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Why company law and the King Codes can’t save corporate SA


Xolisa Phillip has had quite an adventure as a journalist in the roles of subeditor, news editor, columnist and commentator. She pretends to be Olivia Pope during the day, while still maintaining a presence in journalism – a passion project she cannot shake away. Journalism keeps finding Phillip no matter where she is and somewhat manages to hold its own space no matter where she is professionally.

What lies at the heart of the rot in corporate SA may surprise you. Where government gets it right, the private sector and SOEs get it spectacularly wrong.

South Africa’s corporate governance framework has often been described as “ground-breaking” and “world class”. And on the surface, this seemed an apt descriptor.

In 2011, the revamped Companies Act came into effect in tandem with sweeping regulations intended to align the South African oversight regime with international best practice. The Companies Act of 2008 also ushered in the birth of the Companies and Intellectual Property Commission and gave rise to the Companies Tribunal.

In the latter part of 2018, the Trade and Industry minister published the Companies Amendment Bill 2018, whose intent is to close loopholes discovered since the new framework came into play in 2011.

The 2008 Act, and proposed amendments thereto, covers both the private sector and state-owned entities (SOE). One of the important express aims of the Companies Act of 2008 was to decriminalise company law, with the caveat being that anyone who signed “false or misleading” financial statements or prospectus, or acted recklessly in the conduct of a company’s business would be liable for a fine or 10 years’ imprisonment. Added to this arsenal of oversight is the King Code on Corporate Governance.

When it comes to the conduct of company directors, both executive and non-executive, for instance, the 2008 Act prescribes that they are subject to common law and the Constitution, should discharge fiduciary duties and exercise duty of reasonable care, they must act in good faith, they must disclose personal financial interests and may not use information for personal gain or to cause harm.

In addition, the regulations and the 2008 Act stipulate that directors serving on a company’s audit committee must have qualifications in economics, law, corporate governance, finance, accounting, commerce, industry, public affairs and human resource management. And a meticulous record of the qualifications and experience of directors appointed to audit committees ought to be kept. And anyone can ask for access to this information by filing a request under the Promotion of Access to Information Act.

The 2008 Act also brought in the concept of social and ethics committees, which are intended to act as a company’s or SOE’s conscience.

Social and ethics committees are deemed so important that some of the fundamental changes proposed in the Companies Amendment Bill of 2018 speak directly to the “composition of [a] social and ethics committee and its functions”. There are other provisions in the Bill, which are designed to bolster social and ethics committees’ mandates and ensure that they are not treated as “nice to haves”, but are rather effective structures set up as a robust internal compliance mechanism.

In theory, the new company law regime and the various incarnations of and updates to the King Codes were supposed to set the country on course for a glorious era of good corporate citizenry. Right? To the contrary, recent experience says otherwise.

South Africa is awash with many instances of corporate malfeasance, both in the private sector and within SOEs, with boards and management at the heart of the rot. In the process, the concept of corporate governance has been unmasked as nothing more than a smoke screen.

But why is that the case, given that both the Companies Act of 2008 and its regulations give guidance on what constitutes acceptable conduct for company directors, and the King Codes provide an outline of board mandates and the respective board sub-committees?

The answer may be deceptively simple: SA Inc has a corporate culture of follow the leader and the cult of personality. Also, the Companies Act of 2008 and its regulations, as well as the King Codes, do not make explicit the lines of delineation between management and boards in terms of who has the final say on operational and strategic matters.

Would management have had a right to veto all the dodgy Steinhoff deals that involved board members? Is it even conceivable for management to push back against an overly active board? In other words, what tools and recourse are at management’s disposal when boards go rogue or overstep their mandates? Furthermore, who is the final accounting authority? And what powers are at a board chair’s disposal versus those of a CEO? Who is the boss of whom?

This is where the government is streets ahead.

A director-general is the final accounting authority within a department and is explicitly empowered to veto a wayward minister. We have been witness to directors-general hauling ministers before the courts to reinforce the notion of a separation of powers and to confirm who is the accounting authority. And the debate about who directors-general report to was reignited in 2018. The choice is between ministers and the Presidency, and the consensus leans towards the latter exercising oversight on directors-general. The accounting authority model empowers directors-general to make unpopular decisions and go on with the business of executing departmental work without fear of reprisals from capricious ministers.

The president has even signed the Public Audit Act Amendment Bill into law, while the proposed amendments to the Auditing Profession Act remain the subject of debate.

Upon careful reading of the Companies Act of 2008 and its regulations and the King Codes guidelines, that level of clarity is missing within SOEs and the private sector and may, in part, explain the rot that has unfolded in recent years – and will probably continue for years to come until this structural defect is addressed.

By way of example, look no further than the boardroom brawl between erstwhile SAA CEO Khaya Ngqula and the airline’s board. And the subsequent skirmishes between Dudu Myeni and the national carrier’s long roster of CEOs and other executives. Think about the governance lapses at Prasa and the fights that ensued between the passenger rail agency’s board and its former CEO.

Other examples that come to mind are: Transnet, Denel, KPMG, McKinsey, Eskom, Bain & Co, Hogan Lovells, African Bank, Steinhoff and the SABC. This is in no way an exhaustive list – there are countless others, but these are the immediate examples that come to mind.

If you talk to any of the former executives and ex-board members of those companies, they will point a finger at overbearing board chairs or partners. And this, in turn, raises a question about their understanding of fiduciary duties and duty of reasonable care. In each of the instances cited above, board members chose the line of least resistance, to the detriment of good corporate governance. And this will continue to be the case until a clearer line of delineation is drawn between executive authority and board mandates.

Until then, rogue board chairs will continue to inflict their will on management and steer companies to the edges of ethics, while the merry-go-round of corporate malfeasance will continue unabated. And, most frightening, the cult of personality and the follow-the-leader culture in corporate will continue to flourish and put paid to the governance principles of transparency and accountability. DM


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