South Africa

Phillip Vallet, Marie-Aurélie Girard and Jack Phalane
Fluxmans Inc

Overview of recent corporate governance reforms

The concept of corporate governance was formally introduced in South Africa in March 1992, with the formation of the King Committee on Corporate Governance.

The King Committee produced its first report in March 1994 (King I). King I went beyond the financial and regulatory aspects of corporate governance in advocating an integrated approach to good governance in the interests of a wide range of stakeholders, having regard to the fundamental principles of good financial, social, ethical and environmental practice.

The main sources of corporate governance in South Africa are acts of Parliament – specifically the Companies Act (61/1973) – common law, the King Reports and the JSE Securities Exchange South Africa Listings Requirements.

King I was never seen as the final word on corporate governance in South Africa; instead, it served as a starting point in the development of corporate governance. In light of subsequent global changes regarding corporate governance, there was a need for the King Committee to review and develop King I.

Its second report, King II, incorporates a Code of Corporate Practices and Conduct in South Africa. This code sets out principles which all companies and their boards and directors should observe in conjunction with other statutes, regulations and authoritative directives regulating the conduct of companies, boards and directors.

While the code sets out the basic requirements on corporate governance, it has not been given the force of an act of Parliament, although it has nonetheless had an impact on how companies should be and are managed and evaluated. The JSE Listings Requirements have been amended to accommodate certain provisions of King II and the code. These include a requirement that JSE listed companies disclose information in the annual financial statements with regard to the code, a statement as to how they have applied the code, and a statement addressing the extent of their compliance with the code and the reasons for non-compliance, if any.

Shareholders’ rights


The general affairs of a company are conducted by the shareholders and directors at a general meeting. It is at the general meeting that the shareholders appoint or remove directors and take any other decisions relating to the company’s business. The rights of the shareholders are derived from the Companies Act and the constitution of the company. These rights include the right to information concerning the company’s affairs, the right to claim dividends and so on.

General meetings may be held from time to time. Unless the company’s articles provide otherwise, shareholders holding not less than one-tenth of the share capital may call a general meeting. If 100 shareholders or shareholders holding not less than one-twentieth of the voting rights at the general meeting request the company to convene a meeting, and the directors fail to do so, the shareholders may call the meeting themselves.

Unless a quorum is present when the meeting proceeds to business, no business may be transacted at a general meeting. A quorum at a general meeting of a private company is two members entitled to vote, present in person or by proxy, or represented where the member is a body corporate; while a quorum at a public company is three members.

Shareholders have an unlimited right to demand a poll on any question, except where it concerns the election of the chairman of the meeting or the adjournment of the meeting.

Initiation of litigation

In order to protect minority shareholders from majority rule, the Companies Act provides minority shareholders with a right to bring an action in their capacity as shareholders, but on behalf of the company. A shareholder may institute such a derivative action where a company has suffered damages or loss or has been deprived of any benefit as a result of any wrong, breach of trust or breach of faith committed by any director or officer of the company, or by any past director or officer while he was a director or officer of that company, where the company has not instituted proceedings for the recovery of such damages, loss or benefit. This action may be brought irrespective of whether the company in any way ratified or condoned such wrong, breach of trust or breach of faith, or any act or omission relating thereto. A shareholder may also obtain relief from the court if any particular act or omission of the company is unfairly prejudicial, unjust or inequitable, or if the company’s affairs are being conducted in a manner unfairly prejudicial, unjust or inequitable to him or to other members of the company. The minister of justice may also appoint inspectors to investigate and report on the affairs of a company – for example if there are circumstances suggesting that the company is being conducted in a manner oppressive to any of the members, or that the founders or managers of the company have acted fraudulently or unlawfully towards the company or its members. Furthermore, the minister of justice must appoint inspectors if the company adopts a special resolution that its affairs should be investigated or if the court orders that the affairs of the company be investigated.

In respect of nominee shareholdings, the Companies Act requires a registered holder of listed securities who is not the beneficial holder of the beneficial interest to disclose to the company at the end of each quarter the identity of the person on whose behalf the securities are held, as well as the number and class of the securities concerned.

Institutional investors as shareholders

In the past, institutional investors in South Africa have been very passive in their involvement in companies in which they invest. This is changing following the much publicised corporate disasters. King II recommends that:

•  consideration be given to amending the Companies Act to require a minimum threshold for the passing of ordinary resolutions, to encourage companies to solicit attendance at company meetings;

•  bodies representing institutions look to the steps taken by bodies such as the National Association of Pension Funds and the Association of British Insurers in the United Kingdom in setting benchmark standards expected of companies in respect of conformance with good corporate governance; and

•  institutional investors be more transparent in their dealings with companies and be encouraged to demand the highest governance standards.

Management structure and the role of directors


The Code of Corporate Practices and Conduct recommends that a board should comprise a balance of executive and non-executive directors, preferably with a majority of non-executive directors, of whom a sufficient number should be independent of management so that shareholder interests (including minority interests) can be protected.

A unitary board structure for companies is preferred, rather than a management and supervisory board structure. A unitary board is a board that brings together executive and non-executive board members. This structure provides for greater interaction among all the board members. The code provides that there should be clearly accepted divisions of responsibilities at the head of a company, to ensure a balance of power and authority such that no one individual has unfettered decision-making powers. Non-executive directors should be individuals of calibre and credibility, and have the necessary skill and experience to bring their judgement to bear, independent of management, on issues of strategy, performance, resources, transformation, diversity and employment equity, standards of conduct and evaluation of performance. The code requires that the directors be categorised as executive, non-executive or independent in the annual reports. This suggestion has been adopted in the JSE Listings Requirements.

Listed companies must have at least four directors.

Directors are not supposed to be the puppets of shareholders who appointed them. The directors owe a duty to the company and to the shareholders to further the interests of the company even though such a director may observe the interests of his or her nominator.


The shareholders generally appoint directors. Procedures for appointments of directors must be formal and transparent, and a matter for the board as a whole, assisted where appropriate by a nomination committee. This committee must only comprise non-executive directors, of whom the majority should be independent, and should be chaired by the board chairman. Continuity in board directorship is imperative. It is therefore important that, subject to performance and eligibility for re-election, there be a programme which ensures a staggered rotation of directors.

At least one-third of the directors of a listed company must retire at each annual meeting. A brief CV of each director standing for re-election at the annual general meeting should accompany the notice of annual general meeting contained in the annual financial statements.

The board has a responsibility to ascertain whether board nominees or candidates are proper and fit, and that they are not disqualified from being directors. The Companies Act sets out several grounds of disqualification, including:

•  any person who is disqualified by an order under the Companies Act;

•  an unrehabilitated insolvent;

•  any person removed from an office of trust on account of misconduct;

•  any person convicted (whether in South Africa or elsewhere) of theft, fraud, forgery or uttering a forged document, perjury or any offence involving dishonesty or in connection with the promotion, formation or management of the company, and sentenced to imprisonment without the option of a fine, or to a fine exceeding R100.

In terms of the Listings Requirements, directors of listed companies must sign a declaration in which issues relating to the integrity of the director (previous convictions, criminal offences, bankruptcy, sequestration) are disclosed.

Directors’ duties

Directors’ duties are derived from the Companies Act, the articles of association and the common law. Some of the most pertinent provisions relating to directors’ duties are outlined in King II.

As part of their duties, directors must act:

•  in good faith, in what they believe to be the best interests of the company as a whole;

•  with the degree of care, diligence and skill that may reasonably be expected from persons of their knowledge and experience; and

•  as a board and not individually.

When acting in good faith, directors are expected to place themselves in a position where there is no conflict between their duties to the company and their personal interests. A director must disclose any interest in any contract that is significant to the company’s business.

King II states that, in line with modern trends worldwide, directors must not only exhibit the degree of skill and care as may be reasonably expected from persons of their skill and experience (which is the traditional legal formulation), but must also exercise both the care and skill any reasonable persons would be expected to show in looking after their own affairs, as well as having regard to their actual knowledge and experience. Directors must also qualify themselves on a continuous basis with a sufficient understanding of the company’s business and the effect of the economy thereon, including by relying on expert advice where necessary.

Any provision in the articles of association or in a contract that purports to exempt a director, officer or auditor of the company from any liability which would attach to such individual in respect of negligence, default, breach of duty or trust shall be void. However, the company is not prohibited from obtaining indemnity insurance against the liability of a director or officer towards the company in respect of negligence, breach of duty or breach of trust.

In terms of the Criminal Procedure Act, directors can in certain instances be charged for crimes committed by other directors of the company, unless they can prove that they did not commit the criminal offence and were unable to prevent it.

Chairman and chief executive officer

To ensure a balance of power and authority in a company, there should be a division of responsibilities such that no one individual has unfettered decision-making powers.

The chief executive officer of a listed company cannot also hold the position of chairman.

Committees of the board

The board of directors must meet regularly, at least once a quarter if not more frequently as circumstances require, and should disclose in the annual report the number of board and committee meetings held in the year and the attendance details of each director.

Board committees are recognised as important since they assist the board and its directors in discharging their duties and responsibilities. Board committees are a mechanism to aid the board and its directors in giving detailed attention to specific areas of their duties and responsibilities in order to evaluate more comprehensively certain issues, such as audit, internal control, risk management and remuneration. The minimum required of a listed company is an audit committee and a remuneration committee.

In establishing board committees, the board must determine their terms of reference, life span, role and function. It must also create reporting procedures and proper written mandates or charters for the committees, and ways of evaluating them.

It is recommended that board committees should, as far as possible, only comprise members of the board; where certain committees fulfil a specialised role, they should co-opt specialists as permanent members. As a general principle, there should be transparency and full disclosure from the board committee to the board, except where the board has mandated otherwise.

The composition of any board committees, a brief description of their mandates and the number of meetings held must be disclosed in the annual financial statements.

The audit committee is the principal governance watchdog in most companies and was the first governance committee to gain broad acceptance in the business community. The audit committee acts as a link between the full board and the company auditors. It enables the board to supervise the company’s financial controls and reporting systems. The audit committee should comprise a majority of non-executive directors and the majority of its members should be financially literate.

‘Risk management’ can be defined as the identification, evaluation and addressing of actual and potential risk areas as they affect the company as a total entity. A risk management committee’s task is to consider risk strategy and policy, to monitor the process at operational level and to report on it. According to King II, risk management constitutes an inherent operational function and responsibility. Therefore, a risk management committee comprising executive directors and members of senior management, who are accountable to the board, is best placed to evaluate risk in the company and report on it to the board.

In addition to the company’s other compliance and enforcement activities, King II recommends that the board should consider the need for a confidential reporting process covering fraud and other risks.

Company secretary

The company secretary plays an important role in facilitating good corporate governance. King II provides that the company secretary must provide the board as a whole and the directors individually with detailed guidance as to how their responsibilities should be properly discharged in the best interests of the company. To this end, the company secretary must:

•  be responsible for inducting new or inexperienced directors;

•  assist the chairman and the chief executive officer in determining the annual board plan;

•  guide the board and individual directors in the proper discharge of their responsibilities; and

•  act as a central source of guidance on matters of ethics and governance.


In the light of the skill required for a person to become a director, the Code of Corporate Practices and Conduct provides that directors’ remuneration should be sufficient to attract, retain and motivate executives of the quality required by the board. A company should appoint a remuneration committee or another appropriate board committee to determine the remuneration packages of the directors.

As part of disclosure, listed companies should disclose emoluments paid to directors during the last financial period in their annual financial statements. These emoluments include fees paid for services rendered as directors, directors’ basic salaries, bonuses and performance-related payments.

The code recommends that performance-related elements of remuneration should constitute a substantial portion of the total remuneration package of executives in order to align their interests with those of the shareowners, and should be designed to provide incentives to perform at the highest operational standards. Share options may be granted to non-executive directors, but must be the subject of prior approval of the shareholders.

Conflicts of interest

Listed companies are obliged to make certain disclosures regarding related-party transactions. A related party includes a material shareholder, a director and/or a company adviser who has beneficial interests in a company. Depending on the percentage ratio of a related-party transaction, a company is required to:

•  inform the JSE of the details of the transaction prior to completing it, publish details of the transaction and provide confirmation that the terms of the transaction are fair and reasonable; or

•  announce the transaction, provide the JSE with a copy of the agreement, and obtain shareholder approval and a fair and reasonable opinion from an independent professional expert.

Directors, officers and persons associated with a company are privy to inside information (ie, confidential and price-sensitive information). The Insider Trading Act (135/1998) makes it an offence for people with inside information to trade in securities or financial instruments. It is also an offence for a person with inside information to use the inside information to encourage or discourage another person from dealing in securities or financial instruments.


Listed companies have a general obligation to disclose material price-sensitive information, excluding trading statements. In this regard, they must announce any circumstances or events that have or are likely to have a material effect on the financial results, financial position or cash flow of the company or any of its subsidiaries, as well as information necessary to enable shareholders and the public to avoid the creation of a false market in the shares of the company. They must also disclose any new developments in the listed company’s sphere of activity which are not public knowledge and which may – by virtue of their effect on the company’s financial results, financial position or cash flow, or on the general course of its business – lead to material movements of the reference price of the company’s shares.

Companies must publish a trading statement as soon as they become aware that the financial results for the period to be reported upon next will be materially different from one or more of the following:

•  the financial results for the previous corresponding period;

•  the forecast projections and indications previously provided to the market in relation to such period; and

•  shareholders’ expectations of the financial results for such period arising from guidance previously provided by the company, trend analysis expectations, consensus analysts’ forecasts which the company is satisfied were materially accurate, where available, or a combination of the above factors.

Accounts and audits

Accounting standards

Companies must adhere to the South African Statements of Generally Accepted Accounting Practice, which conform to international accounting standards.


Companies must have an independent auditor who must conduct an annual audit of the company’s financial statements. The annual financial statements must include a report by the auditor on whether he has carried out an audit and whether in his opinion the annual financial statements fairly represent the company’s financial position, results of operations and cash flows. Only a registered public accountant may be appointed as an auditor.

Auditors’ credibility depends on their independence from the company on whose financial statements they issue their opinions. Auditors are expected to observe the highest level of business and professional ethics. The board must ensure that the auditor is independent. As part of their role, audit committees must continually address external auditor independence issues.

Auditors are not liable for a company’s failure. King II recommends that consideration be given to changing the law to make directors and auditors proportionally liable for a company’s failure.


The introduction of King II does not necessarily mean that corporate government problems will disappear. What is important is enforcing the corporate governance laws that already exist.

The Code of Corporate Practices and Conduct applies to listed companies, among others. By requiring that listed companies comply with King II, the JSE has become the enforcer of the principles of King II.

If a company fails to comply with the JSE Listings Requirements, the JSE may suspend and/or terminate the listing of that company if it is in the public interest to do so. The JSE may also publicly or privately censure the company or its directors, individually or jointly, and thereafter may impose a penalty of up to R1 million on the company or its directors, individually or jointly.

The good governance principles will also be enforced by shareholders where they play an active role in the affairs of the company.

The Companies Act imputes liability on directors if it is found that directors conducted the business of the company fraudulently or recklessly. Ignoring good corporate governance principles may arguably amount to fraud and/or recklessness. This provision is therefore an enforcement mechanism that can be used to ensure good corporate governance, although it is seldom used in practice.

Corporate social responsibility

The concept of sustainability and the achievement of balanced and integrated economic social and environmental goals (‘triple bottom line’) has been recognised and adopted in the business society. In South Africa, the triple bottom line has been extended a little wider to take into consideration the South African culture of ‘ubuntu’: that is, one’s personhood depends on one’s relationship with others. King II recommends that every company report at least annually on the nature and extent of its social transformation, ethical, safety, health and environmental management policies and practices, with the board identifying what is relevant for disclosure, given the company’s particular circumstances.

King II recommends that a South African board should disclose:

•  whether it has adopted an appropriate HIV (human immuno-deficiency virus)/AIDS (acquired immuno-deficiency syndrome) strategy plan, and policies to address and manage the potential impact of HIV/AIDS in the company;

•  whether it has developed formal procurement policies that take into account black economic empowerment; and

•  whether it has developed and implemented a definitive set of standards and practices in the company based on a clearly articulated code of ethics.

Every company should engage its stakeholders in determining the company’s standards of ethical behaviour. This must be demonstrated by the company’s commitment to organisational integrity by codifying its standards in a code of ethics.

Sarbanes-Oxley Act

If the Sarbanes-Oxley Act has had an impact on corporate governance in South Africa, such impact is to the extent that South Africa is and will be guided by international best practice in its approach to corporate governance.