South Africa and Stakeholder Rights

This Blog tries, when the opportunity is presented, to shed light on corporate governance practices from other countries that vary from those in the United States. In part this illustrates the lack of uniformity in the area. In addition, however, it demonstrates that there may be ways the US can learn from the experience in other countries in reforming its own governance process.

In the Fall, students from my comparative corporate governance class produced some posts that raise interesting issues. Over the next week or so, we will publish some of them. The following post today is about the system of governance in South Africa and was written by Carrie Stanley, a third year student at the University of Denver Sturm College of Law.

The end of Apartheid in South Africa prompted major revisions to the common law country’s policies and practices, including corporate governance. International and domestic pressures called for the country to address human rights abuses of the previous regime, and the weak state of the economy caused the government to seek out policies that would lead to market stabilization in an effort to attract foreign investors.

This led to South Africa’s adoption of the King Report, a voluntary governance code of corporate practices and conduct. The Report, first published in 1994 and revised in 2002, solicits voluntary compliance with a multitude of corporate governance directives, including director duties and responsibilities, requirements for internal audits, a compensation committee, a code of ethics, and annual reporting.

What makes the King Report unique from other voluntary codes is that it goes beyond the traditional financial and regulatory aspects of corporate governance by advocating an integrated approach taking into account social, financial, and environmental interests. Coined “the triple bottom line,” or “people, profits, planet,” this approach calls for companies to move away from profit maximization when developing business strategies and focus on a broad range of stakeholders, such as customers, employees, suppliers, and the community.

The King Report made compliance with the triple bottom line voluntary. Most public companies, however, comply because external sources track and publish performance, providing a powerful incentive. For example, South Africa’s security exchange, the JSE, publishes a Social Responsibility Index that measures the triple bottom line performance of selected trading companies. Major South African companies, such as SABMiller, AngloGold Ashanti, and Mondi tout their social responsibility initiatives on their websites.

Legal developments, however, have created the possibility that the triple bottom line will become a legal mandate and a permanent part of the fiduciary duties of directors. Under the existing Companies Law, directors have a fiduciary duty to act in good faith for the “company as a whole.”

Historically, courts have interpreted “company as a whole” to mean acting in the best interests of the shareholders. There has, however, been a shift in public opinion towards the recognition of stakeholder interests, with academic commentators contending that director requirements to act in the interest of the company as a whole “cannot mean anything else nowadays, but a blend of all these [triple bottom line] interests.”

The shift has begun to affect the courts. In Minister of Water & Forestry v. Stilfontein Gold Mining Co., 2006 (5) SA 333 (W), four directors of a Gold Mining Company faced a contempt of court order. The Department of Water Affairs and Forestry directed the company to drain water from a mine to avert pollution and promote safe mining operations in the area. After a period of inaction, the Department filed a court order. The directors still did not comply, stating it was “financially impossible for the company to comply with the directives and remain financially viable.”

The Court held that the directors blatantly failed to comply with court orders and their conduct “flies in the face of everything recommended in the code of corporate practices and conduct recommended by the King Committee.” The Court further held, “the corporate community within South Africa has widely, and almost uniformly, accepted the findings and recommendations of the King Committee on Corporate Governance” and “[t]he King Committee, correctly . . . stressed that one of the characteristics of good corporate governance is social responsibility.”

The Court’s acknowledgement of the King Report and the triple bottom line shows potential for infusion into common law. It is too early to determine how this precedent will affect directors’ fiduciary duty, but it is clear that the Court believes the triple bottom line principles are relevant. Additionally, the legislature has recognized the importance of the principles and drafted some recommendations from the King Report into a forthcoming revised Companies Act. This Act is expected to be effective in 2010.