Authored By: Bafundi Masina
Eduvos
Abstract
Corporate governance ensures that companies are managed ethically, transparently, and in the best interests of stakeholders. South Africa has witnessed some of the most corporate collapses in recent decades, notably Steinhoff International, Tongaat Hulett, and Eskom which resulted in severe financial, regulatory, and reputational consequences. These cases expose systemic weaknesses in board oversight, ethical leadership, and internal controls. This article examines the legal framework governing corporate governance, including the Companies Act 71 of 2008 and the King IV Report on Corporate Governance, analyses judicial interpretation and regulatory outcomes, and evaluates the practical challenges in implementing governance standards. The study concludes with recommendations for improving oversight, audit quality, regulatory enforcement, and corporate ethical culture to prevent future corporate failures in South Africa.
1. Introduction
Corporate governance refers to the system of rules, practices, and processes through which companies are directed and controlled. Corporate governance has become one of the most critical pillars of modern corporate activity, particularly in jurisdictions such as South Africa where the companies that are listed play a major role in economic development, employment, and financial stability. Effective governance promotes accountability, ethical leadership, transparency, and sustainable performance. Conversely, failures of governance have devastating end results that range from collapsed share prices and loss of investors to job cuts, national economic instability, and significant commercial liability.
In recent years, South Africa has witnessed some of the most damaging corporate scandals of the era. Recent scandals include the Steinhoff International collapse in 2017, which involved fraudulent accounting practices, Tongaat Hulett in 2019 admitting to overvaluing land and misreporting profits, and Eskom, the state-owned power utility filled with corruption, contract breach and state capture . Each of these entities has suffered governance breakdowns which were rooted in misrepresentation, fraud, inadequate board oversight, weak internal controls, and unethical leadership. These failures would unfortunately not simply affect corporate performance; they triggered billions of rand in losses, class-action litigation, regulatory intervention, contractual breaches, and widespread national and economic harm.
This article is set to examine the failures of corporate governance in these three institutions, focusing on the lessons they give for South Africa’s position on governance. It analyses the role of directors, the influence of the Companies Act 71 of 2008, the expectations set out in the King IV Report on Corporate Governance, and the commercial liabilities that follow when due to the collapse of governance.
Thesis statement: This article argues that corporate failures in South Africa are largely due to governance weaknesses, ethical lapses, lack of integrity and ineffective oversight. Through analysis of key case studies, statutory provisions, and regulatory frameworks, this article identifies the gaps in current practice and offers recommendations to strengthen corporate governance.
2. Research Methodology
This study employs a doctrinal and analytical approach, reviewing legislation, case law, regulatory reports, company filings, and scholarly literature. Primary sources include the Companies Act 71 of 2008, King IV Report, and judicial decisions. Secondary sources include forensic investigation reports, annual company reports, audit quality reviews, and academic commentary. The analysis focuses on identifying legal, ethical, and structural factors contributing to governance failures and evaluating the effectiveness of existing frameworks.
Understanding Corporate Governance in the South African Context
3.1 Legal Framework
3.1.1 The Companies Act 71 of 2008
The Companies Act codifies central governance duties, including the duty of care, skill and diligence and the fiduciary duty of directors. Section 76 of the Act requires directors to act:
- in good faith,
- for a proper purpose,
- with appropriate care and skill,
- in the best interests of the company.
The Act also introduces remedies such as the derivative action where directors fail in their duty, personal liability of directors under s77, and shareholders’ capacity to seek relief for misleading financial information. Directors may be held liable for breaches
3.1.2 King IV Report
The King IV Report on Corporate Governance emphasises ethical leadership, accountability, risk management, stakeholder inclusivity, and transparency. South Africa follows the globally respected governance framework, the King IV Report, which emphasises:
- Ethical and effective leadership
- Sustainable value creation
- Stakeholder inclusivity
- Transparent reporting
- Audit independence
- Adequate risk management
King IV is based on an “apply and explain” basis, which would require companies to show the implementation of governance practices by creating a culture of integrity, rather than simply stating compliance, which is important to prevent corporate scandals.
Judicial Interpretation and Case Studies
4. Steinhoff International
Background:
Once hailed as an international retail giant, Steinhoff collapsed in 2017 after the revealing of their widespread accounting fraud amounting to billions of rand. This scandal wiped out approximately R200 billion in shareholder value, making it one of the biggest corporate collapses in South African history.
Governance Failures:
Misrepresentation of Financial Statements
The company deliberately overstated profits and assets through fake transactions and concealed liabilities. This violated:
- directors’ fiduciary duties,
- the requirement for truthful financial reporting under the Companies Act,
- principles of transparency and accountability in King IV.
- Weak Board Oversight
The board relied excessively on executive leadership, particularly the now former and late CEO Markus Jooste, without adequate independent scrutiny. Audit committees failed to interrogate and report suspicious financial reporting trends.
2. Audit and Risk Failures
External auditors did not detect the manipulation early enough, raising many questions about audit independence and effectiveness, a recurring theme in South African corporate scandals Commercial Liability and Legal Consequences:
Steinhoff faced:
- shareholder class actions for misleading financial statements,
- regulatory investigations in South Africa and Europe,
- contractual claims from creditors based on breach of loan covenants,
- delictual claims for pure economic loss due to negligent misstatements.
Judicial commentary: Courts and tribunals made it clear of the the importance of directors’ duties under the Companies Act, highlighting the consequences of failure to ensure accurate financial reporting
Tongaat Hulett
Background:
In 2019, Tongaat Hulett, a major sugar and property company, admitted to overstating its assets and profits by inflating the value of its land sales and misrepresenting financial performance over several years. The board decided to suspend top executives, and the share price dropped dramatically, causing massive losses in share prices, investor litigation and business rescue proceedings.
Governance Failures:
- Financial Manipulation
Executives overstated revenue by recognising future land sale revenue prematurely. This compromised the integrity of financial reporting and violated s29 of the Companies Act, which requires financial statements to fairly present the company’s affairs.
2. Lack of Ethical Leadership
King IV emphasises ethical and effective leadership, yet Tongaat’s executives prioritised short-term performance over integrity, undermining long-term sustainability.
3. Audit Committee Weaknesses
Despite the red flags, the audit committee failed to exercise adequate scepticism. The company’s internal controls were bypassed or ignored, revealing deep structural weaknesses.
Commercial and Legal Consequences:
Tongaat faced:
- Regulatory intervention by the JSE.
- Lenders renegotiated or withdrew facilities, triggering liquidity crises.
- Shareholders instituted claims based on misrepresentation.
- The company was forced into business rescue, affecting thousands of employees and supply chain stakeholders.
The scandal highlighted how governance failures create commercial instability and jeopardise stakeholders far beyond the boardroom.
Eskom
Background:
Eskom’s failures in governance occurred over a longer period of time, marked by:
- corruption,
- state capture,
- procurement irregularities,
- poor risk management,
- leadership instability.
Unlike Steinhoff and Tongaat, Eskom’s failures also had national consequences, including load shedding and fiscal pressure.
Failures in Governance:
- Board Instability and Political Interference
Frequent board changes, appointments that are politically influenced, and lack of technical expertise undermined corporate continuity.
2. Procurement Irregularities
Eskom was at the centre of the state capture investigations which involved irregular coal contracts, inflated tenders, and preferential procurement. This violated:
- s217 of the Constitution (fair, equitable, transparent procurement),
- King IV’s risk governance principles,
- basic fiduciary duties of SOE directors.
Lack of Risk Governance
Eskom failed to anticipate or mitigate operational risks, resulting in maintenance backlogs and generation failures.
Commercial Consequences:
Eskom’s governance failures led to:
- ballooning debt exceeding R400 billion,
- breach of loan obligations,
- inability to meet contractual energy supply obligations,
- delictual claims based on negligence,’
- national economic losses.
The Eskom case demonstrates how failures in governance in SOEs can create a systemic commercial and economic damage for years.
Critical Analysis of the Governance Failures
Although Steinhoff, Tongaat, and Eskom operate in totally different sectors, their failures in governance share common themes:
Lack of Ethical Leadership:
All three cases involved top executives prioritising personal or political interests over ethical obligations, contradicting King IV’s principle of ethical leadership.
Weak Board Oversight:
The board of directors failed to:
- interrogate financial statements,
- challenge management decisions,
- maintain independence.
This shows the importance of a strong, active, and well-informed board of directors.
Failures in Financial and Non-Financial Reporting:
Misrepresentation, whether through fraudulent accounting or concealed procurement irregularities, played a central and major role in each of the three scandals.
Inadequate Risk Governance:
Corporate risks were either ignored or intentionally concealed, undermining long-term sustainability for short term success and stakeholder value.
Audit Failures:
Auditors in both Steinhoff and Tongaat did not detect red flags early enough, demonstrating weaknesses in external assurance mechanisms.
Recent Developments
Legal Amendments: Updates to the Companies Act and King IV aim to enhance accountability
Regulatory Oversight: Stricter disclosure and reporting standards have been introduced for listed companies
Public scrutiny: Media coverage and civil society oversight has increased pressure on board of directors to comply with the governance standards
Suggestions for South African Corporate Governance
Strengthening Board Independence and Expertise:
The different board of directors must include individuals with sector-specific expertise and the independence that is necessary to challenge top executives and management decisions.
Enhancing Regulatory Enforcement:
While South Africa has strong governance frameworks (King IV, Companies Act), the enforcement of such framework remains inconsistent. Regulators and enforcers must act swiftly against any misconduct.
Greater Transparency and Integrated Reporting:
Transparent and publicly published financials and ESG reporting improves accountability and public trust.
Strengthening Internal Controls and Audit Processes:
Companies must invest heavily in internal audit functions, whistleblowing systems, and independent risk assessment.
Ethical Leadership and Corporate Culture:
Strong and stable governance cannot exist without ethical leadership from the executives and management. Companies must cultivate cultures that promote integrity and accountability.
Conclusion
The failures of corporate governance at Steinhoff, Tongaat Hulett, and Eskom revealed a deep structural weakness in the South African corporate oversight. Despite a sophisticated governance framework, including the Companies Act 71 of 2008 and King IV, these scandals and cases demonstrate that governance is not merely a compliance exercise, it is a living system that depends on ethical leadership from top executives and management, strong oversight, transparency, reliability, and accountability.
The consequences of the failures in governance are far-reaching: massive financial losses, contractual breaches, delictual claims, regulatory penalties, increased unemployment, and national and economic instability. These scandals are to serve as a wake-up call. For South Africa to rebuild trust in its corporate sector, governance reforms must move beyond just guidelines and become part of a corporate culture.
If these guidelines are effectively reformed and implemented, the lessons from these cases can guide South African companies toward a more transparent, ethical, and sustainable future.
