The dynamics of corporate governance in South Africa: Broad based black economic empowerment and the enhancement of good corporate governance principles

Journal of International Commercial Law and Technology

Volumn 3, Issue 3, 2008, Pages 157-169

  Esser, Irene marié ^a   Dekker, Adriette ^a  

^a UNIVERSITY OF SOUTH AFRICA   (South Africa)

Author keywords

Broad based black economic empowerment; Corporate governance; South Africa; Stakeholders; Triple bottom line approach

Indexed keywords

EID: 84861845943     PISSN: 19018401     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (97)

1. This is discussed in more detail in par 2.
2. See King Report II on Corporate Governance for South Africa, Institute of Directors in Southern Africa (2002) (hereafter the King II Report).
3. Policy Document of the South African Department of Trade and Industry (DTI): The Guidelines for Corporate Law Reform, South African Company Law Reform for a 21st Century, (May 2004) (hereafter the Policy Document).
4. See par 2 See also Doreen McBarnet, Voiculescu A & Campbell T (eds), The New Corporate Accountability: Corporate Social Responsibility Beyond Law, Through Law, For Law, in "The New Corporate Accountability: Corporate Social Responsibility and the Law" (2007) on this issue.
5. Our emphasis. See Lionel Hodes, The Social Responsibility of a Company, 100 South African Law Journal 468 (1983). See also McBarnet at 1 where it is stated that corporate social responsibility includes a shift of corporate responsibility from profit maximization for the shareholders within the obligations of the law to responsibility to a broader range of stakeholders. It is a shift from the "bottom line" to the "triple-bottom line".
6. John E Parkinson, Corporate Power and Responsibility Issues in the Theory of Company Law (1993) 23 Claredon Press Oxford where he quotes Robert A Dahl, A Prelude to Corporate Reform, in Robert L Heilbroner, London P (eds) "Corporate Social Policy" 18 (1975).
7. John E Parkinson, Corporate Power and Responsibility Issues in the Theory of Company Law (1993) 23 Claredon Press Oxford where he quotes Robert A Dahl, A Prelude to Corporate Reform, in Robert L Heilbroner, London P (eds) "Corporate Social Policy" 18 (1975).
8. John E Parkinson, Corporate Power and Responsibility Issues in the Theory of Company Law (1993) 23 Claredon Press Oxford where he quotes Robert A Dahl, A Prelude to Corporate Reform, in Robert L Heilbroner, London P (eds) "Corporate Social Policy" 18 (1975).
9. This will have the effect of corporate socially responsible conduct no longer be defined as voluntary conduct, where companies do more than what is expected of them in terms of the law.
10. John E Parkinson, Corporate Power and Responsibility Issues in the Theory of Company Law (1993) 23 Claredon Press Oxford where he quotes Robert A Dahl, A Prelude to Corporate Reform, in Robert L Heilbroner, London P (eds) "Corporate Social Policy" 18 (1975).
11. The pension regulation in the United Kingdom is an example in point. This legislation requires pension companies to state how they complied with social, environmental and ethical issues. It does not oblige companies to consider social, environmental and ethical issues when making business decisions, but merely requires them to disclose whether they did so (see the Pension Act of 1995). This disclosure requirement was added to the Act in July 2000. See also s 172(1) of the United Kingdom Companies Act of 2006 which requires directors to have regard to a number of factors (like the interests of employees and the impact of the company's operations on the community and the environment) when managing a company. However, it is within the directors' discretion whether to consider these factors or not.
12. John E Parkinson, Corporate Power and Responsibility Issues in the Theory of Company Law (1993) 23 Claredon Press Oxford where he quotes Robert A Dahl, A Prelude to Corporate Reform, in Robert L Heilbroner, London P (eds) "Corporate Social Policy" 18 (1975).
13. This can be seen in the way that many small and medium enterprises (SMMEs) in South Africa still attempt to comply with BBBEE measures even though they are mostly exempted from it. Bigger companies are indirectly requiring SMMEs to comply with BBBEE practices. For example Eskom (the national electricity provider) is increasingly stipulating that their procurement policies should specifically look at black owned and women owned SMMEs. In 2007 Eskom has allocated 17% of their budget for women owned SMME companies. Sven Lünsche It's Too Little-Hardly Too Much, Financial Mail, (March 30, 2007) available at http://www.fm.co.za/cgi-bin/pp-print.pl (visited on May 20, 2008).
14. Sibex Construction (SA) (Pty) Ltd v Injectaseal 1988 (2) SA 54 (T) at 65; Novick v Comair Holdings Ltd 1979 (2) SA 116 (W) at 130 and 151; Swanee's Boerdery (Edms) Bpk (in Liquidation) v Trust Bank of Africa Ltd 1986 (2) SA 850 (A) at 854.
15. See Len S Sealy, Directors' Wider Responsibilities-Problems Conceptual, Practical and Procedural, 13 Monash University Law Review 164, 166, 173 (1987) where he refers to this concept of the company, where the company is an object of directors' duties, entirely perceived in terms of its members, as "corporate membership". See also Michele K Havenga, The Company, the Constitution and the Stakeholders, 5 Juta's Business Law 134, 136 (1997). This viewpoint was confirmed in the Policy Document ch 3 par 3.2.2.
16. John H Farrar et al., Farrar's Company Law 139-140 (3ed 1991) Butterworths; Hendrik S Cilliers & Marius L Benade, Corporate Law 139-140 (3ed 2000) Butterworths; Ron C Beuthin & Stephanie M Luiz, Beuthin's Basic Company Law 199 (3ed 2000) Butterworths
17. Michele K Havenga, Directors' Fiduciary Duties under our Future Company-law Regime, 9 South African Mercantile Law Journal 310, 312, 314 (1997).
18. These were the terms used during the company law reform processes in South Africa and the United Kingdom.
19. Francis Dawson, Acting in the Best Interest of the Company-For Whom are Directors' Trustees, 11 New Zealand Universities Law Review 68, 81 (1984); the Policy Document ch 3 par 3.2.2.
20. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
21. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
22. Irene-marie Esser & Jean J Du Plessis, The Stakeholder Debate and Directors' Fiduciary Duties, 19 South African Mercantile Law Journal 346, 358 (2007).
23. The interests of creditors may, for example, be more important than those of the shareholders when a company is nearing insolvency.
24. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
25. See par 17.1 of the King II Report. See on the "triple-bottom line" approach Tshepo Mongalo, The Emergence of Corporate Governance as a Fundamental Research Topic in South Africa, 120 South African Law Journal 173, 177 (2003); Siyabonga Shandu, Shareholders' Interests versus Social Demands: Incongruous Agendas, 26 Obiter 87 (2005); Michele K Havenga, Regulating Directors' Duties and South African Company Law Reform, 26 Obiter 609, 618 (2005).
26. The economic aspect of this approach concerns financial and non-financial aspects of the business of the company. The environmental aspect relates to the effect on the environment caused by the products or services of the specific company.
27. King II Report par 17.1, Introduction. In addition to requiring listed companies to comply with King II the Johannesburg Stock Exchange (JSE) Limited also launched a Socially Responsible Investment Index (SRI Index) in May 2004. In terms of this Index the JSE developed criteria to measure the "triple-bottom line" performance of the FTSE/JSE All Share Index available at http://www.jse.co.za/sri/index.htm (visited on January 20, 2008).
28. In 2004, a Policy Document on the guidelines for corporate law review was issued by the South African Department of Trade and Industry. The document envisaged an overall review of corporate laws in South Africa, comprising the Companies Act 61 of 1973, the Close Corporations Act 69 of 1984 and the common law relating to these corporate entities.
29. The Policy Document ch 3 par 3.2.3.
30. See Irene-marie Esser, A Global Perspective on African Corporate Governance: The Protection of Stakeholders' Interests
31. South African Yearbook of International Law 405, 406 ff (2007) for a discussion on the meaning of "the company" in terms of the Companies Bill of 2007.
32. Our emphasis.
33. The Policy Document ch 3 par 3.2.3.
34. Clauses 163, 164 and 166 in chapter 7, part B of the Companies Bill of 2007 deal with various rights to seek specific remedies. Clause 163 relates to an application to declare a director delinquent or to place a director under probation. A company, a shareholder, director, company secretary or other officer of a company, a registered trade union or other representative of the employees of a company, or the Commission or the Takeover Regulation Panel may apply to a court for an order declaring a person delinquent or under probation. Clause 166 relates to derivative actions.
35. Our emphasis. See clause 164(1)(c) of the Companies Bill of 2007.
36. Clauses 163 and 166 may also create confusion as to whom directors owe their duties to, although not as directly as is done in terms of clause 164. Clauses 163 and 166 only provide specific parties with certain remedies regarding the interests of the company, whereas clause 164 provides the parties concerned with remedies regarding their own interests.
37. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
38. Paul Benjamin et al., Black Economic Empowerment: Commentary, Legislation & Charters (1)1-2 (2005).
39. Jonathan Goldberg, Update on Broad Based Black Economic Empowerment, 44 Civil Engineering 114, 115 (26 Aug 2006).
40. Tony Balshaw & Jonathan Goldberg, Cracking Broad-Based Black Economic Empowerment: Codes & Scorecard Unpacked 44 (2005). The "triple-bottom line" approach interestingly enough also corresponds with one of the core values of the Constitution namely ubuntu which relates to basic humanity. According to ubuntu people can only be respected because they co-exist in harmony with other people. In the spirit of ubuntu a business cannot account for profit alone, it must also look at the people and environment within which it functions.
41. Section 9(1) of the South African Constitution.
42. Section 217 of the South African Constitution also states that when state organs implement procurement policies, they may favour people who were disadvantaged by unfair discrimination.
43. Act 55 of 1998. The Employment Equity Act provides for measures to remove all forms of discrimination in the workplace and ensures that so-called "designated groups" (i.e. women, disabled persons, African, Coloured and Indian people) are represented on all levels of organisation with "designated employers". A designated employer means (a) an employer who employs 50 or more employees; (b) an employer who employs fewer that 50 employees, but has a total annual turnover that is equal to or above the applicable annual turnover of a small business in terms of Schedule 4 of the Act; (c) a municipality; (d) an organ of state, but excluding local spheres of government, the National Defence Force, the National Intelligence Agency and the South African Secret Service; and (e) an employer bound by a collective agreement in terms of s 23 or s 31 of the Labour Relations Act, which appoints it as a designated employer in terms of this Act, to the extent provided for in the agreement.
44. Act 5 of 2000.
45. Act 97 of 1998. See, for example, the Preferential Procurement Policy Framework Act 5 of 2000 and the Skills Development Act 97 of 1998. The Preferential Procurement Policy Framework Act provides a framework for the preferential procurement policies of government and its agencies. The effect is that an organ of State will apply a preferential point system before a tender is awarded. The better the racial composition of the contractor the higher the points that a contractor can obtain. This will ensure that contractors from previously disadvantaged background can benefit from state contracts. The purpose of the Skills Development Act is to provide a framework wherein the skills of the South African workforce can be developed and improved. The Act facilitates the integration of these strategies to improve skills within the National Qualifications Framework and also provides for learnerships that lead to recognised occupational qualifications. Skills development is financed by means of a levy-financing scheme and a national skills fund. It establishes a National Skills Authority as well as various sector education and training authorities (SETAs); labor centres; and the Skills Development Planning Unit to aid in this process. This Act plays an important role to enable previously disadvantaged groups to improve their training and qualifications and consequently improve their career opportunities. Also see Marlize van Jaarsveld, Black Economic Empowerment and Skills Development: A Success in Many Ways? 17 South African Mercantile Law Journal 261, 266-267 (2005).
46. See South Africa's Economic Transformation: A Strategy for Broad-Based Black Economic Empowerment available at http://www.thedti.gov.za/bee/bee.htm (visited at May, 22 2008) at par 2.2.1. (Hereafter the Strategy Document.)
47. Act 53 of 2003. The Act came into force in 2004.
48. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
49. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
50. This includes national or provincial departments, municipalities, Parliament, provincial legislatures and public entities.
51. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
52. The Act allows for the development of a Transformation Charter for a particular sector of the economy by all major stakeholders in that particular industry, for example, the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Sector (GN 1639 in GG 26661 of 13 August 2004); Charter for the South African Petroleum and Liquid Fuels Industry on Empowering Historically Disadvantaged South African in the Petroleum and Liquid Fuels Industry (GN 538 in GG 26293 of 26 April 2004); Construction Sector Charter of Black Economic Empowerment (GN 111 in GG 29616 of
53. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
54. The current Strategy Document has not been issued in terms of section 11 of the BBBEE Act, but will probably form the basis of strategies which still need to be published.
55. After promulgation of the BBBEE Act the so-called Phase 1 Codes (and Scorecards) were published. The Phase 1 Codes only dealt with the management and control element of BBBEE. The Phase 2 Codes then followed which dealt with the remainder of the generic scorecard elements. In February 2007 the Phase 1 & 2 Codes were gazetted along with the relevant generic scorecards. These codes are available at http://www.thedti.gov.za/bee/beecodes.htm (visited on May, 22 2008).
56. Section 1 of the BBBEE Act.
57. Section 2 of the BBBEE Act.
58. These are: Code 000: Framework for Measuring BBBEE [Statement 000-General Principles and the Generic Scorecard, Statement 003-Guidelines for the Development and Gazetting of Transformation Charters and Sector Codes, Statement 004-Scorecards for Specialized Enterprises]; Code 100: Measurement of the Ownership Element of BBBEE [Statement 100-General Principles for Measuring Ownership, Statement 102-Recognition of the Sale of Assets, the Recognition of Equity Equivalents for Multinational]; Code 200: Measurement of the Management Control Element of BBBEE [Statement 200-General Principles for Measuring Managing Control]; Code 300: Measurement of the Employment Equity Element of BBBEE [Statement 400-General Principles for Measuring Skills Development]; Code 500: Measurement of the Preferential Procurement Element of BBBEE [Statement 500-General Principle for Measuring Preferential Procurement]; Code 600: Measurement of the Enterprise Development Element of Broad Based Black Economic Empowerment [Statement 600-General Principles for Measuring Enterprise Development]; Code 700: Measurement of the Socio-Economic Element of BBBEE [Statement 700-General Principles for Measuring Socio-Economic Development]. The Code of Good Practice on BBBEE for Qualifying Small Enterprises is contained in Code 800 (Statements 800-807).
59. Strategy for Broad Based Black Economic Empowerment as issued by the DTI, March 2003, Appendix A.
60. In determining ownership the "flow through principle" has been applied, meaning that the natural chain of ownership must be followed to ensure a black natural person is a beneficiary. In the phase 2 Codes this is slightly modified and ownership is also determined by looking at economic interest and exercisable voting rights. These two together form an equity interest. See Stephanie Luiz & Kathleen Van Der Linde, Broad-based Black Economic Empowerment: Some Challenges in Measuring Ownership of Companies, 18 South African Mercantile Law Journal, 473-485, 476-483 (2006) for a discussion of problems arising from the application of the equity interest to measure ownership.
61. This component measures the representivity of black people on senior top management and other top management levels.
62. The Code dealing with this aspect aligns with the Employment Equity Act. It goes even further than the Employment Equity Act in that it sets targets for representivity at different levels of the business and for different categories of employees.
63. This Code sets targets for employers for amounts to be spent on learnerships in terms of the Skills Development Act, and also aligns with this Act.
64. Preferential procurement policies ensure that black owned professional service providers and entrepreneurs are used as suppliers.
65. Enterprise development is aimed at setting up and growing viable enterprises that are majority owned by black operators while developing existing companies.
66. Socio-economic development is quite broad and was previously the "residual element" in the scorecard (Phase 2 Code 700 statement 700). It refers to schemes or projects that target infrastructural development or reconstruction in underdeveloped areas, rural areas etc. This can be made in terms of monetary transfers or by devoting time by staff of management to upliftment projects.
67. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
68. Available at http://www.dme.gov.za/minerals/mining_charter.stm (visited on May 20, 2008).
69. Available at http://www.fscharter.co.za/page.php?p_id=1 (visited on May 20, 2008).
70. Par 10, Statement 000. The DTI must issue clear guidelines on the verification process. The South African National Accreditation System (SANAS) currently conducts accreditation of BBBEE verification agencies and it must also develop and maintain criteria in this regard. The DTI encourages the establishment of an Independent Industry Body that will provide guidance to the verification industry through the development and maintenance of high quality and reliable BBBEE verification services.
71. Level 1 is the highest level of compliance. A level 1 contributor scores more than 100 points on the generic scorecard and has a 135% black economic empowerment recognition level. See par 8 of the Code 000 Statement 000.
72. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
73. SMME's are further indirectly supported by the Act in that companies which assist and support enterprise development can claim 15% of the BBBEE Code Points. The scorecard also provides for 15 points out of a maximum of 100 for contributing to socio-economic development and for backing black owned business.
74. Derek French, Stephan W Mayson, & Christopher L Ryan Mayson, French & Ryan on Company Law 24ed (2007-2008) Oxford UP.
75. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
76. of Table A of the Companies Act 61 of 1973 in Schedule 1 that states: "the business of the company shall be managed by its directors".
77. For example ss 234-251 of the Companies Act 61 of 1973.
78. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
79. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
80. Alistair Alcock, Corporate Governance: A Defence Against the Status Quo, 58 Modern Law Review 898, 907, 912 (1995) argues further that a firm that operates according to a board where various stakeholders are represented is a "recipe for disaster".
81. Economic Empowerment Rating Agency (Empowerdex) Impact of BBBEE Implementation on Profit Margin and Productivity Report (2007) available at http://www.empowerdex.co.za/content/Default.aspx (visited on May 20, 2008).
82. African Institute of Corporate Citizenship Why We Need to Link BEE to CSR? Business Day (Jan 24, 2005) at 4.
83. According to Ernst & Young's Mergers and Acquisitions 2004 Review, in 2004 BBBEE transactions increased by 29% to 244 from 189 the previous year. The average BBBEE deal value increased from R42,2 billion in 2003 to R52,9 billion in
84. (See Fin24. com BEE to Drive Corporate Activity (May 16, 2008) available at http://www.fin24.com/articles/default/display_article.aspx?ArticleId=1518-1786_2323546 (visited on May 22, 2008).
85. South Africa The Good News BEE Transactions Drive Domestic Corporate Activity (May 19, 2008) available at http://www.sagoodnews.co.za/bee/bee_transactions_drive_domestic_corporate_activity.html (visited on May 21, 2008).
86. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
87. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
88. See Ben Pettet, The Combined Code: A Firm Place for Self-Regulation in Corporate Governance, 13 The Company Lawyer 394-400 (1998) on the dangers of box-ticking.
89. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
90. South Africa's black middle class has grown by 30% between 2006 and 2007. Their collective spending power rose from R130-billion to R180-billion. 12% of South Africa's black population account for over half (54%) of all black buying power. University of Cape Town's Unilever Institute of Strategic Marketing and TNS Research Surveys, Black Diamond Study 2007: SA's Booming Black Middle Class available at http://www.unileverinstitute.co.za/index.php?Itemid=34&id=72&option=com_content&task=view (visited on May 22, 2008).
91. The term broad based is defined in terms of the act as: the economic empowerment of all black people including women, workers, youth, people with disabilities and people living in rural areas through diverse but integrated socio-economic strategies that include, but are not limited to (a) increasing the number of black people that manage, own and control enterprises and productive assets; (b) facilitating ownership and management of enterprises and productive assets by communities, workers, co-operatives and other collective enterprises; (c) human resource and skills development; (d) achieving equitable representation in all occupational categories and levels in the workforce; (e) preferential procurement; and (f) investment in enterprises that are owned or managed by black people. (See s 1 of the BBBEE Act).
92. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
93. Vuyo Jack BEE Success Comes with Work and Life's Cycles Business Report (September 24, 2006) available at http://www.busrep.co.za/index.php?fSectionId=2512&fArticleId=3449596 (visited on May 22, 2008).
94. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
95. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
96. JL Levin, Considering the Legitimacy of Government Measures to Introduce Black Economic Empowerment Legislation, 18 South African Mercantile Law Journal, 388-392, 392 (2006).
97. At par 3.1 & 3.2.