Industry, Conference on South African Company Law for the 21st Century,
Pretoria
19 March 2007
Ladies and gentlemen, I am indeed delighted to be here. I must, however,
apologise for the Minister's and Deputy Minister's absence. The Minister
happens to be on official business in the United States of America, while the
Deputy Minister was required to deal with a high-level Russian delegation.
Given the theme of the conference, South African Company Law for the 21st
Century, I would like to talk about the importance of company law to our
economy and why it needs to modernise. Let me start with the events of recent
weeks in corporate South Africa.
Fidentia
Director accountability in South Africa has been badly shaken by events at
Fidentia. The actions of a small number of individuals have had immense
repercussions on the whole business community. We know only too well the
effects of scandals like these. We previously had our fair share in the late
90s � Saambou, Masterbond, etc.
Events at Fidentia happened at an opportune time for us to be able to
identify some weaknesses in our corporate governance regime. Government
recognises that the provision of loans to directors and subsequent writing off
of such loans by companies has serious repercussions for the investing public,
particularly for widows and orphans as the events at Fidentia have
demonstrated. It poses the question whether such loans should be permitted by
law, as is currently the case in our company law and in the proposed Bill, or
whether a general prohibition should be built in. Financial assistance to
directors for purposes unrelated to the company does not benefit the company in
any direct way. A careful assessment of this issue is therefore necessary. We
are happy that action is being taken and as we reform our company law we need
to ensure that such actions are effectively regulated.
On a related note, financial reporting and accountability has also presented
enormous challenges in the past. In the previous year, Parliament has passed
some of the most significant statutes in an endeavour to improve accounting and
auditing standards. The Corporate Laws Amendment Act and the Auditing
Professions Act are notable in this regard. These enactments are significant in
improving the regulatory framework for auditing and accounting standards.
And our system is the stronger for it. Which is not to mean that we can
relax. I do not believe that we can be complacent. What is noteworthy is that
South Africa is not immune to what is happening in other economies, developing
or developed. In the global economy, this is simply not a practical or
realistic view to take. Stock markets all around the world are affected by what
goes on in other economies.
Consequently, we must take action on the global stage to restore confidence.
In particular, we must press ahead with developing a full set of rigorous and
effective international standards and, in particular, ensuring that the
incentives built into remuneration packages encourage responsible behaviour,
particularly in the aftermath of events at Fidentia. We need to decide what
balance between a 'rules-based approach,' as contained in our current statutes,
and a 'principles-based approach,' as contained in the Codes of Best Corporate
Practice, must be struck to improve corporate behaviour.
But our approach must involve a mixture of action on both the international
and domestic stage. This is crucial in the global economy - where all our
economies are interdependent. Globalisation and the pace of technological
change presents challenges for policy makers across the world.
The importance of Company Law and the imperative to modernise
In 1911, Nicholas Murray Butler, the president of Columbia University,
claimed that the limited liability company outweighed even electricity as "the
greatest single discovery of modern times." If an invention is measured by
endurance, then after a hundred and sixty years, the limited liability company
is certainly not doing badly.
As observed by John Monks: "Company Law provides the legal basis for one of
the most important institutions organising our economy."
Company law is central to our economy and our prosperity - for wealth
creation and social renewal. It can promote enterprise - or it can hold it
back. Company law can do so in a number of ways. Firstly, the requirements of
the law to register and maintain a company can be such that it is too costly to
operate in the formal economy, and individuals may choose to operate as
unregistered entities without the advantages of limited liability. Thus, it can
create incentives for greater informal sector activity. Secondly, the corporate
finance provisions, if outdated, can disadvantage our companies with respect to
their global competitors and constrain their ability to raise capital and
compete effectively. Furthermore, ineffective corporate rescue provisions,
which may result in creditors receiving lower recoveries, can create
disincentives for equity investors, limiting sources of capital for South
African businesses.
A facilitating and enabling framework for all 1,7 million South African
corporations (i.e. companies and close corporations) Company Law is a key
indicator of our national competitiveness - weighed up by potential
investors.
That notwithstanding, our company law was largely created in the nineteenth
century. But what was a source of competitive advantage to us then, is now a
source of competitive disadvantage. The law has got out of date - and become
encrusted with all sorts of amendments and case law.
When a Discussion Document for the Reform of Company Law was first published
on 23 June 2004, it was correctly observed that the 1973 Companies Act is
outdated, highly formalistic, has unnecessarily burdensome information
requirements, is creditor-oriented and is overly criminal.
So there is a need to tidy up the law. But we also need to reflect on the
huge change we have seen in our economy since the last review.
To quote from the Discussion Document:
"The domestic and global environment for enterprises has changed markedly
since the 1970s. Corporate structures and financial instruments have undergone
significant developments. Many old concepts have been abandoned or modified and
new concepts have been developed. We now live in a world of greater
globalisation, increased electronic communication, greater sensitivity to
social and ethical concerns, fast changing markets, greater competition for
capital, goods and services. South Africa cannot afford to be left behind.
There is a growing recognition by companies and governments that there is a
need for higher standards of corporate governance and ethics and greater
interdependence between enterprises and the societies in which they operate. A
number of corporate failures in South Africa and other jurisdictions have
revealed serious defects in the prevailing standard of corporate governance and
the administration of the law and have resulted in investors suffering
extensive losses. The introduction, in 1999, of the Public Finance Management
Act (PFMA), Act 1 of 1999, also emphasises the importance of good corporate
governance for public entities and new company law will have to take into
account the implications for public enterprises, where appropriate."
Furthermore, "[s]ocio-political and economic change in South Africa has
underscored the need for social responsiveness, transparency and accountability
of enterprises. The mobility of international capital has highlighted the need
for domestic laws to be investor friendly and competitive with international
trends. The rise in international trade and foreign investment since 1994 has
made necessary the harmonisation and modernisation of company law, as well as
the need to make specific provision for foreign companies to operate in South
Africa. This is further underscored by South Africa's reintegration into the
region and the role that the country and domestic companies play in the
economic development of Southern Africa and Africa in general. Finally, the
growth of the small business sector has created a need for simpler and more
accessible laws."
The United Kingdom's 1862 Companies Act, from which the 1973 Act originated,
was developed for joint-stock companies to raise capital for large projects,
such as building railways - but today 99% of all firms registered at the
Companies and Intellectual Property Registration Office (CIPRO) are privately
owned or closely held corporations. This has very significant implications for
the very foundations of company law and has been a key issue that informed the
development of new company law.
The upshot is that the urgency for modernising our company law cannot be
gainsaid.
"A Balancing Exercise"
In any reform process, competing objectives must be balanced. Company law is
no different and this most recent reform has also sought to achieve such a
balance. In developing company law for the 21st century, it is important to
create flexibility and simplicity particularly for closely held companies. But
it is also imperative to enhance corporate governance and financial reporting,
especially for public interest companies.
Aided by the advent of information and communication technology (ICT) and
the rapid development thereof, corporate formation in the twenty first century
should be hassle free and encourage corporate formation in the formal economy �
i.e. Company Law should assist in bridging the gap between the first and second
economies existing in South Africa.
While the government acknowledges that measures should be taken to increase
the contribution of small and medium�sized enterprises to the country's Gross
Domestic Product (GDP), cognisance is taken of the important role and the
contribution that public interest companies make to the country's GDP and
development. As such, company law in the twenty first century should also seek
to enhance corporate accountability and financial reporting for public interest
companies. This is not the responsibility of South Africa alone, but measures
need to be taken at a global level as well. We all know too well what the
effects of lax corporate governance and corporate accountability can be in a
more Globalised environment. We have seen the ramifications of events at
Worldcom, Enron, Polly Peck, Parmalat, Leisurenet, Saambou, to name but a
few.
On the corporate governance front, clarity and enhanced accountability is of
utmost importance, particularly given the recent events at Fidentia. Related
important measures to improve corporate governance were taken in South Africa
at the end of the last century. Classic examples of these measures included the
two King Reports and Codes in 1994 and 1999; the Public Finance Management and
Municipal Finance Managements Acts; the amendments to the Banks Act, and, more
recently, the Corporate Laws Amendment Act, 2006. Company Law reform in the
area of corporate governance should be preceded by the acknowledgement of the
fact that at the moment, directors' duties are set out in 250 years of case
law. And, not surprisingly, the message isn't getting through. A 1999 survey of
Institute of Directors (IoD) members in the United Kingdom (UK) found
considerable confusion amongst directors - half of those surveyed incorrectly
thought they had an explicit duty to take into account the interests of
creditors and customers when considering actions on behalf of their company.
Some thought they had no duty to shareholders! Three quarters thought that
directors' duties were difficult to understand because of the variety of legal
sources involved. That is, among other reasons, why we need to make directors
duties clearer.
Another important area of corporate accountability is the improvement of
financial reporting standards. Important measures have already been undertaken
in this regard. Firstly, the International Financial Reporting Standards (IFRS)
have already been adopted for public companies in South Africa and through the
Corporate Laws Amendment Act of 2006, attempt has been made to provide legal
backing for financial reporting standards. The institutional framework proposed
in both the Corporate Laws Amendment Act and the Companies Bill in this regard
will go a long way in ensuring improved financial reporting standards,
particularly for public interest companies.
Conclusion
To sum up, this is the most fundamental reform of company law for over 30
years. We are rewriting the settlement between business and society for the
modern economy.
Importantly, the Bill has taken the best out of best practice jurisdictions,
thus living up to the objective of making company law compatible and harmonious
with best practice jurisdictions internationally. Importantly, the process is
about responsible government creating the right market framework for successful
and responsible business. It's about the relationship we need between the state
and the market in the modern economy.
This law reform is aimed at creating an environment where responsible
business can flourish. With the aim of prosperity for all.
And I look forward to working with you in the future as we take this
important work forward.
Thank you.
Issued by: Department of Trade and Industry
19 March 2007
