Abstract
Corporate governance and regulation are intrinsically linked. One formulation of that relationship frames is as follows:
Regulation should begin with strong corporate governance. It is the role of shareholders and boards to scrutinise and ensure that their companies are being led in the right direction over the long term. Encouraging transparency, accountability and long-term stability will promote healthy long term growth …
Another reason why regulation should begin with strong corporate governance is that it establishes a norm on which the regulation can rest. The most effective regulation follows social mores. The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company. Corporate governance is about what the board of a company does and how it sets the values of the company.
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Notes
- 1.
FRC (Oct 2012b) The UK approach to Corporate Governance, foreword. The FRC sets the standards framework in which auditors, actuaries and accountants operate in the UK. It also sponsors the UK Corporate Governance Code (for companies) and the Stewardship Code (for investors). The FRC monitors the implementation of these standards and promotes best practice by companies and professionals by issuing guidance and publishing thought leadership papers—www.frc.org.uk.
- 2.
FRC (Sept 2014) The Corporate Governance Code, paras 1 and 3. See a recent South African case: Mthimunye-Bakoro v Petroleum Oil and Gas Corporation of South Africa (SOC) Limited 2015 JOL 33,744 where corporate governance was defined as ‘… the animating idea of which is to ensure net gains in wealth for shareholders, protect the legitimate concerns of other stakeholders and improve efficiency, organisational performance and resource allocation.’
- 3.
- 4.
Du Plessis et al. (2014), Part III, Ch. 11 for corporate governance in the UK and South Africa.
- 5.
This is often referred to as ‘soft law’. The following definition is used for the purposes of this chapter: ‘Soft law refers to rules that are neither strictly binding in nature nor completely lacking legal significance’ (http://definitions.uslegal.com/s/soft-law/). See also Abbott and Snidal (2000) on the meaning of hard versus soft law.
- 6.
Keay (2015), p. 551.
- 7.
- 8.
Keay (2015), p. 551.
- 9.
Shrives and Brennan (2015), p. 85.
- 10.
Moore (2009), p. 101. It was stated in the Cadbury Report that: ‘The Code is to be followed by individuals and companies in the light of their own particular circumstances. They are responsible for ensuring that their actions meet the spirit of the Code and in interpreting it they should give precedence to substance over form.’ (UK CGC, para 3.10).
- 11.
- 12.
UK Corporate Governance Code Para. 3.
- 13.
Shrives and Brennan (2015), p. 85.
- 14.
- 15.
See, for example, the asset management company Schroders who came under heavy fire from shareholder groups and investors due to a decision to appoint the CEO as the new chairman. Investors also said that there was a lack of communication. See: Newlands, Marriage and Oakley (3 March 2016).
- 16.
The Financial Conduct Authority (FCA) is responsible for making securities markets work well. The FCA is thus responsible for monitoring market disclosures through the FCA Disclosure and Transparency Rules, reviewing and approving of prospectuses through the FCA Prospectus Rules, and operating the UK listing regime through the FCA Listing Rules. They are accountable to Treasury—which is responsible for the UK’s financial system—and Parliament. They are an independent body and do not receive any Government funding. See: http://www.fca.org.uk/about.
- 17.
See Moore (2009), p. 134 on this issue. The EU Directive 2006/46/EC on company reporting requires less than UK company law as it does not require the additional ‘appliance’ statement detailing the company’s policy in relation to the application of the relevant code’s provisions as a whole. Listing Rule 9.8.6(5) still requires the dual appliance and compliance components relating to disclosure, but it now only relates to the main principles as set out in s 1 of the UK CGC.
- 18.
See DTR 7.2 for full details.
- 19.
See s 91 of the Financial Services and Markets Act 2000.
- 20.
- 21.
Section 414C(4).
- 22.
Section 416 deals with the general contents of the Report.
- 23.
Section 414C(4). Directive 2014/95/EU on disclosure of non-financial and diversity information by certain large undertakings and groups is also relevant is this regard. EU Member States should transpose the rules on non-financial reporting into national legislation by 6 December 2016. On the UK’s position see: Department for Business Innovation & Skills: A call for views on effective reporting alongside proposals to implement EU requirements (Feb 2016). The proposed EU framework is similar to the current UK framework but with some differences, i.e. the UK framework requires quoted companies to include to the extent necessary for an understanding of the development, performance or position of the company’s business, information on environmental, social and community, employee and human rights matters; the EU NFR Directive requires disclosure (to the extent necessary for an understanding of the undertaking’s development, performance, position and impact of its activity): relating to (as a minimum) environmental, social and employee matters; respect for human rights and anti-corruption and bribery matters. The UK Government is requesting views on whether the UK should take advantage of this option to allow companies to use the separate report as a vehicle for disclosure of non-financial information.
- 24.
Financial companies were excluded because the overall regulatory environment for those companies differs significantly from those of financial companies.
- 25.
This period was chosen as the Combined Code was in force during 1998–2004.
- 26.
Keay (2012), p. 291.
- 27.
Moore (2009), p. 125.
- 28.
Arcot et al. (2010), pp. 193–201.
- 29.
Arcot et al., p. 198.
- 30.
FRC (2012a).
- 31.
FRC (July 2009) Review of the effectiveness of the Combined Code.
- 32.
FRC (July 2009).
- 33.
Shrive and Brennan (2015), pp. 85–99.
- 34.
Grant Thornton (2014) Available at: http://www.grant-thornton.co.uk/Global/Publication_pdf/Corporate-Governance-Review-2014.pdf.
- 35.
- 36.
Shrives and Brennan (2015), p. 92.
- 37.
MacNeil and Li (2006), p. 491.
- 38.
See Moore (2009) p. 118 on the treating of non-compliance as a breach.
- 39.
- 40.
Keay (2012), p. 289.
- 41.
Shrives and Brennan (2015), pp. 91–92.
- 42.
See for example, Keay (2012), pp. 279–304.
- 43.
On this, see generally Keay (2012), pp. 294–300.
- 44.
The ‘comply or explain’ approach is discussed in detail in a series of papers at: http://www.financialdirector.co.uk/financial-director/opinion/2321127/comply-or-explain-is-it-sustainable.
- 45.
- 46.
MacNeil and Li (2006).
- 47.
See, for example, a recent incident where the Institute of Directors (the IoD) was concerned with Schroders’ decision to appoint their CEO as new chairman as this is in contravention of UK corporate governance rules as per the Code. The IoD said that: ‘It must be acknowledged that Mr. Dobson has played a key role in Schroders’ recent success, and the firm should be commended for taking a long-term approach. But strong performance is no excuse for ignoring the corporate governance rules without a very convincing explanation.’ Mr. Dobson defended his move, saying: ‘We know the code says chief executives should not become chair but the board has decided it is in the best interests of the company, bearing in mind my experience and knowledge of our clients.’
- 48.
Moore (2009), p. 102.
- 49.
Moore (2009), p. 130.
- 50.
- 51.
This is discussed in detail by Keay (2014), pp. 300–302.
- 52.
- 53.
Arcot et al. (2010), p. 201.
- 54.
Shrives and Brennan (2015), p. 97.
- 55.
Keay (2012).
- 56.
Moore (2009), p. 134.
- 57.
An evaluation of the advantages and disadvantages of self-regulation versus legislation is not included in my analysis here. On self-regulation versus legislation, see generally: DeJong et al. (2005), pp. 473–503; Demaki (2013), pp. 37–42, Graham and Woods (2006), pp. 868–883. See also Moore (2009), p. 85 on flexibility versus accountability.
- 58.
- 59.
King III (2009).
- 60.
FRC (Sept 2014) p. 1, Para 6.
- 61.
See Coffee (2010), and Esser and Delport (2016), pp. 7–8. On the UK see also: http://www.ons.gov.uk/economy/investmentspensionsandtrusts/bulletins/ownershipofukquotedshares/2015-09-02 for the ownership of UK quoted shares during 2014.
- 62.
In the context of corporate law the Companies Act 71 2008 2012 (hereafter 2008 Companies Act) is the relevant Act (unless stated otherwise, all references here are to this Act). The Act came into operation on 1 May 2011. In February 2007 a draft Companies Bill was published. During September 2008 Parliament’s Trade and Industry Portfolio Committee approved the Companies Bill of 2008. In December 2008 the Portfolio Committee amended the Bill. The 2008 Companies Act was assented to on 8 April 2009. Draft Regulations to the Companies Act were published for comment on 22 December 2009 and again on 29 November 2010. See N 1664, GG 32832 of 22 December 2009 and GG 33695 of 27 October 2010 for the Regulations and the Amendment Bill. The Companies Amendment Bill B40-2010 was approved by the Portfolio Committee on Trade and Industry on 10 March 2011. The Companies Amendment Act 3 of 2011 was signed into law on 20 April 2011; see GG 34243 of 20 April 2011.
- 63.
See for example the Labour Relations Act 66 1995 and the Broad Based Black Economic Empowerment Act 53 2003. This is, however, beyond the scope of this chapter.
- 64.
See Listings Requirement 8.63(a) on the contents of the annual report and to what an extent companies need to disclose compliance with King. See also Listing Requirement 3.84 dealing with specific corporate governance matters that companies have to comply with. For example: there must be a policy detailing the procedures for appointments to the board of directors.
- 65.
For the SRI Index see: https://www.jse.co.za/About-Us/SRI/Criteria.aspx.The last annual review of the Index took place in 2014. The SRI Index continued to be calculated until the end of 2015, based on the results from the 2014 review. Assessment now takes place as part of the collaboration with FTSE Russell. See: https://www.jse.co.za/services/market-data/indices/socially-responsible-investment-index for the announcement.
- 66.
- 67.
Report of the Committee on the financial aspects of corporate governance chaired by Sir Adrian Cadbury Gee and Co Ltd. (1992).
- 68.
Armstrong (1995), p. 65.
- 69.
King I, Ch. 20.
- 70.
The essential corporate governance principles identified in King II are discipline, transparency, independence, accountability, responsibility, fairness and social responsibility (King II, pp. 10–11).
- 71.
Esser and Coetzee (2004), p. 27.
- 72.
See Havenga and Esser (2012), p. 22.
- 73.
Loubser (2012) in Havenga and Esser (2012), ch 2 discusses King III in detail and also indicates which parts of the Report are now embedded in the Companies Act.
- 74.
See para 13, preface, King III Report.
- 75.
- 76.
The UK studies, referred to in para 2.1, focused primarily on the degree of compliance and the quality of explanations given in cases of non-compliance. A study conducted by the IoDSA and one by Waweru are referred to later in this section even though the aims of these studies are different to the UK studies. Compliance, per se, is not the main focus of the South African studies referred to. The IoDSA focused on perceptions by companies on the application, commitment and effect of King III. Waweru’s study focuses on factors contributing to the quality of good governance in South Africa and Kenya. The methodologies followed in these South African studies are thus different to those in the UK studies, but some of the conclusions reached are relevant here. Other studies deal with King III compliance, but it is usually not the main aim of the study. See Pamburai et al. (2015), pp. 115–131 on the relationship between corporate governance mechanisms and company performance as measured by economic value-added (EVA), return on assets (ROA) and Tobin’s Q. They find, inter alia, that most of companies listed on the JSE comply with the King III requirement; that most board members are NEDs and that most of the NEDs are independent. See also Integrated Reporting & Assurance Services (2012): ‘Unlike most countries, sustainability reporting in South Africa has less of a ‘nice to have’ than a ‘need to have’ propensity, particularly for listed companies. Whereas consumer, shareholder and/or other stakeholder requests for additional information drive reporting trends in the more developed economies of Europe and North America, the key motivation for integrated sustainability reporting in our context is centred around the listing requirements of the Johannesburg Stock Exchange (JSE)—‘Regardless of the accuracy of these figures, the results clearly suggest that South Africa is among a rare breed of countries successfully implementing the GRI G3 Guidelines as a means for demonstrating maximum transparency and accountability.’
- 77.
IoDSA Perceptions and Practice of King III in South African companies (March 2013).
- 78.
Taken from the IoDSA (March 2013) report.
- 79.
Waweru (2014), pp. 455–485.
- 80.
- 81.
It is recommend that companies should indicate their compliance with King III in their integrated report, but they should limit it to a summary of compliance with King III (i.e. only on 25 principles and not 75). Detailed explanations on all the principles and recommendations should then be dealt with in terms of a register and published on the company’s website. Reference to this link should be provided in the integrated report. See Practice Note ‘King III reporting in terms of the JSE Listings Requirements’ (Jan 2013).
- 82.
In the Practice Note of King III it is stated that: ‘The integrated/annual report should contain a summary of the issuer’s application of all of the principles contained in Chap. 2 of King III as those principles link to the other chapters of King III. This approach is not compulsory but limits the quantum of reporting in the integrated report to 27 principles, as opposed to the 75 principles in total, while providing users with a holistic view and the ability to access the complete report on the website.’
- 83.
This pilot study only considered some of the top 40 listed companies. It did not consider smaller companies. Further research, especially with a larger sample, is envisaged.
- 84.
It is interesting to refer to the recent Gupta scandal in South Africa and the fact that it has been said that corporate governance is working well in South Africa. The conduct of the stakeholders, shareholders and directors in the context of the Gupta-owned Oakbay companies demonstrates that corporate governance, and specifically King III, is indeed working. See: Fin24: The Gupta saga shows corporate governance working in SA (10 April 2016) at http://www.fin24.com/Economy/gupta-saga-shows-corporate-governance-working-in-sa-20160410.
- 85.
- 86.
The Code was drafted by the Stakeholder Committee chaired by John Oliphant. CRISA aims to provide the investor community with the guidance needed to give effect to King III as well as the United Nations-backed Principles for Responsible Investment (PRI) initiative. CRISA has been endorsed by the Institute of Directors in Southern Africa (IoDSA), the Principal Officers Association (POA), and the Association for Savings and Investment South Africa (ASISA). The principles of CRISA are supported by the Financial Services Board (FSB) and the JSE Ltd. (JSE).
- 87.
Esser and Delport (2016), p. 27.
- 88.
- 89.
Joubert (2014), p. 185.
- 90.
King III Report, Introduction and background, p. 12.
- 91.
See Lombard and Joubert (2014), p. 221.
- 92.
As highlighted by Joubert (2014), p. 186, this objective should not be achieved to the exclusion of other objectives of the Act, such as ‘promotion of economic efficiency’ in s 7(b)(iii).
- 93.
The subject of the social and ethics committee requires its own study. See, however, Esser (2011), pp. 317–335; Locke in Esser and Havenga (2012), pp. 107–118; Kloppers (2013), pp. 165–199; Stoop (2013), pp. 562–582; Havenga (2015), pp. 285–292. Regulation 43 deals with the social and ethics committee as referred to in s 72 of the Act. This regulation applies to all state-owned companies, public companies that are listed or any other company that complies with certain criteria. A public interest score of more than 500 points (in any two of the preceding five financial years) will be relevant in this regard. The ‘public interest score’ is calculated at the end of a financial year as the sum of a number of things. The number of employees and the turnover are some of the factors that will therefore determine whether a company is obliged to have such a committee. The public interest score is thus a method used to determine whether a company must comply with enhanced accountability requirements based on its social and economic impact. A minimum of three directors or prescribed officers must serve on a company’s social and ethics committee. The social and ethics committee’s function is to monitor the company’s activities, having regard to any relevant legislation, other legal requirements or prevailing codes of best practice. This relates to social and economic development, including the company’s position regarding the goals and purposes as envisaged in, for example, the OECD principles and the Global compact principles as well as record of sponsorships, consumer relationships, and labour and employment. The committee should also report annually to the shareholders at the company’s annual general meeting on matters within its mandate.
- 94.
Locke in Havenga and Esser (2012), p. 107.
- 95.
2006 5 SA 333 (W).
- 96.
- 97.
See Integrated Reporting South Africa ‘King Reports on Corporate Governance’, available at http://www.integratedreportingsa.org/SustainabilityReporting/StandardsandGuidelines/KingReportsonCorporateGovernance.aspx, accessed 7 March 2016.
- 98.
See Quick guide to corporate governance and King III, available at http://services.bowman.co.za/Brochures/OnlineServices/CorporateGovernance/Corporate-Governance-King-3.pdf, accessed 7 March 2016 as taken from King III, Introduction, para 3.
- 99.
IoDSA King III Reporting in terms of the JSE Listings Requirements (January 2013).
- 100.
- 101.
This tool is now completely outsourced and no longer sold by the IoDSA even though the King III material is used under licence from the IoDSA.
- 102.
King IV report on corporate governance for South Africa 2016.
- 103.
- 104.
See part 1, para 3 of King IV.
- 105.
There are supplements for various sectors but it is stated that this should not detract from the idea that King is drafted to be suitable for all organisations. A specimen register is also provided for organisations to indicate how judgment was exercised. The emphasis is on transparency. This register should demonstrate disclosure.
- 106.
With regard to this new approach, Ramalho (former CEO of the IoDSA and responsible for King IV) explains that the intention is ‘to help organisations move beyond a compliance mind-set to describing how implemented practices advance progress towards giving effect to each principle—the application of which is assumed due to it being basic to good governance.’
- 107.
The JSE is one of the top 20 exchanges in the world in terms of market capitalisation. More than 400 companies are listed on the Main Board. South Africa is currently ranked 1st in the world in terms of regulation of securities exchanges and second for raising capital through the local equity market according to World Economic Forum’s Global Competitiveness Survey for 2013–2014. Almost one fifth of the Main Board companies are dual listed. See: www.jse.co.za/capital/main-board. Potgieter and Another v Howie and Others NO 2014 (3) SA 336 (GP) dealt, inter alia, with the enforcement of the Listings Requirements by the JSE. This is an appeal from a decision of the Johannesburg Stock Exchange in terms of which the appellants had been fined five million Rands each for contravening the JSE Listings Requirements.
- 108.
Listing Requirements 3.84.
- 109.
Listing Requirements 8.63(a).
- 110.
Kleitman (2013), p. 57.
- 111.
See https://www.fsb.co.za/appealBoard/Documents/VictorFarkas_OthersvJSE%20Limited.PDF for the full judgment.
- 112.
The FSB is an independent institution established by statute to oversee the South African non-banking financial services industry. The Enforcement Committee (established in terms of the Financial Institutions Protection of Funds Act 2001) is an administrative body established to adjudicate any alleged contravention of the regulations etc. administered by the FSB. They are appointed by the FSB. Orders made by this Committee are enforceable as if it is a judgment made by the high court.
- 113.
- 114.
- 115.
Esser and Havenga (2012), pp. 12–13. On integrated reporting see Du Plessis and Rühmkorf (2015), p. 49.
- 116.
King III, p. 13.
- 117.
See http://integratedreporting.org/ for details on integrated reporting.
- 118.
- 119.
Integrated Reporting Realizing the benefits (2014), http://integratedreporting.org/wp-content/uploads/2014/09/IIRC.Black_.Sun_.Research.IR_.Impact.Single.pages.18.9.14.pdf.
- 120.
See Solomon and Maroun (2012) where the annual reports of 10 major South African companies listed on the Johannesburg Stock Exchange (JSE) were analysed to assess the impact of the required introduction of integrated reporting on social, environmental and ethical reporting. It was found that ‘there is a significant increase in the quantity of social, environmental and ethical information reported in the annual reports of the sample companies. Social, environmental and ethical information appears throughout in a significantly greater number of sections of the reports for 2010–2011 than of those for 2009’.
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Esser, IM. (2017). Corporate Governance: Soft Law Regulation and Disclosure—The Cases of the United Kingdom and South Africa. In: du Plessis, J., Low, C. (eds) Corporate Governance Codes for the 21st Century. Springer, Cham. https://doi.org/10.1007/978-3-319-51868-8_11
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