Corporate Governance in South Africa

Warren Maroun,Dannielle Cerbone

• Verlag: De Gruyter Oldenbourg
• Jahr: 2020
• ISBN:
  9783110618334
• Auflage: 1
• Thema: Business
• Thema: Corporate Governance

This book provides an examination of corporate governance in South Africa which includes an overview of the history of corporate governance and summary of the key provisions of South Africa's codes on corporate governance from 1994 to 2016. The aim is to provide a comprehensive reference for academics and practitioners interested in South African corporate governance and to illustrate how corporate governance practices evolve in a developing African economy. It also includes a review of the research dealing with the drivers and consequences of South African corporate governance. The focus is on South African-specific research which is complemented with international references. This book will be highly relevant to both accounting/governance academics and the broader practitioner community.

1 Introduction

There is no single definition of “corporate governance”. In broad terms, corporate governance can be understood as being concerned with how companies behave and the rules according to which they operate (Claessens and Yurtoglu, 2013). Early studies on corporate governance were grounded in finance and economic theories with the result that corporate governance was framed according to a shareholder-centric perspective and the need to reduce agency costs (Brennan and Solomon, 2008). As explained in the opening to one of the seminal papers on the topic:

Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers?

(Shleifer and Vishny, 1997, p. 737)

These questions arise with the emergence of the joint stock and limited liability company which saw a separation of the owner and manager functions. Capital markets, on which companies’ shares and debt are traded, operate in such a way that providers of financial capital can be (and often are) completely removed from the day-to-day operations of the organisation in which they hold a financial interest. Responsibility for managing the organisation is delegated to agents, but there is no guarantee that they will act in the best interest of their principals when the parties’ objectives diverge (Berle and Means, 1932; Jensen and Meckling, 1976; Eisenhardt, 1989; Bathala and Rao, 1995). In terms of agency and transaction cost theories, resulting in agency losses require a monitoring and control system to reduce information asymmetry, lower transaction costs and mitigate residual losses for shareholders (Berle and Means, 1932; Jensen and Meckling, 1976; Fama and Jensen, 1983). To this end, corporate governance becomes concerned with finding:

ways of bringing the interests of the two parties [management and investors] into line and ensuring that firms are run for the benefit of investors.

(Mayer, 1997, p. 154)

As agency costs increase, internal controls and “systems of checks and balances” must be widened to allow the shareholder to exercise more control over corporate insiders (Bathala and Rao, 1995; Deakin and Hughes, 1997; Mitchell et al., 1997; Singh and Davidson III, 2003; Solomon, 2013). The focus is on ensuring that the firm’s structures, processes, systems and cultures maximise efficiency and minimise residual losses for investors (Keasey et al., 1997). In this way, from an agency theory perspective,

The importance of corporate governance is essentially only relevant where there is a division between the owners of the equity and the directors of the business. With an independent company the owner of the equity and the directors are effectively merged. As soon as the owner of capital is dependent on directors to control the business or the directors are dependent on other persons to finance the company, a good system of corporate governance is imperative.

(Institute of Directors in Southern Africa (IOD), 1994, p. 5).

Many of the earliest codes on corporate governance were firmly grounded in agency theory. This includes the Cadbury Report (1992) and Combined Code (1998) in the United Kingdom (UK) and in laws promulgated in the United States of America (USA) in the early 2000s, most notably the Sarbanes Oxley Act (Brennan and Solomon, 2008; Solomon, 2013).

A slightly broader view of corporate governance focuses on ensuring that a firm is co-ordinated correctly and controlled to maximise efficient use of resources. According to this logic, if markets are efficient, a firm which pursues the interests of its shareholders will automatically maximise resource allocation (Allen, 2005). At the same time:

Corporate governance is not just about controls, it also involves developing and implementing effective accounting and business polices and long-term strategic objectives. From a broader perspective, therefore, corporate governance may be regarded as a framework for effective monitoring, regulation, and control of companies, which allows alternative internal and external mechanisms for achieving the underlying objectives. These mechanisms include both those internal to the firm and its organization, and those external to the firm, such as statutory requirements and the operation of markets. Internal mechanisms include board composition, managerial ownership, and non-managerial large shareholding including institutional shareholding. External mechanisms include a statutory audit, the market for corporate control manifested in hostile takeovers, and the stock market evaluation of corporate performance.

(Demirag et al., 2000, p. 348, emphasis added)

An economic logic which stresses the importance of maximising shareholder wealth is still present. Corporate governance is, however, seen as more than a control function operating at a single point in time. In the context of using resources efficiently, corporate governance is concerned with setting and achieving long-term objectives after taking into account the firm’s internal mechanisms and the external context in which it operates. In other words, corporate governance is an essential mechanism for ensuring management accountability but it is also concerned with providing direction to a firm (King, 2012; Solomon, 2013).

If this view of corporate governance is combined with stakeholder theory, corporate governance can be explained as the management of constraints which would otherwise limit the quasi-rents or profits generated from the relationships between an organisation and all its stakeholders (Claessens and Yurtoglu, 2013). This will include co-ordination and control of management actions and the satisfaction of legitimate “expectations of accountability and regulation by interests beyond the corporate boundaries” (Tricker, 1984). For this purpose, “profit”, “co-ordination” and “control” do not need to be understood only in economic terms. Under stakeholder theory, generating a financial return is still a legitimate business consideration but the organisation must also take steps to ensure that it maximises value for society as a whole, rather than just for shareholders (IOD, 2009; Claessens and Yurtoglu, 2013; Solomon, 2013). This means that, in addition to managing economic considerations, social and environmental imperatives must be taken into account and cannot be seen as subordinate to generating a financial return (IOD, 2009; King, 2018). Focusing on the benefits provided to stakeholders can also be justified on the grounds that markets are seldom perfectly efficient. As a result, the assumption that maximising shareholder wealth produces an optimal outcome for society as a whole is questionable (Allen, 2005).

Solomon (2013, p. 14) provides a definition of corporate governance framed according to a stakeholder perspective:

[C]orporate governance is the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activity.

(emphasis added)

The definition is based on the view that companies can only maximise value creation and ensure efficient utilisation of resources if they act in a manner which is cognisant of the legitimate expectations of their stakeholders (Solomon, 2013). A stakeholder-centric approach to corporate governance is also essential for fulfilling what is increasingly being seen as a moral duty for organisations to ensure that their activities do not undermine the rights and benefits of future generations and the realisation that companies cannot be seen as independent from the broader social context (King and Atkins, 2016; King, 2018). This logic is at the heart of South Africa’s codes on corporate governance which are the primary focus of this research.

1.1 Contribution

The majority of the prior corporate governance research is based in an Anglo-Saxon setting with the result that we know very little about the history, application and consequences of corporate governance (or the lack thereof) in Africa (Brennan and Solomon, 2008; Mangena and Chamisa, 2008). This is true even for South Africa despite its status as one of the largest and most developed capital markets on the Continent.

There has been some research on the political and institutional forces which have contributed to the development of codes on corporate governance in South Africa (see, for example, Rossouw et al., 2002; Armstrong et al., 2005; Vaughn and Ryan, 2006; Andreasson, 2011). The evolution of African governance has also been touched on (Rossouw, 2005; West, 2009). Research by Harvey Pamburai et al. (2015) and Ntim et al. (2012a; 2012b) confirms that the relationship between good governance and firm value documented by the international literature holds in a South African setting. The link between corporate governance and corporate social responsibility (CSR) has also been considered, although to a lesser extent (Ntim and Soobaroyen, 2013b).

This book complements the prior South African-specific research. It provides a detailed account of the history of corporate governance in South Africa which draws on both the academic literature and South Africa’s codes of best practice. At the same time, it provides the first accounts of corporate governance in South Africa over an extended period (1994–2018) complemented by a review of the similarities and differences in King Codes. This includes a review of some of the most recent trends in South African corporate governance, a review of the internal and internal factors which influence governance practices and preliminary evidence of the benefits of good governance.

Unlike the prior research, which has focused on select governance mechanisms, this b...

Inhaltsverzeichnis

• Title Page
• Copyright
• Contents
• 1 Introduction
• 2 A brief history of South African corporate governance
• 3 Determinants and outcomes of good corporate governance
• 4 Trends in South African corporate governance
• 5 Preliminary evidence on the drivers and implications of South African corporate governance
• 6 Assurance
• 7 Corporate governance by not-for-profit organisations
• 8 Emerging forms of corporate reporting, governance and accountability
• 9 Summary and areas for future research
• References
• List of acronyms/ abbreviations