CORPORATE GOVERNANCE IN SOUTH AFRICA

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INTRODUCTION

The study seeks to explore the relationship between internal corporate governance structures and financial performance for South African companies listed on the Johannesburg Stock Exchange (JSE), cognisant of the industry dynamics as well as different economic periods. Corporate governance has been a topical subject for researchers, investors, policymakers and academics. While some have seen corporate governance as an ultimate solution for companies, others have attributed the 2007 to 2008 global financial crisis to the inadequacies in the corporate governance of financials companies (Kirkpatrick, 2009:1).
Essentially, this underscores the importance of corporate governance to the performance of a company. Internal corporate governance attributes are expected to enhance company performance during normal economic times by effectively monitoring directors and ensuring that their interests and those of shareholders are in tandem (Afrifa & Tauringana, 2015:729). However, the cogency of such claims in abnormal economic times such as a financial crisis and for different types of industries has been questioned (Van Essen, Engelen & Carney, 2013:220).
The literature review indicates that research to date has an inconclusive record regarding good corporate governance and financial performance nexus. Such findings may be due to differences in definitions, measurements and periods of time as well as variables associated with companies such as size and complexity (Shank, Hill & Stang, 2013:391). To this end, using an unbalanced panel data regression analysis on a sample of 90 JSE- listed companies (1 170 firm-year observations) over the period 2002 to 2014, the study contributes to the understanding of the importance of compliance with the prescribed King III Code of Corporate Governance on the performance of South African listed companies, before, during and after the global financial crisis. In addition, the study also investigates the impact of the industry nuances on the relationship between corporate governance and performance across the five major South African industries during the three distinct economic periods.
The period of this study is also unique, because it covers a relatively stable economic period before the financial crisis, a challenging and unstable period of time when the financial crisis materialised and the aftermath of the financial crisis. In addition, the examination period of the study also covers the two corporate governance reforms in South Africa, King II in 2002 and King III in 2009 as well as the new Companies Act No. 71 of 2008. The chapter is structured as follows: after the introduction, Section 1.2 provides a summary of the recent corporate governance reforms in South Africa as a background to the study. Section 1.3 sets out the context of the study. Section 1.4 presents the main motivation for the study. The significance of the study is noted in Section 1.5. The research problem is presented in Section 1.6. Key concepts are provided in Section 1.7. The organisation of the thesis is introduced in Section 1.8 and the conclusion to the chapter is in Section .

BACKGROUND TO THE STUDY

Interest in corporate governance has grown tremendously in the last two decades. Corporate scandals, environmental concerns, globalisation and the recent global financial crisis have all played their part in raising renewed shareholder and public awareness of the governance of companies. The international disasters in financial reporting including WorldCom Incorporated (Inc) in the United States (US), Parmalat in Italy, the Maxwell saga in the United Kingdom (UK), Daewoo in Korea, Macmed, Regal Treasury Bank, Saambou, Leisurenet, JCI, Sentula Mining and Fidentia in South Africa, demonstrate the growing need for robustness and transparency in the governing of companies.
These kinds of events have raised considerable public demand for governance reforms globally. Indeed, almost all major developed countries have made efforts to reconsider how companies should be organised by developing codes of good corporate governance (Macey & O’Hara, 2003:98). In theory, compliance with the relevant code of corporate governance should reduce agency costs and improve corporate performance (Garanina & Kaikova, 2016:347). Durnev and Kim (2005:1461), Giannetti and Simonov (2006:1507), Klapper and Love (2004:703) and Shank et al. (2013:384), provide empirical evidence of good corporate governance being positively related to growth opportunities of companies and countries alike and investors benefitting from good corporate governance.
Hence it is not surprising that countries have elevated corporate governance as a policy agenda. The pressure emanates from institutional investors who regard corporate governance as a primary consideration when selecting shares for investment (Abdioglu, Khurshed & Stathopoulos, 2013:916; Giannetti & Koskinen, 2010:160). With the implementation of South Africa’s National Development Plan (NDP), which aims to eliminate poverty and reduce inequality by 2030 (African Corporate Governance Network, 2016:101), the country needs to increase mobilisation of both domestic and foreign capital. Foreign capital is the key to creating the 11 million jobs that the NDP envisages by 2030. Corporate governance is particularly relevant in developing economies, where the injection of foreign investment is essential to economic growth (Vaughn & Ryan, 2006:504).
According to Chen, Chen and Wei (2009:273), institutional investors from around the world are willing to pay a price premium for shares in companies with good corporate governance, especially when the companies are in countries with weak legal protection of investors. Consequently, corporate governance increasingly contributes to the economy of any country. To this end, South Africa has to take stock of its corporate governance culture in order to attract inward investment because corporate governance impacts both the stability and growth prospects of companies and therefore of the country (Malherbe & Segal, 2001:3).

CONTENTS :

• ABSTRACT
• DECLARATION AND COPYRIGHT
• DEDICATION
• ACKNOWLEDGEMENTS
• CHAPTER INTRODUCTION, BACKGROUND AND MOTIVATION
  • 1.1 INTRODUCTION
  • 1.2 BACKGROUND TO THE STUDY
  • 1.3 CONTEXT OF THE STUDY
  • 1.4 RESEARCH PROBLEM
    • 1.4.1 Problem statement
    • 1.4.2 Research objectives
  • 1.5 MOTIVATION FOR THE STUDY
  • 1.6 SIGNIFICANCE OF THE STUDY
  • 1.7 KEY CONCEPTS
  • 1.8 ORGANISATION OF THE STUDY
  • 1.9 CHAPTER SUMMARY
• CHAPTER CORPORATE GOVERNANCE MODELS
  • 2.1 INTRODUCTION
  • 2.2 DEFINING CORPORATE GOVERNANCE
  • 2.3 GLOBAL CORPORATE GOVERNANCE REFORMS
  • 2.4 MAIN CORPORATE GOVERNANCE MODELS
  • 2.5 SHAREHOLDER MODEL OF CORPORATE GOVERNANCE
    • 2.5.1 Major criticisms of the shareholder model
  • 2.6 THE STAKEHOLDER MODEL OF CORPORATE GOVERNANCE
  • 2.6.1 Major criticisms of the stakeholder model
  • 2.7 CONVERGENCE IN CORPORATE GOVERNANCE MODELS
  • 2.8 CHAPTER SUMMARY
• CHAPTER CORPORATE GOVERNANCE IN SOUTH AFRICA
  • 3.1 INTRODUCTION
  • 3.2 THE SOUTH AFRICAN EXTERNAL CORPORATE GOVERNANCE LANDSCAPE
    • 3.2.1 Overview of the external corporate governance system
    • 3.3 THE SOUTH AFRICAN INTERNAL CORPORATE GOVERNANCE LANDSCAPE
    • 3.4 THE SOUTH AFRICAN COMPANIES ACT, INSIDER TRADING ACT, JSE’S LISTINGS REQUIREMENTS AND INTERNAL CORPORATE GOVERNANCE STRUCTURES
    • 3.4.1 The Companies Act and internal corporate governance structures
    • 3.4.2 The JSE’s Listings Requirements, Insider Trading Act and internal corporate
    • governance structures
  • 3.5 THE 1994 KING REPORT ON CORPORATE GOVERNANCE FOR SOUTH AFRICA (KING I)
    • 3.5.1 Background to King I
    • 3.5.2 Corporate governance structures imposed on companies by King I
    • 3.5.3 Evaluation of King I
  • 3.6 THE 2002 KING REPORT ON CORPORATE GOVERNANCE FOR SOUTH AFRICA (KING II)
    • 3.6.1 Background to King II
    • 3.6.2 Corporate governance structures imposed on companies by King II
    • 3.6.3 Evaluation of King II
  • 3.7 THE 2009 KING REPORT ON CORPORATE GOVERNANCE FOR SOUTH AFRICA (KING III)
    • 3.7.1 Background to King III
    • 3.7.2 Corporate governance structures imposed on companies by King III
    • 3.7.3 Evaluation of King III
  • 3.8 CHAPTER SUMMARY
• CHAPTER LITERATURE REVIEW AND RESEARCH HYPOTHESES ON THE CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE NEXUS
  • 4.1 INTRODUCTION
  • 4.2 REVIEW OF THE LITERATURE ON INTERNAL CORPORATE GOVERNANCE AND COMPANY PERFORMANCE
  • 4.3 AGENCY THEORY
    • 4.3.1 Agency theory and corporate governance
  • 4.4 STEWARDSHIP THEORY
    • 4.4.1 Stewardship theory and corporate governance
  • 4.5 RESOURCE DEPENDENCE THEORY
    • 4.5.1 Resource dependence theory and corporate governance
  • 4.6 REVIEW OF EMPIRICAL LITERATURE ON INTERNAL CORPORATE GOVERNANCE AND HYPOTHESES DEVELOPMENT
    • 4.6.1 Board size and financial performance
    • 4.6.2 Board independence and financial performance
    • 4.6.3 Presence of board committees and financial performance
    • 4.6.4 Board activity and financial performance
    • 4.6.5 Board diversity and financial performance
    • 4.6.6 Leadership structure and financial performance
  • 4.7 CHAPTER SUMMARY
• CHAPTER RESEARCH METHODOLOGY
  • 5.1 INTRODUCTION
  • 5.2 CORPORATE GOVERNANCE PROXIES
  • 5.3 PARADIGMS OF RESEARCH
  • 5.4 RESEARCH OBJECTIVES
  • 5.5 SECONDARY DATA COLLECTION
  • 5.6 DATA AND SOURCES
  • 5.7 CRITERIA FOR SELECTING THE FINAL SAMPLE
  • 5.8 DATA FRAMEWORK
  • 5.9 CONTROLLING FOR SAMPLING BIAS
  • 5.10 DATA COLLECTION
    • 5.10.1 Independent corporate governance variables
    • 5.10.2 Control variables: company characteristics
    • 5.10.3 Other control variables: company characteristics
    • 5.10.4 Dependent variables: performance measures
  • 5.11 PANEL DATA
  • 5.12 MODEL SPECIFICATION
  • 5.13 SPECIFICATION TESTS
    • 5.13.1 Testing for the presence of outliers
    • 5.13.2 Panel data unit root test
    • 5.13.3 Heteroscedasticity
    • 5.13.4 Serial correlation
    • 5.13.5 Endogeneity
    • 5.13.6 Multicollinearity
    • 5.13.7 Normality
  • 5.14 ESTIMATION METHODS
  • 5.15 CHAPTER SUMMARY
• CHAPTER EMPIRICAL EVIDENCE OF CORPORATE GOVERNANCE STRUCTURES AND FINANCIAL PERFORMANCE IN SOUTH AFRICA
  • 6.1 INTRODUCTION
  • 6.2 PRELIMINARY DATA ANALYSIS
    • 6.2.1. Selection of the appropriate estimation method for the study
    • 6.2.2 Assumption of autocorrelation
    • 6.2.3 Panel data unit root test
    • 6.2.4 Selection of the requisite performance measures for the study
    • 6.2.5 Assumption of normality
    • 6.2.6 Endogeneity tests
    • 6.2.7 Assumption of outliers
    • 6.2.8 Assumption of multicollinearity
    • 6.2.9 Descriptive statistics
  • 6.3 REGRESSION RESULTS OF CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE
    • 6.3.1 Tobin’s Q and corporate governance: Model
    • 6.3.2 ROA and corporate governance: Model
    • 6.4 IMPACT OF INDUSTRY DYNAMICS ON THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND FINANCIAL PERFORMANCE
    • 6.4.1 Corporate governance and financial performance nexus in the financials industry
    • 6.4.2 Corporate governance and financial performance nexus in the basic materials industry
    • 6.4.3 Corporate governance and financial performance nexus in the consumer services industry
    • 6.4.4 Corporate governance and financial performance nexus in the consumer goods industry
    • 6.4.5 Corporate governance and financial performance nexus in the industrials industry
  • 6.5 TESTING FOR ROBUSTNESS
    • 6.5.1 Potential endogeneity problems
    • 6.5.2 Sensitivity analyses
  • 6.6 CHAPTER SUMMARY
• CHAPTER CONCLUSIONS, IMPLICATIONS AND LIMITATIONS
  • 7.1 INTRODUCTION
  • 7.2 RESEARCH FINDINGS
    • 7.2.1 Board size and financial performance
    • 7.2.2 Board independence and financial performance
    • 7.2.3 Board committees and financial performance
    • 7.2.4 Board diversity and financial performance
    • 7.2.5 Board activity and financial performance
    • 7.2.6 Leadership structure and financial performance
  • 7.3 CORPORATE GOVERNANCE IN PRE-CRISIS CONDITIONS
  • 7.4 CORPORATE GOVERNANCE IN POST-CRISIS CONDITIONS
  • 7.5 CORPORATE GOVERNANCE IN CRISIS CONDITIONS
  • 7.6 FINDINGS BASED ON INDUSTRY AND PERIOD DYNAMICS
  • 7.6.1 Findings specific to the financials industry
  • 7.6.2 Findings specific to the basic materials industry
    • 7.6.3 Findings specific to the consumer services industry
    • 7.6.4 Findings specific to the consumer goods industry
    • 7.6.5 Findings specific to the industrials industry
  • 7.7 FINDINGS BASED ON THE ROBUSTNESS ANALYSES
  • 7.8 POLICY IMPLICATIONS
  • 7.9 RESEARCH CONTRIBUTIONS
  • 7.10 LIMITATIONS
  • 7.11 AVENUES FOR FURTHER STUDIES
  • 7.12 CHAPTER SUMMARY
  • REFERENCES

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