What is corporate governance?

Corporate governance is the system or process by which companies, partnerships, close corporations and trusts are directed and controlled. Directors of the board, members of a close corporation and trustees of a trust are all responsible for the governance of their enterprise.

The concept of corporate governance has grown in prominence in recent times. In the wake of Enron, WorldCom, Adelphia Communications and an ever-lengthening litany of corporate malpractice scandals, finding new ways to protect average investors has become an international priority. It is, therefore, not surprising that corporate governance reform is gaining importance as a crucial mechanism for addressing the erosion of investor confidence.

It goes without saying that there is no single, universally appropriate, model of corporate governance. This principle is recognised in the King Report on Corporate Governance for South Africa 2002 ("King II"), which reiterates that:

"companies are governed within the framework of the laws and regulations of the country in which they operate. Communities and countries differ in their culture, regulation, law and generally the way business is done. In consequence, as the World Bank has pointed out, there can be no single generally applicable corporate governance model. Yet there are international standards that no country can escape in the era of the global investor. Thus, international guidelines have been developed by the Organisation for Economic Development Principles of Corporate Governance (OECD), the International Corporate Governance Network and the Commonwealth Association for Corporate Governance. The four primary pillars of fairness, accountability, responsibility and transparency are fundamental to all the international guidelines of corporate governance."[1] (Our emphasis)

It follows that corporate governance can not be reduced to a set of pro-forma rules capable of mechanical application. It is, and should be, a flexible, tailor-made, multidimensional process to which a company, and many and varied individuals, submit themselves.

Many companies in the corporate arena today have a distinctive split between control and ownership. The need for corporate governance becomes ever increasing as directors are becoming more accountable to their shareholders and stakeholders. 

Other enterprises such as trusts, close corporations, partnerships and sole proprietors do not necessarily have to ensure that they comply with the requirements of corporate governance due to their nature and composition. However, as will be discussed in a later part of this publication, it is suggested that these enterprises follow the broad, underlying principles of corporate governance recommended in King II.

The primary sources of law and regulation relating to corporate governance and director's duties comprise:

1. statute, particularly the Companies Act, the JSE Listings Requirements of the JSE and the Securities Regulation Code on Take-overs and Mergers. In addition, there is special-purpose legislation such as the Banks Act, 1990, the Long-term Insurance Act, 1998, the Short-term Insurance Act, 1998, the Financial Markets Control Act, 1989, the Stock Exchanges Control Act, 1985, the Unit Trusts Control Act, 1981 and the Public Finance Management Act, 1999;
2. the common law ;
3. the company’s articles of association; and
4. King II.

The first part of this publication will detail the common law and statutory duties and responsibilities of directors, sole proprietors, partners, members of close corporations and trustees whilst the second part of the publication will detail the recommendations laid down in the King Reports on corporate governance. It is our aim that this section will explain the principles of corporate governance in the South African context and provide practical guidance to the people who are responsible for ensuring good corporate governance in their enterprises.