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SHAREHOLDERS’ INTERESTS VERSUS SOCIAL DEMANDS: INCONGRUOUS AGENDAS

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Abstract

In this note the chasm between shareholder and stakeholder interests in the running of the corporation in an emerging economy in general, and the third world country in particular, is considered. A study of two corporate governance models is undertaken with the intention to demonstrate that inclusive corporate governance which does not relegate stakeholder interests to the periphery is more efficient under the Two-Tier Board than the Anglo-Saxon model which is followed in South Africa. The reality of an entrenched corporate governance model which is supported in the South African Companies Act 61 of 1973 (the Anglo-Saxon model) is appreciated; hence it is argued that it is unlikely that South Africa might, in future, change to the Two-Tier board. The answer to the international revolution of realising societal expectations lies either in the King Report on Corporate Governance in South Africa (2002) (hereinafter King II) or modified corporate mindset, or both. It is also argued that the proposals in the Policy document of theDepartment of Trade and Industry (DTI) (South Africa Company Law for the 21st Century: Guidelines for Corporate Law Reform, May 2004, GN 1183 GG 26493 23-06-2004 May 2004, also available at http://www.dti.gov.za/ccrdlawreview/companylaw.htm) for optional representation of stakeholders on boards and the proposed inclusion of the statement recognising stakeholder interests in the Companies Act constitute a good start to changing the corporate mindset towards being stakeholder-sensitive. It is argued that the focus of King II on the triple-bottom line approach is negated by its ambivalence on enforcement and the status of stakeholdersin the South African corporation. The article then concludes that in a country which emerged from a history of entrenched overt racism, a significant recognition of stakeholder interests is critical to the socio-economic need for transformation to create a stable civil society. Globalisation has given rise to remarkable increase in the power of the global corporation. Events in the corporate sector can have negative repercussions not only for the shareholders of that particular corporation but also for society at large, either in that particular country or internationally. The emergence of powerful multinational corporations has led to a demise of state authority. The spate of corporate failures, however, has precipitated a move towards strengthening corporate governance rules to ensure thatcompanies are well governed. Indeed it has been opined that companies contribute enormously to the economic and social wellbeing of our societies (Worthington “Corporate Governance: Remedying and Ratifying Directors Breaches” October 2000 (116) LQR 638).
NOTES/AANTEKENINGE 87
SHAREHOLDERS’ INTERESTS VERSUS
SOCIAL DEMANDS: INCONGRUOUS AGENDAS
1 Introduction
In this note the chasm between shareholder and stakeholder interests in the
running of the corporation in an emerging economy in general, and the third
world country in particular, is considered. A study of two corporate
governance models is undertaken with the intention to demonstrate that
inclusive corporate governance which does not relegate stakeholder
interests to the periphery is more efficient under the Two-Tier Board than the
Anglo-Saxon model which is followed in South Africa. The reality of an
entrenched corporate governance model which is supported in the South
African Companies Act 61 of 1973 (the Anglo-Saxon model) is appreciated;
hence it is argued that it is unlikely that South Africa might, in future, change
to the Two-Tier board. The answer to the international revolution of realising
societal expectations lies either in the King Report on Corporate Governance
in South Africa (2002) (hereinafter King II) or modified corporate mindset, or
both. It is also argued that the proposals in the Policy document of the
Department of Trade and Industry (DTI) (South Africa Company Law for the
21st Century: Guidelines for Corporate Law Reform, May 2004, GN 1183 GG
26493 23-06-2004 May 2004, also available at http://www.dti.gov.za/
ccrdlawreview/companylaw.htm) for optional representation of stakeholders
on boards and the proposed inclusion of the statement recognising
stakeholder interests in the Companies Act constitute a good start to
changing the corporate mindset towards being stakeholder-sensitive.
It is argued that the focus of King II on the triple-bottom line approach is
negated by its ambivalence on enforcement and the status of stakeholders
in the South African corporation. The article then concludes that in a country
which emerged from a history of entrenched overt racism, a significant
recognition of stakeholder interests is critical to the socio-economic need for
transformation to create a stable civil society.
Globalisation has given rise to remarkable increase in the power of the
global corporation. Events in the corporate sector can have negative
repercussions not only for the shareholders of that particular corporation but
also for society at large, either in that particular country or internationally.
The emergence of powerful multinational corporations has led to a demise of
state authority. The spate of corporate failures, however, has precipitated a
move towards strengthening corporate governance rules to ensure that
companies are well governed. Indeed it has been opined that companies
contribute enormously to the economic and social wellbeing of our societies
(Worthington “Corporate Governance: Remedying and Ratifying Directors
Breaches” October 2000 (116) LQR 638).
88 OBITER 2005
Since the dawn of the democratic dispensation, South Africa has
endeavoured to ensure that its corporate governance system is continuously
evolving towards improvement. The aim is to bring the legislative and
regulatory framework in line with the high standards adopted by some of the
developed countries.
After a decade of this exercise it is worthwhile to ponder and reflect on a
critical aspect of corporate governance, namely the concept of the
shareholder as the owner of the company. In this note it is argued that the
endorsement of the traditional system of enhancing shareholder value
through corporations and simultaneously meeting stakeholders’ demands
through corporate social responsibility in South Africa, is open to
considerable doubt. Many developed countries have realised that the
company is not exclusively for shareholders’ wealth creation. However the
problem is in demystifying the old notion that shareholders are “owners” of
the corporation and that the directors’ primary and exclusive duty is to create
wealth for the shareholders. Another problem which arises when analysing
the shareholder and stakeholder paradigm is the move from exclusively
financial reporting to the triple-bottom line approach.
It is also argued that the corporate governance model that South Africa
utilises, the Anglo-Saxon model, is not vigorous enough to ensure that
shareholders and different stakeholder interests are considered in the
operation of the company.
The United States has promulgated the Sarbanes-Oxley Act of 2002 to
ensure a high standards of corporate governance. It will also be useful to
ascertain whether the South African self-regulatory model of corporate
governance is the answer or whether we should legislate.
2 Brief historical perspective
The definition of corporate governance is not settled in literature. According
to the King Report on Corporate Governance in South Africa (1994)
(hereinafter “King I”, par 1) corporate governance is defined as the system
by which companies are directed and controlled.
The primary document dealing with corporate governance in South Africa
is King II. It was formulated under the aegis of South African private
business institutions and draws its spirit from similar reports in the United
Kingdom and the United States (for an in-depth analysis of the historic
development of King II see Mongalo “The Emergence of Corporate Gover-
nance as a Fundamental Topic in South Africa” 2003 SALJ 173 175-179).
The path that South African corporate governance reform has taken is
unique in the sense that it was located within the context of South African
experiences and African cultural heritage. In King II there are references to
the underlying ethos of ubuntu, an African concept which stresses the
principle of reciprocally honouring the inherent worth of all members of the
community. Indeed, Charkham opined that “in the UK and elsewhere,
corporate governance is set in the framework of its political and social
history and attitudes”. (Charkham Keeping Good A Company: A Study of
Corporate Governance in 5 Countries (1994) 1. See further Smerdon A
NOTES/AANTEKENINGE 89
Practical Guide to Corporate Governance (1998) 3, where it is submitted that
“[C]orporate structures vary from country to country. They are the product of
the local economic and social environments”.)
King II provides for the responsibility of the company to its stakeholders
((King II) par 5). In this respect it focuses on the companies’ social
responsibility. Mervyn King comments that:
“All stakeholders now have an interest in the company and corporate
governance has expanded far beyond financial matters. This has given rise to
the concept of triple-bottom line reporting where social, economic and
environmental issues now need to be reported in a sustainable manner” (King
“Corporate Governance: Adopting an Inclusive Approach” May 2002
Management Today 28).
Of critical importance in this regard is that companies should have a clear,
sustainable and integrated approach to give effect to the triple-bottom line
concept.
To appreciate the argument advanced in this note it is perhaps fitting to
begin by explaining the concepts which form the basis of the note: the
Anglo-Saxon and Two-Tier Board models of corporate governance and the
“triple-bottom line approach” to corporate management. The Anglo-Saxon
model is derived from the UK Companies Act of 1884 which enshrined the
concept of a company as a legal entity separate from its owners. In this
model there is a single board of directors appointed by members and
reporting to them on the stewardship of the corporation. Members also
appoint auditors to ensure that members of the company, especially
shareholders, receive independent and reliable information on the financial
standing of the company (see generally Wixley and Everingham What You
Must Know About Corporate Governance 1ed (2002) 3). This in turn enables
shareholders and other interested parties to make informed investment
decisions on the authority of an independent voice.
The Two-Tier Board proper, a “German” model (which also exists in
Austria, and the Netherlands and finds echoes in the Scandinavian
approach), is a “stakeholder model”. (For an in-depth analysis of the Two-
Tier board system see Du Plessis “Corporate Governance: Reflections on
the German Two-Tier Board System” 1996 TSAR 20; and Salzberger and
Theisen “Three Ideas for the ‘Two-Tier’ Approach” http://www.legemedia.
net/dy/articles/article_15789.php#.) The interests of shareholders are
paramount, although stakeholder interests are not relegated to the fringe.
The model entails two boards; the first one is a supervisory board (der
Aufsichtsrat) with no executive power, but with authority to appoint, approve
or remove a manager of the board. Employees and shareholders are
represented on this board. The second one is a management board (der
Vorstand) which is responsible for the ongoing management of the
enterprise and has the responsibility of reporting to the supervisory board
(Wixley and Everingham 4). It has been opined that in Germany economic
criteria come second to social duty and the company is obliged to the
community in which it stands (Charkham 8).
The “triple-bottom line”, a phrase coined by John Elkington in 1994,
means that the board of directors needs to balance and integrate economic
90 OBITER 2005
and social development and environmental protection in the operation of
their companies (Visser and Sunter Beyond Reasonable Greed: Why
Sustainable Business is a Much Better Idea! (2002) 65; and Naudé
“Sustainability Reporting Simplified” February 2005 Accountancy SA 22-24,
22). This broad concept of sustainability reporting has been widely adopted
by the business world. Indeed, King II provides that every company should
report, at least annually, on the nature and extent of its social transformation,
safety, health, and environmental policies and practices (King II par 5.1).
The guidelines on corporate law reform also give special attention to the
“triple-bottom line” approach where it provides that in the new company
legislation:
“Disclosure should extend not only to financial information, but should include
statements on compliance with public interest legislation, including Black
Economic Empowerment Act, environmental regulation and labour regulation.
This is generally referred to as Triple Bottom Line Accounting” (Guidelines for
Corporate Law Reform 41).
3 Shareholders versus stakeholders
As mentioned earlier, the South African corporate governance model
perceives the company as a vehicle for maximising shareholders’ wealth.
The common law position in this regard has been that reference to the duties
of directors to act in the best interests of the company means that they
should act in the best interests of shareholders as a general body. (In this
regard see the Australian case of Kinsela v Kinsela Russel Pty Ltd (1986) 10
ACLR 395 CA NSW 401, where it was decided that “the proprietary interests
of the shareholders entitles them as a general body to be regarded as the
company when questions of duties of directors arise”.) Given the social
background in South Africa and international trends, it was critical that the
King Committee lay down guidelines for ethical practices in business. King II
further gives credence to this where it provides explicitly that every company
should report at least annually on the nature and extent of its social
transformation, ethical, safety, health and environmental policies and
practices (King II par 5).
It is submitted that although the socio-economic conditions of the country
have to be taken into account, the emerging global trend in corporate
governance is to shift from focusing on the financial aspect of the company
to broad initiatives embracing diverse issues. The vexed question is the
viability of incorporating a balanced and meaningful contribution to groupings
pursuing contrasting agendas. In other words, how can one expect harmony
and sustainability in business between shareholder wealth-maximising
initiatives, and societal or stakeholder interests?
The running of the corporation as a tool for creating shareholder wealth is
not a virtue. Sappideed opines that the providers of long-term debt finance
also have ownership rights in the corporation which needs to be
safeguarded and further, that a duty to maximise shareholders’ wealth
creates perverse incentives, because it invites managers to maximise wealth
in whole or in part at debt holder’s expense (Sappideed “Fiduciary Obligation
to Corporate Creditors” 1991 JBL 365, 395). It is submitted that debt holders
in the company are stakeholders and that Sappideed provides an example
NOTES/AANTEKENINGE 91
of how maximising shareholder value can be adversative to advancing
stakeholder interests.
In their evaluation of King II, Kakabadse and Korac-Kakabadse argued
precisely that proposing a corporate governance model where companies
have to satisfy shareholders’ demands by their ability to harness market
forces while requiring them, by dictates, to satisfy stakeholders might raise
substantial tensions (Kakabadse and Korac-Kakabadse “Corporate
Governance in South Africa: Evaluation of the King II Report” 17 January
2002 (Draft) Vol 2 No 4 Journal of Change Management 305 312).
It is submitted that one of the myriad aspects of corporate governance is
the achievement of an optimal balance between running the company for the
benefit of shareholders and ensuring that the company, wherever possible,
contributes to the economic and social programmes where it is located. This
may be referred to as a broad concept definition of corporate governance
(adapted from Mongalo 2003 SALJ 117). The point of departure in this
regard should be to accept that companies are in business to make profit,
and that not all companies will be able to contribute to, for instance, social
reform initiatives.
It should be appreciated that, in terms of King II, directors are not only
responsible for relations with the stakeholders, but are accountable to the
shareholders (King II par 5). If the “narrow concept definition of corporate
governance” is favoured in South Africa instead of the broad concept, a
rationale for providing for the responsibility of directors to stakeholders is
more apparent than real. This submission is further supported by Mongalo
where he suggests that if the concern in corporate governance reform is to
do away with shareholders’ return, the question is whether the goal of
considering stakeholders’ interests will ever be achieved (Mongalo 2003
SALJ 177 fn 35).
While King II raises the importance of ethical practices it, however, lacks
the organisational developmental technique of ensuring the implementation
of those ethical practices, including the shift towards a stakeholder sensitive
management.
It is submitted that, when faced with corporate decision-making,
stakeholder interests will always be relegated to the periphery whenever the
decision is likely to jeopardise shareholders’ wealth creation. King II seems
to have tried, ineffectively it is submitted, to bridge the gap between
shareholders and stakeholders by making provision for independent non-
executive directors. One of the primary duties of non-executive directors is to
act as “buffers” between the executive directors and the company’s outside
shareholders; that is, they monitor the executive actions and question
executive decisions and are required to ensure that the company is acting in
a “responsible” way and in the best interest of the shareholders and other
stakeholders. (Pass “Corporate Governance and the Role of Non-Executive
Directors in Large UK Companies: An Empirical Study” 2004 Vol 4 No 2
Corporate Governance International Journal of Business in Society 52 59).
Potential limitations on the role of non-executive directors in this regard are
disconcerting. The first challenge is the multiplicity of boards on which most
non-executive directors sit. The value which they add to the boards on which
92 OBITER 2005
they sit is therefore questionable. Second, they are appointed on a part-time
basis and the question which arises is whether it is prudent to rely on part-
time “outsiders” to keep boardrooms in check. Thus, non-executive directors
may be unable to devote sufficient time to the company to really understand
the needs of the company (Pass 58-60). If the role of non-executive directors
is questionable in South Africa, it is submitted that bridging the gap between
stakeholder and shareholder interests will remain elusive. Indeed, it has
been argued that in the South African context a robust debate is required on
the extent to which non-executive directors can realistically be expected to
perform the roles expected of them. (Dlamini “Shareholders Show Their
Muscle” City Press 20-02-2005 available at http://www.finance24.com).
It is also worth noting that the concern regarding non-executive directors
resulted in the UK government appointing the Higgs Commission under
Derek Higgs to review the role and effectiveness of non-executive directors
on corporate governance matters. The Higgs Report was published in
January 2003 (available on http://www.dti.gov.uk/cld/non_exec_review).
While companies might embrace, as some have done, the idea of non-
executive directors, the vexed question is whether a non-executive director
sitting on the unitary board structure would be able to resist the allure of
short-term equity based capital demands adversative to stakeholder
interests (Kakabadse and Korac-Kakabadse 313). The point being made is
that in the current South African Anglo-Saxon model of corporate
governance, stakeholder interests will never be truly given effect to; the
balancing of interests of the parties with conflicting agendas is open to
considerable doubt.
The treatise on corporate governance models reveal that the Two-Tier
Board model is more suitable than the Anglo-Saxon model for any country
intent on initiating a broad-based, stakeholder- and shareholder-inclusive
corporate governance model. Given that the South African socio-political
environment, is intent on redressing the imbalances of the past that
promoted perverse socio-economic conditions which still persist, the country
cannot afford exclusively to adopt a model where maximising shareholder
value will be pursued at all costs. Mongalo captured the essence of the
changing nature of corporate governance thus:
“It is indeed true of a modern company that profit, or need of it, cannot be the
only bottom line in company operation. The post industrial era brought with it
the realisation that companies were not operating in vacuum. The shibboleths
of the exclusive approach or shareholders supremacy at all cost approach
started to fall apart … During this time, companies realized that the ‘inclusive
approach’ represents the future of every company” (Mongalo 2003 SALJ 191).
He argued that the inclusive approach recognizes that, whenever
developing the company strategy, stakeholders such as the community in
which the company operates, its customers, its employees, and its suppliers
need to be considered. We are currently witnessing this process taking root
under the term “Corporate Social Responsibility”. It is now worthwhile for any
company to be seen to be investing in the community it serves through
various initiatives. Although the “rules of the game” in corporate governance
have changed, there are grounds for scepticism under our model.
NOTES/AANTEKENINGE 93
4 Corporate governance models
It can be argued that the concept of corporate governance is universal and
somehow derived from countries which have pioneered the initiative of
passing Corporate Governance codes. Different countries strive to adopt
different models that are conducive to their societies or seek to ensure that
their models resonate well with the policies of the respective countries.
Charkham argues that in corporate governance models everyone is to some
extent imprisoned by their history, social, political and economic realities
(Charkham 1). South Africa is no exception. King II among other things,
makes recommendations regarding gender issues and black economic
empowerment, which are initiatives to realise the socio-economic need for
transformation to create a stable civic society and sustainable economic
development (King II par 4).
In addition, various statutes (Basic Conditions of Employment Act 75 of
1997; the Employment Equity Act 55 of 1998; the Skills Development Act 97
of 1998; and the Skills and Development Levies Act 9 of 1999) have been
passed to realise the above mentioned priorities and many others, the latest
example being the Broad-Based Black Empowerment Act (53 of 2003). It is
however submitted that, if one appreciates the gaping chasm that exists
between the citizens in the country, both in terms of skills and access to
opportunities, it will take time to realise the goal of ensuring the meaningful
participation of the majority of previously disadvantaged South Africans in
the economy. However it should be stated that legislation in every aspect of
the economy, to ensure such participation, will not be conducive to
sustainable economic growth in general and attracting foreign direct
investments in particular. It is submitted that it is debatable whether the
widely accepted Anglo-Saxon model is favourable to South African society.
The main difference between the two models is that the Anglo-Saxon
model is traditionally directed at maximising shareholder value whereas the
Two-Tier Board seeks to balance the interests of both the shareholders and
the stakeholders. This difference is succinctly set out thus:
“The implication is that the former (shareholder perspective) relies on ‘quick
money’, ie, reasonably foreseeable return on investment, whereas the latter
focuses more on ‘slow money’, ie distribution of investment over a long period
involving a greater number of directly (or even indirectly) connected
stakeholders” (Kakabadse and Korac-Kakabadse 313).
Considering the circumstances under which business operations are
conducted in South Africa, coupled with the transformation agenda, it may
be argued that the Two-Tier Board system is more suitable for the country
than the current Anglo-Saxon model which is more convenient in a “market
place focused on short-term perspective to the detriment of general
economic performance” (Wixley and Everingham 8). It is submitted that the
Two-Tier Board model is one of the measures to balance the divide between
shareholder and stakeholder interests. It is clear from the German
experience that the system can be operationally more wearisome; for
instance unions, shareholders, and other stakeholders sit on the supervisory
board, and these may delay reaching of consensus on various issues but it
can be one of the ways in which business can move from the notion of
94 OBITER 2005
individualism to inclusiveness. It has been said that viewed in its entirety the
Two-Tier Board system has proved to be meaningful in Germany. (Du
Plessis 41. It is appreciated that there might be contrasting views on the
efficacy of the Two-Tier Board system in Germany.)
Companies are now realising that it is no longer good enough to look at
the company’s financial standing; the stakeholder concept has taken root
(King May 2002 Management Today 28). However, not all companies
embrace the idea that in addition to their shareholders they also have to be
genuinely concerned about different stakeholders. Shareholders are also in
the position to curb any move towards stakeholders’ activism if this is
considered antithetical to their aspirations to maximise wealth. Whether the
company’s practice will put it in the best position in its compliance with
corporate governance rules will not be an issue. Shareholders can vote
against any initiative as they are entitled to vote in their own interests.
A cursory reading of King II reveals that the interests of the shareholders
will always be pivotal, thus relegating the stakeholders’ interests to a
secondary position. It is submitted that in any stakeholder interests initiatives
issues will be determined on the “cost/benefit analyses” (what the company
is going to gain in return). If this submission is correct, the question that
arises is whether the responsibility of the directors to the stakeholders as
contained in the King Report can meaningfully be attained. The question is
whether, in its self-regulatory mode, the King Report will succeed in striking
the necessary balance between the incongruous interests of shareholders
and stakeholders.
5 Enforceability
Compliance with the King Report is not compulsory. It derives its teeth,
partly but not satisfactorily, from the JSE Securities Exchange South Africa
(JSE) Listing Requirements. King I provided that its recommendations
should form part of the listing requirements for companies on the main board
of the JSE (Chapter 19 par 2.1). King II provides that the code applies to all
companies listed on the JSE Securities Exchange. Sanctions imposed by
the JSE Listing Requirements for non-compliance with the King Code or
listing requirements vary depending on the nature of the company or entity
that has failed to comply. (Sanctions are imposed under s 1 of the JSE
Listing requirements and vary from suspension of the listing of the
company’s securities; power of censure; publication of those responsible for
breaching the requirements and termination of the listing.) One of the
shortcomings of the JSE in this regard is that listed companies are only
required to disclose the reasons for failure to comply with King II (s 1 of JSE
Listing Requirements). These undoubtedly open doors for selective
disclosure and a box-ticking compliance.
It is not clear how the directors are responsible for the relations with the
stakeholders as provided in the code. In this respect it has been submitted
that:
“It is difficult to understand the committee’s insistence that directors are
accountable to the company and only responsible to other stakeholders. What
does this mean? Does it mean that stakeholder interests are independent of
NOTES/AANTEKENINGE 95
or subordinate to the interests of shareholders? Are directors entitled to treat
stakeholder interests as ends in themselves or consider them as means to
ensuring the success of the company in the collective best interest of
shareholders? ... Thus there is a lot of confusion in King II on the issue of
stakeholders” (Mongalo “Governance and the Constitution: A Case for
Broadening the Stake-holder” in Pete and Du Plessis (eds) Constitutional
Democracy in South Africa 1994-2004 (2004) 174).
It is submitted that in as much as King II is ambivalent on the issue, the
significant recognition of stakeholder interests might remain an elusive goal.
The structural basis of South African corporate law is founded on the
accountability of directors to the shareholders. Unless there is a change from
that model, shareholders will always be “owners” of the company/corporation
and the ultimate beneficiaries.
Certain companies realise that stakeholder interests are worth their
attention. Much depends on who the company would perceive as its
stakeholders. Many companies who have reported on compliance with the
code and triple-bottom line concept do not meet the objectives the
committee was striving for (Khoza “Corporate Governance: Integrated
Sustainability Reporting” May 2002 Management Today 18 20). The tick-box
approach is prevalent. It will be difficult to defuse this trend as long as
reporting is on a voluntary basis.
It is submitted that it is unlikely that the government, as the power that can
strike a necessary balance between competing interests, can at this stage or
in the near future intervene. Indeed, it has been suggested in the company
law reform policy document that the current corporate governance model will
be retained and that stakeholders’ representation on the board will be
optional (Guidelines for Corporate Law Reform 39). Contrasting views
abound. The corporate law reform policy document’s patent stance that
South Africa cannot simply follow the Anglo-Saxon model of “shareholder
dominance” theory and putting the stakeholder argument in its constitutional
perspective need to be welcomed as both in keeping with international
trends, our socio-economic realities and the supremacy of the Constitution
(the Constitution of the Republic of South Africa Act 108 of 1996). The policy
document provides that:
“It is proposed that in the South African context, the company law needs to
take account of stakeholders such as the community in which the company
operates, its customers, its employees, its suppliers and the environment in
certain situations mandated by the Constitution and related legislation”
(Guidelines for Corporate Law Reform 26).
The argument of paramount importance in this regard is that for corporate
law to be congruent with the Constitution and consequential legislation,
shareholder interests should be balanced with those of other stakeholders
“when this is appropriate and/required by the Constitution and related
legislation”. It is however crucial that there is “a degree of consensus on how
far the role of each stakeholder can go to minimise or avoid the tendency to
place unrealistic expectations on business, government and the civil society”
(Dlamini “Why Trust and Credibility are Important for Business Sunday
Times Business Times 2004-10-17 www.sundaytimes.co.za 6). For an
illuminating discussion on how stakeholder interests can be protected
96 OBITER 2005
through the prism of the Constitution, see Mongalo (178-180) where it is
argued that “For law not to require directors to consider their (stakeholders)
interests in South Africa’s peculiar socio-economic environment is for law to
fail as an engaged participant in the reform of corporate law post-1994”.
It is hoped that this is a realisation that the current rigid affirmation of the
Anglo-Saxon model of corporate governance is antithetical to the socio-
economic realities in the country. In endorsing the stakeholder model South
Africa will be following states like the State of Massachusetts where as early
as July 1989 the law provided that:
“In determining what he reasonably believe to be in the best interest of the
corporation, a director may consider the interests of corporation’s employees,
suppliers, creditors and customers, the economy of the state, region and
nation, community and societal considerations, and the long-term and short-
term interests of the corporation and its stockholders, including the possibility
that these interests may be best served by the continued independence of the
corporation” (s 65 of Mass. Gen. Law Ann. ch.156B).
Furthermore, communicating information to stakeholders without involving
them in corporate decision-making smacks of paying lip service to the triple-
bottom line approach which is one of the important components of King II.
(See s 4 King II (2002); and Mongalo “South Africanising Company Law for a
Modern, Competitive Global Economy” 2003 SALJ 93 115.)
Part of the answer lies in the companies’ change of heart. (See Botha
“The Changing Business of Business in South Africa: Some Comments on
Developments in the Scope and Control of the Social Responsibility of
Business in South Africa” 1994 SA Merc LJ 90 95: “It is a debatable and
controversial point as to whether some form of legislation will be enacted to
influence and/or control the nature and extent of corporate social
responsibility.”) There are many proponents for change from a shareholders’
model to a broader stakeholder’s model. Internationally, there has been a
growth of “stakeholder-orientated shapeshifters”. (See Visser and Sunter
“Beyond Reasonable Greed” September 2002 Accountancy SA 3 5. The
authors list companies like 3M, AT&T, The Body Shop, Canon, Electrolux,
Hewlett Packard, Levi Strauss, Reebok, Unilever, Volkswagen and Volvo.) In
South Africa, while there is room for scepticism, the edifice has begun.
Companies are accepting the importance of stakeholders’ interests (Botha
1994 SA Merc LJ 91-92). What is critical is that many stakeholders believe
that executives do not run companies for the benefit of consumers or
investors but for personal ambition and financial gain, and that the
companies act with impunity to the damage they cause to societies (the
depletion of its resources and exploitation of social capital) and the
environment (through the emission of toxic gases and waste products)
(Bhasa “Global Corporate Governance: Debates and Challenges” 2004 Vol
No 2 Corporate Governance International Journal of Business in Society 5
8). It is therefore important that business engages with stakeholders to
restore trust and credibility damaged by the spate of corporate governance
scandals locally and internationally.
It is submitted that the relationship between government and the business
sector can efficiently be productive without promulgating legislative material
which more often than not scares off potential investors. This is even more
NOTES/AANTEKENINGE 97
relevant to emerging markets like South Africa. The prevention of
government intervention in the form of legislation can be achieved by the
companies themselves. Companies in general and directors in particular
have to wholeheartedly accept their share of the responsibilities that came
with socio-economic changes in South Africa and that business has changed
to include not only wealth creation, but also activities of critical importance
which would contribute to the redistribution of wealth, partnering the
government in its initiatives to push back the frontiers of poverty and
ensuring that the majority of South Africans are introduced to participate
meaningfully in economic activities and ultimately realising the goal of
sustainable economic development. Naidoo argues that “the most significant
obstacle to the implementation of good corporate governance and
meaningful social, ethical and environmental accountability lies in the way
management thinks within an organisation” (Naidoo Corporate Governance:
An Essential Guide for South African Companies (2002) 148).
While King II is ambivalent on the issue of enforceability and stakeholder
interests, the King Committee should be commended for raising corporate
governance awareness in South Africa in the past decade of democracy.
Whether King II, in its Anglo-Saxon mode, is sufficient to raise corporate
governance standards on issues of stakeholder and shareholder
relationships in particular and the triple-bottom line approach in general is
debatable. However the proposals of the DTI pave the laudable way forward
on the issue of stakeholder interests. As hinted earlier, caution needs to be
exercised lest unrealistic expectations be placed on business. It should also
be recognised that “silent stakeholders” such as local communities and “the
environment” may be less easily identifiable and less coherent in articulating
their viewpoints (Simmons “Managing in the Post-Managerialist Era:
Towards Socially Responsible Corporate Governance” 2004 Vol 42 No 3/4
Management Decision 601 604) but their recognition, together with other
stakeholder interests, should begin with a clear articulation of their
importance in 21st century business operations.
6 The role of legislation: aligning shareholder and
stakeholder interests
It is perhaps fitting to start by mentioning that although King II is a
comprehensive code on corporate governance in South Africa, it is not the
law. Its formation was not initiated by the DTI and non-compliance with it is
not visited with legal sanctions.
There are contradictory opinions as to whether statutory corporate
governance rules are the only way of ensuring high corporate governance
standards. On a balanced view, Charkham opined that the regrettable fact
about codes is that they affect least those who need them most, the good
follow them and the bad avert their gaze. However the author is quick to say
that voluntarism has its own shortcomings even though excessive legislation
may be counterproductive (Charkham 262). There are advantages as there
are disadvantages for the self-regulatory corporate governance regime and it
is generally accepted that the “pros” outweigh the “cons” (see generally
Mongalo “Self-regulation Versus Statutory Codification: Should the New
98 OBITER 2005
Regime of Corporate Governance be Accorded Statutory Backing?” 2004
Obiter 264).
In the context of the stakeholder-shareholder relationship, those charged
with reform of company law in South Africa treated the issue of statutory
codification with a requisite perceptive restraint. The position in this regard is
clear; first, advancing the interests of stakeholders is not a subordinate
consideration to the primary goal of directors to act in the best interest of the
shareholders; second, the advancement of certain stakeholders may be best
achieved through separate legislation; and third and most importantly,
allowing the enforcement of rights for all legitimate stakeholders in company
law would lead to multiplicity of unnecessary and avoidable litigation
(Guidelines for Corporate Law Reform 27). It is submitted that a combination
of statutory and voluntary measures is a feasible alternative.
It is submitted that for an emerging economy like South Africa, following
the international trend of a flexible philosophy of “comply or explain” and
complementing it, where appropriate, with statutory backing is inevitable. As
hinted earlier, the multitude of statutory material will increase the costs of
doing business in the country and ultimately stifle sustainable economic
development. The complementary legislative and self-regulatory
environment is conducive to attracting foreign direct investment into the
country. Indeed, it has been opined that the brittleness and rigidity of
legislation cannot dictate the behavior or foster trust which is fundamental to
superior corporate performance but the codes can and should regularly
evolve to lead best practice in the boardroom and raise the bar for
performance (Higgs 3-4).
7 Conclusion
The contrasting ideologies of shareholder and stakeholder interests can be
difficult to reconcile. King II will not be able to ensure the responsibility of
directors towards stakeholders. However, change is inevitable and
companies are realising that they have to be part of the community where
they are situated and that this comes with responsibility. Furthermore, there
is an international apprehension on the challenges faced by business in the
changing expectations of society towards business. South Africa cannot
afford to be left unscathed if we are to be serious and competitive players on
the international scale.
The commitment by companies to seriously advance the interests of
various stakeholder groups is currently questionable. It is submitted that
there are three challenges that pose a difficulty to inculcating a culture of
moving beyond maximising wealth only for shareholders. First, the self-
regulatory nature of the South African primary corporate governance
instrument, that is, King II; second, the propensity of shareholders to vote
against any initiative perceived not to be value-maximising and third, the
failure of companies to compromise on their value-maximising initiatives.
On the first challenge, clearly voluntarism has its own shortcomings but
excessive legislation can also be counterproductive and in South Africa it will
not work. Promulgating legislation on critical corporate governance issues
NOTES/AANTEKENINGE 99
raised in this paper will be the equivalent of stultifying the economy as a
whole. (For advantages and disadvantages of self-regulatory corporate
governance see Mongalo 2004 Obiter 275. The author argued that “in a well
organised corporate environment, codes of best practice should work
harmoniously with the statutory enactments or official regulations”.
International trends also point towards the efficacy of adopting voluntary
compliance supported by the legal system. Amongst voluntary corporate
governance reports one can mention: The Hilmer Report of 1993 (Australia);
the Cadbury Committee of 1992 (UK); the Vienot Report of 1995 (France);
Greenbury Report of 1995 (UK); Peters Report of 1997 (Netherlands);
Hampel Report of 1998 (UK); and Bajaj Committee Report of 1999 (India).)
The solution therefore, is to be vigorous in attempts at achieving the optimal
balance between shareholder and stakeholder interests.
There is nothing that can be done by the voting pattern in the companies’
general meetings; shareholders will always be influenced by value-
maximising when they cast their votes. Due to the improbability of legislation
on the issue raised in this note, the challenge is on the companies to break
down the walls of reluctance in their dealings, decision makings, policies and
values and shift from pure wealth creation principles to the broader ideology
of responsibility to stakeholder interests. Failure in this respect will mutate
itself into a difficult, if not impossible, mission of finding an appropriate
balance between social, economic and environmental development which, it
is submitted, is the essence of King II.
Siyabonga Shandu
Legal Researcher, Natal Provincial Division: High Court
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