CORPORATE GOVERNANCE IN

SOUTH AFRICA
WITH INTERNATIONAL COMPARISONS
 CORPORATE GOVERNANCE
IN SOUTH AFRICA
WITH INTERNATIONAL COMPARISONS

SECOND EDITION

Tobie Wiese
BCom LLB LLM LLD (Stellenbosch) Attorney, Notary
and Conveyancer of the High Court of South Africa
 First Published 2014

Second Edition 2017

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PREFACE TO SECOND EDITION

The publication of the King IV Report on Corporate Governance in South Africa, 2016, as well as
changes to several international codes on corporate governance, has necessitated the publication of
a new edition of Corporate Governance in South Africa.

The discussion of the governance of risk, corporate ethics, responsible investing, assurance, and
reporting and disclosure, which were combined in chapters in the previous edition, are now included
in separate chapters for ease of use. In addition, the comparative chapter on international corporate
governance frameworks has been removed from the main text and included as an annexure for use
by academics and those interested in international comparisons.

New examples of corporate governance failure, both locally and internationally, have been included to
illustrate the importance of effective corporate governance to enhance the sustainability of
organisations.

Tobie Wiese

November 2016
Chapter 1
INTRODUCTION
1.1 DEFINITION OF CORPORATE GOVERNANCE 2
1.1.1 Narrow definition 2
1.1.2 Wider definition 2
1.2 THE OBJECTIVES OF CORPORATE GOVERNANCE 3
1.3 THE HISTORY OF CORPORATE GOVERNANCE 3
1.4 THE IMPORTANCE OF CORPORATE GOVERNANCE 5
1.4.1 Introduction 5
1.4.2 The reduction of risk 5
1.4.3 Access to capital 5
1.4.4 Shareholder activism 6
1.4.5 Public demand for accountability 6
1.5 THE STAKEHOLDER DEBATE 6
1.5.1 Introduction 6
1.5.2 The shareholder-centric approach 7
1.5.3 The pluralist stakeholder approach 7
(a) Shareholders 8
(b) Employees 8
(c) Creditors 8
(d) Customers 8
(e) The community 8
(f) The environment 9
(g) Government 9
1.6 RECOGNITION OF STAKEHOLDER INTERESTS 9
1.6.1 Introduction 9
1.6.2 South Africa 9
1.6.3 Internationally 10
(a) Brazil 10
(b) China 10
(c) The United Kingdom 10
(d) The United States of America 11
(e) The International Corporate Governance Network Global Governance
Principles 11
(f) The Organisation for Economic Co-operation and Development Principles of
Corporate Governance 12

1.7 STAKEHOLDERS AND SUSTAINABILITY 12

1.7.1 The World Business Council for Sustainable Development 12
1.7.2 The United Nations Sustainable Development Goals 12
2 Corporate Governance in South Africa

1.1 DEFINITION OF CORPORATE GOVERNANCE

The topic of corporate governance has become well known internationally over the past few decades,
yet there is no precise definition of the topic.

1.1.1 Narrow definition

The origins of corporate governance can be traced back to the formation of the first companies and
1
the separation of ownership and control. The owners of the company - the shareholders - entrusted
the management of the company to managers - the directors - to manage the company on behalf of
the shareholders. This created the potential for a conflict of interests between shareholders and
managers and led to a need for the supervision and control of the managers. A narrow definition of
2
corporate governance would thus be: 'the practice by which companies are managed and controlled.

1.1.2 Wider definitions

In the twentieth century the debate evolved to include the issue of on whose behalf the company
3
should be managed. It became increasingly clear and accepted that companies do not operate in a
vacuum; instead, they have a pronounced effect on the society and environment in which they
operate. Society and others who interact with companies are now seen as important stakeholders,
together with shareholders, in the regulation and management of companies.
4
The definition of corporate governance can, as a result, be expanded :
The system of regulating and overseeing corporate conduct and of balancing the interests of all internal
stakeholders and other parties (external stakeholders, governments and local communities) who can be
affected by the corporation's conduct, in order to ensure responsible behaviour by corporations and to
achieve the maximum level of efficiency and profitability for a corporation.
Certain important aspects relating to corporate governance can be identified from this definition:
 it is a process of controlling management;
 it takes into consideration the interests of all stakeholders;
 it aims at ensuring responsible behaviour; and
 its ultimate goal is to achieve maximum efficiency.
Another definition of corporate governance emphasises that it comprises the regulation of the
5
exercise of power within a company :
Corporate governance regulates the exercise of power . . . within a company in order to ensure that the
company's purpose is achieved.
This means the creation of a system of checks and balances on the exercise of power within a
company, ensuring compliance by the company with its legal and

1
See 1.3 below on the history o f the development of corporate governance.
2
From the 1992 UK Cadbury Report (Report of the Committee on the Financial Aspects of Corporate Governance (Sir Adrian
Cadbury, Chair)).
3
See 1.6 below for a discussion of the stakeholder debate.
4
JJ du Plessis eta! Principles of Contemporary Corporate Governance 2 ed (2011) 10.
5
R Naidoo Corporate Governance 2 ed (2009) 3.
Chapter 1: Introduction 3
regulatory obligations, the implementation of a risk management process, and accountability to
6
stakeholders of the company.

1.2 THE OBJECTIVES OF CORPORATE GOVERNANCE

Corporate governance entails more than mere management of a company:
If management is about running the business, [then] governance is about seeing that it is run properly. All
7
companies therefore need governing as well as managing.
Governance is a more strategic process and is primarily the responsibility of the board of directors. It
entails the delegation of power to managers and ensuring accountability to all stakeholders.
8
The essential objectives of effective corporate governance can thus be identified as:
 leadership;
 oversight of management;
 ethical compliance with laws and regulations;
 risk management;
 achievement of sustainability;
 transparency and disclosure; and
 accountability and responsibility to stakeholders.

9
1.3 THE HISTORY OF CORPORATE GOVERNANCE
Modern corporate governance originates with the introduction of the Joint-Stock Companies Act of
1844 in the United Kingdom (UK). This Act established the way in which businesses were governed. It
became the foundation of modern company law around the world, probably because the UK ruled
much of the world during the nineteenth century. There were few checks and balances on the powers
of directors, as in most cases the directors were the shareholders.
But the size and complexity of companies began to grow. By the early twentieth century companies
started to internationalise and were listed on stock exchanges. This resulted in a separation of
ownership and control as the directors did not necessarily represent the interests of the shareholders.
An example that is often seen is where directors oppose a takeover bid, not because the takeover
would not be in the best interest of the company and its shareholders, but because it would result in
them losing their jobs, and therefore their power, influence and income.
The celebrated authors Adolf Berle and Gardiner Means, in their book The Modern Corporation and
10
Private Property , also drew attention to the growing economic and social power of large listed public
11
companies :

6
Ibid.
7
Bob Tricker, quoted in Naidoo (n 5) 5.
8
Adapted from Du Plessis (n 4) 11-13.
9
See T Mongalo Corporate Law and Corporate Governance (2004) 186-98.
10
1932.
11
As quoted in Mongalo (n 9) 192.
4 Corporate Governance in South Africa
The rise of the modern corporation has brought a concentration of economic power which can compete on
equal terms with the modern state economic power versus political power, each strong on its own field.
The future may see the economic organism, now typified by the corporation, not only on an equal plane
with the state, but possibly even superseding it as the dominant form of social organisation.
That this forecast was accurate can be seen from the fact that the turnover of many large international
companies now exceeds that of many states. An example is the international retailer Wal-Mart, whose
turnover of in excess of 350 billion dollars in 2012 was five times the GDP of South Africa and
exceeded the GDP of over 80 per cent of the countries in the world. Their payroll was more than 2
million employees, which is more than the number of state employees in South Africa.
In addition, towards the end of the twentieth century there were several large corporate collapses,
such as the collapse of the Maxwell empire of companies in the UK, Enron and Worldcomm in the
USA, Parmalat in Europe and the Master- bond group in South Africa.

The collapse of the Maxwell Group

Robert Maxwell, the flamboyant Czech-born UK-based media baron who changed his name three
times, mysteriously disappeared from his yacht in 1991 while on a cruise off the Canary Islands. His
body was later found and the inquest ruled that he died as a result of a heart attack and accidental
drowning. It has always been suspected that it was suicide.
Shortly after his death it became apparent that his media empire, which included publications such as
New York City's Daily News and London's Daily Mirror, was bankrupt. The Maxwell Group had run up
4, 5 billion dollars in debt to buy several publications worldwide in an apparent attempt to compete
with Rupert Murdoch in building an international publishing empire. The same assets were pledged
for several loans from different banks. The proceeds of these loans were used to make ever-
increasing loan paybacks as they fell due.
It also became clear that Maxwell had looted 550 million pounds from the pension fund of his group of
companies, as he controlled the trust company responsible for management of the pension funds. He
had used these funds to buy shares in the publicly listed companies of his group in a desperate
attempt to shore up the share price, as these shares were used as collateral for his loans.
The result of the collapse was that pensioners of the Maxwell Group of companies received only half
of what their pensions would have been had the fund not been raided by Maxwell. Coopers &
Lybrand, the auditors of the group, had to pay 67 million pounds to creditors for failing to expose the
extent of the corporate fraud and falsified accounting at the group in the audit prior to its collapse.
After Maxwell's death it was revealed that an investigation by the UK Department of Trade and
Industry into one of Maxwell's previous transactions in 1969 had concluded as far back as 1971 that
he was 'unfit to exercise proper stewardship of a public quoted company', because of his tendency to
regard the company’s funds as his own. It also became clear that too much power was held by
Maxwell, who acted as both CEO and Chairman. In addition, there was no independent audit
committee to watch over the financial affairs of the group.