By Peet Serfontein
Corporate governance and shareholder activism are crucial elements in ensuring transparency, accountability, and ethical management in financial markets. In South Africa, corporate governance has been significantly influenced by the King Reports on Corporate Governance, while shareholder activism has been growing as investors demand stronger oversight and accountability from companies.
Corporate governance in South Africa
Corporate governance refers to the systems, principles and processes by which companies are directed and controlled. It ensures that organisations are managed in a way that aligns with the interests of stakeholders, including shareholders, employees, customers and regulators.
One of the most prominent examples of corporate governance failure in South Africa is the Steinhoff International scandal (2017), which exposed significant failures in corporate oversight and financial transparency. This case highlighted the importance of strong corporate governance and led to widespread reform efforts.
The King reports on corporate governance
South Africa has been a pioneer in corporate governance reform, largely due to the King Reports, a series of guidelines issued by the Institute of Directors in Southern Africa (IoDSA).
The key versions include:
The reports are called "King" because they were led and compiled under the leadership of Justice Mervyn King, who played a vital role in shaping corporate governance principles in South Africa. His expertise in corporate law, ethics, and governance made him a key figure in establishing global best practices for businesses.
The Johannesburg Stock Exchange (JSE) requires listed companies to comply with King IV, reinforcing its influence on financial markets.
Key principles of corporate governance
1. Ethical leadershipemphasises the importance of integrity, fairness, responsibility, and transparency in corporate decision-making. It encompasses:
Example: A company like Naspers Ltd has established ethics committees to ensure that business practices align with corporate governance principles.
2. Stakeholder inclusivity beyond just shareholders - recognising the interests of employees, customers, suppliers, regulators, and communities.
Example: Anglo American plc, a mining company, has implemented community development programmes to ensure its operations benefit local communities.
3. Sustainability means that companies operate in a way that drives environmental, social and economic well-being longer term.
Example: Sasol Ltd, a major petrochemical company, has faced shareholder activism demanding more aggressive plans to reduce emissions, in line with global sustainable development goals.
4. Integrated reporting means companies must disclose both financial and non-financial information to provide a full picture of their performance.
Example: The Johannesburg Stock Exchange (JSE) mandates listed companies to apply integrated reporting principles to enhance corporate transparency.
5. Effective risk management is crucial for a company's sustainability and stability. Companies must establish processes to identify, assess, and mitigate risks before they impact business operations.
Example: Standard Bank Group Ltd has a robust risk-management framework to detect and prevent financial fraud and cyber threats.
Regulations
South Africa's corporate governance framework is supported by various laws and regulations, including:
Shareholder activism in South Africa
Shareholder activism in South Africa is playing an increasingly critical role in corporate governance, ensuring that companies adhere to ethical leadership, transparency, and accountability as outlined in frameworks like the King IV Report, the Companies Act, and the JSE listing requirements. Investors, particularly institutional, are using their influence to push for governance reforms, greater corporate responsibility, and stronger environmental, social, and governance (ESG) commitments.
1. Strengthening transparency and accountability. Shareholder activism holds boards and executives accountable for their actions, reducing the risk of corruption, mismanagement and unethical decision-making. Activists use mechanisms such as:
Example: The Steinhoff Scandal (2017) saw institutional investors demand governance reforms after financial fraud led to billions in shareholder losses. Shareholders pushed for stronger board oversight and auditing standards.
2. Enhancing board independence and corporate ethics. Activists advocate for independent, diverse, and competent boards that prioritise the interests of all stakeholders, not just executives or majority shareholders. Aligning with King IV principles emphasising ethical and effective leadership, this includes:
Example: In 2022, Standard Bank faced shareholder activism when investors questioned its climate policies and risk-management strategies. Activists pushed for more climate-focused board members.
3. Promoting Environmental, Social and Governance (ESG) issues. South African shareholders are increasingly demanding sustainable and socially responsible corporate behaviour, ensuring that businesses contribute positively to society.
Example: In 2020, Sasol's shareholders pushed for clearer climate change risk disclosures, aligning with global ESG standard.
4. Holding State-Owned Enterprises (SOEs) accountable. State-Owned Enterprises (SOEs), such as Eskom, Transnet and South African Airways (SAA), have been at the centre of corruption scandals and financial mismanagement. Debtholders, particularly institutional investors, are demanding greater oversight and adherence to the Public Finance Management Act (PFMA).
Example: Activists and business groups have challenged mismanagement at Eskom, demanding leadership changes and greater transparency in procurement.
5. Encouraging regulatory compliance. Shareholders use activism to ensure companies comply with the Companies Act, JSE listing requirements, and financial regulations.
Example: The Public Investment Corporation (PIC), which manages South Africa's largest pension funds, has been vocal in demanding corporate governance reforms in JSE-listed firms.
