Using The OECD Principles of Corporate G

ANGLIA RUSKIN UNIVERSITY
Using the OECD Principle of Corporate

Governance as an International Benchmark: A
Comparative Analysis of Corporate Governance
Legislation in the UK, US and South Africa
PAUL CHU NGUM
A Dissertation in partial fulfilment of the

requirements of Anglia Ruskin University for the
degree of Master of Law (LL.M International and
European Business Law)
Submitted: January 2009
ABSTRACT
Adopting corporate governance practises has been a great concern to the academia,
professionals and policy makers. This concern might be partially triggered by the
realization of the importance of an official corporate governance regime, which provides
a platform for market integrity and efficiency, as well as facilitating economic growth.
Formulating effective corporate governance measures is a complex task for legislators.
The purpose of this paper is to provide an in depth analysis and comparison of the
corporate governance legislative frameworks in three countries the UK, US and South
Africa. In 2004, the Organization for Economic Cooperation and Development (OECD),
in conjunction with national and international governmental organizations, finalized a
universal set of corporate governance principles. Although non-binding, the OECD
Principles 2004 are a serious attempt to strengthen every aspect of corporate governance
and, accordingly, have been utilized in this paper as an international benchmark.
Emphasis is placed on South Africa as an emerging economy and because of its
international links with Anglo-American corporate governance and domestic pursuit of
socio-economic development. The ultimate objective of this paper is to formulate a
number of detailed and specific recommendations to the South African Government.
This paper is organized as follows; the first chapter sets out an introductory explanation
of the concept of corporate governance in an attempt to reach a well-tuned concept
comprising the origin, importance and theoretical aspects that influence corporate
governance development. The second Chapter provides a detailed discussion of the
corporate governance principles formulated by the OECD. The process began in 1999
and was completed in 2004 after extensive revision and consultation. The third chapter
examines the background and development of corporate governance practices in the UK,
US and South Africa. Chapter four, the core part of the paper, presents a comparative
analysis of the implementation of the OECD principles in the UK, US and South Africa.
The last chapter provides a summary of analysis and sets out a list of recommendations to
the South African Government.
TABLE OF CONTENTS
ABSTRACT1
TABLE OF CONTENTS..2
Introduction..5
CHAPTER 1 The Concept of corporate governance.10

1.1 What is Governance.................................................................................................10
1.2 What is Corporate Governance?..............................................................................10
1.3 Origin of corporate Governance .....12
1.4 Importance of corporate Governance...16
1.5 Theoretical Aspects of corporate Governance ....17
1.5.1 Agency Theory..17
1.5.2 Stakeholder Theory...20
1.5.3 Stewardship Theory...21
CHAPTER 2 The OECD Principles of corporate

Governance..24
2.1. Historical Background..24
2.2 How the principles work26
2.3 Reasoning behind the Principles.28
2.4 OECD Principles (1999) Critical Content....29
2.4.1 Core Standards..29
(a) Fairness.29
(b) Responsibility..30
(c)Transparency30
(d) Accountability..31
2.5 OECD Principles (2004)..32
I. Ensuring the basis for an effective corporate governance framework...34
II. The Rights of Shareholders...35
III. Equitable Treatment of Shareholders..36
IV. The Role of Stakeholders in Corporate Governance...37
V. Disclosure and Transparency39
VI. Responsibility of the Board.40
CHAPTER 3 An Overview of Corporate Governance in

United Kingdom, United States AND South Africa..43
3.1 Background and development of corporate Governance in the UK43
3.1.1The Cadbury Report 1992..43
3.1.2 The Greenbury Report 1995.....45
3.1.3 The Hampel Report 1998..46
3.1.4 The Combined Code 1998 and Beyond....47
3.2 Background and development of Corporate Governance in the US.......50

3.2.1Sarbanes Oxley..52
3.2.2 The NYSE and NASDAQ54
3.3 Background and development of Corporate Governance in SA.55

3.3.1The King Report I and II56
CHAPTER 4 Implementation of the OECD Principles

2004 in the United Kingdom, United States AND South
Africa.60
4
Comparative Analysis .60

4.1 Framework of Analysis60
4.2Content of Analysis..60
4.2.1 Ensuring the Basis for an effective Corporate Governance Framework..61
4.2.2 The Rights of Shareholders and Key Ownership Functions.65
4.2.3 Equitable Treatment of Shareholders............................75
4.2.4 The Role of Stakeholders in Corporate Governance....79
4.2.5Disclosure and Transparency.82
4.4.6Responsibility of the Board...84
CHAPTER 5 Conclusion and Recommendations87

5.1 Conclusion.87
5.2. Recommendations91
Final Remarks..92
INTRODUCTION
Governance is a word that barely existed 20 years ago. Now it is in common use not just
in companies but also in charities, universities, local authorities and National Health
Trusts. It has become shorthand for the way an organization is run, with particular
emphasis on its accountability, integrity and risk management. The corporation has a vital
role to play in promoting economic development and social progress. It is the engine of
growth internationally and is increasingly responsible for providing employment, public
and private sector services, goods and infrastructure. 1 The efficiency and accountability
of the corporation is now a matter of both private and public interest, and corporate
governance has thereby come to the head of the international private enterprise agenda. 2
The corporate collapses, which have taken, place in the US, UK and around the world in
the recent years (2001-2004), and their disastrous consequences, have been generating
far-reaching effects at governmental level and at an academic level. On the one hand, the
corporate collapses have brought corporate governance at the top of the reform agenda of
Governments all over the world. Not surprisingly, in the aftermath of these collapses, the
OECD published in 2004 a revised version of its Principles of Corporate Governance,
first published in 1999 and which represent a common basis that OECD member
countries consider essential for the development of good corporate practices.
These Principles evidence the overriding concern that should guide the development of
the corporate governance framework, the impact on overall economic performance,
irrespective of the legal environment in which companies operate (common law or civil
law) and irrespective of the companys ownership structure. They serve as a benchmark
for identification of good elements of corporate governance, though there is no single
1 Mallin C, Corporate Governance: An International Review (2004).

2 Center for International Private Enterprise, Strengthening Corporate Governance (2004).
model of good corporate governance. The OECD principles cover five aspects of
governance: (a) the rights of shareholders; (b) the equitable treatment of shareholders; (c)
the role of stakeholders in corporate governance; (d) disclosure and transparency; and (e)
the responsibilities of the board
It is interesting to note that there are variations in the corporate governance systems in the
US, UK and South Africa. The key distinction between US and UK corporate governance
lies in the regulatory methods and styles adopted by each country. The more prescriptive
regulatory approach of the US that is based on a formal legalism in the context of a
litigation culture3 stands in contrast to the principles-based approach of the UK.
The regulation of corporate governance in the UK is provided by a number of different
rules, regulations and recommendations, namely: Common law rules (e.g. directors'
fiduciary duties), Statute (notably the Companies Act 1985)4. A company's constitutional
documents (the memorandum and articles of association), The Listing Rules, which apply
to all companies that are listed on the Official List (or AIM Rules, as appropriate), The
Combined Code on Corporate Governance (the provisions of the Code are not mandatory
but listed companies are required to include a statement in their annual reports as to
whether or not they comply with the Code and give reasons for non-compliance). The
Code is supplemented by: the Turnbull Guidance (relating to the internal control
requirements of the Code), the Smith Guidance (on audit committees and auditors) and
suggestions of good practice from the Higgs Review, Non-legal guidelines issued by
bodies that represent institutional investors (such as the Association of British Insurers
(ABI), the National Association of Pension Funds (NAPF) and the Pensions &
Investment Research Consultants (PIRC). These guidelines apply to listed companies and
although they are informal, some institutional investors may oppose any corporate actions
that contravene them. In the context of takeovers of public companies, the City Code on
Takeovers and Mergers and the rules of the Takeover Panel apply. The Financial
3 Kagan, R. A. (2001). Adversarial Legalism: The American Way of Law. Cambridge, MA: Harvard
University Press.
4 The Companies Act 2006 has now effectively replaced existing company legislation by re-writing,
updating and modernising company law. The 2006 Act received Royal Assent on 8th November 2006. All
references will be to the 2006 Act unless expressly stated
Services Authority's Code of Market Conduct (relating to the disclosure and use of
confidential and price sensitive information and the creation of a false market).
In the U.S., corporate governance is determined predominantly by legislation in the form
of the Sarbanes-Oxley Act of 2002 ("SOX") and detailed regulations which SOX
required the Securities and Exchange Commission ("SEC"), New York Stock Exchange
("NYSE") and NASDAQ to draw up.
The UK "comply or explain" approach to corporate governance varies significantly from
the general approach taken by SOX. Although SOX-related regulations use the "comply
or explain" method in some instances5, in most other instances, U.S. regulation tends to
rely on the legislation and fines and imprisonment penalties for violating the
requirements of SOX.
Kelemen and Sibbitt 6 argue that the adversarial style of the US regulatory approach
undermines insider networks, which might in turn make this approach incompatible with
informal co-operative processes that facilitate and support social partnerships. This
difference between the US and UK approaches is not new, but it has been made more
pronounced with the enactment of new legislation in the wake of recent US corporate
scandals.
On the other hand, South Africas colonial legacy and resultant ties with the UK and US
has shaped the countries approach to corporate governance to lean towards the traditional
Anglo-America model. 7 Corporate governance has been a reasonably well-developed
concept in South Africa since the establishment of the King Committee on Corporate
Governance in 1992, at the instigation of the Institute of Directors of Southern Africa
(IoD) and the release of the first King Report in November 1994. It was not stimulated by
any significant crisis in the corporate sector at that time; rather it concerned the
5
For example, in relation to whether a company has a "code of ethics" or its audit committee has a
"financial expert"),
6 Kelemen, R. D., & Sibbitt, E. C. (2004). The Globalization of American Law. International Organization,
58(1), 103-136.
7 Reed, D. (2002). Corporate governance reforms in developing countries. Journal of Business Ethics, 37,
223-247.
competitiveness of the South African private sector following the re-admission of the
country to the global economy following its transition to a fully-fledged democracy after
the collapse of apartheid.
The first Kind Report on corporate Governance (King I) was released on the 29 th of
November 1994. The purpose of King I was to promote the highest Standards of
corporate governance in SA. The King Committee issued a detailed report on corporate
governance, a series of recommendations and a code of Good Corporate Practices and
Conduct. A number of the recommendations in King I were superseded by legislation in
the social and political transformation in SA. Further, a dominant feature of business
since 1994 was the emergence of information technology. In light of these factors, as well
as many others, the king committee reviewed corporate governance standards and
practices for SA against developments that took place after publication of King I. The
code of corporate Practices and Conduct in King II replaced the code of Good Corporate
Practice and Conduct in Kind I, with effect from 1 march 2002. In January 2009, King
Report III will appear in South Africa, having been written by a committee of 90
members.
This paper serves to provide an analysis and comparison of the systems of corporate
governance in the UK, US and South Africa measured against the principles of corporate
governance recently formulated by the OECD as an international benchmark. The
ultimate objective of this paper is to formulate a number of detailed and specific
recommendations to the South African Government
This paper is organized as follows; the first chapter sets out an introductory explanation
of the concept of corporate governance in an attempt to reach a well-tuned concept
comprising the origin, importance and theoretical aspects that influence corporate
governance development. The second Chapter provides a detailed discussion of the
corporate governance principles formulated by the OECD. The process began in 1999
and was completed in 2004 after extensive revision and consultation. The third chapter
examines the background and development of corporate governance practices in the UK,
US and South Africa. Chapter four, the core part of the paper, presents a comparative
analysis of the implementation of the OECD principles in the UK, US and South Africa.
The last chapter provides a summary of analysis and sets out a list of recommendations to
the South African Government
10
CHAPTER 1
The Concept of corporate governance
1.1 What Is Governance

The concept of "governance" is not new. It is as old as human civilization. The term
governance in itself derives from the Latin gubernare, meaning to steer, usually
applying to the steering of a ship. 8A dictionary definition of the word governance yields
the following: The act, manner, function, or power of government. 9 Governance in its
widest sense refers to how any organization, including a nation, is run. It includes all the
processes, systems, and controls that are used to safeguard and grow assets.10 Governance
can be used in several contexts such as corporate governance, international governance,
national governance and local governance. When applied to organizations that operate
commercially, it is often termed "corporate governance
1.2 What Is Corporate Governance

Corporate governance has succeeded in attracting a good deal of public interest because
of its apparent importance for the economic health of corporations and society in general.
However, the concept of corporate governance is poorly defined because it potentially
covers a large number of distinct economic phenomenon 11. As a result different people
have come up with different definitions depending on the viewpoint of the policy maker,
8 Jill Solomon & Aris Solomon (2004): Corporate Governance and Accountability John Wiley & Sons,
Ltd
9 Websters New World Dictionary, Simon and Schuster.
10 Te Puni Kkiri (Wed, 25 Oct 2006) Effective Governance [online]
http://governance.tpk.govt.nz/why/index.aspx [accessed 13/08/2008]
11 Encycogov.com, The Encyclopedia about corporate Governance,
http://www.encycogov.com/WhatIsGorpGov.asp
[accessed 14/08/08]
11
practitioner, researcher or theorist. 12 There is therefore no single accepted definition of

the concept. Some take a narrow view, seeing governance as a fancy term for the way
in which directors and auditors handle their responsibilities towards shareholders. Others
expand the concept to explain a firms relationship to society, often blurring the
distinction between corporate governance and corporate social responsibility. Be that as it
may, it seems that existing definitions of corporate governance either adopt a narrow
view where corporate governance is restricted to the relationship between a company and
its shareholders (agency theory), or a broader view where corporate governance maybe
seen as a web of relationships, not only between a company and its owners (shareholders)
but also between a company and a broad range of other stakeholders: employees,
customers, suppliers, bondholders (stakeholder theory) 13 Cadburys definition is
illustrative of the former view
Corporate governance is the system by which companies are directed and controlled.
Boards of directors are responsible for the governance of their companies. The
shareholders role in governance is to appoint the directors and the auditors and to
satisfy themselves that an appropriate governance structure is in place. The
responsibilities of the board include setting the companys strategic aims, providing the
leadership to put them into effect, supervising the management of the business and
reporting to shareholders on their stewardship. The boards actions are subject to laws,
regulations and the shareholders in general meetings14
The OECD provides the most authoritative functional definition of corporate governance
that tally with the latter view.
"Corporate governance is the system by which business corporations are directed and
controlled. The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as, the board,
12 Lannoo (1995) states in this context: the notion of Corporate Governance is perceived differently
from one country to anotherit sometimes refers to distinctly different matters for different persons and
institutions, depending on the circumstances.
13 See generally Jill Solomon & Aris Solomon (2004): Corporate Governance and Accountability John
Wiley & Sons, Ltd pg 12
14 Cadbury Report 1992 (The Financial Aspects of Corporate Governance) pg 14, 2.5
12
managers, shareholders and other stakeholders, and spells out the rules and procedures
for making decisions on corporate affairs. By doing this, it also provides the structure
through which the company objectives are set and the means of attaining those objectives
and monitoring performance"15
Some writers16 in defining corporate governance go as far as establishing a fiduciary
relationship between directors and shareholders:
Corporate Governance could be thought of as the combined statutory and nonstatutory framework within which boards of directors exercise their fiduciary
duties to the organizations that appoint them.
The key issue is that directors owe to shareholders, or perhaps to the corporation, two
basic fiduciary duties: the duty of loyalty and the duty of care 17
One thing is clear from both definitions however, they tend to share certain
characteristics, paramount of which is the notion of accountability: either to shareholders
specifically or to shareholders and other stakeholders.
1.3 Origin of Corporate Governance

The etymology of the words corporate governance is derived from the ancient Greek and
Latin (though there are similar words in most languages). The word corporate derives
from the Latin word corpus meaning body, and comes from the Latin verb corporare to
form into one body, hence a corporation represents a body of people that is a group of
people authorized to act as an individual. 18 The word governance is from the Latinized
Greek gubernatio meaning management or government, and comes from the ancient
15 OECD April 1999.

16 Alan Calder, Corporate Governance (2008), A Practical Guide to the Legal Frameworks and
International Codes of Practice Kogan Page Limited, pg 3
17 Professor Bernard S Black, Stanford Law School, Presentation at Third Asian Roundtable on Corporate
Governance, April 2001.
18 Clarke, T. 2007, International Corporate Governance: A Comparative Approach, Routledge, London pg
1
13
Greek, kybernao to steer, to drive, to guide, to act as a pilot.19 This etymological origin of
the concept of corporate governance captures a creative meaning of collective endeavor
that defies the contemporary inclination to place a passive and regulatory emphasis on the
phrase. Adrian Cadbury cites Cicero in conveying the original meaning of this contested
concept
Governance is a word with a pedigree that dates back to Chaucer and in his day
the word carried with it the connotation wise and responsible, which is
appropriate. It means either the action of governing or the method of governing
and it is in the latter sense it is used with reference to companiesA quotation
which is worth keeping in mind in this context is He that governs sits quietly at
the stern and scarce is seen to stir.20
Corporate governance has been practised for as long as there have been corporate entities
developed to resolve group relations in religious and social communities. These medieval
elements were transformed by the application of corporate ideas and practices of the
business enterprises that came later21 Among these devices was the idea of incorporate
person-the interpretation of companies as legal persons with rights and duties.
In many ancient and modern organisations legal transactions had to be carried out and
duties incurred by the succession of joint holders of an office on behalf of a number of
people who were interested in carrying out a common purpose or object. There therefore
arose the need from the point of view of both private and public law to replace the vague
group by something more definite- an artificial person. Such corporate bodies recognised
by common law were applied to business organisations in England and Holland when
charters were granted to incorporate trading companies.
The problem of corporate governance actually arose with the formation of the first
trading company, where the distinction between ownership and leadership gave rise to
19 Id.
20 Cadbury 2002: 1
3,citing Redmond 2005:28
14
the so-called agency problems between the ownership/shareholder on the one hand and
the manager/business manager on the other hand. It is believed that this occurrence took
place around 1602, with the formation in the United East India Company. 22 Investors
were disillusioned as they found their capital locked into a company only publishing its
accounts every ten years, and which insisted on paying dividends in spices (pepper, mace
and nutmeg)23 LHelias also sees the origin of corporate governance in the distinction
between ownership and leadership 24 which she refers to as a societal schism.
However the study of the subject corporate governance is less than half a century old.
Indeed, the phrase 'corporate governance' was scarcely used until the 1980s. According to
Monks & Minow25 the concept is one, which has only emerged in the last 10 years:
Whereas the systematic development and application of improved management
practices has been going on now for 100 years, the term Corporate Governance
has been in use for not much more than 10.26
Adam Smith in 1776 in The Wealth of Nations27 made a comment on company
management that would echo through the ages: Being managers of other peoples money
than their own, it cannot well be expected that should watch over it with the same
anxious vigilance with which the partners in a private co-partnership frequently watch
over their ownNegligence and profusion, therefore, must always prevail more of less in
the management of the affairs of a joint stock company.
With the industrial revolution, there was advancement in technology and hence a wider
diffusion of ownership of many large companies owing to the fact that no individual,
22 Weimer, J., Pape, J.C. (1999), "A taxonomy of systems of corporate governance", Corporate
Governance: An International Review, Vol. 7
3,citing Frentrop 2003: 75-76
24 The pioneering work of Berle & Means (1932) looks closely at the consequences of this division for the
governance and management of the enterprise.
25 Robert A.G Monks and Nell Minow, Corporate Governance 1996, Blackwell Publishing
26 For a general discussion on this, See Prof. dr. Lutgart Van Den Berghe & Liesbeth De Ridder:
International Standardisation of Good Corporate Governance; Best Practice for the Board of Diractors,
Kluwer Academic Publishers 1999
27 Smith 1976: 264-265
15
family or group of managers could provide sufficient capital to sustain growth.

Columbian University professors Adolf Berle and Gardiner Means coined the phrase the
separation of ownership and control in their landmark 1932 book The Modern
Corporation and Private Property, and it remains the most widely used expression in the
voluminous literature on corporate governance. It refers to their observation that during
the 1920s the structure of ownership in large corporations changed from the traditional
arrangements of owners managing their own companies to one in which shareholders had
become so numerous and dispersed that they were no longer willing or able to manage
the corporations they owned. They therefore basically made management decisions of the
corporation and claimed profits thereof. (These claims are sometimes called residual
claims to reflect that they accrue after all costs and fixed claims have been satisfied). In a
large publicly held corporation, the shareholders own residual claims but lack direct
control over management decision-making. Correspondingly, managers have control but
possess relatively small (if any) residual claims.
The influence of Berle and Means work cannot be underestimated: it has coloured
thinking about the way companies are owned, managed, and controlled for over seventy
years, and represents the reality in many US and UK companies. Monks (2001)28 states
The tendency during this period [the twentieth century] has been the dilution of the
controlling blocks of shares to the present situation of institutional and widely dispersed
ownership ownership without power.
The call of Berle and Means for an increase in the recognition and scope of fiduciary
duties of those who controlled corporations influenced legal thinking for much of the
century. If this view fell from favour in the rampant opportunism of the 1980s and 1990s,
the importance of the principle of fiduciary duty has re-emerged with a vengeance in the
reaction to the revelations of managerial irresponsibility that were exposed in the US and
UK after the major corporate bankruptcies. Berle and Means left an enduring legacy in
their work written during the depths of the 1930s Great Depression, concerning the need
to enforce accountability and the responsible management of corporations, arguments
16
that shaped the US Securities Acts of the 1930s that remain the basis for federal securities
law today29
1.4 Importance of Corporate Governance

We have come across companies which apparently were very efficiently managed but
which came to grief because the governance was not all right. Corporate governance is a
matter of high importance in the Company and is undertaken with due regard to all of the
Company's stakeholders and its role in the community. Good corporate governance is a
fundamental part of the culture and the business practices of any nation and its controlled
entities. Monks & Minow (1996)30 affirms the fact that good governance is of national
importance by stating The government must explicitly adopt the policy that commercial
competiveness is a national priority and that an effective governance system is a
necessary precondition. Bain and Band (1996)31 are of the same opinion and point out
that directors are thinking along the same lines: Companies and other enterprises with a
professional and positive attitude to governance are stronger and have a greater record of
achievement.
During the last decade, policy makers, regulators, and market participants around the
world have increasingly come to emphasize the need to develop good corporate
governance policies and practices. An increasing amount of empirical evidence shows
that good corporate governance contributes to competitiveness facilitates corporate
access to capital markets, and thus helps develop financial markets and spur economic
growth.
Today, both domestic and foreign investors place an ever-greater emphasis on the way
that corporations are operated and how they respond to their needs and demands.
3,citing Holderness 2003
31 Corporate Governance, Class materials in Corporate Governance and Shareholder Remedies,
CGSR.4/900(SG), Faculty of Law, University of Hong Kong, 26 December 2000
17
Investors are increasingly willing to pay a premium for well-governed companies that
adhere to good board practices, provide for information disclosure and financial
transparency, and respect shareholder rights. Well-governed companies are also better
positioned to fulfil their economic, environmental, and social responsibilities, and
contribute to sustainable growth.
Corporate governance is a key element in enhancing investor confidence, promoting
competitiveness, and ultimately improving economic growth. It is at the top of the
international development agenda as emphasized by James Wolfensohn, President of the
World Bank:
The governance of companies is more important for world economic growth than the
government of countries.
Improvement in corporate governance practices can improve the decision-making process
within and between a companys governing bodies, and should thus enhance the
efficiency of the financial and business operations. Better corporate governance also
leads to an improvement in the accountability system, minimizing the risk of fraud or
self-dealing by company officers. An effective system of governance should help ensure
compliance with applicable laws and regulations, and further, allow companies to avoid
costly litigation. Also, Russian companies should stand to benefit from a better reputation
and standing, both at home and in the international community.
Sound corporate governance is therefore very essential to the wellbeing of an individual

company and its stakeholders, particularly its shareholders and creditors. It ensures that
constituencies (stakeholders) with a relevant interest in the companys business are fully
taken into account. In addition, good governance can make a significant contribution to
the prevention of malpractice and fraud, although it cannot prevent them absolutely.
1.5 Theoretical Aspects of corporate governance
18
There are several diverse and well-established theories associated with corporate
governance. They approach corporate governance in different ways using different
terminology. They each attempt to analyse the same problems but from different
perspectives. Tricker (1996:31) states:
Stewardship theory, stakeholder theory and agency theory are all essentially
ethnocentric. Although the underlying ideological paradigms are seldom
articulated, the essential ideas are derived from Western thought, with its
perceptions and expectations of the respective roles of individual, enterprise and
the state and of the relationships between them.
1.5.1 Agency Theory

Agency theory argues that in the modern corporation, in which share ownership is widely
held, managerial actions depart from those required to maximise shareholder returns.32
The agency relationship is a contract under which one party (the principal) engages
another party (the agent) to perform some services on their behalf. As part of this, the
principal will delegate some decision-making authority to the agent. Jensen and Meckling
argue that, the agency theory rests upon this contractual view of the firm.
The agency problems basically arise because of the impossibility of perfectly contracting
for every possible action of an agent whose decisions affect both his own welfare and the
welfare of the principal. Arising from this problem is how to induce the agent to act in the
best interests of the principal.
The essence of the agency problem is the separation of management and finance.
Managers raise funds from investors to put them to productive use or to cash out their
holdings in the firm. Financiers need the managers specialised human capital to generate
returns on their funds. 33 A contract is signed in principle wherein both parties specify
32 Berle, A. and Means, G (1932) The Modern Corporation and Private Property, New York. AND Jensen,
M. C. and Meckling, W. H. (1976) Theory of the Firm: Managerial behaviour, agency, costs and
ownership structure, Journal of Financial Economics, 3, October 305-360.
33 Thomas Clarke: Theories of Corporate Governance The Philosophical Foundations of corporate
Governance, Taylor & Francis ltd, pg 5
19
what the mangers do with the funds, and how the returns are divided between them and
the financiers. The problem that arises as a result of this system of corporate ownership is
that the agents do not necessarily make decisions in the interests of the principal. 34
Agency theory offers shareholders a pre-eminent position in the firm legitimized not by
the idea that they are the firms owners, but instead its residual risk takers. Fama35
emphasises the irrelevance of ownership:
Ownership of capital should not be confused with ownership of the firm. Each
factor in a firm is owned by somebody. The firm is just the set of contracts
covering the way inputs are joined to create outputs and the way receipts from
outputs are shared among inputs. In this nexus of contracts perspective,
ownership of the firm is an irrelevant concept.
In the context of corporations and issues of corporate control, agency theory views
corporate governance mechanisms, especially the board of directors, as being an essential
monitoring device to try to ensure that any problems that may be brought about by the
principal-agent relationship are maximized. Blair (1996) states:
Managers are supposed to be the agent of a corporations owners, but
managers must be monitored and institutional arrangements must provide some
checks and balances to make sure they do not abuse their power. The costs
resulting from managers misusing their position, as well as the costs of
monitoring and disciplining them to try to prevent abuse, have been called
agency cost
The total agency cost arising from the agency problem has been summarised as
comprising of: the sum of the principals monitoring expenditures; the agents bonding
34 See generally Jill Solomon & Aris Solomon (2004): Corporate Governance and Accountability John
Wiley & Sons, Ltd pg 17
35 Fama, E. F. (1980) Agency problems and the theory of the firm, Journal of Political Economy, 88,
288-307
20
expenditures; and any remaining residual loss 36. It is contended that risk sharing is one
of the main reasons that the desired actions of principal and agent diverge. 37 This is
because of their different attitudes toward risk 38
A basic conclusion of agency theory is that the value of a firm cannot be maximised
because managers possess discretions, which allow them to expropriate value to
themselves. In an ideal world, managers would sign a complete contract that specifies
exactly what they could do under all states of the world and how profits would be
allocated. The problem is that most future contingencies are too hard to describe and
foresee, and as a result, complete contracts are technologically unfeasible.
1.5.2 Stakeholder Theory

The definition of stakeholder is not set in stone. Indeed, there are almost as many
varying definitions of what a stakeholder is and who can be characterised as a
stakeholder as there are individuals who have written about stakeholders in corporate
governance.
One very broad definition of a stakeholder is any group or individual which can affect or
is affected by an organization." Such a broad conception would include suppliers,
customers, stockholders, employees, the media, political action groups, communities, and
governments. A more narrow view of stakeholder would include employees, suppliers,
customers, financial institutions, and local communities where the corporation does its
business. But in either case, the claims on corporate conscience are considerably greater
than the imperatives of maximizing financial return to stockholders.
The stakeholder theory was first presented by Freeman39, who proposed a general theory
of the firm, incorporating corporate accountability to a broad range of stakeholders. It is
a theory of organisational management and business ethics that addresses morals and
36 Hill, C. W. and Jones , T. M. (1992) Stakeholder-agency theory, Journal of Management Studies, 29,
134-135
37 ibid 5 at pg 17
38 Shankman, N. A.(1999) Reframing the debate between agency and stakeholder theories of the firm,
Journal of Business Ethics, 19, 319-334
39 Freeman, E. (1984) Strategic Management: A stakeholder Approach, Pitman Press, Boston
21
values in managing an organisation. 40 The stakeholder theory takes account of a wider

group of constituents rather than focusing on shareholders. .
In the UK the Corporate Report (ASSC, 1975) was a radical proposal for its time, which
suggested that companies should be made accountable for their impact on a wide group
of stakeholders. The way that the Corporate Report hoped to achieve this was by
encouraging companies to disclose voluntarily a range of statements aimed for
stakeholder use, in addition to the traditional profit and loss account and balance sheet.
This was the first time that such an all encompassing approach to financial reporting was
considered seriously by a professional UK accounting body. 41
An interesting development in relation to the stakeholder theory is that put forward by
Jensen, who state s that traditional stakeholder theory argues that the managers of a firm
should take account of the interests of all stakeholders in affirm but, because the theorists
refuse to say how the trade-offs against the interests of each of these stakeholder groups
might be made, there are no defined measurable objectives and this leaves managers
unaccountable for their actions. Jensen therefore advocates enlightened value
maximisation, which he says is identical to enlightened stakeholder theory: Enlightened
value maximisation utilises much of the structure of stakeholder theory but accepts
maximisation of the long-run value of the firm as the criterion for making the requisite
trade-offs among its stakeholdersand therefore solves the problems that arise from
multiple objectives that accompany traditional stakeholder theory.
1.5.3 Stewardship Theory

The stewardship theory was propounded by Donaldson and Davis 42 who cautioned
against accepting agency theory and argued a view of managerial motivation alternative
to the agency theory and which was termed stewardship theory. In the stewardship
40 Phillips, R. Robert Edward Freeman (2003). Stakeholder Theory and Organisational Ethics. BerrettKoehler Publisher
41 ibid 5 at pg 24
42 DONALDSON, L.; DAVIS, J.H. (1991). Stewardship Theory or Agency Theory: CEO governance and
shareholder returns. Australian Journal of Management. Vol.16, 1, pp.49-64.
22
model, 'managers are good stewards of the corporations and diligently work to attain high
levels of corporate profit and shareholders returns'.43
They state that the owners-managers relationship depends on the behaviour adopted
respectively by them. Managers choose to act as agent or as steward according to certain
personal characteristics and their own perceptions of particular situational factors.
Principals choose to create a relationship of one type or the other depending on their
perceptions of the same situational factors and of their managers psychological
mechanisms.
The executive manager, under this theory, far from being an opportunistic shirker,
essentially wants to do a good job, to be a good steward of the corporate assets. The
executive managers pro-organisational actions are best facilitated when the corporate
governance structures give them high authority and discretion.
Thus, stewardship theory holds that there is no inherent, general problem of executive
motivation. Given the absence of an inner motivational problem among executives, there
is the question of how far executives can achieve the good corporate performance to
which they aspire. Thus, stewardship theory holds that performance variations arise from
whether the structural situation in which the executive is located facilitates effective
action by the executive. The issue becomes whether or not the organisation structure
helps the executive to formulate and implement plans for high corporate performance.
Structures will be facilitative of this goal to the extent that they provide clear, consistent
role expectations and authorise and empower senior management.
Stewardship theory stresses the beneficial consequences on shareholder returns of
facilitative authority structures which unify command by having roles of executive
director and chair held by the same person. The safeguarding of returns to shareholders
may be along the track, not placing management under greater control by owners, but by
empowering managers to take autonomous executive action.
43 Id
23
It is therefore been seen that the above theories have influenced the development of
corporate governance The preceding chapters will cover the OECD principles of
corporate governance which will in tend be used as a benchmark to see how they are
being used and complied with in the UK, US and South
24
CHAPTER 2
The OECD Principles of corporate Governance

2.1
Historical Background
The OECD grew out of the Organisation for European Economic Co-operation (OEEC),
which was set up in 1948 with support from the United States and Canada to co-ordinate
the Marshall Plan for the reconstruction of Europe after World War II
The OECD is a unique forum where the governments of 30 market democracies work
together to address the economic, social and governance challenges of globalisation as
well as to exploit its opportunities.
The Organisation provides a setting where governments can compare policy experiences,
seek answers to common problems, identify good practice and co-ordinate domestic and
international policies. It is a forum where peer pressure can act as a powerful incentive to
improve policy and which produces internationally-agreed instruments, decisions and
recommendations in areas where multilateral agreement is necessary for individual
countries to make progress in a globalised economy.
The OECD principles of corporate governance were developed as a result of financial

crises and a series of corporate scandals and failures that began in East Asia and rapidly
spread to Russia44 Investors in the affected countries watched helplessly as their
investments crashed due to systematic failures of investor protection mechanisms,
combined with weak capital market regulation. 45 These financial crisis and the corporate
scandals raised serious concerns about the stability of the international financial market
and further focused the minds of governments, regulators, companies, investors and the
44 Gregary H, The Globalisation of Corporate Governance (2002), 2
45 Jesover F and Kirkpatrick G, The revised OECD Principles of Corporate Governance and their
relevance to Non-OECD Countries (2004), 2
25
public on weaknesses in corporate governance systems. 46 This situation created some

awareness on the need for good corporate governance and the importance of an official
corporate governance regime, which could underpin market confidence, integrity and
efficiency as well as assist in the strengthening of economic growth47.
In response to the growing awareness of the importance of good corporate governance

and a model of corporate governance applicable to all countries, the OECD was asked by
Ministers in 1998 to develop a set of standards and guidelines for presentation to
Ministers by May 199948, which became known as the OECD principles of corporate
governance
At a council meeting in May 1999 the Ministers agreed and adopted principles, which
have been referred to as the first initiative by an inter-governmental organisation to
develop the core elements of a good corporate governance regime.
Since the principles were agreed in 1999, they have formed the basis for corporate
governance initiatives in both OECD and non-OECD countries alike. The OECD
Principles 1999 provided the landscape for the establishment of regional corporate
governance roundtables in cooperation with the World Bank and the International
Monetary Fund.49 In fact the international monetary fund adopted the OECD Principles
as a benchmark instrument for their member countries and surveillance procedures. 50
Moreover, they have been adopted as one of the Twelve Key Standards for Sound
46 Ibid
47 Chee L, Corporate Governance: An Asia-Pacific Critique (2002), 55. See also Kirkpatrick G, Improving
Corporate Governance Standards: The Work of the OECD and the Principles (2005).
48 To fulfil the Ministerial mandate, the OECD established an AD-Hoc Task Force, comprised of all
Member governments: the European Commission; four international organisations (the World Bank,
International Monetary Fund, Basle Committee on Banking Supervision, and the international Organisation
of Securities Commission); the OECDs Business and Industry Advisory Committee (BIAC) and Trade
Union Advisory Committee (TUAC); and representatives from selected other private sector organisations.
49 Ibid 42 at 18
50 Ibid
26
Financial Systems by the Financial Stability Forum. Accordingly, they form the basis of
the World Bank/IMF Reports on the Observance of Standards and Codes (ROSC). 51
The principles were however revised in 2004 following high-profile cases of Corporate
Governance failure. There was therefore the need to take into account new developments
and concerns
2.2
How the Principles Work
Generally, the OECDs way of working consists of a highly effective process that begins
with data collection and analysis and moves on to collective discussion of policy, then
decision-making and implementation. Mutual examination by governments, multilateral
surveillance and peer pressure to conform or reform are at the heart of OECD
effectiveness in areas such as corporate governance.
The principles offer broad guidance for governments to follow when reviewing whether
their corporate governance framework is compatible with establishing the corporate
governance they want. Policy makers are encouraged to develop the governance
framework with a view to its impact on overall economic performance, market integrity
and incentives it creates for market participants and the promotion of transparent and
efficient markets. This should help reduce the risk of costly over-regulation and minimise
the unintended consequences of policy measures. To underpin market integrity, the legal
and regulatory requirements that affect corporate governance practices should be
consistent with the rule of law, transparent and enforceable
The OECD principles of corporate governance are Non-binding. They are principle-based
and non prescriptive and are intended to assist OECD and non-OECD governments, and
to provide guidance for stock exchanges, investors, corporations and others related to
Corporate Governance. It is up to governments and market participants to decide how to
apply these Principles in developing their own frameworks for corporate governance,
taking into account the costs and benefits of regulation.The non prescriptive nature of the
51 Using the OECD Principles Of Corporate Governance: A Boardroom Guide. OECD 2008
27
principles is its principle success as the principles retain their relevance in varying legal,
economic and its social contexts
The Principles focus on publicly traded companies, both financial and non-financial.
However, to the extent they are deemed applicable, they might also be a useful tool to
improve corporate governance in non-traded companies, for example, privately held and
state owned enterprises. The Principles represent a common basis that OECD member
countries consider essential for the development of good governance practices.
Since 1999, the OECD Corporate Governance Principles have become the globally
recognised benchmark in the area of corporate governance. They have been used as a
basis for development of regulatory frameworks in many countries. They have also been
endorsed by the Financial Stability Forum as one of twelve key standards considered
essential for financial stability. In addition, the IMF and World Bank have been using the
Principles as a benchmark in their country Reports on the Observance of Standards and
Codes.
Equally very importantly is the fact that the principles are used as the reference point by
the private sector. It is believed that today there is hardly any initiatives that do not use
the OECD Principles as the reference point or benchmark. This is the attraction of the
Principles. They provide a common language and a shared aspiration that everyone can
understand and relate to.52
52 Veronique Ingram, Speech to ICGN Annual Conference. Rio De Janiero 8 JULY 2004. Online at
http://www.midcgroup.com/j_libry/2_ICGN%E5%B9%B4%E6%AC%A1%E5%A4%A7%E4%BC%9A%
E3%82%B9%E3%83%94%E3%83%BC%E3%83%81%EF%BC%88%E5%8E%9F%E6%96%87OECD%
20VI%20jun04%EF%BC%89.pdf accessed 09/09/2008
28
2.3
Reasoning behind the Principles
As has been seen earlier, as a consequence of corporate scandals 53, the minds of
governments, regulators, companies, investors and the general public were focused on
weaknesses in corporate governance systems and the need to address this issue.
The OECD principles of corporate governance were therefore developed not as a panacea
to this but as guidance to policymakers, regulators and the market participants in
improving the legal, institutional and regulatory framework that underpins corporate
governance, with a focus on publicly traded companies. The principles are meant to
provide practical suggestions for stock exchanges, investors, corporations and other
parties that have a role in the process of developing good corporate governance.
The Principles are intended to assist OECD and non-OECD governments in their efforts
to evaluate and improve the legal, institutional and regulatory framework for corporate
governance in their countries and to provide guidance and suggestions for stock
exchanges, investors, corporations, and other parties that have a role in the process of
developing good corporate governance. They are intended to be concise, understandable
and accessible to the international community. They are not intended to substitute for
government, semi-government or private sector initiatives to develop more detailed best
practice in corporate governance.54
The original text of the OECD Principles basically evolved to be a statement of existing
good corporate governance practices in OECD countries. It served to provide a nonbinding statement of the key elements essential for good corporate governance just the
basic necessities. The Principles were designed to assist policy advisers in evaluating and
improving the legal, regulatory and institutional framework underpinning corporate
governance. As such, the Principles have served as a guide to governments, regulators,
stock exchanges, directors, investors and other market participants regarding good
practice.
53 For example, the collapse of Enron, Tyco and WorldCom in the United Sates, Maxwell and BCCI in the
United Kingdom;
54 Preamble OECD principles of Corporate Governance 2004
29
OECD Principles (1999) Critical Content
2.4
The Principles address governance problems that result from the separation of ownership
and control in the modern corporation. They identify the critical elements required for
good governance. They describe the basic elements of an effective corporate governance
framework for corporations that seek to attract capital from equity investors.
Specifically, they focus upon:
Rights of Shareholders
Equitable Treatment of Shareholders
Role of Stakeholders in Corporate Governance
Disclosure and Transparency
The Responsibilities of the Board
2.4.1 Core Standards

According to the Millstein Report (1998)55, corporate governance takes place within the
corporation and as such it depends very much on investors, boards and managements for
its successful implementation. The report noted that for corporate governance to be
effective in attracting capital, it must focus on four important areas. The OECD
Principles 1999 were built on these core standards: fairness, transparency, accountability,
and responsibility.
(a) Fairness
In relation to this core concept, two separate principles were developed. The first
principle states that the corporate governance framework should protect the rights of
shareholders. This includes both their proprietary as well as their participatory rights.
Effective corporate governance depends on laws, procedures and practices that protect
their property right and ensure the security of ownership as well as the unfettered
55 Millstein, I.M. (1998). The Evolution of Corporate Governance in the United States, Remarks to the
World Economic Forum, Davos, Switzerland (February 2, 1998).
30
transferability of shares. This principle also recognizes their participatory rights on key
corporate decisions such as the election of directors and the approval of major mergers or
acquisitions.
The second principle states that the corporate governance framework should ensure the
equitable treatment of all shareholders including the minority and foreign shareholders
and that all shareholders should have the opportunity to obtain effective redress for
violation of their rights. This means that the legal framework should include laws that
protect the rights of the minority shareholders against misappropriation of assets or selfdealing by the controlling shareholders, managers or directors.
(b) Responsibility
The third principle states that the corporate governance framework should recognize the
rights of stakeholders as established by law and encourage active cooperation between
corporations and stakeholders in creating wealth, jobs and the sustainability of financially
sound enterprises. This means that corporations must abide by the laws and regulations
of the countries in which they operate. However, laws and regulations impose only
minimal expectations as to conduct and corporations should be encouraged to act
responsibly and ethically with special consideration for the interests of stakeholders
particularly the employees. It is now acknowledged that socially responsible corporate
conduct is consistent with the principle of shareholder wealth maximization. In numerous
countries around the globe, the practice of corporate social responsibility accounting is
now well established with corporations going beyond the legal requirements to provide
health care and retirement benefits, financially supporting education and formulating and
adopting environmentally friendly technologies. Similarly other companies strive to
avoid practices, which are socially undesirable even if not prohibited under the law.
(c) Transparency
The fourth principle states that the corporate governance framework should ensure that
timely and accurate disclosure is made on all material matters regarding the corporation
including the financial situation, performance, ownership and governance of the
company. This is in recognition of the fact that both investors and shareholders need
31
information regarding the financial and operating performance of the company as well as
information about their corporate objectives and material risk exposures. This
information should be prepared in accordance with internationally acceptable accounting
and auditing standards and should be subject to an independent audit, which is conducted
annually. The use of internationally accepted accounting standards would enhance
comparability and assist both investors and analysts in comparing corporate performance
and decision-making based on their relative merits. Likewise information about the
companys governance such as share ownership, voting rights, identity of board
members, key executives and executive compensation is also a critical component of
transparency.
(d) Accountability
The fifth principle states that the corporate governance framework should ensure the
strategic guidance of the company, the effective monitoring of management by the board
as well as the boards accountability to the company and the shareholders. This principle
implies a legal duty on the part of the directors to the company and its shareholders. The
directors are said to have a fiduciary relationship to both the shareholders and the
company, which requires that they avoid self-interest in their decision-making and act
diligently and on a fully informed basis. This principle also recognizes the duty of the
board to oversee the professional managers who have been entrusted to run the company
and who are accountable to the board for the use of firm assets. Thus the board acts as a
mechanism for minimizing the agency problem inherent in the separation of ownership
and control. If the board is to be an effective monitor of managerial conduct it must be
suitably distinct from the management in order to be objective in its assessment of
management. This requires that some of the directors are neither members of the
management team nor closely related to them through family or business ties. A critical
aspect of effective corporate governance is the quality of the directors. Objective
oversight therefore necessitates the participation of professionally competent nonexecutive and independent directors on the board. The latter must have the capability,
fiduciary commitment and objectivity to provide strategic guidance and monitor
performance on behalf of the shareholders. In order for the board to be able to play their
32
roles effectively, they should meet often, at least once every three months and if possible
more often. Additionally, for the non-executive directors to be effective and to ensure
that independent oversight has meaning, they must have access to important information
in advance of board meetings. In the developed countries, board committees have played
an important role in performing detailed board work. In these countries, it is common to
rely on an audit committee, remuneration committee and a nomination committee staffed
either wholly or primarily with non-executive or independent directors.
2.5
OECD Principles (2004)
In 2004, at a Council Meeting at Ministerial Level, the OECD agreed to survey

developments in OECD countries and to assess the Principles in light of developments in
corporate governance. This task was entrusted to the OECD Steering Group on Corporate
Governance, which comprises representatives from OECD countries. 56 Review
committees were established and, in some countries, significant policy initiatives were set
in motion. Further, the OECD implementation process continued in developing and
transition countries. However, systemic corporate failures and scandals 57 continued to
occur and undermine confidence in the integrity of corporations, financial institutions and
the market generally. Accordingly, the OECD Ministerial Council formally launched a
review process in 2002 which resulted in the call for a reassessment of the OECD
Principles 1999 by 2004. 58
The OECD Steering Group on Corporate Governance was entrusted with the task of
undertaking a survey and consultations with member countries highlighting the key
features of corporate governance arrangements and requesting comments on some
significant issues that had not been addressed in the OECD Principles 1999. 59
Consultations were also made with experts from a large number of countries which took
56 OECD Principles of Corporate Governance 2004, 9
57 For example, the collapse of Enron, Tyco and WorldCom in the United Sates, Maxwell and BCCI in the
United Kingdom
58 Trade Union Advisory Committee (TUAC) to the OECD, The OECD Principles of Corporate
Governance: An Evaluation of the 2004 Review by the TUAC Secretariat, (2004) 6
59 Ibid
33
part in the Regional Corporate Governance Roundtables that the OECD organized in
Russia, Asia, South East Europe, Latin America and Eurasia with the support of the
Global Corporate Governance Forum and others, and in co-operation with the World
Bank and other non-OECD countries as well. 60 There was also some participation of
leading business and labor representatives, including the OECDs Business Industry
Advisory Committee61 and Trade Union Advisory Committee.62
A draft of the revised Principles was later in January 2004 made public by putting them
up on the OECD website for comment. This attracted a number of responses. Based on
these responses and comments from the general public it was concluded that the 1999
Principles should be revised to take into account new developments and concerns. 63 It
was agreed that the revision should be pursued with a view to maintaining a non-binding
principles-based approach, which recognises the need to adapt implementation to varying
legal economic and cultural circumstances. It is worthy of note that the revised principles
thus build upon a wide range of experience not only in the OECD area but also in nonOECD countries.64
The new OECD principles of corporate governance focused primarily on public

companies and on developing corporate governance in emerging countries. 65 The OECD
recognises that one size does not fit all, that is, there is no single model of corporate
governance that is applicable to all countries. However the principles represent a certain
common characteristics that are fundamental to good corporate governance. 66 The
Principles build on these common elements and are formulated to
61 The Business Industry Advisory Committee to the OECD is an independent organisation officially
recognised by the OECD as being representative of the OECD business community. Its members are the
major industrial and employers organisations in the 30 OECD member countries. The principal objective
of the Committee is to ensure that business andindustry needs are adequately addressed in OECD policy
instruments.
62 The Trade Union Advisory Committee to the OECD is an interface for labour unions with the OECD. It
is an international trade union organisation which has consultative status with the OECD and its various
committees.
65 Alan Calder: 2008 Corporate Governance A practical Guide to the Legal Frameworks and
International Codes of Practice, Kogan Page
66 Christine A. Mallin: Corporate Governance2007 Oxford University Press, second Edition
34
embrace the different models that exist. They provide solutions to governance problems
that stem from the separation of ownership and control, and suggest methods of dealing
with complex issues relating to shareholders, employees, boards, management, and
decision-making.There are six high level principles each supported by a number of
recommendations. 67
I. Ensuring the basis for an effective corporate governance framework

This is an innovation from the previous 1999 OECD principles of corporate governance.
It deals with the basis for ensuring an effective enforcement of the principles. To ensure
an effective corporate governance framework, it is important to improve the enforcement
of existing laws and regulations. It is necessary to put in place an appropriate and
effective legal, regulatory and institutional foundation is established upon which all
market participants can rely in establishing their private contractual relations. The
drafters of the OECD principles therefore established the fact that it was very necessary
for an effective mechanism to be put in place in overseeing the enforcement of the
principles.
The corporate governance framework should promote transparent and efficient markets,
be consistent with the rule of law and clearly articulate the division of responsibilities
among different supervisory, regulatory and enforcement authorities. 68
A. The corporate governance framework should be developed with a view to its impact
on overall economic performance, market integrity and the incentives it creates for
market participants and the promotion of transparent and efficient markets.
B. The legal and regulatory requirements that affect corporate governance practices in a
jurisdiction should be consistent with the rule of law, transparent and enforceable.
C. The division of responsibilities among different authorities in a jurisdiction should be
clearly articulated and ensure that the public interest is served.
67 Ibid
68 OECD principles of corporate governance 2004 at pg 17
35
D. Supervisory, regulatory and enforcement authorities should have the authority,

integrity and resources to fulfill their duties in a professional and objective manner.
Moreover, their rulings should be timely, transparent and fully explained.
II. The Rights of Shareholders

It is a generally accepted principle of good corporate governance that organizations
should respect the rights of shareholders and help shareholders to exercise those rights.
They can help shareholders exercise their rights by effectively communicating
information that is understandable and accessible and encouraging shareholders to
participate in general meetings
Chapter 2 of the 2004 principles is an amendment to chapter one of the 1999 principles.
The chapter concerns the protection of shareholders rights and the ability of shareholders
to influence the behavior of corporations. Shareholders have a right for their shares to be
registered and secured.
The Principles list some basic rights including those to: secure methods of ownership
registration, convey or transfer shares, obtain relevant and material information on the
corporation on a timely and regular basis, participate and vote in general shareholder
meetings, elect and remove members of the board and share in the profits of the
corporation.69 In addition Shareholders per the 2004 principles have been empowered to
participate in, and to be sufficiently informed on, decisions concerning fundamental
corporate changes such as amendments to the statute, authorisation of additional shares,
extraordinary transactions, including the transfer of all or substantially all assets that in
effect result in the sale of the company. 70
The 2004 principles further made amendments to ownership rights for all shareholders,
including institutional investors. Under the original OECD Principles 1999, there was no
mention of the need to facilitate the exercise of ownership rights by institutional
investors. The revised Chapter 2 encourages authorities to allow institutional investors to
69 OECD Principles 2004, Chapter 2, Principle A.

70OECD Principles 2004, Chapter 2,.Principle B
36
cooperate and consult with each other on issues of corporate governance. 71 It is a

significant improvement to include a provision calling for an active ownership policy by
institutional investors. The chapter also recommends that institutional investors maintain
a good practice of disclosing information to the market.72 This has been said to be
particularly important for trade unions in pre-funded retirement systems, collective
investment schemes and some activities of insurance companies. 73
It is worthy of note that some of the innovations in the 2004 OECD principles have been
criticised. Union Network international74 commented that it would have been more clear
and concise if the title of the chapter referred to the rights and responsibilities of
shareholders. 75 It is further argued that, although the chapter calls for shareholders
effective participation in the nomination of directors, it does not explain or introduce the
means by which shareholders can effectively access the nomination process, specifically,
the company material. 76 On his part, George Loladze,77 is to the opinion that chapter 2
should have been amended with a more specific and detailed requirement that
shareholders have the opportunity to effectively buy or sell shares. 78
III. Equitable Treatment of Shareholders

Chapter 3 of the 2004 principles is an equivalent of chapter 2 of the 1999 principles
which generally calls for an equitable treatment of all shareholders, including minority
and foreign shareholders. The 2004 principles place more emphasis on minority
shareholders. It calls for their protection from abusive actions by, or in the interest of,
71 OECD Principles 2004, Chapter 2, Principle G.

72 OECD Principles 2004, Chapter 2, Principle F.
73 Trade Union Advisory Committee (TUAC) to the OECD, The OECD Principles of Corporate
Governance: An Evaluation of the 2004 Review by the TUAC Secretariat, (2004), 13
74 For more information about the union network see www.union-network.org.
75 OECD, Comments Received from Web consultations, Union Network International (UNI) (2004).
76 Ibid
77 He is the Chairman of the Supervisory Board of the Georgian Stock Exchange.
78 OECD, Comments Received from Web consultations, George Loladze, Chair, Supervisory Board,
Georgian Stock Exchange (2003).
37
controlling shareholders acting either directly or indirectly, and should have effective
means of redress.79
Another innovation to this chapter was the modification of the provision relating to
disclosure to read Members of the board and key executives should be required to
disclose to the board whether they, directly, indirectly or on behalf of third parties, have a
material interest in any transaction or matter directly affecting the corporation. 80 Lastly a
new clause was introduced in this chapter to the effect that impediments to cross border
voting should be eliminated.81
Some commentators82 are of the view that the principles do not recognise the concept of
one share one vote as best practice, as this is increasingly the case in governance
regimes around the world. This therefore means the principle will benefit one set of
shareholders at the expense of the others and will act as a deterrent to takeovers by
entrenching management. They further hold that any benefits from the dual share
structures are outweighed by the potential for abuse as identified in the Principles in
section A.2.
IV. The role of the stakeholders in corporate governance
Chapter 4 of the 2004 principles is an equivalent of chapter 3 of the 1999 principles. The
chapter recognises the rights of stakeholders as established by law and encourage active
co-operation between corporations and stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises. The chapter also provides that the rights of
stakeholders that are established by law or through mutual agreements are to be
respected.83 Principle C84 has been modified to read as performance-enhancing
79 OECD Principles 2004, Chapter 3, Principle A2.

80 OECD Principles 2004, Chapter 3, Principle C.
81 OECD Principles 2004, Chapter 3, Principle A4.
82 OECD, Comments Received from Web consultations, Australian Pensions & Investment Research
Consultant Ltd (PIRC) (2003).
38
mechanisms for employee participation should be permitted to develop. This

modification is important as it seeks to allow such performance mechanisms to develop,
especially in countries where they have no effective mechanisms to ensure and encourage
employees to participate in the corporate governance of the company.
Chapter 4 of the 2004 principles also call for individual employees and their
representative bodies, to be able to freely communicate their concerns about illegal or
unethical practices to the board and their rights should not be compromised for doing
this. 85 This new principle advocates protection for whistleblowers, including institutions
through which their complaints or allegations can be addressed and provides for
confidential access to a board member. Effective enforcement of this is covered by
principle F86 of the same chapter.
The new principle was not totally satisfactory to some commentators. The FIDH87 for
instance was particularly concerned with the lack of a definition for a stakeholder.
According to the FIDH88 the chapter should have included a definition of stakeholders as
given by the Norms on the responsibilities of transnational corporations and other
business enterprises with regard to human rights adopted by the Sub-Commission on
human rights in august 200389 The FIDH also pointed the vagueness of the wording of
chapter 4 regarding the participation of stakeholders, pointing out that it falls short of an
objectively effective mechanism to ensure stakeholder participation. This criticism was
particularly targeted at Principles B1, C, and D. It was contended that these provisions
allow a wide margin of discretion to managers with respect to the information they agree

85 OECD Principles 2004, Chapter 4, Principle E.
86 The corporate governance framework should be complemented by an effective, efficient insolvency
framework and by effective enforcement of creditor rights.
87 International Federation for Human Rights
88 OECD, Comments Received from Web consultations, The International Federation for Human Rights
(IFHR) (2003).
89 See Norms on the responsibilities of transnational corporations and other business enterprises with
regard to human rights, (E/CN.4/Sub.2/2003/12/Rev.2) for its definition of a stakeholder
39
to make public and they do not go far enough to ensuring access to judicial recourses for
affected stakeholders. 90
V. Disclosure and Transparency

Chapter 6 of the 2004 principles again is the equivalent of chapter 5 of the 1999
principles. Key elements of the disclosure and transparency provision include
Major share ownership and voting rights
Material foreseeable risk factors
Full financial disclosure
Governance structure and policies, and what code if any followed
Information should be prepared audited and disclosed in accordance with high

standards of accounting, audit and non financial disclosure
Regular continuous disclosure
Full disclosure of related party transactions, usually with controlling shareholders
Some exciting additions were made to these provisions which significantly improved
standards for disclosure and auditing procedures. 91 New Disclosure issues for intellectual
asset driven economy were also added to the 2004 principles. 92 Another new principle
was introduced providing that the corporate governance framework should include an
effective approach to ensure the integrity of those professions that serve as conduits of
analysis and advice to the market, such as brokers, analysts, and rating agencies. 93
Unlike the foregoing chapters, Chapter 5 did not go unnoticed in relation to flaws
from some commentators and prominent business societies. FIDH 94 was not
90 OECD, Comments Received from Web consultations, International Federation for Human Rights
(FIDH) (2003).
91 See for instance OECD Principles 2004, Chapter 5, Principle A and C relating to Disclosure
requirements for board members and key executives; and the requirement for an annual external audit
respectively
92 OECD Principles 2004, Chapter 5, Principle D.
93 OECD Principles 2004, Chapter 5, Principle F.
(FIDH) (2003).
40
happy with the chapters limited scope on material to be disclosed by a company

and called for disclosure obligations of a company to include the companys
policies regarding human rights, social and environmental responsibilities, as well
as the actual impact on such activities. 95
VI. Responsibility of the Board
Chapter 6 of the 2004 principles is an equivalent to chapter 5 of the 1999 principles.

Many of the provisions of the chapter were modified and some new ones added. The
duties and responsibilities of the board have been clarified as fiduciary in nature,
particularly important where company groups are concerned. The principle covering
board independence and objectivity has been extended to avoid conflicts of interest and
to cover situations characterised by block and controlling shareholders, as well as the
board's responsibility for oversight of internal control systems covering financial
reporting.
Board members are required to act on a fully informed basis, in good faith, with due
diligence and care, and in the best interest of the company and the shareholders. 96 The
chapter also calls for fairness on the part of the board and to apply high ethical
standards.97 This is a new modification from the 1999 principles when looking at the
interest of shareholders.
Other changes were made to the key functions to be performed by the board paramount
of which was monitoring the effectiveness of the companys governance practices and
making changes as needed. This was to involve continuous review of the internal
structure of the company to ensure that there are clear lines of accountability for
management throughout the organisation.98 Moreover the provision on board
remuneration was modified which called for boards to develop and disclose a
(FIDH) (2003).
98 OECD Principles 2004, Chapter 6, Principle D.2
41
remuneration policy statement covering board members and key executives and for such
policy statements to specify the relationship between remuneration and performance, and
include measurable standards that emphasise the longer run interests of the company over
short-term considerations.99
Further modifications were made in relation to exercise of judgements by the board. 100
Objective judgement is very necessary for the exercise of the boards duties of
monitoring managerial performance, preventing conflicts of interest and balancing
competing demands on the corporation101. In order to prevent conflicts of interest an
independent board is most desirable. Independent board members can contribute
significantly to the decision-making of the board and for them to do this; it is desirable
that boards declare who they consider to be independent and the criterion for this
judgement. One of such criteria is when committees of the board are established; their
mandate, composition and working procedures should be well defined and disclosed by
the board.102 Another criterion is for board members to be able to commit themselves
effectively to their responsibilities103.
In order to fulfil their responsibilities, board members should have access to accurate,
relevant and timely information. 104
Chapter 6 also came under scrutiny from various divisions. The FIDH 105 for instance
finds it particularly regrettable principle C does not call for the duties of directors to
respect explicitly Human Rights Declaration and other human rights instruments, which
form the only possible foundation of such ethical standards (interest of stakeholders was
not taken into account). It further holds that the principle is not an internationally
accepted norm.
99 OECD Principles 2004, Chapter 6, Principle D.4

100 OECD Principles 2004, Chapter 6, Principle D
101 Ibid
102 OECD Principles 2004, Chapter 6, Principle E.2
103 OECD Principles 2004, Chapter 6, Principle E.2
104 OECD Principles 2004, Chapter 6, Principle F
(FIDH) (2003).
42
On its part, the Japan Business Federation (Nippon Keidanren) 106 affirmed FIDHs
position on the lack of universality in relation to the term ethics. It also criticised the
requirement to have non-executive members on the board and clearly called for this to be
removed owing to the fact that this is not applicable in instances of legally required
mutual supervision among board members.
The International Bar Association Section on Business Law (the IBA)107 on its part
proposed an addition of the level of indebtedness of the company and of other
companies off the group to the monitoring provision108
The above principles as have been seen are generally intended to assist OECD and nonOECD governments in their efforts to evaluate and improve the legal, institutional and
regulatory framework for corporate governance in their countries. These principles will
eventually be matched against corporate governance practices in the UK, US and South
Africa in chapter 4.
106 The Japan Business Federation (Nippon Keidanren) comprises 1,541 major Japanese business firms
and industrial associations.
107 The IBA is a dual membership organisation, comprising 16.000 individual lawyers and over 190 Bar
Associations and Law Societies, that promotes the development of international law reform and shapes the
future of the legal profession. The IBAs Section on Business Law (the SBL) represents the interests of
14.000 business lawyers from countries around the world. The above opinion is that of the ad hoc working
group and do not reflect the official position of the SBL or the International Bar Association.
108 OECD, Comments Received from Web consultations, International The International Bar Association
Section On Business Law (IBA) (2003).
43
CHAPTER 3
An Overview of Corporate Governance in the United Kingdom, United States AND

South Africa
3.1
Background to the Corporate Governance Debate in the United Kingdom
In the UK, the issue of corporate governance has been around for as long as there has
been a separation between the ownership and the control of commercial concerns.
Although they might have referred to it in other terms, discussions on corporate
governance has been going on since the South Sea Bubble and before109
In terms of existing practices and guidelines in the UK, however, one need only go back a
couple of decades to the eighties boom. Initial corporate governance developments in the
UK began in the late 1980s and early 1990s in the wake of corporate scandals such as
Polly Peck, BECCI and Robert Maxwell pension fund. The UK business community
recognized the need to put its house in order.110 The direct result was a number of reports
all aimed at redressing the appalling situation. These reports concentrated on issues
concerning the mechanics of controlling the boards of companies and their directors,
preventing fraud, improving information about companies, and making boards of
directors more accountable to shareholders.
3.1.1 The Cadbury Report (1992)
As result of the public concern over the way in which companies were being run and
fears concerning the type of power prevalent in the Maxwell case 111; corporate
governance became the subject for discussion among policy makers. The start of a
109 Rob Lewis: Corporate governance: a combined code time-line, Online at
http://www.accountingweb.co.uk/cgibin/item.cgi?id=174351&d=1032&h=1024&f=1026&dateformat=%2
5o%20%25B%20%25Y[accessed 30/09/2008]
110 Financial Reporting Council, The UK Approach to corporate Governance, November 2006 at pg 4
111 For a general discussion on the Maxwell Scandal See J. Solomon and A Solomon 2004; Corporate
Governance and Accountability, John Wiley & Sons ltd pg 47
44
formalised approach to the governance of the UK companies was the report of the
Committee112 on the Financial Aspects of Corporate Governance, or the Cadbury Report,
1992 led by Sir Adrian Cadbury to which was attached a code of best practice 113. It has
been held114 that the formation of the Cadbury committee was a reactive rather than a
proactive measure. This was however on the assumption that the existing implicit system
of corporate governance in the UK was sound and that many of the recommendations
were merely making explicit a good implicit system115
A draft report was issued for public comment on 27 May 1992, and the final report 116 was
released on 1 December 1992. The Cadbury Committee addressed the financial aspects of
corporate governance and subsequently produced a Code of Best Practice, the provisions
of which, in their belief, all boards of UK listed companies should comply with. At the
heart of the committees recommendations was its Code of Best Practice, 117 designed to
achieve high standards of corporate behavior. 118 The principles on which the code is
based are those of openness, integrity and accountability. 119 While the code sets out the
general principles,120 the committee also made various recommendations on specific
aspects: the composition of the board of directors;121 the establishment of auditing
committees;122 and the role of a companys shareholders. 123
112 The committee was made up of the Financial Reporting Council, the London Stock Exchange (LSE),
and the accountancy profession.
113 Cadbury Report (1992), below n 121, 11 para 1.3
114 Ibid at pg 47
115 See Cadbury Report, 1992, pg. 12, para. 1.7
116 Report of the committee on the Financial Aspects of Corporate Governance. (hereinafter Cadbury
Report 1992) Committee on the Financial Aspects of Corporate Governance, UK (1992)
117 See generally Jean Jacques du Plessis et al 2005; Principles of Contemporary Corporate Governance,
Cambridge University Press 301
118 Cadbury Report (1992), below n 121, 11 para 1.3
119 Ibid 16 para 3.2
120 Ibid 58 et seq
121 Ibid 20 et seq
122 Ibid 36 et seq
123 Ibid 48 et seq
45
The code of Best Practice called for a clear division of responsibilities at the head of a
company in order to ensure a balance of power and authority, such that no single
individual has unfettered powers of decision124
The Cadbury Code was not legally binding on boards of directors. Nevertheless, one of
the rules in the Stock Exchange Yellow Book125 at the time of its publication was a
statement of compliance with the code. The result of this was that all companies
publicly quoted on the Stock Exchange had to state in their annual reports whether or not
they had implemented the code in all respects. Specifically, they recommended that listed
companies should incorporate a formal statement into their Report and Accounts
outlining whether or not they complied with each of the Codes provisions. In respect of
areas of non-compliance an explanation of the reason was sought. Further to this, the
Report recommended that the compliance statements made by the companies be reviewed
by auditors prior to release of the Annual Report.
3.1.2 The Greenbury Report 1995
The Greenbury Report was prompted by growing public concern about the growth in
executive remuneration, especially to departing directors and to the directors of privatised
utilities, at a time when prices were rising, pay was being restrained and staff made
redundant. These high remuneration packages were failing to provide the necessary
incentives for directors to perform better. Consequently, it was recognised that corporate
governance issues relating to directors remuneration needed to be addressed in a more
rigorous manner. This led to the establishment of the Greenbury Committee. The aim of
the Geenbury report was not to reduce directors salaries. Rather it was to provide a
means of establishing a balance between directors salaries and their performance 126
124 Jean Jacques du Plessis et al 2005; Principles of Contemporary Corporate Governance, Cambridge
University Press at pg 302
125 The Yellow Book provided the requirements of the Stock Exchange with which all listed companies
had to comply. This has now been superseded by the overreaching responsibilities of the FSA.
126 J. Solomon and A Solomon 2004; Corporate Governance and Accountability, John Wiley & Sons ltd
pg 49
46
The Greenbury Report (1995) had a very specific focus on executive remuneration 127: its
recommendations dealt primarily with the establishment of remuneration committees for
listed companies and the role and function of the remuneration committee. 128
Greenbury attempted to develop a code of practice 129, with special emphasis on
accountability and transparency. These two aims were to be achieved by: i) the presence
of a remuneration committee comprised of independent non-executive directors who
would report fully to the shareholders each year about the companys executive
remuneration policy, including full disclosure of the elements in the remuneration of
individual directors,130 and ii.) the adoption of performance measures linking rewards to
performance of both the company and individual directors, so that the interests of
directors and shareholders were more closely aligned. The final part of the Greenbury
recommendations dealt with service contracts and what entitlements directors would have
in the event of early termination.131
3.1.3 The Hampel Report 1998
The Hampel Committee was set up in 1995 to review the extent to which the Cadbury
and Greenbury Reports had been implemented and whether the objectives had been met.
The Committee reported in 1998. The Final report emphasised principles of good
governance rather than explicit rules in order to reduce the regulatory burden on
companies and avoid box-ticking so as to be flexible enough to be applicable to all
companies. It was recognised that good corporate governance will largely depend on the
particular situation of each company. 132 This emphasis on principles would survive into
the Combined Code.
127 Jean Jacques du Plessis et al 2005; Principles of Contemporary Corporate Governance, Cambridge
University Press at pg 302
128 Code Recommendations Para A.
129 Christine A Mallin, 2007Corporate Governance (2nd Ed) Oxford University Press
130 Code Recommendations Para B
131 Code Recommendations Para D
132 The Hampel Report, 1998, pg. 10, paras 1.11-1.12
47
The Hampel committee made a total of 56 separate recommendations (dealing with

corporate governance, the role of directors, directors remuneration, the role of
shareholders, and accountability and audit), which included and endorsed those already
contained in the Cadbury and Greenbury codes and which stressed that the pursuit of the
principles of corporate governance were more important than complying with sets of
prescriptive rules.
On the question of in whose interests companies should be run, its answer came with
clarity.
The single overriding objective shared by all listed companies, whatever their
size or type of business is the preservation and the greatest practical enhancement
over time of their shareholders' investment.133
The Hampel Report, like its precursors, also emphasized the important role that
institutional investors have to play in the companies in which they invest (investee
companies). It is highly desirable that companies and institutional investors should
consider carefully the resolutions on which they have a right to vote and reach a decision
based on careful thought, rather than engage in box ticking
3.1.4 The Combined Code 1998 and Beyond

The Combined code was formulated in 1998 and revised in 2003 following publication of
the Higgs Report. It drew together recommendations of the Cadbury, Greenbury and
Hampel Reports. The code was structured into two parts. The first part dealt with
companies and includes four sections of Principles covering: (A) Directors 134(B)
Directors remuneration,135 (C) Accountability and audit,136 (D) Relations with
133 Committee on Corporate Governance, Final Report' (London 1998) para 1.16
134 The Combined Code 1998 Section 1.A
135 The Combined Code 1998 Section 1.B
136 The Combined Code 1998 Section 1.C
48
shareholders;137 The second part dealt with institutional shareholders and included three
sections (E) 1. Share holding voting;138 2. Dialogue with companies;139and 3.Evaluation
of governance disclosures. 140 These three issues were already dealt with in the Cadbury
and Greenbury reports. However, the emphasis of the Combined Code was slightly
different and the aim was to consolidate previous views into a consensus on what
constituted good corporate governance. Under each main principle there was a list of
provisions, giving details on how the principles may be attained.
The 1998 Combined Code applied to all listed companies from 31 December 1998 until
reporting years commencing on or after 1 November 2003 until it was superseded by the
revised Code in 2003141. It was appended to Listing Rule 12.43A requiring companies to
provide in their annual reports a narrative statement of how they have applied the Code
principles and state that they have complied with the Code provisions or, if not, why not
and for what period
Part of the 1998 and 2003 Combined Codes required companies to provide a statement in
their annual report on how they have applied the Code Principle and Code Provisions
relating to internal control.142 Guidance for companies on how this should be approached
was needed. This led to the establishment of the Turnbull Committee in 1998 by the
Institute of Chartered Accountants in England & Wales (ICAEW) which then resulted in
the Turnbull Guidance. 143The Guidance was a Securities & Exchange Commission (SEC)
approved framework for management to show that they have adequate internal control
structures and financial reporting procedures in place. The guidance based itself on the
premise that a risk-based approach to internal controls should be part of normal
137 The Combined Code 1998 Section 1.D

138 The Combined Code 1998 Section 2.E.1
141 This Code superseded and replaced the Combined Code issued by the Hampel Committee on
Corporate Governance in June 1998. It derived from a review of the role and effectiveness of non-executive
directors by Derek Higgs and a review of audit committees by a group led by Sir Robert Smith.
142 This has been in keeping with the preferred approach of company law in the UK, which is one of selfregulation of the city of London financial institutions, as expressed in the Financial Services Act 1986
143 Internal Control: Guidance for Directors on the Combined Code, Published in September 1999.
49
management process, and not a separate exercise undertaken simply for regulatory
compliance. It also highlighted the importance of continual review.
In March 2000, the Chancellor of the Exchequer commissioned Paul Myners to conduct a
review of institutional investment in the UK. The objective of the review was to consider
whether there were factors distorting the investment decision-making of institutions.
Myners concluded that there were a number of areas where change would result in
improved investment decision-making. In his report, which was published in March
2001, he recommended that pension fund trustees voluntarily adopt, on a comply or
explain basis, a series of principles codifying best practice for investment decisionmaking.144 It included suggestions for the improvement of communication between
investors and companies and encouraged institutional investors to consider their
responsibilities as owners and how they should exercise their rights on behalf of
beneficiaries. 145
Following a review of company law by the government, the DTI146 and HM Treasury147
instigate another review of the Combined Code. This led to the appointment of Derek
Higgs, former director of Prudential Assurance Group, to look into The Role and
Effectiveness of Non-Executive Directors. Published in 2003, it included a definition of
independence and the proportion of independent non-executive directors on the board and
its committees. Additionally it expanded on the role of the senior independent director to
provide an alternative channel to shareholders and lead evaluations on the chairmans
performance. The transparency of the board nomination process and the issue of board
evaluation were also both covered.
Around the same time the Financial Reporting Council published the Smith Report
Guidance on Audit Committees. Both the Higgs and Smith Reports were published in
January 2003 followed by the Tyson Report on the recruitment and development of non144 Institutional Investment in the United Kingdom: A Review. Chapter two Pension Funds: the Context
for Investment Decision-Making pg 39-50
145 Institutional Investment in the United Kingdom: A Review. Chapter three Investment Decision-Making
by Trustees pg 51-62
146 Department for Trade and Industry www.dti.gov.uk
147 UK government department responsible for developing and executing the British governments public
finance policy and economic policy
50
executive directors commissioned by the DTI. The recommendations from the Higgs and
Smith Reports led to changes in the Combined Code of Corporate Governance published
in July 2003 as was seen earlier. It was referred to as the biggest shake-up of boardroom
culture in more than a decade.148 The revised code retained almost all of the 50
recommendations contained Higgs original report. The language not the message was
altered.149
In June 2006 an updated version of the Combined Code was issued with three main
changes being made. These included to allow company chairman to serve on (but not to
chair) the remuneration committee where he is considered independent on appointment as
chairman; to provide a vote withheld option on proxy appointment forms to enable a
shareholder to indicate that they wish to withhold their vote; and to recommend that
companies publish on their website the detail of proxies lodged at the general meetings
where votes were taken on a show of hand. 150
A recent version of the combined code was issued in 2008.This edition of the Code
applies to accounting periods beginning on or after 29 June 2008, and takes effect at the
same time as new FSA Corporate Governance Rules implementing European
requirements relating to audit committees and corporate governance statements.
One of the criticisms of the Combined Code has been criticized its failure to indicate
what shareholders can do if they feel unhappy with the choice of a particular person
being appointed as a NED. As pointed out in the Hampel Report, the shareholders do
have a right to submit names for consideration151, but there are no sanctions levied
against the company for appointing a marionette NED
3.2
Background to the Corporate Governance Debate in the US
148 Tassel T (24 July 2003) Investors Urged to Adopt Higgs Standards, Financial Times.
149 See J. Solomon and A Solomon 2004; Corporate Governance and Accountability, John Wiley & Sons
ltd pg 56
150 See generally Christine A. Mallin: Corporate Governance2007 Oxford University Press, second
Edition
151 Hampel Report, para. 3.20
51
The collapse of the 1990s stock market bubbles in the United States led to a wave of
massive corporate finance scandals and stock market crashes around the world. 152
Corporate finance scandals, such as Enron, World Com, Tyco and some other prominent
companies, made securities market regulation and the internal structure and governance
of the corporation critical issues of public concern. These scandals were orchestrated
because the corporate governance structures in place at the time gave the managers of
large public U.S. corporations little reason to make shareholder interests their primary
focus.
Before 1980, corporate managements tended to think of themselves as representing not

the shareholders, but rather the corporation. In this view, the goal of the firm was not to
maximize shareholder wealth, but to ensure the growth (or at least the stability) of the
enterprise by balancing the claims of all important corporate stakeholders-employees, suppliers, and local communities, as well as shareholders. 153
In the 1980s, this began to change with the emergence of the leveraged buyout and the
corporate raider. Nearly half of all major U.S. corporations received a takeover offer and
many companies that were not taken over responded to hostile pressure with internal
restructurings that made themselves less attractive targets.154 In addition to the unusually
large volume of activity, the 1980s also saw the emergence of the leveraged buyout and
the corporate raider. The takeover wave of the 1980s appears to have been a capital
market response to corporate governance deficiencies.
In the 1990s, the pattern of corporate governance activity changed again. After a steep
but brief drop in merger activity around 1990, takeovers rebounded to the levels of the
1980s. Hostility and leverage, however, declined substantially. At the same time, other
152 Froot, Kenneth A. and Obstfeld, Maurice. "Intrinsic Bubbles: The Case of Stock Prices." American
Economic Review, 1991, 81(5), pp. 1189-214.
153 See Gordon Donaldson and Jay Lorsch, Decision Making at the Top (Basic Books, New York, 1983),
and Michael Jensen, The Modern Industrial Revolution, Journal of Finance, pp. 831-880 (1993).
154 See Mark Mitchell and Harold Mulherin, The Impact of Industry Shocks on Takeover and
Restructuring Activity, Journal of Financial Economics, pp. 193-229 (1996).
52
corporate governance mechanisms began to play a larger role, particularly executive

stock options and the greater involvement of boards of directors and shareholders.
In the early 2000s US corporate governance was exposed with the overnight collapses of
major corporations such as Enron, WorldCom, and Global Crossing. These collapses
were highly criticised and showed a failure in the US corporate governance system
These failures and criticisms, in turn, however served as catalysts for legislative change
(Sarbanes-Oxley Act of 2002) and regulatory change (new governance guidelines from
the NYSE and NASDAQ.
3.2.1 The Sarbanes-Oxley Act of 2002

Following directly from the financial scandals of Enron, WorldCom, and Global
Crossing, the Sarbanes-Oxley Act (SOX)155 was enacted in the summer of 2002 and
mandated a number of changes in corporate governance for publicly traded companies.
The act was named after its sponsors: Senator Paul Sarbanes and Representative Michael
G. Oxley, and was approved by the House by a vote of 334-90 and by the Senate 99-0.
President George W. Bush signed it into law, stating it included "the most far-reaching
reforms of American business practices since the time of Franklin D. Roosevelt." 156 SOX
mandated changes having a bearing on executive compensation, shareholder monitoring,
and, particularly, board monitoring.
SOX called for the creation of the Public Company Accounting Oversights Board. This
board will register and regulate all public accounting firms, including: inspections of
accounting firms, investigations and disciplinary proceedings, and enforce compliance
with professional standards. SOX also outlines the responsibilities of the accounting
firms:
Section 204- Auditors must report all critical accounting policies and practices to
the firms audit committee.
155 also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and
commonly called SOX or Sarbox; is a United States Federal Law enacted on July 30, 2002
156 Elisabeth Bumiller: "Bush Signs Bill Aimed at Fraud in Corporations", The New York Times, July 31,
2002, page A1).
53
Section 203- The lead audit and reviewing partner must rotate off the audit every
5 years.
Section 201- Prohibits any public accounting firm from providing non-audit
services while auditing firm. These services include bookkeeping, appraisal, and
others (excludes tax preparation).
Section 301 calls for the formation of an independent and competent audit committee.
The audit committee is responsible for hiring, setting compensation, and supervising the
auditors activities. SOX requires that each member of a firms audit committee be a
member of the board of directors and be independent. The term independent means
the members are not part of the management team and do not perform any consulting or
professional services for the firm. In addition, it is recommended that each audit
committee have a financial expert as part of the committee. The boar of directors
currently has freedom to define financial expert based on the individuals education
and background.
Section 302 requires the CEO and chief financial officers to certify that the financial
statements accurately and fairly represent the financial condition and operations of the
company. There are criminal sanctions for intentional false certification.
Section 402 prohibits loans to any of the firms directors or executives. Section 409
requires rapid disclosure of material changes in the financial conditions of the firm.
Section 404 requires that each annual report contain an internal control report. This report
states the responsibility of management for establishing and implementing adequate
procedures for financial reporting. This report must include: assessment of effectiveness
of internal control structure and procedures, any code of ethics and contents of that code.
SOX provides new protection for whistle blowers and mandates criminal penalties for
actions taken against whistle-blowers. It is now illegal for any (includes private firms)
firm to punish whistle-blowers in any way. Section 1102 makes it a crime for any person
to destroy, alter, or conceal any document to prevent its use in official legal proceedings.
54
SOX provide for far-reaching reform and has caused much disquiet outside the USA
because the Act applies equally to US and non-US firms with a US listing. However,
some of the provisions of SOX are in direct conflict with the provisions in the
law/practice of other countries. In reality, this has led to some companies delisting from
the NYSE and has deterred other non-US firms from applying to be listed on the NYSE.
Detractors such as Congressman Ron Paul contend that SOX was an unnecessary and
costly government intrusion into corporate management that places U.S. corporations at a
competitive disadvantage with foreign firms, driving businesses out of the United
States157
3.2.2 The NYSE and NASDAQ

The NYSE158 and NASDAQ159 also played a big role in the reform of corporate
governance in the US. In 2002, they both submitted proposals designed to strengthen the
corporate governance of their listed companies and to increase the independence of their
boards of directors. They both recommended the following:
(1) Shareholder approval of most equity compensation plans;

(2) A majority of independent directors with no material relationships with the company;
(3) A larger role for independent directors in the compensation and nominating
committees; and
(4) Regular meetings of only nonmanagement directors.
These proposals received strong support from virtually all interested parties, including
President Bush, SEC Chairman Harvey Pitt, members of Congress, the CEOs of many
157 Repeal Sarbanes-Oxley! Ron Paul, April 14, 2005, available at

http://www.house.gov/paul/congrec/congrec2005/cr041405.htm accessed 04/12/08
158The NYSE (acronym of New York Stock Exchange) is the largest equity exchange in the world.
Founded in 1789, it has a global market capitalization of over $15 trillion. Common and preferred stock,
bonds, warrants, and rights are all traded on the NYSE, which is also known as the Big Board.
159 The NASDAQ (acronym of National Association of Securities Dealers Automated Quotations) is an
American stock exchange. It is the largest electronic screen-based equity securities trading market in the
United States. With approximately 3,200 companies, it has more trading volume per day than any other
stock exchange in the world.
55
high profile public companies, institutional investors and state pension funds, and
organizations such as the Business Roundtable and the Council of Institutional Investors.
The proposals were passed onto to SEC160 for consideration and on November 4, 2003,
SEC issued Release No. 34-48745 approving the proposals.
3.3
Background to the Corporate Governance Debate in the SA
By the late 1980s, many of South Africas corporations were bloated, unfocused and
run by entrenched and complacent managers. These firms were sustained and tolerated by
a very different environment from that in advanced economies and capital markets. The
mainstay of the South African environment was isolation. Tariffs and political isolation
shielded firms from foreign product competition, while financial sanctions kept
international institutions out of the domestic capital market, and South African firms out
of international capital markets. Corporate practices fell behind international norms, as
did laws and regulations. 161 Overall, economic enterprise whether in the private or
public sectors featured a lack of accountability for performance. It was also severely
constrained by inadequate governance structures which hindered the proper functioning
of market mechanisms.
From the 1990s onwards the wind of change blew through South Africa. This began
with the gradual dismantling of the apartheid siege economy and the subsequent
liberalisation of the national economy by the African National Congress (ANC)
government. At the time of the early 1990s transition from apartheid, the Johannesburg
Stock Exchange (now JSE Limited) was dominated by a small group of conglomerates
characterised by relatively high levels of ownership concentration and cross-
160 The SEC (acronym Securities and Exchange Commission) The SEC is a statutory body responsible for
the regulation of the securities industry and investor protection in the United States.
161 Stephan Malherbe and Nick Segal , Corporate Governance in South Africa, 2001 Annual Forum at
Misty Hills, Muldersdrift
56
shareholding, 162 generally controlled to a significant degree by a founding family, e.g.,

Oppenheimer (Anglo-American, De Beers), Rupert (Rembrandt), Gordon (Liberty
Group), Mennel and Hersov (Anglovaal) 163 Properly functioning market mechanisms and
a sound corporate governance culture based on transparency and disclosure were
consequently stifled. 164
The direct consequence of the above situations led South Africas governing and
corporate elites to becoming proponents of best practice in corporate governance and
financial regulation, resulting in the establishment by the Institute of Directors (IoD) in
Southern Africa in 1993 of the King Committee on Corporate Governance, chaired by
former High Court Judge Mervyn King. The Committees Reports in 1994 and 2002
referred to as King I and King II provide the framework for debate on corporate
governance in South Africa today.
3.3.1 The King Reports I and II
The King Committee formed in 1992 had as one of it major aims to consider corporate
governance, of increasing interest around the world, in the context of South Africa. The
committee first reported in 1994 and focused on promoting the highest standards of
corporate governance in South Africa.
162 Sarra, J. P. (2004) Strengthening Domestic Corporate Activity in Global Capital Markets: A Canadian
Perspective on South Africas Corporate Governance, The George Washington University Law School
Public Law and Legal Theory Working Paper No 118, Institute for International Corporate Governance and
Accountability, at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=628702. [accessed 14/10/2008]
163 Barr, G., J. Gerson and B. Kantor (1995) Shareholders as Agents and Principals: The Case for South
Africas Corporate Governance System, Journal of Applied Corporate Finance 8, 1: 18-31. and
Okeahalam, C. C. and O. A. Akinboade (2003) A Review of Corporate Governance
in Africa: Literature, Issues and Challenges, working paper, Global Corporate
Governance Forum, at http://www.ifc.org/ifcext/cgf.nsf/AttachmentsByTitle/Pan_Africa_2003_Revie
w_of_CG_Okeahalam/$FILE/Charles+Okehalam+-+Corporate-Governance+ver+4+Jul+2003.pdf.
[accessed 14/10/2008]
164 Armstrong, P., N. Segal and B. Davis (2005) Corporate Governance: South Africa, a pioneer in
Africa, Global Best Practice, Report No. 1, The South African Institute of International Affairs,
Johannesburg.
57
The first King Report (King I) was instrumental in raising awareness of what constitutes
good governance, both in the private and public sectors. It offered to companies, and
state-owned enterprises, for the first time, a coherent and disciplined governance
framework that was relevant to local circumstances and offered practical guidance. 165 The
King Committee had no official mandate (unlike nearly all the other similar initiatives in
other countries), and thus its recommendations were self-regulatory. 166
Over and above the financial and regulatory aspects of corporate governance, King I
advocated an integrated approach to the good governance in the interests of a wide range
of stakeholders. Although groundbreaking at the time, the evolving global economic
environment together with recent legislative developments necessitated that King I be
updated. To this end, the King Committee on Corporate Governance developed the King
Report on Corporate Governance for South Africa, 2002 (King II).
The King II Report followed a review of the developments that had taken place in the
South African economy and in the global markets since 1994. The review was not driven
by any major crisis in the corporate sector, but however brought some crisis in the both
the private and public sector to light, which provided additional reasons for the review. 167
The second report adopted an inclusive approach which recognised that stakeholders
such as the community in which the company operates, its customers, its employees and
its suppliers need to be considered when developing the strategy of a company
There were a number of new issues addressed in the King II Report. The new report
Includes the opinion of each task team
is a work of reference
requires disclosure of remuneration of directors
165 Philip Armstrong et al. 2005, Corporate Governance South Africa, a pioneer in Africa The South
African Institute of International Affairs. Global Best practice at
http://saiia.org.za/images/upload/Corporate_Gov_3Mayl2005final.pdf [accessed 14/10/2008
166 Ibid
167Christine A. Mallin et al 2006, Handbook on International Corporate Governance : Country Analysis,
Edward Elgar Publishing
58
includes non-financial issues such as social responsibility
addresses risk management extensively
introduces the requirement of reporting on a triple bottom line
emphasises ownership in business
requires companies to adopt an inclusive approach
follows a balanced scorecard approach to illustrate sustainability
emphasises the need of the correct balance between conformance and

performance and
stresses the reciprocal relationship with stakeholders
King II recommends that organisations report on a triple bottom line and not on financial
performance only. The triple bottom line refers to social, economic and environmental
aspects. The environmental aspects include the effect that the product or services
produced by the company have on the environment. Social aspects involve values, ethics
and the reciprocal relationship with stakeholders other than the shareowners of the
company. Economic aspects refer to the financial performance of the company. The way
in which a company should report on the triple bottom line is recorded in the Global
Reporting Initiative. 168
Although King II does not prescribe the required conduct of each company and its board
in detail the responsibilities of the company board with regard to corporate governance
are prescribed by the King II Report to be the following:
to define the purpose of the company
to define the values by which the company will live its daily life
to identify the stakeholders relevant to the business of the company
to develop and implement a strategy combining the purpose, values and

stakeholders of the company
to monitor that implementation
to deal with the financial aspects which are well known
to identify and manage the key risk areas and the key performance indicators
168 Appendix XI of the King II Report
59
to regularly monitor the aspects of human resources in the company
to ensure effective internal and external communication regarding strategic plans

and ethical code
to enforce adequate internal controls and efficient information systems and
to perform a "licence to operate" check in a language understandable to all parties

concerned.
Seven characteristics, or principles, of good corporate governance are listed in King II

namely discipline, transparency, independence, accountability, responsibility, fairness
and social responsibility. King II recommends that every organisation should report at
least annually on the nature and extent of its social, transformation, ethical, safety, health
and environmental management policies and practices, while stakeholder reporting is also
important. Specific consideration should be given to the development of a code of ethics
and issues such as HIV/Aids, the environment, social responsibility and human capital
development.
In January 2009, King Report III will appear in South Africa, having been written by a
committee of 90 members.
The next chapter will now examine how the above countries have complied with the
OECD principles that were examined earlier on in chapter 3
60
CHAPTER 4
Implementation of the OECD Principles 2004 in

the United Kingdom, United States AND South
Africa SA
Comparative Analysis
4.1 Framework of Analysis

This chapter serves to provide a comparative analysis of the implementation of the
OECD Principles 2004 in the UK, US and South Africa. An attempt is made here to
bring the comparative position of the OECD Revised Principles, its annotations to the
UK, US and South African context. It assesses the compliance of the UK, US and
South Africa to each OECD Principle of Corporate Governance. This is followed by a
detailed discussion of the relevant legal framework in these countries. Where
necessary, recommendations are proposed at the end of the section. Each statement is
given a benchmark, based upon the countrys level of estimated observance of the
principle.169
4.2 Content of Analysis
169 (Observed means that all essential criteria are generally met without any significant deficiencies.
Largely observed means that only minor shortcomings are observed, which do not raise any questions
about the authorities ability and intent to achieve full observance in the short term. Partially observed
means that while the legal and regulatory framework complies with the OECD Principles, practices and
enforcement diverge. Materially not observed means that, despite progress, the shortcomings are
sufficient to raise doubts about the authorities ability to achieve observance. Not observed means that
no substantive progress toward observance has been achieved.
61
4.2.1 Ensuring the Basis for an effective Corporate Governance

Framework
Annotation The corporate governance framework should promote transparent and
efficient markets, be consistent with the rule of law and clearly articulate the division
of responsibilities among different supervisory, regulatory and enforcement
authorities.
Connotation. The United Kingdom and the United states have both made significant
advances in designing appropriate legal/regulatory architecture for corporate
governance. South Africa however on its part continues to face considerable
challenges in implementing good corporate governance standards.
Assessment: This principle is therefore observed in the UK and US and partially

observed in South Africa
The UK is one of the countries in the world with the greatest degree of dispersion in
stock ownership of listed corporations170 and therefore it is imperative for it to have a
sound enforcement mechanism. Shares in publicly quoted UK companies are,
similarly to those in their US counterparts, dispersed amongst many holders. 171 The
central problem of corporate governance for UK quoted firms is therefore rendering
managers accountable to shareholders. 172 In contrast, for the UKs private companies,
the central governance problems concern how to minimize the costs of conflicts of
interest between majority and minority shareholders, and between shareholders and
creditors.173
170 Indeed, it is singled out by La Porta et al, The Law and Economics of Self-Dealing, NBER
Working Paper 11883 (2005) as an exemplar of the common law approach.
171 See R La Porta, F Lopez-de-Silanes, and A Shleifer, Corporate Ownership Around the World,
(1999) 54 Journal of Finance 471, 492; M Becht and C Mayer, Introduction, in F Barca and M Becht
(eds.), The Control of Corporate Europe (Oxford: OUP, 2001), 19-30; M Faccio and LHP Lang, The
Ultimate Ownership of Western European Corporations, (2002) 65 Journal of Financial Economics
365, 379-380; CG Holderness, The Myth of Diffuse Ownership in the United States, forthcoming
(2008) 21 Review of Financial Studies (online advance access doi:10.1093/rfs/hhm069), 19.
172 See R Kraakman et al, The Anatomy of Corporate Law (Oxford: OUP, 2004), 21-22.
173 See PL Davies, Introduction to Company Law (Oxford: Clarendon Press, 2002), 215-17.
62
Enforcement of corporate governance in the UK can be divided into public, private,

formal and informal enforcement.174 The former involves legal proceedings and court
actions while the latter secures compliance without recourse to legal proceedings.
However it is worth noting that it is public rather than private legal enforcement,
which dominates in the UK. Indeed, to a degree that may be startling to observers
whose experience of common law enforcement is based on the US,175 shareholder
lawsuits are conspicuous by their absence in the UK.
The most empirically significant enforcement agencies in relation to corporate

governance in the UK are the Takeover Panel (the panel), the Financial Reporting
Review Panel (FRRP), the Financial Services Authority (FSA), and the
Department for Business Enterprise and Regulatory Reform (BERR). 176 The
enforcement activities of each of these agencies comprise a mixture of formal and
informal actions
The structure of English corporate law gives considerable power to the shareholders
in general meeting. In the case of listed companies, this is further enhanced through
various provisions of the Listing Rules, the Combined Code of Corporate
Governance, and the Takeover Code. Together, these combine to permit shareholders
to control many aspects of the managerial agency problem without the need for
litigation. There are several ways in which such enforcement by investors takes
place. One distinction concerns the action taken by the enforcer: whether to exit by
selling their shares, or use voice by exercising control rights. 177
On the other hand, there is the Combined Code of Corporate Governance, which
prescribes corporate governance practices without any associated formal enforcement
mechanismand enforcement simply of standards of good management. The Code
174 Ibid
175 For details of private enforcement activity in the US, see RB Thompson and RS Thomas, The
Public and Private Faces of Derivative Lawsuits, (2004) 57 Vanderbilt Law Review 1747; J Armour,
B
Black, BR Cheffins, and RC Nolan, Private Enforcement of Corporate Law: An Empirical
Comparison of the US and UK, working paper presented at ALEA Conference (2008).
176John Armour, Enforcement Strategies in UK Corporate Governance: A Roadmap and Empirical
Assessment, April 2008 Law Working Paper N. 106/2008, University of Oxford and ECGI
177 AO Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and
States
(Cambridge, MA: Harvard University Press, 1970).
63
sets out a number of substantive corporate governance requirements that apply to

listed companies incorporated in the UK. 178 The Combined Code consists of a
framework of overarching principles, fleshed out by a series of more specific
provisions. Key provisions include the separation of the CEO and Chairman of the
board, the inclusion of a minimum number of independent non-executive directors,
and the establishment of separate nomination, remuneration, and audit committees,
which must be populated by a majority of independent directors.179
The UK approach of self-sanctioning tends to lower enforcement costs as regulators

spend less time and resources imposing sanctions. Most of the costs of imposing
sanctions will be borne by the sanctioned companies themselves. If companies are
unwilling to devise sanction schemes themselves, the regulator will impose sanctions.
On its parts, the Foreign Corrupt Practices Act (FCPA) has in the past championed
enforcement of corporate governance in the United States. After its enactment in
1977, the US government initiated relatively few investigations and enforcement
actions charging violations of the Act. This was largely due to the governments
difficulties in evidence gathering. Recently, however, the number of such
enforcement actions has increased significantly. This has been with the passing of the
(1.) The Sarbanes Oxley Act 2002,
(2.). The U.S. Department of Justice (DOJs) Thompson Memo (Principles of
Federal Prosecution of Business Organizations, Jan. 20, 2003);
(3.) The SECs Seaboard Order (Report of Investigation Pursuant to Section 21(a)
of the Securities Exchange Act of 1934 and Commission Statement on the
Relationship of Cooperation to Agency Enforcement Decisions, Oct. 23, 2001); and
(4). the creation of the Presidents Task Force on Corporate Fraud; and (5.) The U.S.
Sentencing Guidelines. 180
178 See FRC, The Combined Code on Corporate Governance (London: FRC, 2006) (Combined Code
2006), available at:
http://www.frc.org.uk/documents/pagemanager/frc/Combined%20Code%20June%202006.pdf.
179 See Combined Code 2006, supra n 137, A.2-A.4, A.7, B.2, C.3.
180 Joseph P. Covington, Thomas C. Newkirk and Jessica Tillipman, FCPA Enforcement In A
Sarbanes-Oxley World What Big Teeth You Have, Uncle Sam Law Journal Newspaper, Volume 20,
Number 3 August 2005
64
Although none of the initiatives amend the FCPA, they have had a tremendous impact
on both the way companies handle FCPA issues, and the manner in which the
government enforces these actions.
SOX require companies to tighten their internal controls and verify that their accounts
and financial statements accurately reflect the current financial status of the company.
For example, Section 404 of SOX and the implementing SEC rules put the onus on
CEOs, CFOs, and company auditors to certify the accuracy of financial reports,
including an annual statement regarding the status of company internal controls. This
statement must identify any material weaknesses that affect the internal controls
(including findings of suspicious and illegal transactions) and must do so in a timely
manner. In addition, these statements carry heavy criminal penalties in the event they
are false when made. Because SOX requires companies to adequately respond to
evidence of potential FCPA violations companies are obligated to investigate and
address these matters within a reasonable time. 181 Further, increased disclosure
obligations to shareholders,182also encourages companies to be forthcoming about
potential FCPA violations, rather than maintaining silence and hoping for the best.
This recent surge of FCPA enforcement activity is, therefore, a direct result of SOXs
emphasis on top-level corporate responsibility.
Prior to Sarbanes-Oxley, white-collar criminals rarely considered that they might

receive jail sentences for their questionable actions. Now that the SEC has the
authority to make this happen, unscrupulous executives may reconsider committing
fraud. However much money they make, they are unlikely to be able to enjoy it
behind bars.
As mentioned earlier, enforcement of corporate governance in South Africa is still in
its elementary. The introduction of King II did not necessarily mean that corporate
government problems would disappear. There had to be a mechanism of enforcing the
corporate governance laws that already existed.
181 A CEO or CFO has to assure the public that the companys accounts are accurate and that all
payments are accurately recorded
182 and the potential repercussions from a companys failure to do so
65
The Code of Corporate Practices and Conduct applies to listed companies, among
others. By requiring that listed companies comply with King II, the JSE has become
the enforcer of the principles of King II.
If a company fails to comply with the JSE Listings Requirements, the JSE may
suspend and/or terminate the listing of that company if it is in the public interest to do
so. The JSE may also publicly or privately censure the company or its directors,
individually or jointly, and thereafter may impose a penalty of up to R1 million on the
company or its directors, individually or jointly.
The good governance principles will also be enforced by shareholders where they
play an active role in the affairs of the company.
The Companies Act imputes liability on directors if it is found that directors
conducted the business of the company fraudulently or recklessly. Ignoring good
corporate governance principles may arguably amount to fraud and/or recklessness.
This provision is therefore an enforcement mechanism that can be used to ensure
good corporate governance, although it is seldom used in practice.
Conclusion and Recommendation
A weakness in South African corporate governance concerns enforcement.
While the legislation in place is strong even compared to developed countries, South
Africa appears to suffer from a somewhat weak enforcement due partly to a relative
dearth of financial resources attached to the task. Furthermore, the judicial system
struggles with backlogs and is often unable to adjudicate cases quickly.
4.1.2 The Rights of Shareholders and Key Ownership Functions
Annotation The corporate governance framework should protect and facilitate the
exercise of shareholders rights.
A. Basic shareholders rights should include the right to: (1) secure methods of
ownership registration; (2) convey or transfer shares; (3) obtain relevant information
66
on the corporation on a timely and regular basis; (4) participate and vote in general
shareholder meetings; (5) elect and remove members of the board; and (6) share in
the profits of the corporation
Assessment: Largely Observed
2.2
Shareholders have a number of property rights that should be protected by law. The
right of shareholders in public companies to buy, sell and transfer shares is
fundamental. In addition to this fundamental right, there are numerous other important
rights possessed by equity investors, for example, the right to share in the profits of
the corporation and the right to vote on important issues regarding the companys
affairs. Management of a company, however, is left in the hands of a board of
directors and management team. Chapter 2, Principle A, is a statement of the most
basic rights of shareholders that are recognized in legal regimes of almost all
developed countries.
(a) Secure Methods of Ownership Registration
Both the UK Companies Law and the various US Corporation Laws comply with the
OECD principle regarding shareholders right to secure methods of ownership
registration. South Africa also complies with this requirement.
In the UK, Shareholder's rights are embodied in the Company's Articles of

Association and in English Law (mainly by the Companies Acts 2006). UK
Companies Law clearly identifies the right of shareholders to secure ownership
registration in Section 113, which provides that every company must keep a register
of its members. It goes further in Section 113(3) to say in the case of a company
having a share capital, there must be entered in the register, with the names and
addresses of the members, a statement of the shares held by each member,
distinguishing each share by its number (so long as the share has a number), and
where the company has more than one class of issued shares, by its class, and the
amount paid or agreed to be considered as paid on the shares of each member. The act
67
also stipulates that a certificate under the common seal of the company specifying any
shares held by a member is prima facie evidence of his title to the shares. 183
In the United States the main laws on shareholder protection are the Delaware
General Corporation Law, Securities Act of 1933, Securities Exchange Act of 1934
and the Sarbanes-Oxley Act. The Securities Act provides that, securities offered or
sold to the public in the U.S. must be registered by filing a registration statement with
the SEC. The prospectus, which is the document through which an issuers securities
are marketed to a potential investor, is generally filed in conjunction with the
registration statement. The SEC prescribes the relevant forms on which an issuer's
securities must be registered. Among other things, registration forms call for: a
description of the issuer's properties and business; a description of the securities to be
offered for sale; information about the management of the issuer; information about
the securities (if other than common stock); and financial statements certified by
independent accountants.184 The Sarbanes Oxley Act actively advocates for a secure
method of ownership registration for shareholders
Similarly, in South Africa, the Companies Act, 1973185 and the guidelines for
Corporate Law Reform, 186 contain detailed provisions relating to exercise of
shareholder rights and their protection. In its Chapter 4(1) the 1973 act provides that
every company shall keep in one of the official languages of the Republic a register of
its members, and shall forthwith enter therein--the names and addresses of the
members and, in the case of a company having a share capital, a statement of the
shares issued to each member, distinguishing each share by its number, if any, and by
its class or kind, and of the amount paid or agreed to be considered as paid on the
shares of each member; and in respect of each member--the date on which his name
was entered in the register as a member; and the date on which he ceased to be one.187
183 Companies Act 2006 Section 768(1)
184 Douglas, William O. Bates, George E. (1933). "The Federal Securities Act of 1933". Yale Law
Journal 43 (2): 171217.
185 Companies Act No. 61 Of1973 [Assented To 19 June 1973] [Date Of Commencement: 1 January
1974]
186 South African Company Law for the 21st Century, Government Gazette, Vol. 468 Pretoria 23 June
2004 No. 26493 available online at http://www.info.gov.za/gazette/notices/2004/26493.pdf. Accessed
27/12/08
68
(b) Convey or Transfer Shares
The UK, US and South Africa all comply with the OECD principle regarding
shareholders right to convey or transfer shares.
In the United Kingdom, unless there are any restrictions placed in the companys
articles of association, the shares of a company are freely transferable. The former
requirement for private companies to restrict the transferability of their shares was
abolished in 1980, although many private companies, especially smaller, family
companies, will have pre-emption provisions in the articles obliging, for example, an
existing member who wishes to sell his shares to offer them for sale to existing
members first. These clauses, while prima facie, perfectly valid, will be strictly
construed. Where a public company has a quotation for its fully paid shares, then the
Stock Exchange Listing Rules require that there should not be any restriction on the
transfer of the shares.188 The holder of shares in a public company with a listing on
the Stock Exchange will be able to sell and transfer them easily and efficiently
through one of the member firms of the Stock Exchange.
189
In the US shareholders in a publicly traded corporation have unrestricted right to sell

their shares, representing their full complement of ownership rights, at anytime and to
anyone they wish. In addition, established securities exchanges provide a ready
market for their shares. Investors in privately held companies however, do not have
these opportunities. Partners are no exception.190
Similarly in South Africa, Chapter V of the companies Act provides that any transfer
of shares of or interest in a company shall be registered by the company by entering in
its register of members the name and address of the transferee, the description of the
shares or interest transferred and the date of the registration of such transfer and, if it
187 Section 105 companies Act 1973

188 This is a requirement of the Admission Directive (79/279/EEC) and is now contained in para 3.15
of the Listing Rules.
189 Simon Goulding, 1996 Company Law 2nd Edition, Cavendish Publishing Limited pg 225
190 Larry D. Soderquist et al, 1999Corporate Law and Practice 2nd Edition pg 48
69
is a transfer of partly paid-up shares of or interest in an existing company, the amount

outstanding on each share or interest, shall be entered in the said register.191
(c) Obtain Relevant Information on the Corporation on a Timely and Regular Basis
The UK, US and South Africa comply with the OECD principle regarding
shareholders right to obtain relevant information on the corporation on a regular
basis.
In the UK shareholders have rights to information, set out in company law and the
Listing Rules, which enable them to hold the board to account. Section 355 of the
Companies Act provides that every company must keep records comprising (a)
copies of all resolutions of members passed otherwise than at general meetings, (b)
minutes of all proceedings of general meetings, and (c) details provided to the
company in accordance with section 357 (decisions of sole member). The records
must be open to the inspection of any member of the company without charge.192
Section 423(1) calls for every company to send a copy of its annual accounts and
reports for each financial year to every member of the company and every holder of
the companys debentures.193 Further Section 430 mandates quoted companies to
ensure their annual accounts and reports are made available on a website, and remain
so available until the annual accounts and reports of its next financial year are made
available. Other important provisions are right to be sent proposed written
resolution,194 right to require circulation of written resolution, 195 right to require
directors to call general meeting, 196 right to notice of general meetings, 197 right to
require circulation of a statement,198right to require circulation of resolution for AGM
of public company, 199
191 Companies Act 1973 Section 133

192 Companies Act 2006 Section 358(3)
193 Recent changes to annual reporting requirements provide opportunities to reduce printing and other
administrative costs. This could be by electronic source.
194 Companies Act 2006 Sections 291 and 293
195 Companies Act 2006 Sections 292
70
The Combined Code also strengthens this. In relation to the internal controls of the
business, the combined code states that the board should maintain a sound system of
internal control to safeguard shareholders investment and the companys asserts and
that the directors should at least annually, conduct a review of the effectiveness of the
groups system of internal control and should report to the shareholders that they have
done so. The review should cover all controls, including financial, operational, and
compliance controls and risk management 200
The Combined Code also provides that Companies should arrange for the Notice of
the AGM and related papers to be sent to shareholders at least 20 working days before
the meeting 201
In the US, Section 302 of the Sarbanes-Oxley Act requires the SEC to adopt rules
requiring the CEO and CFO of a public company in each quarterly and annual report
to personally vouch for the accuracy of the report, and to certify the accuracy of the
company's financial statements and that the company has adopted adequate internal
controls. (80) As stated earlier, this means, based on their knowledge, these
executives claim the reports filed with the SEC do not contain any material
misstatement or omission.
Section 409 Sarbanes Oxley also provides that issuers are required to disclose to the
public, on an urgent basis, information on material changes in their financial condition
or operations. These disclosures are to be presented in terms that are easy to
understand supported by trend and qualitative information of graphic presentations as
appropriate.
In South Africa, Section 284 of the Companies Act provides that every company shall
keep in one of the official languages of the Republic such accounting records as are
necessary fairly to present the state of affairs and business of the company and to
explain the transactions and financial position of the trade or business of the company.
It goes further in Section 286 to say the directors shall cause to be made annual
financial statements consisting of a balance sheet, income statement and additional
components required in terms of financial reporting standards. A copy of the annual
200 Combined code 1998 Part D.2.1
71
financial statements and group annual financial statements, if any, shall not less that
twenty-one days before the date of tile annual general meeting of the company be sent
to every member of the company and every holder of debentures of the company
(whether or not such member or holder of debentures is entitled to receive notices of
general meetings of the company) and to all persons other than members or holders of
debentures of the company who are entitled to receive such notices: 202 Provided that,
if so authorized by a company's articles, a copy of its financial statements may be
made available in electronic format to all persons who have agreed thereto in writing.
Further, widely held companies other than wholly owned subsidiaries are required to
send to every member and holder of debentures of the company an interim report on
the business and operations of the company. 203 In addition, any member or holder of
debentures of a company shall be entitled to be furnished on demand without charge
with a copy of the last annual financial statements (including group annual financial
statements) and provisional annual financial statements and of the last interim report
of the company. 204
The King Report on its part urges companies to ensure adequate information is
provided in advance to all shareowners about annual general meetings agenda items,
and there should be reasonable time for discussion of items. The results of decisions
made at annual general meeting should be made available to shareowners to enable
those who could not attend to be aware of the outcomes.
(d) Participate and Vote in General Shareholder Meetings

Both UK, US and South Africa comply with the OECD principle regarding
shareholders right to participate and vote in general shareholder meetings.
Shareholders voting rights are important. The rights which investors gain by holding
shares in a company give them a say in how the company is run. By attending,
speaking and voting at company general meetings, they can hold management to
account and help to improve standards of corporate governance.
202 Companies Act 1973, Section 302

72
Under UK company law, shareholders have comparatively extensive voting rights,

including the rights to appoint and dismiss individual directors and, in certain
circumstances, to call an Extraordinary General Meeting of the company. Certain
requirements relating to the AGM, including the provision of information to
shareholders and arrangements for voting on resolutions, are also set out in company
law, Section 284 of the Companies act provides that on a vote on a written resolution
in the case of a company having a share capital, every member has one vote in respect
of each share or each 10 of stock held by him, and in any other case, every member
has one vote. In the case of voting on a resolution by show of hand every member
present in person has one vote, and every proxy present who has been duly appointed
by a member entitled to vote on the resolution has one vote. On a vote on a resolution
on a poll taken at a meeting in the case of a company having a share capital, every
member has one vote in respect of each share or each 10 of stock held by him, and in
any other case, every member has one vote.
In South Africa, there is a similar provision in respect of shareholders right to vote.

Section 193 of companies act provides that subject to the provisions of section 194 205
and 195206 and to the exceptions stated in section 196 207, every member of a company
having a share capital shall have a right to vote at meetings of that company in respect
of each share held by him. Its goes further to state that every member of a company
limited by guarantee shall, unless the articles otherwise provide, have the right to vote
at meetings of that company and shall have one vote.
Generally, United States shareholders are assigned one vote per each share. But in
many States including Delaware shares with multiple voting as well as fractional
voting are allowed. Each outstanding share, regardless of class, is entitled to one vote
205 The articles of a company may provide that preference shares shall not confer the right to vote at
meetings of the company except in certain circumstances.
206 A member of a public company having a share capital shall - if the share capital is divided into
shares of par value, be entitled to that proportion of the total votes in the company which the aggregate
amount of the nominal value of the shares held by him bears to the aggregate amount of the nominal
value of all the shares issued by the company; if the share capital is divided into shares of no par value,
be entitled to one vote in respect of each share he holds.
207 The provisions of section 193(1) shall not apply in respect of shares of a company which at the
date of the commencement of this Act had already been issued without voting rights, or in respect of
issued shares (other than preference shares) in respect of which at that date there existed different
voting rights or in respect of shares subsequently issued in respect of which there existed at that date a
contractual right or obligation to issue any such shares.
73
on each matter voted on at a shareholders meeting. Only shares are entitled to vote.
Absent special circumstances, the shares of a corporation are not entitled to vote if
they are owned, directly or indirectly, by a second corporation, domestic or foreign,
and the first corporation owns, directly or indirectly, a majority of the shares entitled
to vote for directors of the second corporation. The above however does not limit the
power of a corporation to vote any shares, including its own shares, held by it in a
fiduciary capacity. It is noteworthy that redeemable shares are not entitled to vote
after notice of redemption is mailed to the holders and a sum sufficient to redeem the
shares has been deposited with a bank, trust company, or other financial institution
under an irrevocable obligation to pay the holders the redemption price on surrender
of the shares208
However, activist shareholders in the United States have been intensely lobbying the
Securities Exchange Commission (SEC) about the lack of investor rights in the US,
when compared to the rights of European shareholders. The European right to vote
enables shareholders to influence change and take an active role in key decisions.
Traditionally, the easiest way for US shareholders to make their voices heard has been
via litigation and this US litigation culture together with the lesser shareholder rights,
is what has contributed to the growing attractiveness of non-US markets for
international capital. 209
The US is still suffering from the empty voting 210 practices, which can be
manipulated by sophisticated investors to deprive shareholders of their basic right to
vote.
(e) Elect and Remove Members of the Board

Both the UK, US and South Africa all have policies that comply generally with the
OECD principle regarding shareholders right to elect and remove members of the
board.
208 See generally the Model Business Corporation Act 2000/01/02 Supplement, 3rd Edition by the
American Bar Foundation, available online at
http://www.abanet.org/buslaw/library/onlinepublications/mbca2002.pdf, accessed 31/12/08
209 Whatever next: the US eyes up European models, The Financial Times, 26 February 2007.
210 Empty voting is the practice of borrowing company shares to influence the outcome of company
votes.
74
In the UK, A company may by ordinary resolution at a meeting remove a director

before the expiration of his period of office, notwithstanding anything in any
agreement between it and him. 211A vacancy created by the removal of a director under
this section, if not filled at the meeting at which he is removed, may be filled as a
casual vacancy.
Under section 303,212 shareholders may by ordinary resolution (i.e. a simple majority
of those present in person or by proxy at a meeting of the company and voting in
favor) remove a director at any time. This is not withstanding any provision in the
Company's Articles of Association or in any service or other agreement.
In the US unless directors are elected by written consent in lieu of an annual meeting,
an annual meeting of stockholders shall be held for the election of directors on a date
and at a time designated by or in the manner provided in the bylaws. Stockholders
may, unless the certificate of incorporation otherwise provides, act by written consent
to elect directors; provided, however, that, if such consent is less than unanimous,
such action by written consent may be in lieu of holding an annual meeting only if all
of the directorships to which directors could be elected at an annual meeting held at
the effective time of such action are vacant and are filled by such action. Any other
proper business may be transacted at the annual meeting. 213 Each director shall hold
office until such director's successor is elected and qualified or until such director's
earlier resignation or removal. 214
In South Africa, members of the board of directors are elected and removed on an
individual basis. 215 Section 220 of the companies act provides that a company may,
notwithstanding anything in its memorandum or articles or in any agreement between
it and any director, by resolution remove a director before the expiration of his period
of office.
211 Companies Act Section 168

212 Companies Act 1985
213 Delaware General Corporation Law available online at
http://delcode.delaware.gov/title8/c001/index.shtml, accessed 32/12/08
214 Ibid 141
75
(f) Share in the Profit of the Corporation
Both the UK, US and South Africa comply with the OECD principle regarding
shareholders right to share in the profit of the corporation.
In the UK members of a company have a right to share in the companies profit only in
their capacity as members216 South Africa has a similar provision in its Section 40 of
the 1973 companies Act. The US is no exception
Conclusion and Recommendation

From the analysis above it can be seen that the UK, US and South Africa generally
comply with the OECD Principles 2004. However it is recommended that
shareholders in South Africa should be able to put resolutions forward; the threshold
needed should be minimal. The quorum should be increased. Large companies should
hire outsiders to collect and organize proxy procedures. Proxies should be permitted
to vote on a show of hands. Voting should be done by ballot, except when all
shareholders and proxies present agree that it be done by a show of hands. Companies
should introduce postal voting and new information and communication technology
for secure absentee voting (encryption). The use of corporate websites should be
encouraged. Amendments should also be made to require a higher quorum of share
capital and voting rights for all fundamental corporate changes.
4.1.3 The Equitable Treatment of Shareholders

Annotation: The corporate governance framework should ensure the equitable
treatment of all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redress for violation of
their rights.
Connotation: All shareholders of the same series of a class should be treated equally.
76
(1) Within any series, all shares should carry the same rights. All investors should be
able to obtain information about the rights attached to all series and classes of shares
before they purchase. Any changes in voting rights should be subject to approval by
those classes of shares, which are negatively affected.
(2) Minority shareholders should be protected from abusive actions by, or in the
interest of, controlling shareholders acting either directly or indirectly, and should
have effective means of redress.
(3) Votes should be cast by custodians or nominees in a manner agreed upon with the
beneficial owner of the shares.
(4) Impediments to cross border voting should be eliminated.
(5) Processes and procedures for general shareholder meetings should allow for
equitable treatment of all shareholders. Company procedures should not make it
unduly difficult or expensive to cast votes.
Assessment: Partially observed
7.2 Comparative Analysis

The UK, US and South Africa both have some drawbacks with regards to compliance
with this provision.
Most UK limited companies generally have one class of shares. It is implied (but not
required) that a company with several classes of share has allocated different rights or
privileges to the different groups. There would be little point in having more than one
type of share if this were not true, as it would be simpler to administer increased
numbers of the same group than account for several groups and their and owners.
Section 630 companies act clearly states that rights attached to a class of a
companys shares may only be varied in accordance with provision in the companys
articles for the variation of those rights, or where the companys articles contain no
77
such provision, if the holders of shares of that class consent to the variation in
accordance with this
In the US shareholder-related provisions include changes in restrictions on insider

trading regulation and enhanced financial disclosure. Executives have to report sales
or purchases of company stock within two days per Sarbanes Oxley Act (SOX) rather
than the current ten days, which will have the effect of making executive shares
somewhat less liquid. SOX also requires more detailed disclosure of off-balance-sheet
financings and special purpose entities, which should make it more difficult for
companies to manipulate their financial statements in a way that boosts the current
stock price. SOX also include a number of provisions meant to improve board
monitoring. These focus largely on increasing the power, responsibility, and
independence of the audit committee. SOX require that the audit committee hire the
outside auditor and that the committee consist entirely of directors with no other
financial relationship with the company.
In South Africa, The JSE Listings Requirements provide that companies must ensure
that all holders of any class of securities are in the same position, receive fair and
equal treatment and that a listed company may not issue any securities with a voting
right different from other securities of the same class. The standard articles provide
that holders of 3/4 of the issued share capital of that class must consent for the rights
to be varied. According to market analysts, in practice there are violations of the fair
treatment principle in holding company structures with listed subsidiaries.
Where a shareholders rights are violated, he/she may have a right to personal action.
This is the case where there is a breach of the rights derived from the memorandum or
articles directly, where there has been illegal conduct or conduct in breach of common
law which relates to his/her rights and which cannot be ratified by an ordinary
resolution, or where fraud on the minority has been committed. There are no clear
guidelines, however, to determine whether a particular act constitutes a fraud on the
minority. According to the Companies Act, a shareholder can approach the High
Court for redress, if the affairs of the company are being conducted in a manner that is
prejudicial, unjust or inequitable to him/her or to a percentage of shareholders.217
217 S252.
78
Shareholders may initiate derivative action on behalf of the company under common
law. There is also a statutory derivative action provided for in the Companies Act.218
The action may be brought forward if a company has suffered damages or loss or has
been deprived of a benefit as a result of a wrong, or breach of trust or faith committed
by any current or past director or officer of the company and if the company has not
instituted proceedings for redress. While class action is provided for in the
constitution, there are no rules and procedures, and no suit has taken place to date.
The introduction of contingency (success) fees could encourage minority shareholder
to initiate class action suits.
In addition, Insider trading is prohibited in South Africa. According to the Insider
Trading Act 135 of 1998, any individual who has inside information and deals
directly or indirectly for his/her own account or for any other person in the securities
to which such information relates (or which is likely to be affected by it) or
encourages or causes another person to deal or discourages another person from
dealing in such securities, is guilty of a criminal or civil offence. In its first 29
months, the Insider Trading Directorate, a sub-committee of the FSB, investigated
124 cases. Ten of these cases led to a settlement with payment of a fine, six cases to
civil proceedings and one case was forwarded for criminal prosecution. When
individuals settle for a fine, their names are made public. This has led to adverse
publicity, and market sentiment has strongly turned against insider trading.
The United Kingdom and the United States have developed somewhat similar legal
remedies for the minority shareholder of the private company. The law in the United
Kingdom recognizes an action for "unfairly prejudicial" conduct, 219 while many U.S.
state statutes provide the machinery for corporate dissolution in certain situations
involving shareholder deadlock or where there has been "illegal, oppressive, or
fraudulent" conduct.220 Under the U.K. company law, the court has broad discretion to
make remedial orders if there has been unfairly prejudicial conduct (including orders
218 S266
219 See U.K. Companies Act, 1985, [sections] 459(1).
220 See MODEL BUS. CORP. ACT ANN. [sections] 14.30 (3d ed. 1996)(containing [sections] 14.30
of the Revised Model Business Corporation Act (1984)). The statutory comparison of [sections] 14.30
of the Revised Model Business Corporation Act reveals that all jurisdictions expressly authorize
involuntary dissolution in defined circumstances. While not all jurisdictions have passed the Revised
Model Business Corporation Act, and there is some variation in exact wording of the dissolution
provisions, a number of states have enacted provisions, which allow for the involuntary dissolution in
the event of illegal, oppressive, or fraudulent conduct.
79
to regulate corporate conduct or purchase a shareholder's stock).221 Although a court

may order a purchase of a shareholder's stock in an effort to resolve a dispute, the
buy-out remedy lies entirely within the discretion of the U.K. court. 222 The remedy of
corporate dissolution may be sought under a separate statutory provision pursuant to
the U.K. Insolvency Act.223
The U.S. counterpart to the petition for unfairly prejudicial conduct is the action for
corporate dissolution under the Revised Model Business Corporation Act. 224 This
model act, adopted by many states, permits a petition for corporate dissolution in the
case of shareholder deadlock or illegal, oppressive, or fraudulent conduct." 225 In lieu
of proceeding with a corporate dissolution, the corporation (or one or more
shareholders) may elect to purchase the stock of the petitioning shareholder within
ninety days after the filing of the petition. 226 Under both U.K. and U.S. law, the
remedial legislation has generated costly and lengthy litigation and has attracted
significant criticism. Both U.K. and U.S. minority shareholders of private companies
face similar obstacles when a conflict arises with the majority owners. Under both
U.K. and U.S. law, the minority shareholder's investment
in a private company is an illiquid asset. In both countries, when a serious and
irreconcilable dispute occurs between the minority and majority shareholders, a
common legal remedy sought by the minority shareholder is a court order to obtain a
buy-out.
4.1.4 The Role of Stakeholders in Corporate Governance

Annotation: The corporate governance framework should recognize the rights of
stakeholders established by law or through mutual agreements and encourage active
221 9) See U.K. Companies Act 1985 [sections] 461 (setting forth specific powers which the court has
broad discretion to exercise if unfairly prejudicial conduct is found under [sections] 459, including the
authority to regulate the conduct of the companies affairs, to order the company to do or refrain from
doing certain acts, and to initiate civil proceedings).
222 The specific remedy of corporate dissolution is found in the U.K. Insolvency Act, 1986, [sections]
122(1).
223 See U.K. Insolvency Act, 1986, [sections] 122(1)
224 See MODEL BUS. CORP. ACT ANN. [sections] 14.30 (3d ed.1996).
225 Id. See also infra notes 44-53 and accompanying text.
226 See MODEL BUS. CORP. ACT ANN. [sections] 14.34 (3d ed. 1996).
80
cooperation between corporations and stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.
Assessment: Materially not observed in the UK, and US, observed in South Africa
A good corporate governance regime will encourage effective cooperation between
companies and the stakeholders that contribute to the effective maintenance and
sustainability of the companies. These stakeholders generally include investors,
creditors, employees and suppliers. The annotation to Chapter 4 reinforces that
corporations must acknowledge the interests of these stakeholders and properly
recognize the contribution that they make to the long-term successful operation of its
business. The annotation to Principle A notes that there are many other legislative
arenas that have an impact on this area; for example, labor, business, commercial and
insolvency laws. Also important in this area is contractual relations. 227
In the UK, the Combined Code does not say anything about the role of stakeholders.
The Hampel Report however notes that good governance ensures that constituencies
(stakeholders) with a relevant interest in the companys business are fairly taken into
account 228 The directors relationship with shareholders is different in kind from their
relationship interests with other stakeholder. The shareholders elect the directors.
Directors as a board are responsible for relations with stakeholders, but they are
accountable to the shareholders. This is not simply a technical point. From a practical
point of view, to redefine directors responsibilities in terms of stakeholders would
mean identifying all the various stakeholders groups and deciding the nature and
extent of the directors responsibility to each. The result would be that the directors
were not effectively accountable to anyone since there would be no clear yardstick for
judging their performance. This is a recipe neither for good governance nor for
corporate success. 229
As regards stakeholders, different types of company will have different relationships,
and directors can meet their legal duties to shareholders, and can pursue the objective
227 For more information see OECD Principles 2004, Annotation to Chapter 4, Principle A.
228 Hampel Report Guideline 1.3
229 Guideline 1.17
81
of long-term shareholder value successfully, only by developing and sustaining these

stakeholder relationships. It is believed that shareholders recognize that it is in their
interests for companies to do this and increasingly to have regard to the broader
public acceptability of their conduct.230
In the US the only provision in relation to stakeholders is provided by the 1996

NACD Report which states that the board should clearly define its role, considering
both its legal responsibilities to shareholders and the needs of other constituencies,
provided shareholders are not disadvantaged.
In South Africa, Employees and trade unions are granted a number of rights under the
Constitution, Labour Relations Act, and the Basic Conditions of Employment Act.
Under the Labour Relations Act, companies are obliged to consult with trade unions
and/or employees prior to a restructuring process. Other rights include not to be
unfairly dismissed (Labour Relations Act); to have a safe and healthy working
environment (Constitution); and for employees who disclose information regarding
unlawful or irregular conduct, not to be subject to occupational detriment (Protected
Disclosures Act). Also, the Employment Equity Act promotes affirmative action; the
Skills Development Act obliges companies to enable its employees to develop their
skills; the Promotion of Equality and Prevention of Unfair Discrimination Act sets out
measures to prevent discrimination and harassment, to promote equality and eliminate
hate speech.
Also stakeholders in South Africa whose rights have been violated have the
opportunity under the Bill of Rights to approach the Constitutional or High Courts or
South African Human Rights Commission for redress.
Conclusion and Recommendations

The UK, US AND South African authorities all need to work on a functional
definition of a stakeholder and create a legislative framework that gives appropriate
recognition to the interests of stakeholders and their contribution to the long-term
success of the corporation.
230 Guideline 1.18
82
4.1.5 Disclosure and Transparency

Annotation: The corporate governance framework should ensure that timely and
accurate disclosure is made on all material matters regarding the corporation,
including the financial situation, performance, ownership, and governance of the
company.
Assessment: Partially observed
Both the UK and US generally comply with the OECD principle of disclosure and
transparency.
In the UK the combined code provides some requirements for disclosure. The code
provides among others the following; the annual report should record a statement of
how the board operates, including a high level statement of which types of decisions
are to be taken by the board and which are to be delegated to management,231 the
names of the chairman, the deputy chairman (where there is one), the chief executive,
the senior independent director and the chairmen and members of the nomination,
audit and remuneration committees,232 the number of meetings of the board and those
committees and individual attendance by directors, the names of the non-executive
directors whom the board determines to be independent, with reasons where
necessary, 233 the other significant commitments of the chairman and any changes to
them during the year, 234 how performance evaluation of the board, its committees and
its directors has been conducted,235 the steps the board has taken to ensure that
members of the board, and in particular the non-executive directors, develop an
understanding of the views of major shareholders about their company. 236
231 Combined Code A.1.1

233Combined Code A.3.1
236 Combined Code D.1.2
83
The Company act provides in Section 412 that The Secretary of State may make
provision by regulations requiring information to be given in notes to a companys
annual accounts about directors remuneration.
The US also fully complies with this disclosure requirement. The provisions of the
Sarbanes Oxley act are instructive. Section 302 requires the CEO and CFO to certify
that the financial statements accurately and fairly represent the financial condition and
operations of the company. The act goes further to prohibit loans to any of the firms
directors or executives.237 Section 409 requires rapid disclosure of material changes in
the financial conditions of the firm. Further, Section 407 requires SEC to issue rules
to require issuers to disclose whether at least 1 member of its audit committee is a
"financial expert." It shall review disclosures made by issuers on a regular and
systematic basis for the protection of investors. Issuers will not be reviewed less
frequently than once every three years.
In South Africa Section 286 of the companies act provides that directors of a company
have the responsibility of ensuring that financial statements for the company are
prepared consisting of a balance sheet, income statement and additional components
required in terms of financial reporting standards; a summary of significant
accounting policies and other explanatory notes. The King Report provides that
Companies should provide full disclosure of director remuneration on an individual
basis giving details of earnings, share options and all other benefits. 238 The board is
also responsible for disclosures in relation to risk management in the annual report 239
However, it is becoming difficult for companies to account for profitability alone. In
a report by the French bank Credit Lyonnais, 240 while South Africa ranked among the
top five of 25 emerging nations in terms of corporate governance, it rated poorly in
terms of disclosure and transparency. The minimalist approach to corporate
governance adopted by many local companies needs to change. Few would dispute,
237Section 402
238 See The King Report section 2.5.4.
239 Ibid Section 5.2.5.
240 The Tides Gone Out: Whos Swimming Naked? CLSA Emerging Markets, October 2000
84
however, that South Africa offers investment returns comparable with the best in the
world,

From the analysis above it can be seen that the UK and US comply with this principle.
There is, however, a level of non-compliance in South Africa as was evidenced by the
report by the French Credit Lyonnais. 241
4.1.6 The Responsibilities of the Board

Annotation: The corporate governance framework should ensure the strategic
guidance of the company, the effective monitoring of management by the board, and
the boards accountability to the company and the shareholders.
Connotation: In the UK, Section 154 of the companies act provides that a private
company must have at least one director and a public company must have at least two
directors. The companies act further outlines certain duties of a director including the
duty to act within powers,242 the duty to promote the company, 243 duty to exercise
independent judgment,244 duty to exercise reasonable care skill and diligence,245 duty
to avoid conflict of interest,246 duty not to accept benefits from third parties, 247 Duty
to declare interest in proposed transaction or arrangement. 248
A companys board of directors per section 414 is responsible to approve annual
accounts, which will be signed on behalf of the board by a director of the company.
The board of directors also has the duty of approving directors reports including
remuneration reports.249
241 ibid
85
The Combined Code 2006 states that the boards role is to provide entrepreneurial
leadership of the company within a framework of prudent and effective controls
which enables risk to be assessed and managed. 250 The board should have regular
meetings, with an agenda, and there should be a formal schedule of matters over
which the board has a right to make decisions. There should be appropriate reporting
procedures defined for the board and its sub-committees.
In the US the passing of Sarbanes Oxley Act greatly defined the powers of boards of
directors. The statute creates the Public Company Accounting Oversight Board
(PCAOB). The Securities and Exchange Commission (SEC) has oversight and
enforcement authority over the PCAOB and is authorized to give it additional
responsibilities.
The PCAOB consists of five financially literate members who are appointed to fiveyear terms. At least two members must be or have been certified public accountants
(CPAs), and three members must not be and cannot have been CPAs. Members serve
full-time and are subject to strict conflict-of-interest provisions that preclude them
from sharing in any profits of, or receiving payments from, a public accounting firm.
The PCAOB requires registered public accounting firms to prepare and maintain audit
work papers and other information related to any audit report in sufficient detail to
support the conclusions reached in the reports. The agency will conduct annual
quality reviews (inspections) of firms that audit more than 100 issues and inspect all
others every three years.
The statute designates services such as bookkeeping or other services related to the
accounting records or financial statements of the audit client as proscribed. A variety
of other services, including financial information system design and implementation,
fairness opinions, actuarial services, internal audit outsourcing services, management
functions or human resources, and expert services unrelated to the audit, are defined
as non-audit services.
The CEO and CFO are required to prepare a statement for inclusion with the audit
report that certifies the appropriateness of the financial statements and any disclosures
250 Combined Code 2006, Para A.1
86
contained in the periodic report. These certifications must state that financial
statements and disclosures present, in all material respects, the operations and
financial condition of the issuer.
Violations of these requirements are punishable by fines of as much as $5 million and
as much as 20 years in prison.
The board of directors represents the connection between shareholders and managers.
Because of this the board chairman and the CEO of the corporation should be separate
positions.
Similarly, in South Africa directors owe their duties to the company. These originate
in common law, statutes, the memorandum and articles of the company, service
agreements, resolutions passed at the AGM and board meetings, and the rules of
regulatory bodies. They include (i) the duty of care; (ii) reasonable skill; (iii)
diligence; (iv) the exercise of powers independently in the best interests of the
company and for the purpose for which they were conferred; (v) acting within the
limits of authority as determined by common law, the Companies Act and the
companys memorandum and articles; (vi) acting within the powers of the company
and bona fide; (vii) reporting to the company any profit made by reason of their
office; (viii) not misappropriating a corporate opportunity; (ix) not competing
improperly with the company; (x) not carrying on the business of the company
recklessly or fraudulently. There is concern in the market that directors in small and
mid-sized companies do not always fully understand their duties and obligations.
Shadow directors are controlling shareholders who exert influence over the board
without being de facto directors. King II attempts to highlight this problem and
subject shadow directors to their statutory duties by declaring them directors. It is
common practice for major shareholders to appoint their own representatives to the
board. According to market analysts, the fair treatment principle is most likely to be
violated in holding company structures with listed subsidiaries
87
CHAPTER 5
5.1. Conclusion
This paper has sought to provide an in depth analysis and comparison of the corporate
governance legislative frameworks in the UK, US and South Africa using the OECD
principles as a benchmark for the comparison. A lot of emphasis is placed on South
Africa as an emerging economy and because of its international links with AngloAmerican corporate governance and domestic pursuit of socio-economic
development. The first part of this paper dealt with the concept of corporate
governance by looking at its definition, origin, importance and theoretical aspects
which are all interrelated with the development of corporate governance.
Corporations are constantly evolving to meet the needs of a changing society. They
have developed to become such a pervasive part of our society that they even
determine the quality of our food and the air that we breathe. Human beings
developed the corporation as part of a social structure amongst other things, which
nowadays almost everyone can participate in to some degree. Corporations enable
people to get things done, and enable a small idea or concept to develop into a vast
and successful business. A corporation is timeless in the sense that it can, and often
does, live beyond the years of its founders. Also, it can be operated internationally
from one corner of the world.
As corporations are constantly evolving, so are the corporate laws which govern them.
The evolution of the corporate form ensures that corporate governance laws must
continue to be reexamined. Corporate governance is primarily concerned with the
relationships between a corporations managers and shareholders, based on the
foundation that the board of directors is the shareholders agent to ensure that the
corporation in managed in the shareholders best interests. This paradigm has been
simplified into the phrase, managers accountable to boards and boards accountable to
88
shareholders. 251 The lack of accountability led to the corporate collapses, around the
world. On the one hand, the corporate collapses brought corporate governance at the
top of the reform agenda of Governments all over the world. Not surprisingly, in the
aftermath of these collapses, OECD Ministers in 1999 endorsed its Principles of
Corporate Governance which have since become an international benchmark for
policy makers, investors, corporations and other stakeholders worldwide.
Soon after their original drafting in 1999, the OECD Principles of Corporate
Governance were tested and implemented in OECD member and non-member
countries to improve their legal systems and regulatory frameworks, and review their
company law regimes. However, continued corporate governance failures in the years
that followed prompted a review of the original principles. In 2002, the OECD called
for an assessment of the OECD Principles by 2004. The assessment process was
carried out by the OECD Steering Group which prepared a synthesis paper covering
major issues in corporate governance. In support of the work of the Steering
Group, the OECD circulated a detailed questionnaire to member counties. Between
March 2003 and January 2004, seven successive draft revisions of the principles were
submitted by the Steering Group, until a final draft was agreed upon in April 2004.
The preamble to the Principles acknowledges that there is no single model of good
corporate governance, and the Principles avoid prescriptive rules of a concrete
character for many aspects of relations between firms, on the one hand, and lenders
and investors, on the other. A prominent figure in recent initiatives for the promotion
of good corporate governance has described the role of codes or principles in this area
as providing a checklist against which to review governance structures and
processes and disclaims for their responsibility for prescribing rules for application
and compliance252
It is thought that had these principles been in place earlier enough, the corporate
collapse could have been avoided. The corporate collapses at Enron, Tyco,
251 Millstein I, above n 38.
252 See A. Cadbury, Corporate Governance and Chairmanship a Personal View, (Oxford, etc., Oxford
University Press, 2002), p.20. Adrian Cadbury was chairman of the United Kingdom Committee on the
Financial Aspects of Corporate Governance (which reported in 1992) and a member of the OECDs
Business Sector Advisory Group on Corporate Governance whose report led to the drafting of the
OECD Principles.
89
WorldCom and other prominent companies in the US was directly linked to changes
in executive compensation, lack of an effective shareholders mechanism and
organisation of the board of directors. These collapses served as a catalyst for
legislative change (Sarbanes-Oxley Act of 2002(SOX)) and regulatory change (new
governance guidelines from the NYSE and NASDAQ). SOX mandated a number of
changes in corporate governance for publicly traded companies which affected
executive compensation, shareholder monitoring, and, particularly, board monitoring.
The NYSE and NASDAQ also mandated corporate governance changes for firms
listed on their respective exchanges. There are two potentially significant dangers
associated with SOX. First, the ambiguity in some of the provisions, particularly those
that overlap with and even contradict aspects of state corporate law, will almost
certainly invite aggressive litigation. The fear of such litigation will lead CEOs and
CFOs to direct corporate resources to protect themselves against potential lawsuits.
Fear of litigation is also making it harder to attract qualified board members--certainly
an unintended consequence of all the effort to improve board effectiveness. The
second, broader concern is that SOX represents a shift to more rigid Federal
regulation and legislation of corporate governance as distinguished from the more
flexible corporate governance that has evolved from state law, particularly Delaware
law. Despite its alleged flaws, the U.S. corporate governance system has performed
very well, both on an absolute basis and relative to other countries. It is important to
recognize that there is no perfect system and that we should try to avoid the
pendulum-like movement so typical of politically inspired system redesigns. The
current problems arose in an exceptional period that is not likely to happen again
soon. After all, it was almost 70 years ago that the corporate governance system last
attracted such intervention. At this point, SOX has probably helped to restore
confidence in the U.S. corporate governance system
It is worthy of note that UK Corporate Governance has influenced corporate
governance regulation in the European Union and United States. As seen in Chapter 3
several UK corporate governance reports, in particular the Cadbury Report
(December 1992), Rutteman Guidance (December 1994), Greenbury Report (July
1995), Hamel Report (June 1998), Turnbull Report (September 1999) and Higgs
Report (January 2003) revealed that the UK has been able to influence US corporate
governance regulation SOX on Corporate Responsibility, enacted by the Senate and
90
House of Representatives of the United States of America). It is interesting too to note

that the UK and US systems of corporate governance has influenced South African
Corporate Governance
On balance, South Africas approach to corporate governance fits the traditional
Anglo-American model as outlined by Reed. 253 This model includes: a) a single-tiered
Board structure where only shareholders are represented; b) an active stock exchange
that is a leader among emerging markets and ensures that financial markets play a
dominant role; c) a banking system that plays a secondary role, in which banks are not
in control of companies and avoid too close relations with clients; and d) a general
commitment to a market-driven economic policy in which industrial policy plays a
lesser role, manifested most clearly in the governments Growth, Employment and
Redistribution (GEAR) macro-economic policy framework. Concessions made to
labour with the 1998 Employment Equity Act and to affirmative action advocates
with the 2003 Broad- Based Black Economic Empowerment Act, as well as hints of a
more active industrial policy in an evolving post-GEAR environment, suggest a
mixed picture on this final variable.254
While maintaining a stable macro-economic environment and generally business

friendly climate have been key priorities for the post-apartheid government, it
remains determined to ensure that corporations play a positive role in the countrys
development. South Africa has consequently undergone comprehensive change to its
corporate governance regime in the last decade (Vaughn & Ryan, 2006). These
changes are a response to economic globalization as well as pressures for a
transformation of state business relations. The countrys King reports on corporate
governance, published in 1994 (King I) and 2002 (King II), have become notable
examples of how an emerging market can devise its own solutions to aligning
corporate governance with international best practice while also addressing corporate
social responsibility and needs for broad-based development.
253 Reed, D. (2002). Corporate governance reforms in developing countries. Journal of Business
Ethics, 37, 223-247.
254 West, A. (2006). Theorising South Africas corporate governance. Journal of Business Ethics, 68,
433-448.
91
2. Recommendations
A) Enforcement
In South Africa, the most important challenge is enforcement of existing laws, rules
and regulations. In this context, policymakers should consider broadening the role of
the securities regulator to include the regulation and oversight of issuers, STRATE,
and the Securities Regulation Panel. FSBs sanction and enforcement powers should
be strengthened, and the possibility of appeal should be restricted to constitutional law
and process. Procedures to safeguard due process inside the securities regulator
should be put in place. This approach would alleviate the strain on a judicial system
that is not equipped to deal with a large number of commercial cases.
B) Rights of Shareholders
In the UK Unfortunately shareholders have very little in the way of rights regarding
the day to day matters - the directors deal with that. Shareholders have no right of
access to the records, or to any management accounts, only to year end accounts. The
rights of shareholders to access records should be reviewed
In South Africa, the Companies Act should be amended to require a higher quorum of
share capital and voting rights for all fundamental corporate changes, mandate
approval of anti-takeover devices by shareholders and proxies should be allowed to
vote on show on hand. Similarly, in the US
C) Equitable Treatment of Shareholders
In South Africa, the notion of beneficial owner should be clarified and better defined.
Also, given that the registrar does not have resources to monitor compliance,
expanding the powers of the securities regulator FSB to oversee issuers should be
considered
D) The Role of Stakeholders in Corporate Governance
There is no functional definition of stakeholders neither in the UK nor the US. There
is also no provision that properly reinforce the role of the stakeholders, particularly
92
with regard to the position of the employee in the corporate governance framework.
The UK and US authorities need to provide a functional definition of stakeholders and
create a legislative framework that gives appropriate recognition to the interests of
stakeholders and their contribution to the long-term success of the corporation.
In South Africa, accounting treatment and effect on capital structures, including

dilution of existing shareholders should be transparent. Any re-pricing and
discounting of stock options should be subject to AGM approval with separate votes
for the employees and each director. Stock options must be directly related to
performance of the company for which the managers are responsible.
E) Disclosure and Transparency
In South Africa, the Companies Act should provide for means to withhold dividends
or disenfranchise voting rights for failure to disclose ultimate beneficial ownership.
JSE should adopt as Listing Rules King IIs recommendations on disclosure of
material foreseeable risk factors
F) Responsibilities of the Board

Issues of shadow directors should be introduced into Companies Law in South
Africa. Policymakers should investigate whether there is a need to formulate a
business judgment rule. The concept of independence per King II should be
disseminated
Final Remarks
As South Africa is only now emerging from a comprehensive process of corporate
governance reform, it would perhaps be unwise to try and predict consequences of
events that are just now unfolding. It is not clear whether the King Reports and related
legislation, such as the Companies Bill, 2007, will in the long run provide South
Africa with a best practice that is better suited than are other models to facilitating
both excellent governance of its corporations and a broad-based socioeconomic
transformation. Nevertheless, four discernible trends are worth mentioning.
Firstly, South Africa seems destined to adhere to a fairly conventional idea of best
93
practice in corporate governance as manifested in the Anglo-American model which

pays great heed to the importance of shareholder value. This is perhaps not surprising
given that King II255 ultimately sides with the shareholder in specifying that the
stakeholder concept of being accountable to all legitimate stakeholders must be
rejected for the simple reason that to ask boards to be accountable to everyone would
result in their being accountable to no one.
Secondly, because there is no great schism between business elites and the ANC
leadership in terms of South Africas overall macro-economic policy trajectory, and
by implication its structures of corporate governance, it should be possible for the
government to forge ahead with reform along the lines of what is deemed best
practice in authoritative reports such as King II. It is, however, not clear whether the
governments relative autonomy from society and its grassroots in terms of
economic policymaking will last. Increasing tensions within the Tripartite Alliance
between the ANC, COSATU and the South African Communist Party (SACP)
suggest that the lack of genuine socio-economic transformation and broad-based
development may have to be taken into much more serious account by future
governments if destabilising chaos, like the current national public service strike, is to
be avoided.
Thirdly, South Africa remains a country suffering from a legacy of grossly uneven
development and where the role of capitalists and corporations is viewed by many as
having undermined democracy by collaborating with the apartheid regime. South
African politicians and business leaders must therefore be explicitly cognisant of the
social impact of corporate activity. They will need to ensure that social responsibility
and related issues of transformation, from triple-bottom-line reporting to Black
Economic Empowerment, are taken into account when its corporate governance
structures are being reformed. The ability to promote and maintain this balancing act
between traditional requirements of best practice corporate governance and the
country-specific requirements to ensure social and economic justice will constitute a
key test for South Africas government and its partners in the private sector who seek
to remain long-term beneficiaries of South Africas initially stable and (from their
255 See Chapter 3
94
point of view) successful post-transition economic and political order.
Fourthly, while it is clear that the global context matters in terms of corporate
governance reform, and while increasing financialisation of the economy has played a
central role in the South African economic and corporate transformation since the
early 1990s (Koelble and LiPuma, 2006), it seems also rather obvious that emerging
markets have a somewhat different set of issues and contexts to take into
consideration when developing a best practice than do the established (Western)
market economies in which mainstream corporate governance practices have hitherto
been developed. In any event, corporate governance has become an increasingly
important issue in South Africa and will for the foreseeable future continue occupying
an important place in greater debates on what policy trajectories ought to look like in
order to produce sustainable economic and social outcomes.
95
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ANGLIA RUSKIN UNIVERSITY

Using the OECD Principle of Corporate

PAUL CHU NGUM

A Dissertation in partial fulfilment of the

Submitted: January 2009

CHAPTER 1 The Concept of corporate governance.10

CHAPTER 2 The OECD Principles of corporate

CHAPTER 3 An Overview of Corporate Governance in

3.2 Background and development of Corporate Governance in the US.......50

3.3 Background and development of Corporate Governance in SA.55

CHAPTER 4 Implementation of the OECD Principles

Comparative Analysis .60

CHAPTER 5 Conclusion and Recommendations87

1 Mallin C, Corporate Governance: An International Review (2004).

1.1 What Is Governance

1.2 What Is Corporate Governance

practitioner, researcher or theorist. 12 There is therefore no single accepted definition of

1.3 Origin of Corporate Governance

15 OECD April 1999.

family or group of managers could provide sufficient capital to sustain growth.

1.4 Importance of Corporate Governance

Sound corporate governance is therefore very essential to the wellbeing of an individual

1.5 Theoretical Aspects of corporate governance

1.5.1 Agency Theory

1.5.2 Stakeholder Theory

values in managing an organisation. 40 The stakeholder theory takes account of a wider

1.5.3 Stewardship Theory

The OECD Principles of corporate Governance

The OECD principles of corporate governance were developed as a result of financial

public on weaknesses in corporate governance systems. 46 This situation created some

In response to the growing awareness of the importance of good corporate governance

How the Principles Work

Reasoning behind the Principles

OECD Principles (1999) Critical Content

Equitable Treatment of Shareholders

Role of Stakeholders in Corporate Governance

Disclosure and Transparency

The Responsibilities of the Board

2.4.1 Core Standards

OECD Principles (2004)

In 2004, at a Council Meeting at Ministerial Level, the OECD agreed to survey

The new OECD principles of corporate governance focused primarily on public

I. Ensuring the basis for an effective corporate governance framework

D. Supervisory, regulatory and enforcement authorities should have the authority,

II. The Rights of Shareholders

69 OECD Principles 2004, Chapter 2, Principle A.

cooperate and consult with each other on issues of corporate governance. 71 It is a

III. Equitable Treatment of Shareholders

71 OECD Principles 2004, Chapter 2, Principle G.

IV. The role of the stakeholders in corporate governance

79 OECD Principles 2004, Chapter 3, Principle A2.

mechanisms for employee participation should be permitted to develop. This

84 OECD Principles 2004, Chapter 4, Principle C.

V. Disclosure and Transparency

Major share ownership and voting rights

Material foreseeable risk factors

Full financial disclosure

Governance structure and policies, and what code if any followed

Information should be prepared audited and disclosed in accordance with high

Regular continuous disclosure

Full disclosure of related party transactions, usually with controlling shareholders

happy with the chapters limited scope on material to be disclosed by a company

VI. Responsibility of the Board