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In 1990, the Republic of South Africa emerged from the shadow of 42 years of apartheid into an uncertain future. The ruling white-controlled National Party began negotiations to dismantle the system of racial segregation that had allowed it to enforce white supremacy and Afrikaner minority rule at the expense of a black majority since 1948.13 Nelson Mandela, a Xhosa attorney and organizer of resistance against that system, was released from prison and his political party, the African National Congress (ANC), was legalized by the last State President of apartheid-era South Africa, FW. de Klerk. While the path to democracy seemed secure by the mid-1990s, South Africa's social triumph was projected onto a backdrop of fiscal unknowns.

By 1989, 155 American educational institutions had fully or partially divested from South Africa and 22 countries, 26 states, and more than 90 cities had taken binding economic action against companies doing business there.14 Between 1985 and 1988, the United States, Japan, Great Britain, Israel, and a number of European countries enacted legislation or initiated trade restrictions with South Africa.15 Around the same period, the country—the world's largest gold producer—saw a precipitous drop in the price of gold from $850/oz. in 1980 to $340/oz. by 1992. Coupled with political unrest and sanctions, this drop resulted in South Africa's withdrawal of its last gold reserves from the International Monetary Fund in 1986, just as pressure from the sanctions intensified.16 Net capital movement out of the country between 1985 and 1988, the most intense years of divestment political pressure and sanctions, totaled over R23.9 billion, causing a dramatic decline in the international exchange rate of the South African rand and, consequently, a rise in the price of imports. Inflation was rising at a rate of 12-15% per year.17

Even measures like the 1973 Companies Act,18 which the South African government adopted in its eagerness to attract foreign investment, did not prevent the extensive flight of private capital that occurred as a result of anti-apartheid pressure.19 Foreign direct investment, at 34% of gross domestic product (GDP) in 1956, had dropped to 9% by 1990 (Figure 1.1), and the

Foreign Direct Investment in South Africa as a Percent of GDP

FIGURE 1.1 Foreign Direct Investment in South Africa as a Percent of GDP

Source: Fedderke, J.W., and Romm, A., 2006, Growth Impact and Determinants of Foreign Direct Investment into South Africa, 1956-2003, Economic Modelling, 23, 738-60.

depleted South African economy cast corporate accountability deficiencies into sharp relief.20 What remained were a few large companies—often, family corporations operating in a culture of cronyism and impunity.21 While the language of reconciliation spoken by politicians like Nelson Mandela lent the postapartheid state moral credence, the basic unreliability of the South African business environment and economy posed a critical challenge to the new government's legitimacy.22

King I

Based on the Companies Act of 1973, corporations were allowed to withhold information from their auditors on the basis of "national interest."23 Such opaque business standards, when combined with the political turmoil of the early 1990s, fostered an atmosphere of uncertainty for foreign investors. While Great Britain lifted the first economic sanction against South Africa in 1990, the last would remain until 1994. Meanwhile, the new government had difficulty attracting foreign capital, likely due to lack of experience,24 as repugnance to a fairly stable apartheid system was replaced with nervousness about the State's political and economic solvency. To mitigate some of this uncertainty, the Institute of Directors in Southern Africa (IoDSA)25 resolved to reinterpret business practices to prepare the South African economy for exposure to international markets by establishing the King Committee in 1992. Named after Mervyn King, a former corporate lawyer and Supreme Court judge selected as its chair, the King Committee sought to develop corporate governance standards that adequately reflected the values of postapartheid South Africa.26

Published in 1994, the first King Code of Corporate Governance Principles (King I) went beyond the reigning standard of corporate governance, the U.K.'s Cadbury Report,27 to advocate total transparency. Key topics included who should be on a company's board, the role of nonexecutive directors, and the categories of people who should fill this role—none of which had ever been addressed in South African business history. "King I" also advocated for disclosure of executive and nonexecutive directors' remuneration, set guidelines for effective auditing, and encouraged companies to implement a Code of Ethics to demand "the highest standards of behavior."28 King I did not, however, call for sustainability reporting.

Mervyn King explained this approach to corporate governance as a way to understand a company's worth in a more comprehensive manner, saying, "The board should take account of the needs, interests, and expectations of the stakeholders . . . their duty being the best interests of the company for the total maximization of the total economic value of the company, not just book value."29 South Africa began to address the "shareholder vs. stakeholder" polemic debated so vigorously around the world today. In his quote, King makes clear that the duty of the board is to the company, not to its investors or any particular stakeholder group. While this is true in many parts of the world, there is a common perception, especially in the United States—and in spite of the law's lack of affirmation on this point—that directors are responsible for putting shareholder interests first.30

Although the report advocated a principles-based approach,31 the JSE made elements of the King Code a listing requirement in 1995 on a "comply or explain" basis.32

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