The myth of a central role by institutional shareholders in corporate governance

• Author: Zikhali, N.L.
• DOI: https://doi.org/10.47348/JCCL/V8/i1a1
• Published date: 10 November 2022
• Date: 10 November 2022
• Citation: (2022) 8(1) JCCL&P 1
• Pages: 1-20

https://doi.org/10.47348/JCCL/V8/i1a1

1

THE MYTH OF A CENTRAL ROLE BY

INSTITUTIONAL SHAREHOLDERS IN

CORPORATE GOVERNANCE

NTOMBIZODWA LUCIA ZIKHALI*

Candidate Legal Practitioner, Gildenhuys Malatji Inc

ABSTRACT

The need for transparent and high standards of corporate governance

is expressly highlighted in s 7 of the Companies Act 71 of 2008. There

has been a wide call by those concerned with corporate governance

for institutional investors to take a central role in ensuring corporate

governance reform is successfully achieved. A number of concerns

are highlighted that stand in contrast with this expectation of

institutional investors taking on such a lead role. These concerns

relate to competition in the investment market, performance

incentives, short-termism, unwarranted interference with director

authority, lack of expertise, the burden of investment and existing

statutory mechanisms making this expectation unrealistic and a

potential for more problems rather than a solution.

Keywords: corporate governance, institutional investors,

shareholders, reform

I INTRODUCTION

In 2008 South Africa adopted the new Companies Act 71 of 2008

(2008 Companies Act), and the Constitution of the Republic of

South Africa, 1996 (Constitution) is the anchor on which the new

2008 Companies Act is built upon.1 This Act not only requires that

company law be applied in accordance with the Bill of Rights but

also highlights the company’s position and purpose in the broader

society. One of the primary objectives of this Act is to improve the

management of companies in a way that recognises non-shareholder

stakeholder interests instead of its business activities solely focusing

* BA, LLM, LLM (Wits).

1 J Katzew ‘Crossing the Divide Between the Business of the Corporation and the

Imperatives of Human Rights – The Impact of Section 7 of the Companies Act 71

of 2008’ (2011) 4 SALJ 686 at 686.

(2022) 8(1) JCCL&P 1

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(2022) 8(1) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

https://doi.org/10.47348/JCCL/V8/i1a1

on maximising shareholder returns.2 The 2008 Companies Act inter

alia sets out various company law objectives that are expressly

highlighted in s 7(a)–(i) of the Act. Developing the economy and

companies,3 promoting high standards of corporate governance,4

encouraging transparency,5 and balancing the rights and obligations

of shareholders and directors6 are some of the objectives of the

2008 Companies Act that companies that have been established in

terms of this Act should uphold, promote, and implement. The Act

recognises the role of shareholders and directors in contributing to

corporate governance reform. In this regard, King IV emphasises the

importance of shareholders by specifically highlighting the active role

that shareholders have played over the years in corporate governance

reform.7 This role is rooted in promoting the move away from solely

being concerned about making profits but seriously considering other

factors such as the environment and the socio-economic welfare of

the broader society.8 Principle 17 in King IV further points out the

active role that shareholders play and recommendations on how

shareholders can continuously play such a central role in corporate

governance.9 However, several challenges stand in contrast to this

expectation of shareholder activism in corporate governance reform.

One of the main challenges relates to institutional investors who

have become dominant figures in the economic market10 and are

entrusted with a fiduciary obligation to maximise the value of their

clients’ assets.11 Some of the issues relating to competition within

the investment market, incentives and reputation, unwarranted

interference with directors’ authority, lack of expertise, short-

termism, the burden of investment, and statutory mechanisms are

already in place to regulate the relationship between shareholders,

directors, and the company.

In light of the above, this article aims to investigate corporate

governance reform in South Africa with a specific focus on the role of

2 J F Sneirson ‘The History of Shareholder Primacy, from Adam Smith through the

Rise of Financialism’ in B Sjåfjell & C M Bruner (eds) The Cambridge Handbook of

Corporate Law, Corporate Governance and Sustainability (2019) 73–85 at 75.

3 Ibid.

4 Ibid.

5 Ibid.

6 Ibid.

7 King IV: Report on Corporate Governance for South AfricaTM (2016) 3.

8 Ibid.

9 Ibid at 73.

10 M A Ferreira & P Matos ‘The Colors of Investors’ Money: The Role of Institutional

Investors Around the World’ (2008) 88 Journal of Financial Economics 499–533 at

499.

11 D Parthiban, M A Hitt & J Gimeno ‘The Influence of Activism by Institutional

Investors on R&D’ (2001) Academy of Management Journal 144–57 at 144.

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