Corporate Governance in South Africa

Literature › Works

Stephan Malherbe; Nick Segal (2001). Corporate Governance in South Africa. 2001 Annual Forum, Misty Hills, Muldersdrift (10-12 September 2001); originally prepared for the OECD Development Centre project on Corporate Governance in Developing and Emerging Economies. Trade and Industrial Policy Strategies (TIPS) Annual Forum / OECD Development Centre (draft).

Type	conference paper
Scope	Post-1994 South African economy
Method	mixed
Period studied	1910–2000
Regions	South Africa, Johannesburg/Witwatersrand
Themes	business and state, macro fiscal finance debt, manufacturing industrial policy, transition post apartheid, sanctions divestment, origins segregation, unions strikes, mining migrant labour, politics ideology elections
Citation key	malherbe2001a

Argument

The paper argues that South African corporate structure and governance (mining finance houses, conglomerates, control blocs, pyramids, mutual insurers) were shaped by the gold windfall and by the protected, isolated 'hothouse' economy of apartheid. Autarky (tariffs, exchange controls, sanctions) fostered diversified, inward-looking and complacent firms. After 1994, trade liberalisation, the return of foreign investors and the emerging-markets crisis forced rapid reform, led chiefly by market pressure, with the King Code, JSE listing rules, accounting standards and the Insider Trading Act as supporting mechanisms. It shows corporations dominate savings, investment and capital stock, so governance matters for growth and stability. It also assesses black empowerment financing and business's political role since the 1970s.

Evidence and method

South African Reserve Bank national-accounts, investment and savings series (1910-1999); aggregate balance sheets from McGregor-BFA and company financial accounts; JSE listing and capital-raising data; FIBV capital-market comparisons; interviews or quotations from senior mining executives; the King Code, JSE proposed listing requirements and the Insider Trading Act; secondary literature (Lipton, Davis).

Findings

• Corporations control most of the capital stock, so governance is economically significant. (p. 11)

  three-quarters of South Africa’s productive capacity, or capital stock, is owned by business corporations.

• Corporate savings are unusually dominant in the 1990s, offsetting household and government dissaving. (p. 12)

  during the 1990s the savings of privately-owned corporations amounted to 72 percent of gross domestic savings, and that of SOEs to 33 percent

• Apartheid policy tied protection to white labour preference and aimed at limiting competition for white workers. (p. 17)

  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.

• Segregation costs were offset by protection, which shaped the inward-looking conglomerates. (p. 18)

  high costs imposed by segregation, compensated for by safe profit margins made possible by strenuous protection against foreign competition.

• Sharpeville produced capital flight, exchange controls and the onset of sanctions and autarky. (p. 18)

  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

• Labour productivity stagnated in the 1970s and 1980s despite rising capital per worker. (p. 21)

  By the 1970s and 1980s, labour productivity had become essentially stagnant, despite a steadily increasing amount of physical capital per worker.

• Effective protection rates were incoherent by the mid-1970s. (p. 21)

  By the mid-1970s protection rates were a mishmash of contradictory signals, with effective protection rates ranging from –24 to 94 percent

• Mining finance houses were dismantled by market pressure, with a large drop in listed mining companies. (p. 52)

  the number of listed mining companies on the JSE fell from 45 in 1992 to 14 in 1999.

• Capital was misallocated in mining houses, with low return norms compared to abroad (executive's testimony). (p. 51)

  Real returns of seven percent were considered acceptable, while the norm abroad was 15 percent or higher, depending on the riskiness of the project.

• Black unions were legalised and recognised after Wiehahn, forcing changes in management style. (p. 76)

  Following the Wiehahn commission’s report in 1979, African unions were legalised. By 1982 all the major employer bodies had recognised the major African unions in their industries

• Black empowerment deals rapidly raised black control of JSE capitalisation, then reversed after 1998. (p. 67)

  Within 52 months, companies which blacks ‘control or have significant influence over’ went from one percent of JSE market capitalisation to 16.3 percent.

• Post-1994 growth disappointed despite macro reform, with low investment and poor savings the proximate constraints. (p. 79)

  But growth has disappointed, averaging 2 percent, with higher unemployment and growing numbers of South Africans in poverty.