors to executives and management.

But even if the rest of the world is going the Sarbanes-Oxley route, perhaps there is no shame for SA were it to break away from the tick-box approach.

A Wharton School newsletter titled “Governance by the numbers” spoke of the absurdity of efforts by the California Public Employees Retirement System to have celebrity investor Warren Buffett booted off the board of Coca-Cola as he was too old, sat on too many boards, and had insider ties to companies on whose boards he sits.

Equally, a Wharton research paper, titled “Does corporate governance really matter?” found there was little empirical research to suggest that “best practice” governance influenced company values or management decisions.

All the right boxes were ticked in Enron, for example, as they were in LeisureNet and JCI (see “Corporate governance rogues’ gallery”, page 36), yet it was the activities that took place behind the scenes – for which there is no box – that sank the companies.

King was on the mark when he predicted a few years ago that the legalistic US approach of Sarbanes-Oxley would lead to companies eschewing the New York Stock Exchange in favour of the more laissez-faire governance approach of London. “Why do you think Nasdaq tried to buy [the London Stock Exchange]?” he asks pointedly.

In fact, of the biggest 26 capital raisings in the past six months, only three took place in the US.

King is justifiably proud of the first two King codes. He describes how he met University of Tokyo professor Shinji Hatta when he was appointed to the UN governance panel and Hatta presented King with a copy of King 1 translated into Japanese.

“They’d been teaching King 1 at Tokyo University since 1995, and it was translated into Japanese,” he said.

King also tells a story about a plane trip he took in the UK, where the flight attendant was pondering which honorific to use when addressing him, given the fact that he is a professor and a judge. The flight attendant said: “How about I call you guv’nor?” (Confusingly, another Mervyn King is governor of the Bank of England, and was on the flight.)

King sees himself as the thumping heart of the country’s corporate governance, and it would be churlish to deny his impact in the first two King codes. This is evident when he discusses his “rules” for how the King committee works. “Every quarter we’ve met [since 1994] and I had a certain criterion – that everyone did this in the interests of SA Inc. No-one got remunerated, no-one even got paid for their disbursements. I wanted to know that everyone did this in the interests of the country,” he says.

But if the man who represents the brand of corporate governance can’t follow the best practice he recommends, other JSE-listed companies would ask why they should follow the rules. And there is much to suggest that King doesn’t stick to the letter of his own rules – as we show on page 38.