Date: 09/07/2004
Source: Department of Trade and Industry
Title: M Mpahlwa: SAICA Banquet
KEYNOTE ADDRESS BY MANDISI MPAHLWA MINISTER OF TRADE AND INDUSTRY AT SAICA BANQUET: REFORM OF SOUTH AFRICAN COMPANY LAW AND ITS IMPLICATIONS FOR THE ACCOUNTING PROFESSION, East London, 9 July 2004
Good evening, ladies and gentlemen, learners and parents, leaders in business, community and academia, colleagues, honourable guests. I am indeed honoured to be able to address you this evening at an important event that not only celebrates the achievements of our youth, but also serves as a platform to encourage the transformation of the Accounting Profession.
In my capacity as Minister of Trade and Industry, I applaud the initiatives of the private sector to transform themselves and to become more representative of South Africa and South Africans. It is voluntary initiatives, such as these, that will have a lasting impact on our society and our economy, as they not only build the future human capital for our industries, but also nurture a more equal and just society.
I would like to take this opportunity tonight to sketch out to you a topic that is traditionally the domain of lawyers, but that increasingly has overlapped with that of the Accounting Profession - namely company law and its reform.
The recent high profile, international corporate governance scandals have demonstrated the linkage between company law and professions such as accounting and auditing. The Enron, Worldcom and more recently the Parmalat cases have all demonstrated that bad accounting practices impact significantly on companies and investors and have a negative impact on investor confidence and capital markets.
It is in this context that the dti and the National Treasury have initiated reviews of company law and of the regulation of the Accounting Profession. It is also for this reason that the company law reform process should be of great interest to you. Providing legal backing for accounting standards and setting clear reporting frameworks for companies are critical components, not only in addressing potential abuses in the corporate sector, but also in restoring investor confidence.
The need for company law reform
Company law reform is important not only because we are responding to breaches internationally and in South Africa. In fact, the reform of our company law is long overdue and something that is far more wide-reaching and systematic in approach.
The current legal framework is more than thirty years old. The existing Companies Act dates from 1973. Over the past thirty years, significant developments have taken place in South Africa and elsewhere and it is time that we review our current regulatory framework to ensure that it is relevant for the present and the future and that it includes all South Africans by promoting economic opportunity for black businesses and small businesses.
And yet, there has not been a significant review or reform of our company law over the past thirty years. Over the years, only piecemeal amendments of the Act were undertaken, but the underlying principles of the Act remains those which were established in the mid nineteenth century Britain with the enactment of the Joint Stock Companies Acts of 1844, 1856 and 1862. At the time of the implementation of these Acts, the corporate environment was still underdeveloped. For example, the corporate environment was dominated by companies engaged in major public works such as the building of roads, bridges, dams and railways. Furthermore, the separation of ownership from control was non-existent in companies. Then, majority shareholders dominated even public companies and financial instruments were underdeveloped. The relationships between companies and shareholders were simple to manage given the number of shareholders involved and the activities undertaken by companies. Our present company law and enforcement mechanisms were appropriate for such an environment.
But times have clearly changed. Today, many developments have taken place and legislation, which provided a competitive advantage in the past, can quickly become a source for competitive disadvantage. Modern trends in corporate finance and corporate governance make a review of our company law all the more important and urgent. In the corporate finance area, the introduction of sophisticated financial instruments, the reconsideration of capital maintenance regimes and the reorientation of policies affecting the raising of capital, among others, heralded the adoption of modern corporate finance principles to enable competitive methods of raising capital on a large scale. Needless to say, spectacular corporate failures and the desire to protect shareholders and other stakeholders witnessed the implementation of improved corporate governance regimes, particularly in jurisdictions where the corporate environment is characterised by the separation of ownership from control such as the United States and the United Kingdom. Even in jurisdictions characterised by the prevalence of majority shareholders like South Africa, other developing countries and continental Europe, the need for improved corporate governance, particularly the exigency of investor protection, could not be avoided.
Another critical rationale for reform of company law is the dramatic social and political change that has taken place in South Africa since 1994, with the ushering in of a new constitutional dispensation, which heralded the commencement of progressive socio-economic policies. We have indeed entered the phase of major legislative reform in line with such policies and need to ensure that our company law embodies the principles and the spirit of the Constitution. In addition, company law must address the particular South African challenges and promote a single economy by offering economic opportunities and appropriate regulation for the "second economy".
What should be the objectives of company law reform?
Ordinarily, corporate law is thought of and seen as a technical area reserved only for experts. This should not be the case as company law is aimed at entrepreneurs, irrespective of the level of their sophistication. That is why one of the main guiding principles for corporate law reform should be the simplification of the law. The law should be accessible, understandable and provide flexibility for businesses. Furthermore, the law should provide a regime, which is predictable, fair and transparent without being overly burdensome. It should ensure that there is maximum transparency in the market, so that investors can make informed choices about where to put their money. It should provide investors with appropriate and adequate recourse and redress in cases of abuse. In addition, company law should recognise the principles contained in our Constitution and that companies operate in a broader social context. Finally, a reform process should also seek to harmonise our law with international best practice.
An overview of the Policy on Corporate Law Reform
These objectives and how we propose to achieve them through the reform process are outlined in a policy document that was recently made public by the dti. The policy document will be in the public domain until the end of September, so I urge you all to obtain a copy and to provide your inputs.
Briefly, the policy document outlines broad principles within clearly identified core company law areas.
The first core area identified by the policy document is the formation of companies. In this regard, the policy makes it clear that unnecessary and artificial distinction between different types of business undertakings (that is, a public company, a private company and a close corporation) should be removed. The law in relation to company formation should be simplified, so that the number of formal requirements required for company formation is reduced and that the process can be essentially and largely automated.
However, we must keep in mind throughout this reform process that not all businesses are affected by regulation in the same way. Sectoral considerations, the size of the firm (particularly on the basis of turnover), how long it has been in operation and whether the firm is listed or not listed all play a role. And, while the focus of the reform is on the regulatory environment and its impact on business, the dti is cognisant of other factors that play a role in promoting entrepreneurship, such as providing access to capital, infrastructure and information.
The dti acknowledges that a shift to a regulatory environment that reduces the administrative burden for SMEs would be a positive investment in South Africa's future. However, business interests should not be the sole determinant of public policy. Indeed, no one seems to disagree that the business environment should be regulated. Thus, what is important is that the cost of regulation should be assessed against the benefits, in particular to the broader benefits of providing a safer environment for investors.
The second core area discussed in the policy document is corporate finance. Here, the emphasis falls on the rules around the issuing of shares and the maintenance of capital. The ultimate objective of reform these rules must be to increase access to capital for firms, while ensuring maximum transparency and disclosure for investors. To this end, it will be necessary to remove economically unnecessary limitations on equity investment, such as par values and legal capital, which may place South African companies at a competitive disadvantage with companies formed under the laws of jurisdictions with more modern and permissive statutes. This area in particular is one that will be of interest to the Accounting Profession, and we look forward to your contributions.
The third core area to be addressed in the review is corporate governance. Here, the main focus is on international best practice, where the tendency has been to adopt additional reporting requirements.
Our goal must be to ensure the protection of shareholders, whose inalienable rights must include the right to information, to vote, to call a meeting and to elect directors. Crucial to enhanced shareholder activism and protection will be effective remedies. Thus, consideration will be given to a dispute resolution mechanism and to more effective means to provide recourse to aggrieved shareholders.
One of the most important challenges of the new law will be to clarify the rules governing the conduct of directors and enforcement of the rules. Rights and duties of directors have traditionally existed in common law. As a result there is little consensus on the precise content of fiduciary duties of directors. Furthermore, these rules on rights and obligations are inaccessible to the very people to whom they apply. We propose to codify these rights and obligations in law through a statutory standard for conduct.
Disclosure and accurate reporting are paramount to ensuring good corporate governance. We propose that this should not just include financial information but also statements on, for example, compliance with public interest measures, such as Black Economic Empowerment and environmental laws. Annual statements may have to include remuneration and bonuses of all directors and senior managers.
Two further important areas of company law that are addressed in the policy framework relate to mergers and acquisitions and to the liquidation and rescue of companies. It proposes that there should be a shift, in law and practice, from liquidation of businesses to effective corporate rescue. No major changes, other than enforcement and institution related, are proposed to the current regulation of mergers and acquisitions.
A new legislative framework is only as effective as the bodies tasked with its administration and enforcement. To this end, a new institutional framework is proposed that will seek to enhance not only the efficiency of company registration, but also the effectiveness of its enforcement. The policy framework envisages the establishment of a Companies and Intellectual Property Commission, which will contain the current registration functions of the Companies and Intellectual Property Registration Office (CIPRO) but also have more extensive duties and responsibilities, including enforcement of the law, education of the public and investors, and pro-actively monitoring market practices.
Furthermore, it is proposed that consideration be given to expanding the role of the Competition Tribunal to include adjudication of company matters, including mergers and takeovers.
These then are the major issues that are covered in the policy on Corporate Law Reform that has been recently published. I hope I have achieved my goal, which was to convey to you tonight the broad outline of corporate law reform and how it may affect the Accounting Profession.
As you proceed with the transformation of the profession, it is important to remember that the transformation agenda extends beyond bringing in new people into the profession. It also includes meeting other challenges such as those raised by corporate scandals and related corporate governance failures. For this reason, I urge you all to engage with the process to reform company law to ensure that the new law is truly one that meets our objectives as South Africans, but also provides a platform for our global competitiveness as a nation.
I thank you.
Issued by Department of Trade and Industry
9 July 2004
Source: Department of Trade and Industry
Title: M Mpahlwa: SAICA Banquet
KEYNOTE ADDRESS BY MANDISI MPAHLWA MINISTER OF TRADE AND INDUSTRY AT SAICA BANQUET: REFORM OF SOUTH AFRICAN COMPANY LAW AND ITS IMPLICATIONS FOR THE ACCOUNTING PROFESSION, East London, 9 July 2004
Good evening, ladies and gentlemen, learners and parents, leaders in business, community and academia, colleagues, honourable guests. I am indeed honoured to be able to address you this evening at an important event that not only celebrates the achievements of our youth, but also serves as a platform to encourage the transformation of the Accounting Profession.
In my capacity as Minister of Trade and Industry, I applaud the initiatives of the private sector to transform themselves and to become more representative of South Africa and South Africans. It is voluntary initiatives, such as these, that will have a lasting impact on our society and our economy, as they not only build the future human capital for our industries, but also nurture a more equal and just society.
I would like to take this opportunity tonight to sketch out to you a topic that is traditionally the domain of lawyers, but that increasingly has overlapped with that of the Accounting Profession - namely company law and its reform.
The recent high profile, international corporate governance scandals have demonstrated the linkage between company law and professions such as accounting and auditing. The Enron, Worldcom and more recently the Parmalat cases have all demonstrated that bad accounting practices impact significantly on companies and investors and have a negative impact on investor confidence and capital markets.
It is in this context that the dti and the National Treasury have initiated reviews of company law and of the regulation of the Accounting Profession. It is also for this reason that the company law reform process should be of great interest to you. Providing legal backing for accounting standards and setting clear reporting frameworks for companies are critical components, not only in addressing potential abuses in the corporate sector, but also in restoring investor confidence.
The need for company law reform
Company law reform is important not only because we are responding to breaches internationally and in South Africa. In fact, the reform of our company law is long overdue and something that is far more wide-reaching and systematic in approach.
The current legal framework is more than thirty years old. The existing Companies Act dates from 1973. Over the past thirty years, significant developments have taken place in South Africa and elsewhere and it is time that we review our current regulatory framework to ensure that it is relevant for the present and the future and that it includes all South Africans by promoting economic opportunity for black businesses and small businesses.
And yet, there has not been a significant review or reform of our company law over the past thirty years. Over the years, only piecemeal amendments of the Act were undertaken, but the underlying principles of the Act remains those which were established in the mid nineteenth century Britain with the enactment of the Joint Stock Companies Acts of 1844, 1856 and 1862. At the time of the implementation of these Acts, the corporate environment was still underdeveloped. For example, the corporate environment was dominated by companies engaged in major public works such as the building of roads, bridges, dams and railways. Furthermore, the separation of ownership from control was non-existent in companies. Then, majority shareholders dominated even public companies and financial instruments were underdeveloped. The relationships between companies and shareholders were simple to manage given the number of shareholders involved and the activities undertaken by companies. Our present company law and enforcement mechanisms were appropriate for such an environment.
But times have clearly changed. Today, many developments have taken place and legislation, which provided a competitive advantage in the past, can quickly become a source for competitive disadvantage. Modern trends in corporate finance and corporate governance make a review of our company law all the more important and urgent. In the corporate finance area, the introduction of sophisticated financial instruments, the reconsideration of capital maintenance regimes and the reorientation of policies affecting the raising of capital, among others, heralded the adoption of modern corporate finance principles to enable competitive methods of raising capital on a large scale. Needless to say, spectacular corporate failures and the desire to protect shareholders and other stakeholders witnessed the implementation of improved corporate governance regimes, particularly in jurisdictions where the corporate environment is characterised by the separation of ownership from control such as the United States and the United Kingdom. Even in jurisdictions characterised by the prevalence of majority shareholders like South Africa, other developing countries and continental Europe, the need for improved corporate governance, particularly the exigency of investor protection, could not be avoided.
Another critical rationale for reform of company law is the dramatic social and political change that has taken place in South Africa since 1994, with the ushering in of a new constitutional dispensation, which heralded the commencement of progressive socio-economic policies. We have indeed entered the phase of major legislative reform in line with such policies and need to ensure that our company law embodies the principles and the spirit of the Constitution. In addition, company law must address the particular South African challenges and promote a single economy by offering economic opportunities and appropriate regulation for the "second economy".
What should be the objectives of company law reform?
Ordinarily, corporate law is thought of and seen as a technical area reserved only for experts. This should not be the case as company law is aimed at entrepreneurs, irrespective of the level of their sophistication. That is why one of the main guiding principles for corporate law reform should be the simplification of the law. The law should be accessible, understandable and provide flexibility for businesses. Furthermore, the law should provide a regime, which is predictable, fair and transparent without being overly burdensome. It should ensure that there is maximum transparency in the market, so that investors can make informed choices about where to put their money. It should provide investors with appropriate and adequate recourse and redress in cases of abuse. In addition, company law should recognise the principles contained in our Constitution and that companies operate in a broader social context. Finally, a reform process should also seek to harmonise our law with international best practice.
An overview of the Policy on Corporate Law Reform
These objectives and how we propose to achieve them through the reform process are outlined in a policy document that was recently made public by the dti. The policy document will be in the public domain until the end of September, so I urge you all to obtain a copy and to provide your inputs.
Briefly, the policy document outlines broad principles within clearly identified core company law areas.
The first core area identified by the policy document is the formation of companies. In this regard, the policy makes it clear that unnecessary and artificial distinction between different types of business undertakings (that is, a public company, a private company and a close corporation) should be removed. The law in relation to company formation should be simplified, so that the number of formal requirements required for company formation is reduced and that the process can be essentially and largely automated.
However, we must keep in mind throughout this reform process that not all businesses are affected by regulation in the same way. Sectoral considerations, the size of the firm (particularly on the basis of turnover), how long it has been in operation and whether the firm is listed or not listed all play a role. And, while the focus of the reform is on the regulatory environment and its impact on business, the dti is cognisant of other factors that play a role in promoting entrepreneurship, such as providing access to capital, infrastructure and information.
The dti acknowledges that a shift to a regulatory environment that reduces the administrative burden for SMEs would be a positive investment in South Africa's future. However, business interests should not be the sole determinant of public policy. Indeed, no one seems to disagree that the business environment should be regulated. Thus, what is important is that the cost of regulation should be assessed against the benefits, in particular to the broader benefits of providing a safer environment for investors.
The second core area discussed in the policy document is corporate finance. Here, the emphasis falls on the rules around the issuing of shares and the maintenance of capital. The ultimate objective of reform these rules must be to increase access to capital for firms, while ensuring maximum transparency and disclosure for investors. To this end, it will be necessary to remove economically unnecessary limitations on equity investment, such as par values and legal capital, which may place South African companies at a competitive disadvantage with companies formed under the laws of jurisdictions with more modern and permissive statutes. This area in particular is one that will be of interest to the Accounting Profession, and we look forward to your contributions.
The third core area to be addressed in the review is corporate governance. Here, the main focus is on international best practice, where the tendency has been to adopt additional reporting requirements.
Our goal must be to ensure the protection of shareholders, whose inalienable rights must include the right to information, to vote, to call a meeting and to elect directors. Crucial to enhanced shareholder activism and protection will be effective remedies. Thus, consideration will be given to a dispute resolution mechanism and to more effective means to provide recourse to aggrieved shareholders.
One of the most important challenges of the new law will be to clarify the rules governing the conduct of directors and enforcement of the rules. Rights and duties of directors have traditionally existed in common law. As a result there is little consensus on the precise content of fiduciary duties of directors. Furthermore, these rules on rights and obligations are inaccessible to the very people to whom they apply. We propose to codify these rights and obligations in law through a statutory standard for conduct.
Disclosure and accurate reporting are paramount to ensuring good corporate governance. We propose that this should not just include financial information but also statements on, for example, compliance with public interest measures, such as Black Economic Empowerment and environmental laws. Annual statements may have to include remuneration and bonuses of all directors and senior managers.
Two further important areas of company law that are addressed in the policy framework relate to mergers and acquisitions and to the liquidation and rescue of companies. It proposes that there should be a shift, in law and practice, from liquidation of businesses to effective corporate rescue. No major changes, other than enforcement and institution related, are proposed to the current regulation of mergers and acquisitions.
A new legislative framework is only as effective as the bodies tasked with its administration and enforcement. To this end, a new institutional framework is proposed that will seek to enhance not only the efficiency of company registration, but also the effectiveness of its enforcement. The policy framework envisages the establishment of a Companies and Intellectual Property Commission, which will contain the current registration functions of the Companies and Intellectual Property Registration Office (CIPRO) but also have more extensive duties and responsibilities, including enforcement of the law, education of the public and investors, and pro-actively monitoring market practices.
Furthermore, it is proposed that consideration be given to expanding the role of the Competition Tribunal to include adjudication of company matters, including mergers and takeovers.
These then are the major issues that are covered in the policy on Corporate Law Reform that has been recently published. I hope I have achieved my goal, which was to convey to you tonight the broad outline of corporate law reform and how it may affect the Accounting Profession.
As you proceed with the transformation of the profession, it is important to remember that the transformation agenda extends beyond bringing in new people into the profession. It also includes meeting other challenges such as those raised by corporate scandals and related corporate governance failures. For this reason, I urge you all to engage with the process to reform company law to ensure that the new law is truly one that meets our objectives as South Africans, but also provides a platform for our global competitiveness as a nation.
I thank you.
Issued by Department of Trade and Industry
9 July 2004
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