The Dynamics of Corporate Governance in South Africa: Broad Based Black Economic Empowerment and the Enhancement of Good Corporate Governance Principles

• Author: Irene-marié Esser; Adriette Dekker
• Position: Senior Lecturer: Mercantile Law University of South Africa. Professor: Mercantile Law University of South Africa
• Pages: 157-169

Key words: Corporate governance, South Africa, broad based black economic empowerment, stakeholders, triple-bottom line approach.

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1 Introduction

Directors are expected to manage a company in the best interests of the shareholders collectively. This traditional view is increasingly being questioned. There is pressure on companies and directors to take into account not only the shareholders when they manage a company, but rather the interests of all stakeholders, such as employees, creditors, consumers, suppliers, the environment and the community. This consideration for the interests of other stakeholders is known as corporate social responsibility.¹

In the South African legal sphere, there is specific legislation which compels companies to take the interests of certain stakeholders into account. This is, for example evident in the Labour Relations Act 66 of 1995; the Promotion of Access to Information Act 2 of 2000; and the Broad Based Black Economic Empowerment Act 53 of 2003 (hereafter the BBBEE Act). The South African BBBEE Act, not only aims to correct racial imbalances, but also strives to promote social investment and the empowerment of communities. This paper will discuss the impact of Broad Based Black Economic Empowerment (BBBEE) on corporate governance in South Africa.

This paper will illustrate how, through BBBEE legislation, directors are compelled to consider the community as a stakeholder and to manage a company to its benefit as well. The first section of this article defines corporate social responsibility. The discussion of social responsibility is followed by a discussion of directors' duties and specifically addresses the question in whose interests they should manage a company. The traditional position in South Africa concerning the beneficiaries of directors' duties, the King II Report,² the Policy Document³ on company law reform, as well as the recent Companies Bill are focused on.

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In the second part of this article the South African BBBEE Act is considered and it is explained how this Act addresses racial imbalances and promotes social investment. Even though social responsibility traditionally concerns voluntary initiatives by companies, it is indicated that legislation can be used as a tool to enhance corporate governance in companies. It is argued below that law plays an increasing role in enforcing corporate social responsibility policies.⁴

2. Corporate Social Responsibility

Social, safety, health and environmental factors have been introduced as important factors that company management must have regard to. Since this article deals with the consideration of social aspects when directors manage a company it is important to understand the concept of corporate social responsibility. In essence, it relates to the consideration of the interests of different stakeholders. A company is said to be socially responsible when directors manage it in such a way that the company "voluntarily expends its resources to do something not required by law and without immediate economic benefits".⁵ According to Parkinson "[E]very large corporation should be thought of as a social enterprise, that is, an entity whose existence and decisions can be justified only in as far as they serve public or social purposes." ⁶ Parkinson suggests that company directors should take some social responsibility for the decisions they make when managing a company. The behavior of companies should reflect an increased sensitivity to the impact of the company's activities on third parties. He refers to this suggestion as "profit-sacrificing social responsibility".⁷ However, he does state that "profit-sacrificing social responsibility" may lead to an increase in profitability over the long term.⁸ Parkinson believes that the duty of directors and the internal structures of major companies should be altered to take account of stakeholders' interests beyond that required of directors in terms of the law.⁹

The above mentioned assumption that corporate social responsibility is voluntary and that it relates to a company extending it resources to do what is not required by law merits further attention. The role of legislation and other forces in facilitating socially responsible conduct is considered by McBarnet. First she states that various external and market forces compel companies to act in a socially responsible manner beyond that required of them in terms of legislation. These forces include pressure on companies by non-governmental organizations to adopt socially responsible policies and protests by civil societies against certain practices of companies (for example the campaign against Nike and their use of cheap labor).¹⁰

She then argues that the law also plays an important role in enforcing socially responsible behavior. Governments foster corporate social responsibility through indirect regulation.¹¹ McBarnet therefore concludes that corporate social responsibility can no longer be seen as a mere voluntary act: "what is emerging in the area of CSR [corporate social responsibility] is a complex interaction between government, business and civil society...".¹²

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With legislation indirectly compelling companies to act in a socially responsible manner one can no longer refer to corporate social responsibility as consisting only of voluntary actions. If corporate social responsibility is still regarded as a voluntary act and legislation compels companies to act socially responsible what would companies have to do to act socially responsible? Do they have to do more than what the legislation compels them to do? But what is "more than compelled by legislation" and how does one predict it? We propose a definition of corporate social responsibility that also takes legislation which indirectly compels directors to act socially responsible into account. Thus, corporate social responsibility should rather be aimed at social conduct where stakeholders' interests are taken into account be it by way of indirect legislation or by way of voluntary conduct.¹³

In the next section, the duties of the directors are considered in order to determine the extent of the social concerns they are allowed to consider in order to cause the company to act in a socially responsible manner.

3. Directors' Fiduciary Duties in terms of South African Company Law

In terms of South African company law, the fiduciary duties of directors are categorized into separate sub- duties. These include acting with an unfettered discretion, for a proper purpose, within the limits of powers conferred upon the particular director and without a conflict of interest. All these duties form part of one overriding duty, namely to act in good faith for the company as a whole.¹⁴ The interpretation thus far has been that the duties of directors should be exercised in the best interests of the company. The concept of "a company as a whole" relates to shareholders "collectively", "all the shareholders, present and future", and the company as a "separate legal entity."¹⁵ Directors must act in good faith in the interests of the company seen as the interests of the shareholders collectively.¹⁶

There has, however, been a shift in public opinion towards the recognition of a wider variety of interests, which should be considered in addition to those of the shareholders.¹⁷ The wider variety of interests includes, inter alia, those of the following stakeholders: investors, employees, consumers, the general public, and the environment. This article focuses on the community at large as a stakeholder. The interest of the wider community is served by BBBEE in light of past discrimination under Apartheid. As a stakeholder, the community has an interest in the way the company is managed by the directors. If it is managed to address existing racial imbalances in the economy and encourage socio-economic upliftment, the best interests of the community will be served. This exhibits the characteristics of good corporate governance by being sensitive to the impact of the company's decisions on the South African society.

Two important schools of thought have developed in response to the question in whose interest the company should be managed, namely the enlightened-shareholder value and pluralist approaches.¹⁸ In the enlightened-shareholder value approach, the primary role of the directors is seen as promoting the success of the company for the benefit of the company as a whole and to generate maximum value for shareholders.¹⁹ The second school is that of pluralism which sees shareholders as one constituency among many and recognizes the Page 160 interests of various groups.²⁰ Thus, a company's existence and success are seen as intertwined with the consideration of the interests of its employees and other potentially qualifying stakeholders in the business, such as suppliers and customers.²¹

Esser and Du Plessis propose a "third" school of thought to determine the true meaning of "the company as a whole" and the beneficiaries of directors' duties.²² A company is represented by several interests, including those of shareholders, employees and creditors. It is argued by Esser and Du Plessis that to require directors to act in good faith in the interests "of the company", cannot mean...