Corporate Governance in South Africa¶
Stephan Malherbe; Nick Segal (2001). Corporate Governance in South Africa. OECD Development Centre, Corporate Governance in Developing Countries and Emerging Economies project (policy dialogue paper). OECD Development Centre.
| Type | report |
| Scope | Wider apartheid literature |
| Method | mixed |
| Period studied | 1886–2000 |
| Regions | South Africa, Witwatersrand/Johannesburg |
| Themes | business and state, origins segregation, manufacturing industrial policy, macro fiscal finance debt, sanctions divestment, transition post apartheid, unions strikes, politics ideology elections, comparative theory |
| Citation key | malherbe2001 |
Argument¶
Malherbe and Segal explain post-1994 corporate governance reform in South Africa as the unwinding of a corporate order shaped by gold-mining finance and the apartheid 'hothouse' of tariff protection, exchange controls and isolation. Mining finance houses, pyramids and conglomerates bred inward-looking, complacent managements shielded from competition and from the market for corporate control. Trade liberalisation, the return of foreign investors and the 1997-98 emerging-markets crisis then forced restructuring and a wave of governance measures (King Code, JSE listing rules, Insider Trading Act, black economic empowerment). The authors argue that governance matters for stability and growth because corporations hold most of the capital stock, savings and investment. Their core economic-history section is brief; most of the paper deals with 1990s capital-market reform.
Evidence and method¶
South African Reserve Bank national-accounts and capital-stock series; aggregate balance sheets of JSE-listed firms (McGregor-BFA, Genesis calculations); JSE listing and capital-raising data; FIBV cross-country market data; interviews with and quotations from mining executives; secondary literature, chiefly Lipton's Capitalism and Apartheid and Davis on managed trade policy.
Place in the debates¶
- Liberal vs revisionist views on apartheid and business (see Liberal vs revisionist: was apartheid functional or dysfunctional for capitalist growth?). Takes a mixed middle line: firms often benefited from apartheid protection but also bore its costs, and governments mostly served white labour and agriculture rather than capital. Defers to Lipton on the cost-benefit tabulation. Calls apartheid 'an unambiguous loss to the economy and society'.
- Effects of protection and isolation on industrial efficiency (see Industrialisation, protection and industrial structure). Argues that autarky and protection fostered market concentration, management complacency, falling competitiveness and stagnant labour productivity. Concedes that protectionism built a diversified industrial base unlike any other in sub-Saharan Africa.
- Business role in apartheid reform and transition (see Why apartheid ended: reform, transition and elite bargaining). Credits large firms with an active reform role after 1976 (Urban Foundation, support for Wiehahn, early ANC talks, the Consultative Business Movement secretariat). Notes that socially progressive firms were not governance pioneers.
Findings¶
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Corporations dominated capital stock, investment and savings, which is why governance matters to the economy. (p. 3)
Over the last five years, corporations have mobilised more than three-quarters of South Africa’s domestic savings, allocated and planned 85 percent of all investment, and currently own and manage three-quarters of the country’s capital stock.
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The state-owned enterprise share of capital stock grew through National Party industrialisation policy, not nationalisation. (p. 11)
During the next thirty-five years the SOE share in capital stock increased rapidly, peaking at 25 percent of the national total in 1990. This was not as a result of nationalisation, but of the National Party’s use of SOEs
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Segregation-era policy tied protection to preferential hiring of white workers, which raised industrial costs and made protection necessary. (p. 16)
As early as 1924-25, tariff protection and access to government tenders were made conditional on preferential hiring of white workers at high rates of pay.
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Parastatals served as employment and patronage vehicles for Afrikaner workers and managers, funded by rents extracted from the wider economy. (p. 17)
The parastatal monopolies were aggressively used to provide employment for surplus white (mainly Afrikaans) unskilled workers, and eventually to create an Afrikaans-speaking managerial class.
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Protectionism combined with segregation produced strong manufacturing growth in the 1960s despite its distortions. (p. 17)
During 1961-65, real manufacturing output growth averaged 10 percent per year, and during 1966-1970, 7.4 percent.
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Sharpeville capital flight led to exchange controls and the start of cumulative sanctions, pushing the economy towards autarky. (p. 17)
In that year, a violent suppression of a political demonstration in the black township of Sharpeville set off a capital flight. This resulted in the imposition of exchange controls on resident individuals and companies
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Protection rates were incoherent and labour productivity stagnated in the 1970s and 1980s. (p. 20)
By the mid-1970s protection rates were a mishmash of contradictory signals, with effective protection rates ranging from –24 to 94 percent
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Isolation and protection led firms to diversify domestically rather than specialise or export. (p. 18)
The protection ensured that there were rich opportunities available domestically, often in unrelated markets. The rational response was to diversify domestically, rather than to specialise internationally.
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Growth fell sharply after the 1960s while investment and savings collapsed in the 1990s. (p. 14)
1980-89 1.5 216.2 23.7 24.3 1990-99 1.3 220.8 16.3 16.3
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The 1970s African labour and political upheavals pushed big business into a political and reform role. (p. 65)
Mine riots and strikes by African workers at Durban factories in 1973 signalled the end of this era.
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Unions won substantial gains after legalisation and changed management style. (p. 67)
The unions won large improvements in wages and conditions of employment for African workers and, more subtly, undermined the traditional authoritarian management style and forced a more consultative approach.
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Mining-house control and Anglo's dominance were extensive in 1989, then unwound by market pressure. (p. 41)
Of the 20 largest firms by market capitalisation in 1989 − and accounting for 51 percent of the market’s total capitalisation − 17 were controlled by shareholder blocs.
Evidence ledger¶
Sources used¶
| Source | Kind | Period | How used |
|---|---|---|---|
| South African Reserve Bank national accounts series on capital stock, gross domestic investment and savings by institutional sector (Tables 1-5), plus the labour productivity series in Figure 1 | national accounts macro | 1910-1999 (sector breakdowns from 1950) | Shows that private and state-owned corporations own most of the capital stock and account for most investment and savings, and traces long-run growth and productivity decline. |
| South African Reserve Bank data on funding of non-financial businesses by loans, equity and bonds, 1994-98 (Figure 2) | official statistical series | 1994-1998 | Shows that equity raised on the JSE exceeded net new bank loans to non-financial firms in 1998. |
| Financial accounts of JSE-listed firms, compiled by BFA McGregor and Genesis Analytics into aggregate balance sheets by sector (Table 6, Tables A1-A10) | company records or reports | 1994-1999 | Supplies the funding-structure analysis: equity versus retained earnings versus debt, and debt-equity ratios by sector. |
| Financial accounts of Eskom, Telkom, Transnet and Acsa, with Genesis Analytics calculations (Table 10, Table A9) | company records or reports | 1999 | Compares the heavy debt reliance of state-owned enterprises with that of listed private firms. |
| Johannesburg Stock Exchange data on listings, secondary offers and capital introductions, 1995-1H2000 (Tables 8, 9, A13, A14) | stock market financial data | 1995-1H2000 | Documents the 1998 listings boom and the subsequent collapse of equity raising, especially for small firms. |
| FIBV data on market value of equity, public debt and private debt as a share of GDP (Figures 3-4, Table A17) | international trade or finance data | 1999 | Shows that South Africa's equity market is unusually deep relative to GDP. |
| World Bank World Development Indicators 2000 and World Bank/SARB data on institutional assets (Figure 6) | international trade or finance data | 1990s (Figure 6 dated mid-1990s) | Benchmarks South Africa's savings rate and institutional-investor asset size against other countries. |
| JSE and McGregor-BFA market capitalisation data by sector and company, 1989 and 1999 (Figure 5, Tables A11, A12, A16), including top-20 companies and control types | stock market financial data | 1989-1999 | Documents the shift in JSE composition away from mining and the fall in control-bloc firms among the top 20. |
| JSE data on pyramid companies listed, 1989 and 1999 (Figure 7) | stock market financial data | 1989-1999 | Shows the drastic decline in pyramid companies and the share of market value under pyramid control. |
| McGregor-BFA price data on N-share discounts, December 1996 and March 2000 (Table A15) | stock market financial data | 1996-2000 | Shows that the average discount on low-voting N-shares narrowed from 16 percent to ten percent. |
| Interviews or quotations from senior mining executives and industry leaders | interviews oral history | c.1999-2000 | Illustrates that poor capital allocation and weak capital-efficiency measures lay behind pressure on the mining finance houses. |
| Fieldwork and research by Robin Lee and Paul Semark (not otherwise described) | author survey or fieldwork | 1999-2000 | Unspecified fieldwork underpinning the study; nature and extent are not described. |
| King Report and Code of Corporate Practices and Conduct (1994) | commission or official report | 1994 (update announced 2000) | Examined and compared with the Cadbury Code to assess its strengths and its neglect of control-bloc governance and director independence. |
| JSE proposed new listing requirements and governance principles (2000), Appendix 1 | legislation gazette | 2000 | Describes the new disclosure and independence requirements, the pyramid and differential-voting listing ban, and the governance principles. |
| SA Institute of Chartered Accountants Accounting Statement 126 on related-party transactions (1999), based on IAS 24 | legislation gazette | 1999 | Presented as a breakthrough standard requiring disclosure of related-party transactions. |
| Insider Trading Act (1998) and preliminary Insider Trading Directorate outcomes | legislation gazette | 1998-2000 | Used to claim that the Act succeeded, citing settlements, prosecutions and share-price reactions in the first months. |
| Mine Health and Safety Act 1996, National Environmental Management Act 1998 and the 1997 Constitutional Court ruling on director liability | legislation gazette | 1977-1998 | Illustrates the expansion and testing of director and corporate liability. |
| Wiehahn Commission report (1979) | commission or official report | 1979 | Cited as the trigger for legalising African trade unions, part of the account of business's political and social role. |
| Lipton, Capitalism and Apartheid (1986) | secondary literature compilation | 1910-1960 policy history | Authority for the account of how apartheid policy served white labour and agriculture and raised business costs. |
| Davis, South African Managed Trade Policy (1994) | secondary literature compilation | 1925-1970s | Supports the account of trade protection and the figures on effective protection rates. |
| Unattributed figures on black-controlled companies' share of JSE market capitalisation (1 percent to 16.3 percent) | other | mid-1990s to 1999 | Quantifies the rise and subsequent stall of black corporate ownership. |
New data¶
The authors built the first aggregate balance-sheet analysis of the funding structure of JSE-listed non-financial firms by sector (manufacturing, services, TMT, emerging, mining, SOEs and the 'London Three') for 1994-1999. They also compiled JSE capital-raising tables, pyramid and N-share counts, and top-20 control classifications, from McGregor-BFA and JSE data.
Inference¶
Quantification: Descriptive tables.
Descriptive, largely qualitative policy and institutional analysis. Aggregate time series and tables establish the corporate sector's role and funding structure, with comparisons across sectors, years (1989 vs 1999) and countries. The causal story (apartheid autarky shaped inward-looking conglomerates; market pressure after 1994 dismantled them) rests on historical narrative, a few executive quotations and secondary literature rather than formal testing.
Key claims¶
| Claim | Basis | Strength |
|---|---|---|
| Corporations (private and state-owned) own about three-quarters of South Africa's capital stock, and account for most investment and savings, so corporate governance matters for the whole economy. (p. 10) | SARB capital stock, investment and savings series (Tables 1-4), aggregated by institutional sector. | Systematic data |
| South African firms rely unusually heavily on equity rather than debt, reflecting a deep equity culture rooted in mining finance. (p. 24) | BFA McGregor financial accounts aggregated into balance sheets (Table 6, A1-A10), SARB funding data (Figure 2), and FIBV cross-country comparison (Figures 3-4). | Systematic data |
| Apartheid-era protection and isolation led firms to diversify domestically into conglomerates and fostered complacent managements, market concentration and falling competitiveness. (p. 18) | Historical narrative drawing on Lipton and Davis, with a productivity chart and the effective-protection range; no firm-level data. | Illustrative or anecdotal |
| Market pressure, especially the mining finance house discount and foreign investor criticism, caused the dismantling of the mining finance houses in the 1990s. (p. 45) | Executive quotations, the Gencor/Billiton case, and an asserted 5-20 percent discount; the discount is not tabulated. | Partial data |
| Equity raising on the JSE boomed in 1998 and then collapsed, especially for small and emerging firms, partly because of governance concerns. (p. 32) | JSE listings and capital-introduction data (Tables 8-9); the governance explanation is inferential. | Partial data |
| Pyramid structures and control-bloc dominance declined sharply between 1989 and 1999 as investors turned against them. (p. 42) | JSE and McGregor-BFA counts of pyramid companies, and top-20 control classifications. | Systematic data |
| The 1998 Insider Trading Act has been an early success in changing market conduct. (p. 56) | Preliminary counts of settlements and prosecutions and a few share-price reactions; the Directorate's data are not cited specifically. | Partial data |
| Debt-financed black empowerment structures were highly vulnerable to the 1998 market turmoil and slowed empowerment. (p. 61) | Stylised description of deal structures and market falls; headline black share of JSE capitalisation from an unattributed source. | Illustrative or anecdotal |
The author's caveats¶
The authors acknowledge that the respective contributions of foreign-owned subsidiaries, listed companies and unlisted companies cannot be isolated because data are unavailable. Firm figures on the share of GDP produced by JSE-listed firms are not available. Gold mining is excluded from the sector balance-sheet analysis for lack of data. The JSE does not record private placings, so capital-raising figures are conservative 'weathervanes'. The 1999 'new economy' balance sheets are distorted by an accounting change. There has been no study of King Code implementation.
Gaps in the evidence¶
The argument that apartheid protection and isolation produced conglomerate structures and managerial complacency is not tested with firm-level data on diversification, profitability, tariffs or returns on capital. Historical company reports, JSE returns and Chamber of Mines records from the 1950s-1980s existed and could test this. The claim that governance reform caused the changes of the 1990s is not separated from macro, tariff and commodity-price shocks, and the discounts and executive quotations are not documented or sourced. Event-study or panel analysis of share prices, ownership and returns could be done with JSE data, which the authors compiled only in aggregate.
Replicability: Data poorly documented.