Transparency and accountability under the new company law

• Jurisdiction: South Africa
• Published date: 15 August 2019
• Author: Caroline B Ncube
• Pages: 43-72
• Date: 15 August 2019

Transparency and accountability under the

new company law

CAROLINE B NCUBE*

This paper discusses the two-tier transparency and accountability regime

provided for by the Companies Act 71 of 2008 (theAct). It includes a detailed

outline and an analysis of the relevant provisions hinged on JL Mashaw’s

six-facet enquiry into governance. The analysis also includes a comparison

with the provisions of the King Code of Governance Principles for South

Africa 2009 (King III Code). The paper f‌inds that the Act retains many of the

provisions of the Companies Act 61 of 1973 but omits references to public

interest, closely held and widely-held companies as these types of company are

not provided for in the Act. Further it makes substantive changes such as

increasing the minimum audit committee membership from two to three;

providing for audits in the public interest; an express statement of a company

secretary’s accountability to the board and the statutory statement of directors’

duties accompanied by the provision for the business judgment rule. These

changes serve various ends ranging from conf‌irming the legal position with

regard to company secretaries to better protecting society through requiring

audits in the public interest and codifying directors’ duties. The Act’s provi-

sions are largely mirrored by the King III Code although certain inconsisten-

cies are evident, for example, with regard to the appointment of company

secretaries. However, in such instances the Act prevails. Overall, the paper

concludes that the Act’s transparency and accountability provisions are both

comprehensive and appropriate.

I INTRODUCTION

Corporate transparency refers to ‘the widespread availability of relevant,

reliable information about the periodic performance, f‌inancial position,

investment opportunities, governance, value, and risk’of companies.

1

It is

a key element of ensuring good corporate governance because it enables

evaluation of company and board performance.

2

In particular, the f‌inan-

cial accounting information disclosed serves three readily identif‌iable

* LLB (UZ) LLM (CANTAB), Lecturer in Law, Department of Commercial Law,

University of Cape Town,Cape Town.

1

RM Bushman and AJ Smith ‘Transparency, Financial Accounting Information and

Corporate Governance’ 2003 FRBNY Economic Policy Review 65 at 76. See also RM Bushman,

JD Piotroski, AJ Smith ‘What Determines Corporate Transparency?’2004 Journal of Accounting

Research 207–252.

2

Benjamin E Hermalin and Michael S Weibach‘Transparency and Corporate Governance’

1. Available at .business.uiuc.edu/weisbach/HWTransparencyJan2007.pdf> (last

accessed 25 March 2009); Tarun Khanna, Krishna G Palepu and Suraj Srinivasan ‘Disclosure

Practices of Foreign Companies interacting with US Markets’2004 Journal of Accounting Research 475

at 476.

43

2010 Acta Juridica 43

© Juta and Company (Pty) Ltd

roles: f‌irst to enable the identif‌ication of viable projects; secondly, to

motivate directors and managers to be more disciplined and, thirdly, to

reduce ‘information asymmetries among investors’.

3

An accountability regime must accompany provisions relating to

transparency to ensure that those making the disclosures are motivated to

do so accurately and properly. It is essential because ‘power without

accountability invites abuse’.

4

An accountability regime provides for six

key features, namely:

who is accountable to whom;what they are liable to be called to account for;

through what processes accountability is to be assured; by what standards the

putatively accountable behaviour is to be judged; and what the potential effects

are of f‌inding that those standards have been breached.

5

These six features need to be examined as an intergral part of any

evaluation of an accountability regime.

6

Therefore, the discussion that

follows on the accountability regime created by the Companies Act 71 of

2008 (the Act) is based on this six-facet inquiry. The answers to this

inquiry enable us to describe and critique the regime.

The Act provides for a two-tier accountability and transparency regula-

tory scheme. The f‌irst rung of regulation, provided for in ss 23 to 33,

applies to all companies and relates to registration of external companies,

form, standards, location of and access to company records. It also

provides for the f‌inancial year of a company, accounting records, f‌inancial

statements, annual f‌inancial statements, access to f‌inancial statements and

related information, the use of a company name and registration number

and annual returns. The second tier of regulation, provided for in ss 84 to

94, which relates to company secretaries, auditors and audit committees

applies only to public companies and state-owned companies

7

and private

companies required to have their f‌inancial statements audited.

8

Other

private, personal liability and non-prof‌it companies may voluntarily opt

in to this scheme through their memoranda of incorporation.

9

This two-tier scheme was created in an attempt to balance the need to

provide accountability and transparency requirements against the desir-

3

Bushman and Smith (n 1) 66. See also L Lowenstein ‘Financial Transparency and

Corporate Governance: YouManage what You Measure’ 1996 Columbia Law Review 1335 at

1335–1336, 1342.

4

Lowenstein (n 3) 1345.

5

J L Mashaw ‘Accountability and institutional design: some thoughts on the grammar of

governance’Yale Law School Research Paper No 116at 118. Availableat SSRN: http://papers.

ssrn.com/sol3/papers.cfm?abstract_id=924879 (last accessed on 12 March 2009).

6

Mashaw (n 5) 116 and 118.

7

Section 34(1) and s 84(1)(a)–(b).

8

Section 84(1)(c).

9

Section 34(2).

44 MODERN COMPANY LAW FOR A COMPETITIVE SOUTH AFRICAN ECONOMY

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