Corporate Governance in South Africa

Literature › Works

Stephan Malherbe; Nick Segal (2001). Corporate Governance in South Africa. OECD Development Centre; Policy Dialogue Meeting on Corporate Governance in Developing Countries and Emerging Economies (OECD/EBRD, 23-24 April 2001). OECD Development Centre.

Type	working paper
Scope	Post-1994 South African economy
Method	mixed
Period studied	1910–2000
Regions	South Africa, Johannesburg (JSE)
Themes	business and state, origins segregation, manufacturing industrial policy, sanctions divestment, macro fiscal finance debt, transition post apartheid, unions strikes, methods data sources
Citation key	malherbe2001b

Argument

The paper argues that South Africa's corporate structure was shaped by the interaction of the mining-finance model and the apartheid-era protected 'hothouse' economy. Protection, segregation costs, exchange controls and political isolation produced diversified, control-bloc conglomerates run by complacent managers. After 1994 the ANC chose growth over confiscation. Trade liberalisation, the return of foreign investors and the emerging-markets crisis then exposed these structures, and the mining finance houses were dismantled. The authors argue that sound governance now matters for savings mobilisation, capital allocation and growth. They survey the reform actors: market pressure, institutions, the King Code, JSE rules, the Insider Trading Act, and black empowerment's effects on governance. Only Sections I and VI deal with the apartheid-era economy; the rest covers 1990s governance.

Evidence and method

South African Reserve Bank national-accounts series on capital stock, investment and savings by institutional sector (1950-99); JSE and McGregor-BFA aggregate balance sheets and listing data; FIBV market-size data; interviews and quotations from mining executives; secondary literature (Lipton 1986, Davis 1994); King Code and JSE listing requirements.

Findings

• State-owned enterprises' share of capital stock grew rapidly after WWII under National Party industrialisation, not through 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.

• From 1924-25 the state tied protection and tenders to preferential hiring of white workers, linking labour policy to industrial protection. (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.

• For firms, apartheid meant high segregation-related costs offset by protected profit margins, which produced inward-looking diversification. (p. 17)

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

• Protectionism delivered rapid manufacturing growth in the 1960s. (p. 17)

  During 1961-65, real manufacturing output growth averaged 10 percent per year, and during 1966-1970, 7.4 percent.

• Sharpeville triggered capital flight and exchange controls, the start of accumulating isolation. (p. 17)

  In that year, a violent suppression of a political demonstration in the black township of Sharpeville set off a capital flight.

• Labour productivity stagnated in the 1970s-80s despite rising capital per worker. (p. 19)

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

• The protection regime was incoherent rather than a considered industrial strategy. (p. 20)

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

• Mining finance house structures were remarkably persistent across the apartheid era. (p. 14)

  The corporate and industry structure among the houses in 1990 was virtually identical with that of 1946.

• Market discipline imposed a discount on the mining finance houses by the early 1990s, motivating unbundling. (p. 45)

  By the early 1990s the valuation of mining finance houses implied a significant discount, usually between 5 and 20 percent

• Restructuring sharply cut the number of listed mining companies as houses bought out minorities. (p. 46)

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

• Business turned to political and labour reform after the 1973 strikes, as union organisation ended the era of prohibited African unions. (p. 65)

  Mine riots and strikes by African workers at Durban factories in 1973 signalled the end of this era.

• Following Wiehahn, African unions were legalised and business engaged with them. (p. 66)

  Following the Wiehahn commission’s report in 1979, African unions were legalised.