Corporate Governance in South Africa

Introduction

Corporate governance in South Africa is informed by common law and statute, soft law and market regulation. South Africa is a member of the G20 and as such works closely with other members for the implementation of international best practice in financial and market regulation. It has also taken a global lead in the adoption of integrated reporting, a fact that has influenced its corporate governance practice. The emeritus chairman of the International Integrated Reporting Council and the Global Reporting Initiative is also the chief drafter of the South Africa Corporate Governance Code, colloquially known as the ‘King Code’.

Common law and statute

South Africa modelled its company law on the English example and therefore has a unitary board. Much of English common law of companies has been adopted into South African case law. English common law is still instructive in the interpretation of company law, but the Companies Act 71 of 2008 (‘the Companies Act’) was heavily influenced by the corporation legislation from Canada, Australia and New Zealand. There is now a wider distinction between the regulation of companies in South Africa and the United Kingdom and the persuasive value of English law has declined in favour of a wider consideration of international perspectives.

The Companies Act commenced on 1 May 2011 and it includes a statutory statement of directors’ duties. The statement is based on the common law fiduciary duties of directors and officers and on the duty to act with care, skill and diligence. Section 76(3)(a) and (b) provide that a director of a company, when acting in that capacity, must exercise the powers and perform the functions of the director in good faith and for a proper purpose, and in the best interests of the company. Section 76(3)(c) provides that a director must exercise the powers and perform the functions of a director with the degree of care, skill and diligence that may be reasonably expected from a person carrying out the same functions as the director and having the general knowledge, skill and experience as the director. These statutory duties do not present a codification and the common law duties still apply to directors. Directors owe their duties to the company.

A statutory business judgment rule is set out in section 76(4). A director or officer will have satisfied her duties to act in the best interests of the company or with the necessary care, skill and diligence, if she can show that she took reasonably diligent steps to become informed about the matter; that she had no material personal financial interest in the matter or disclosed it properly in terms of the relevant sections of the Companies Act (s 75); that she made a decision or supported a decision by a committee of the board; and that she had a rational reason for believing and did believe that the decision was in the best interest of the company.

Liability in terms of these provisions is determined in accordance with the principles of the common law relating to a breach of fiduciary duties or in delict (tort) for a breach of the duty of care, skill and diligence (s 77(2)). Directors and officers are also potentially liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of a breach of a long list of statutory provisions (s 77(3)). Moreover, section 218(2) provides that any person who contravenes any provision of the Companies Act is liable to any other person for any loss or damages suffered by the person as a result of the contravention. The introduction of this last provision was initially met with some concern that a flood of litigation will ensue against directors, but it has so far not met with much success in litigation.

Although the legislation is set up to empower the Companies and Intellectual Property Commission (‘CIPC’) to enforce these provisions directly, the institutional resources has not been allocated to this regulator to enable it to take much direct enforcement action for breaches of the Companies Act. Enforcement is therefore mostly left to shareholders and directors through the statutory derivative action (s 165).

The Companies Act introduced a social and ethics committee as a compulsory committee for all state-owned companies and all public listed companies (reg 43(1)(a) and (b) of the Companies Regulations, 2011). Other companies may need to appoint a social and ethics committee if they score highly on a public interest score, the application of which is set out in regulation 26(2). This committee must monitor the company’s activities regarding a list of environmental and social issues and report back to the general meeting about these matters (reg 43(5) read with s 72(8)). Issues under the mandate of the committee include the company’s standing in terms of the UN Global Compact, the OECD recommendations on corruption, the South African legislation setting out affirmative action in employment and black economic empowerment, the environment, health and public safety, employment relations and consumer relationships.

King IV Report on Corporate Governance for South Africa

South Africa was one of the first countries outside of the United Kingdom to introduce a code of corporate governance. The Institute of Directors of Southern Africa (‘IoDSA’), an industry body representing directors, convened a committee under the leadership of Mervyn King, a former High Court judge to compile the first Code of Corporate Practices and Conduct, which was first released in 1994. The Code has since been reviewed three times, leading to the current version King IV Report on Corporate Governance for South Africa 2016 (‘King IV’).

King IV is intended to apply to any organisation that has a governing body, extending its potential scope further than the boards of incorporated companies to include, for instance, trustees of pension funds and councils of municipalities. Entities listed on the Johannesburg Stock Exchange (‘JSE’) must report on their compliance with King IV’s disclosure and application regime as part of their annual report (par 8.63(a) of the JSE Listings Requirements Service Issue 27).

The number of principles has been reduced from 75 principles in King III to only sixteen principles in King IV. At the same time, it has moved from a ‘apply or explain’ basis of compliance to an ‘apply and explain’ basis. King IV proceeds from the premise that all organisations that claim to practice sound governance will have applied these basic sixteen principles, but that the method of adoption may differ in accordance with the circumstances of the individual organisation. The explanation that is required by the Code is of the practices that are adopted at the organisation, which shows compliance with the attached principle. Adoption of the Code therefore remains voluntary and it retains considerable flexibility in the means that organisations may employ to comply with the underlying principles.

King IV further assumes that the organisation has implemented integrated reporting, without which the sixteen principles cannot be fully met. Sustainable development is an underpinning philosophy of King IV and it promotes a stakeholder inclusive model of governance.

Market regulation

In additional to the annual reporting requirement mentioned above, certain aspects of governance as set out in King IV are mandatory as listings requirements on the JSE (par 3.84):

• There must be a policy evidencing clear balance of power between directors, so that no one director has absolute powers of decision-making;
• The positions of chairman and CEO must be separated. The chairman must be an independent non-executive director, or otherwise a lead independent director must be appointed;
• A mandatory audit committee, remuneration committee and social and ethics committee must be appointed in accordance with the requirements of the Companies Act;
• A brief CV of each directors must accompany a new listing application, as well as notice of every annual general meeting where the director stands to be elected or re-elected;
• Each director must be categorised as executive, non-executive or independent and criteria are prescribed;
• Unless specifically authorised by the JSE, every listed company must have an executive financial director;
• Certain additional duties are prescribed for the audit committee;
• The appointment of a company secretary is mandatory;
• The board must have adopted a promotion of diversity policy;
• The remuneration policy and implementation report must be presented at the annual general meeting for a non-binding advisory vote of shareholders. If voted against by more than 25% of the vote, the policy must indicate what measures the board will take to address the concerns raised by shareholders during the meeting. Shareholders must be invited to engage with the board on this matter and must be given the time and manner of such engagement;
• The CEO and the financial director must sign off on the annual financial statements confirming a list of prescribed issues.

Investor stewardship

South Africa was only the second country after the United Kingdom to publish a shareholder stewardship code. The Code for Responsible Investment in South Africa (‘CRISA’), published in 2011, was heavily influenced by the UN Principles of Responsible Investment and consequently has a strong emphasis on responsible investing over and above shareholder engagement principles. IoDSA was also the originator of this Code, but its secretariat has since moved to the Association for Saving and Investment South Africa, an industry body representing asset managers.

The main purpose of CRISA is to provide guidance to institutional investors about how they should execute investment analysis and investment activities, and exercise rights so as to promote sound governance by investee companies. It is a much more compact document than King IV, comprising only five principles and seventeen recommendations for practical implementation. It applies on an ‘apply or explain’ basis, which is a less onerous requirement than currently operative in terms of King IV. There is no official sign-on system in place and no central register where record is kept of the signatories to CRISA.

King IV includes a seventeenth principle that applies exclusively to institutional investors, namely that ‘the governing body of an institutional shareholder should ensure that responsible investing is practiced by the organisation to promote the good governance and the creation of value by the companies in which it invests.’ The accompanying recommended practices refer to the adoption of a responsible investing code, which presumably refers to CRISA but also to the UN Principles of Responsible Investing. Part 6.4 of King IV sets out a sector supplement to guide the governance principles as they would apply to retirement funds. Here, specific reference is made to the implementation of CRISA as part of the proper governance of retirement funds.

Last updated: September, 2020

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