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South Africa is seen today to be one of the largest and most developed economies in the African continent and generates up to 20 per cent of the income generated within the whole of sub-Saharan Africa (Vaughn and Ryan, 2006). One of the major reasons given for such an astonishing success in the region is thanks to its leadership in the corporate governance area. According to Statistics South Africa (2016), as of 2013, 75.7% of SA GDP is derived from the private sector, with finance, real estate and business services contributing 19.4%; wholesale, retail and motor trade, catering and accommodation 13.7%; manufacturing 13%; transport, storage and communication 8.4%; mining and quarrying 7.7%; personal services 5.4%; construction 3.4%; electricity, gas and water 2.4%; and agriculture, forestry and fishing 2.3%. South Africa is seen to not only be one of the biggest economies in Africa but also Africa’s most sophisticated economy (Vaughn and Ryan, 2006), with its financial institutional structures very much advanced compared to other emerging markets (Andreasson, 2011, Vaughn and Ryan, 2006). Table 1 below shows the historical context and milestones within which CG has emerged in South Africa.

Historically, South Africa has suffered notoriously with a high crime rate and sluggish economy, especially during the era of apartheid. In fact, during the period 1961–1994, the country was almost excluded from the global economy as a result of its apartheid practices (Andreasson, 2011, Vaughn and Ryan, 2006). Owing to the oppressive political environment of the country at the time, the United Nations excluded South Africa from partaking in international unions, and economic and trade sanctions were imposed, helping to effectually stifle the country’s economic growth and development (Vaughn and Ryan, 2006). These sanctions arguably also protected South African firms from outside competition, as financial sanctions kept international organisations out of the country’s domestic market and national firms out of the global capital market (Vaughn and Ryan, 2006, Ntim, 2013c, Ntim et al., 2014c). As a result of this, corporate practices, regulations and domestic laws fell far behind global standards, and, by the late 1980s, a lot of the country’s firms were fuzzy entities led by self-serving and entrenched executives (Vaughn and Ryan, 2006).

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Table 1: Historical and Contextual Milestones Leading to the Development of South Africa’s Corporate Governance Code (King I, II and III).

After 1986, South Africa started witnessing political reforms, with certain repeals to the apartheid legislation; however, it was not until the complete collapse of apartheid in 1994 and the release of Nelson Mandela from prison that the country was once more welcomed to the global economy (Vaughn and Ryan, 2006). Faced with the challenges of being welcomed in the international market, South African firms were compelled to embrace and address international corporate governance standards as investors

1887 •Creation of Johannesburg Stock Exchange (JSE)

Pre- 1910

•British colonisation of South Africa •South Africa Act 1909

•Common Law system

1913 •Natives' Land Act (black South Africans were relatively restricted from the legal ownership of land) 1948 • Beginning of Apatheid South Africa

1961- 1980

•South African republic referendum to gain independence

•Isolated from the global economy by the UN because of apartheid practices •Excluded from economic and trade transactions

•Corporate practices, laws and standards were far behind international standards •Firms were entities led by self-serving, entrenched executives

1986 •Repeals to Apartheid legislation

1992 • Formation of the King Committee on corporate governance, tasked with developing CG codes

1994

• Release of Nelson Mandela • End of Apartheid South Africa

• Creation of King I corporate governance code derived from the UK 's 1992 Cadbury report within the Anglo-American CG model (discussed in 2.1); applicable to listed firms in the JSE

• Re-introduction of SA into the global economy

2002

•Creation of King II corporate governance report with hybridisation of the Anglo-American CG model and the stakeholder CG model. Applicable to listed firms under the UK principle of 'comply or explain'

•Introduction of triple bottom line reporting (firms are to report on environmental, financial and social aspects of an entity)

2004 •Introduction of the Socially Responsible Investment Index by the JSE 2008 • New Companies Act incorporating some CG provisions in King I and II into law

2009

• Creation of King III CG report

• Applicable to all firms, whether listed or unlisted

• King III operates under the principle of 'apply or explain' (borrowed from The Netherlands) to give some flexibility to firms in their reporting

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demanded a reform in both corporate governance practices and corporate structures. Indeed, the South African government and economic enterprises equally acknowledged that an improvement in corporate governance rules and policies could enhance the country’s ability to achieve increased productivity growth and economic stability, which were seen as crucial for long-term national development (Vaughn and Ryan, 2006, Andreasson, 2011).

Similar to many African countries, South Africa’s colonial inheritance and follow-on ties with the UK have assured that corporate practices and corporate laws have been adopted mainly from the UK. Thus, the South African corporate governance regime has been heavily based on the corporate governance system in the UK. To respond to international pressure, the King Committee on Corporate Governance was formed in 1992 with the task of developing CG codes. Its first report was published in 1994 (King I), with substantial inspiration drawn from the UK 1992 Cadbury Committee report (Ntim et al., 2014b, Ntim, 2013c, Andreasson, 2011, Vaughn and Ryan, 2006). The production of the King I CG report also coincided with post- apartheid South Africa and the re-integration into the world economy. As a result of this affiliation, the King I corporate governance report was tailored to reflect the Cadbury report of the UK (Ntim et al., 2014b, Ntim, 2013c, Andreasson, 2011, Vaughn and Ryan, 2006). The South African first corporate governance regime (the King I report), which was developed in 1994, fits the traditional Anglo-American corporate governance model with a more shareholder-oriented approach. In fact, this model included: (i) a single-tier board system with only shareholder representation; (ii) an active local capital market which ensures that financial markets play a dominant role in governance; (iii) a banking structure which plays a secondary role, in which banks are not controllers of firms and avoid excessively close relationships with customers; and finally (iv) a general commitment to a market-driven economic course of action in which industrial policy plays a very minimal role as articulated in the government’s Growth, Employment and Redistribution policies (GEAR) (Andreasson, 2011, López de Silanes et al., 1998).

The King I report was later followed by the King II report in March 2002, which was different from the King I report in that it moves away from the Anglo-American model to a somewhat mixed model which has come to be known as a ‘hybrid model’, incorporating both the shareholder and stakeholder regime of CG. In fact, King

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II recommended the introduction of ‘triple-bottom-line’ reporting (Ntim et al., 2014b, Ntim, 2013c, Andreasson, 2011, Vaughn and Ryan, 2006). Hence, King II requires firms to report on environmental sustainability and social aspects of the firm’s activities, in addition to traditional reporting on the economic and financial ‘bottom line’ as in the King I report (Ntim et al., 2014b, Ntim, 2013c, Andreasson, 2011, Vaughn and Ryan, 2006). As a result of both the ‘triple-bottom-line’ reporting standard and the implementation of a Socially Responsible Investment Index by the JSE in 2004, South Africa is praised to be the first emerging market to introduce such reforms (Andreasson, 2011, Vaughn and Ryan, 2006).

In 2009, a third report (King III) was developed with the aim of continuous promotion of the principles-based approach of King I and King II (Andreasson, 2011), with some of the principles of the King report established in law. In contrast to King I and II, which were applicable only to listed companies in the JSE, King III is applicable to all entities, be they private, non-profit or public. The King III regime follows The Netherland’s enforcement principle of ‘apply or explain’, where boards are to decide how to apply the recommendations of King III or apply another practice which can still enable the firm to achieve the objectives of CG principles of accountability, fairness, responsibility and transparency (see summary of provisions of King III in table V). In fact, the main difference between the ‘comply or explain’ principle in the King II report and the King III ‘apply or explain’ principle is that, under the former, firms could denote a mind-set on complying with King II provisions regardless of its applicability to the firm. While the latter shows an appreciation for the fact that it is often not the case of compliance but instead of considering how the King III principles and recommendations can be applied at firm level which fits with both the Anglo-American CG model and the stakeholder CG model. Indeed, the King III report covers a number of global emerging governance trends, including alternative dispute resolution, shareholder approval of remuneration of non-executive directors, evaluation of directors’ and board performance and risk-based internal auditing, IT governance and business rescue (Esser, 2009, Posthumus et al., 2010, Gstraunthaler, 2010, Ioannou and Serafeim, 2014).

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In a nutshell, the principal objective of the King reports on corporate governance is to encourage the highest corporate governance standards in South Africa by promoting an assimilated approach to corporate governance in the interests of a wide range of stakeholders. The report addresses the responsibilities and accountability of executives, boards and individual directors, laterally auditing process and accounting. Some of these recommendations include: encouraging shareholder activism, improving the Companies Act, implementing accounting standards into company law and calling on the powers that be to improve the enforcement of existing rules and regulations (Esser, 2009, Posthumus et al., 2010, Gstraunthaler, 2010, Ioannou and Serafeim, 2014). Indeed, South African CG standards have become notable examples of how emerging markets especially in Africa can develop CG regulations which incorporate international best practices in corporate governance while also addressing national needs through corporate social responsibility, which are essentials for broad-based development in the country (see section 3.5 for a synopsis of institutional context and table 3 for a summary of CG provision of King III).