The socio-economic milieu
According to a World Bank Report, South Africa is the most unequal country globally.Footnote 1 Studies indicate that colonialism and apartheid created and exacerbated inequality in the distribution of opportunities, resources and wealth among different racial groups.Footnote 2 To date, black South Africans continue to be underrepresented in the middle class, and race remains one of the strongest predictors of poverty.Footnote 3 As a result, South African policymakers have acknowledged that the Government needs to swiftly eliminate the twin challenges of poverty and inequality by 2030 through the National Development Plan.Footnote 4 Inequality has become more apparent since 1994, when South Africa became a democratic state. Specifically, the evidence shows that the top 10 per cent of the population, predominantly white, hold 71 per cent of the wealth, while the bottom 60 per cent, predominantly black, hold only 7 per cent.Footnote 5
To address this anomaly, the South African Government introduced policies such as broad-based black economic empowerment (BBBEE) to accelerate economic transformation and enhance the participation of the black majority in the economy. The Broad-Based Black Economic Empowerment Act 53 of 2003 (the BBBEE Act)Footnote 6 requires certain companies to engage with the socio-economic and political realities of the country, involving them in the reform process and reconciliation.Footnote 7 The overarching objective of the BBBEE Act is to increase black ownership through either individuals or black-owned entities. Key aspects of black ownership include the voting rights of shareholders, the exercisable voting rights of black board members as a percentage of all board members, economic interests through initiatives such as employee share schemes and net value realization. A loophole in the BBBEE Act is that it only applies to all organs of state, public entities and any entities doing business with the State. Therefore, many listed and private companies that do not conduct business with the State can easily sidestep the BBBEE requirements.
Reports indicate that only 35 per cent of the 400 listed companies disclose their compliance with the BBBEE Act. A legitimate question is whether corporations are appropriate vehicles to advance the broader stakeholder interests of the black population, including employees, the environment and the local community, particularly within the context of an emerging economy. In other words, can companies maintain profitability and global competitiveness while striving for social transformation? The answer to this question largely depends on one’s view of the socio-economic role of the corporation. According to Korten’s exposé titled When Corporations Rule the World, modern corporations wield excessive power and dominate every aspect of society.Footnote 8 Corporations effectively rule the world by controlling the media, shaping narratives, manipulating politics, corrupting democracy and determining society’s economic agenda and direction. In light of this context, we believe it is appropriate for corporations to shoulder some responsibility for transforming society, which, in various ways, they have divided and continue to divide economically and otherwise.
This article subscribes to the “progressive corporate law” school of thought, sometimes called a “socio-economic model of corporate law”. This school of thought primarily argues for more comprehensive and mandatory approaches to corporate law to serve the public interest.Footnote 9 According to Testy, progressive corporate law seeks to promote the equitable distribution of wealth in society rather than the increased concentration of wealth in the hands of the few. Progressive corporate law notes and laments the widening gap between the rich and the poor and recognizes corporate power as a significant tool capable of reversing the problem of systemic inequality in society. Progressive corporate law aims to reduce all types of discrimination, such as those based on race, gender and religion. It also seeks to enhance social democracy and promote environmental justice.Footnote 10
To achieve these aims, we submit that the theoretical foundations and corporate law approaches adopted by South African company law should address the following question: In whose interests must a company operating in an equal society be run? Before the current Companies Act 71 of 2008 (the Act) came into force, both the old Companies Act 46 of 1926Footnote 11 and the old Companies Act of 1973Footnote 12 were predominantly focused on the shareholders.Footnote 13 As will be demonstrated later, the position under the current Companies Act is said to be the “enlightened shareholder value” (ESV) model. The questions that fall for investigation are: What informed the adoption of the ESV model in South Africa? Has the ESV model translated into what we term “transformative corporate law”, which we view as an iteration of the “progressive corporate law” explained above? As we will explain later, transformative corporate law centres corporate law and the governance of companies within the economic transformation agenda of the post-apartheid state, grappling with poverty, inequality and economic exclusion, which are just a few of the many ills confronting the State.
This article is structured as follows: after this introduction, we examine the nature and role of corporate law during apartheid and how the context of corporate law then successfully excluded black South Africans and exacerbated inequality in South Africa. This is followed by a critical assessment of whether post-apartheid corporate law policy rationale and regulations adequately foster inclusivity and whether they attempt to address the inequality brought about by apartheid. The article then argues for reconsidering corporate law approaches to address extreme inequality in South Africa. This can be realized by incorporating Ubuntu, transformative constitutionalism and distributive justice, thus creating a workable stakeholder-inclusive model through equitable subordination of stakeholder interests. This reconsideration will result in what we call transformative corporate law in an unequal society.
Apartheid-era corporate law
South African apartheid-era corporate law was based on a strong sense of justice. It incorporated the values of impartiality and natural justice, similar to its colonial sources, Roman-Dutch law and English law.Footnote 14 However, these values were residual. Citizens enjoyed them insofar as an act of parliament did not deny them, since the country operated a system of parliamentary supremacy.Footnote 15 In the case of the black majority, the benefits of company law, such as the right to incorporate a business for economic participation, were negated by segregation laws like the Group Areas Act 40 of 1950. For example, section 5 of the Groups Areas Act prohibited disqualified persons or companies (that is, black South Africans and companies owned by black South Africans) from acquiring immovable property or conducting business in a group area, essentially in towns and business hubs of the time. The black South African majority was restricted to operating largely insignificant businesses in the townships and so-called “homelands”. While the apartheid-era corporate law was theoretically inclusive for all citizens, it was negated by other laws that operated concurrently with it. Consequently, the black majority never truly participated in the mainstream economy before the 1994 democratic transition.
The shareholder primacy model that prevailed during the apartheid era and its related laws favoured the white community because these laws made whites the sole beneficiaries of business ownership in the economic hubs where it mattered most. This structural and systemic differentiation further widened the gap between the white and black communities, exacerbating inequality.Footnote 16
Post-apartheid corporate law
Unlike in the apartheid era, democratic South Africa follows a system of constitutional supremacy, which means that any law or conduct inconsistent with the Constitution is invalid to the extent of the inconsistency.Footnote 17 Chapter 2 of the Constitution of the Republic of South Africa, 1996 (the Constitution) also upholds the democratic values of human dignity, equality, freedom and the relationship among economic citizens; hence, it may have significant implications for company law.Footnote 18 According to Sibanda, the post-apartheid era embraced the concept of transformative constitutionalism, which seeks to have all South African laws aligned with the Constitution, promoting human rights and pursuing substantive justice.Footnote 19 Since the Companies Act of 1973 did not conform to the Constitution because it predated the constitutional era, the Companies Act had to be enacted in alignment with the Constitution. Against this backdrop, company law reform was inevitable.Footnote 20
The Companies Act 71 of 2008, as amended
The Act was drafted to mitigate the social, political and economic woes of the apartheid era. It adopted a model that balances the need to promote economic growth through investment with the necessity of addressing South African ills, specifically inequality.Footnote 21 A closer look at the Companies Act, as amended in 2024, reveals a deliberate effort to reimagine the company law of the 21st century, informed by the South African reality and context.
Section 76: directors’ duties
Section 76 of the Act partially codifies directors’ duties. Duties not covered by the section, such as the duty to avoid conflict of interest and the duty not to make secret profits, are governed by the common law. Section 76(3)(b) specifically requires directors to perform their functions in the best interests of the company. Esser and Delport assert that the wording of section 76(3)(b) prima facie retained the shareholder primacy model, except that the definition and scope of the functions of a company have since evolved.Footnote 22 Several provisions reflect the ethos of stakeholder inclusivity in the Act. These include sections 20(4), 157(1), 165(2) and 218(2). Chapter 6 of the Act resembles stakeholder interests. In Maroos and Others v GCC Engineering Pty Ltd and Others,Footnote 23 the court interpreted section 128(1)(b)(iii) of the Act. It held that the secondary goal of business rescue is to ensure higher returns for shareholders and creditors.Footnote 24 The Act and the Companies Regulations of 2011 also protect creditors in amalgamation or merger transactions through notice and the solvency and liquidity test.Footnote 25 These sections suggest that the Act appears inclined towards considering broader stakeholder interests.Footnote 26
Another view is that the Act largely embraces a shareholder-centric approach, which is evident in the directors’ duties towards the company and the definition of a profit company as a vehicle for profit generation for shareholders.Footnote 27 The tension in the Act suggests a corporate law model that is between the ESV and the shareholder primacy model. We shall demonstrate next that certain sections of the Act focus more on stakeholders. Consequently, they merit deeper examination to bolster our argument that the Act straddles shareholder primacy with a stakeholder-inclusive objective, with the former remaining dominant. We aim to assess whether the current formulation of the ESV model is sufficient to position companies as effective vehicles for social and economic transformation in South Africa.
Section 7: the purpose of the Act
Section 1 of the Act defines a profit company as a “company incorporated for financial gain for its shareholders”.Footnote 28 At face value, the definition of a profit company is purely shareholder-centric. However, section 5 of the Act provides that “the Act must be interpreted and applied in a manner that gives effect to the purposes set out in section 7”. Section 7(a) mandates that the application of the Companies Act must align with the Bill of Rights, which includes rights such as non-discrimination, equality and human dignity. It is worth noting that this position makes the 2008 Act different from the Companies Act of 1973.Footnote 29 Section 7(d) also requires directors to manage companies to achieve economic and social benefits. Esser and Delport submit that the approach under section 7(d) of the Companies Act can be considered a stakeholder model.Footnote 30 However, the entirety of section 7 is couched in vague terms such as “to promote” and “to encourage”, suggesting that it does not create a new enforceable duty on directors. Therefore, section 7(d) should be understood to mean that directors must consider stakeholders’ interests; however, this does not create enforceable stakeholders’ rights. In other words, there is no enforceable duty placed on directors to ensure that a company delivers social benefits.
Section 72(4): the social and ethics committee
Section 72(4)(a) of the Act, read together with regulations 43(1) and (5) and 26(2) of the Companies Regulations, 2011, authorizes the minister of trade, industry and competition to prescribe that certain companies must have a social and ethics committee (SEC) to ensure that companies become good corporate citizens.Footnote 31 As Esser and Delport assert, matters of good corporate citizenship are related to, among other things, the promotion of equality, the prevention of unfair discrimination and the reduction of corruption.Footnote 32 To eradicate inequality, the SEC is also tasked with promoting broad-based black economic empowerment.Footnote 33 However, section 72 failed to expressly include stakeholder representatives, such as employees, in the SEC to actively engage with key stakeholders to ensure the adequate protection and promotion of their interests.
Although the Companies Amendment Act 16 of 2024 (the Amendment Act) changes the composition and role of the SEC, it does not go far enough regarding promoting and protecting stakeholder interests. Section 72(7A) provides that the committee must comprise at least three members. For public or state-owned companies, the majority of the members must be non-executive directors. In contrast, for companies that are not public or state-owned, the SEC members must include no fewer than three directors or prescribed officers, with at least one being a non-executive director. This indicates that in the case of the latter companies, it is possible to have a majority of executive directors. The changes in the composition of committee members for public and state-owned companies are ostensibly intended to enhance transparency in the committee’s work.
As previously noted, the role of the SEC is extensive. It involves overseeing the company’s practices regarding employment equity, BBBEE, corporate citizenship, promotion of equality, prevention of unfair discrimination, community development and environmental matters. To enhance diversity and ensure the committee fulfils its mandate, it is submitted that section 72(A) should have altered the composition of the SEC and increased its size to include directors representative of labour, communities and other crucial stakeholders, as well as directors with expertise in corporate social responsibility (CSR), particularly in environmental and social governance. It is submitted that a lack of diversity could undermine efforts to address inequality and use companies as vehicles for achieving economic and social benefits, which are stated objectives in section 7 of the Act.Footnote 34
Section 30(A) and (B): remuneration disclosure
The history of income inequality and discrimination in South Africa’s labour market is a chequered one. It has been noted that, from 1911, racially discriminatory laws excluded black workers from skilled jobs, forcing them into low-paid, unskilled roles and entrenching wage inequality.Footnote 35 Despite no longer being legally sanctioned, income inequality persists in post-apartheid South Africa. A study by Statistics South Africa shows that income distribution reflects apparent racial disparities in the labour market. Black South Africans, making up the majority, face the highest unemployment rates and receive the lowest wages among employed individuals. Conversely, white employees earn substantially more than any other group.Footnote 36
In several ways, excessive executive remuneration adversely impacts societies, particularly those with considerable inequality, such as South Africa. Firstly, it widens the income gap, reinforcing existing systemic disparities. Wealth becomes concentrated among the few, exacerbating the overall wealth gap within society. Reports indicate that the ratio between executive remuneration and employees’ wages in South Africa is exceedingly disproportionate, with top executives earning between 150 and 949 times the average employee’s remuneration.Footnote 37 Furthermore, excessive executive remuneration has dire social ramifications. It fosters social and labour unrest, a phenomenon that characterizes the South African labour market. It also fuels perceptions of economic injustice, which are seen as typical of what is referred to as “white monopoly capital” in South Africa, thereby destabilising an already unequal society. Secondly, excessive executive remuneration diverts resources that could be invested in initiatives such as CSR, employee share schemes and financial assistance to acquire company shares by previously disadvantaged citizens. Ultimately, the effect of excessive executive remuneration is that the social contract and corporate legitimacy are diminished, especially when contrasted with widespread poverty and unemployment in South Africa.Footnote 38
Sections 30(A) and (B) of the Companies Amendment Act of 2024 were inserted to address the adverse effect of executive remuneration. It provides that a remuneration policy must be prepared and approved by ordinary resolution at the Annual General Meeting (AGM). An annual remuneration report must also be prepared and presented at the AGM. The report must contain a background statement and an implementation report, accompanied by an approved remuneration policy. This section is groundbreaking yet contentious in some quarters.Footnote 39 Its introduction was inspired by global developments and informed by the objective reality of extreme inequality in South Africa. Excessive executive remuneration has been correctly viewed as a direct and unintended consequence of maximizing shareholder wealth, with the board and executive management pursuing every legal avenue to generate substantial profits for the company, thereby increasing shareholders’ wealth in exchange for, sometimes, regrettably, excessive remuneration. The change in the law will hopefully contribute towards transparency, accountability, fairness and social equity in South Africa.
Beneficial ownership
The Financial Action Task Force, a global watchdog addressing money laundering and terrorist financing, agitated for a beneficial ownership disclosure regime that was introduced by the General Laws Amendment Act of 2022.Footnote 40 Under the regime, a beneficial owner is an individual or natural person who, directly or indirectly, ultimately owns 5 per cent or more of a company or exercises effective control over it.Footnote 41
While introduced to combat money laundering and the financing of terrorism, a significant benefit of disclosing beneficial ownership is that a clear picture of the structure and patterns of ownership of the South African economy will emerge. It will be apparent that black South Africans remain underrepresented in the ownership of companies, particularly large companies. Consequently, the necessity for a more transformative corporate law, in which the beneficial owners of companies reflect the demographics of the country and where companies serve as vehicles for social transformation, will become increasingly essential and must be actively pursued.
The drafters of the Companies Act and its amendments aimed to accommodate various stakeholder interests. However, the shareholder primacy model stands as the dominant and enforceable approach.Footnote 42 We argue that extreme inequality renders the shareholder primacy model unsuitable in South Africa. While this approach may attract much-needed investment, it is potentially antithetical to the Act’s objectives, which include promoting economic and social benefits.Footnote 43 We further assert that failing to balance the objectives of the Companies Act is undesirable, as South Africa’s need for investment must be fulfilled in a manner that does not exacerbate existing divisions but instead bridges the socio-economic gap.
The King Reports of corporate governance
The King Reports are also an essential source for defining the role of companies in South Africa.Footnote 44 In Minister of Water Affairs and Forestry v Stilfontein Gold Mining, the court held that the King Reports had been widely accepted as elucidating the standard of directors’ duties in South Africa, and it applied the principles to test the directors’ conduct.Footnote 45 Indeed, the King regime acknowledges the indirect benefits that may accrue to companies should they consider social factors in their operations, given that most of South Africa’s citizens “remain on the fringes of society’s economic benefits”. The regime also recognizes that exclusion and inequality contradict the traditional African values of co-existence, cooperation, communitarianism and consensus. King V expressly states that stakeholder inclusivity is one of its foundational tenets. Stakeholder inclusivity, as provided for in King V, requires directors to consider the legitimate and reasonable interests of stakeholders in executing their duties in the best interests of the company. Therefore, King V promotes the principles of the interdependent relationship between the organization and its stakeholders by ensuring that stakeholder interests are balanced through prioritizing or trading off these interests on a case-by-case basis.Footnote 46 We contend that the failure to incorporate some of the ethos of King IV concerning stakeholder interests in the recent amendments to the Companies Act signifies a missed opportunity to transition corporate law from a shareholder-centric focus to one that is more stakeholder-friendly. However, King IV was repealed, paving the way for the adoption of King V. King V is effective since 1 January 2026 and we argue that King V prescribes a more nuanced and reinforced stakeholder approach than previous King regimes.Footnote 47
Evaluation of corporate law models from an unequal society perspective
This part of the article considers the general corporate law approaches and norms that attract and retain capital and investment in most jurisdictions.Footnote 48 We evaluate the shareholder primacy, ESV and stakeholder models and consider their relevance, application and effects in an unequal society like South Africa.
Societal implications of shareholder wealth maximization
The shareholder wealth maximization model operates on the premise that shareholders, as the investors and incorporators of the company, are its owners. Thus, prioritizing their interest in wealth maximization should be the primary objective of directors.Footnote 49 The theory is rooted in the agency or trust principle, which asserts that shareholders are principals and directors are agents in a company.Footnote 50 Accordingly, when directors pursue wealth maximization for the exclusive benefit of shareholders, it is assumed that they become responsible agents who fulfil their duties to their principals.Footnote 51
The model has faced spirited criticism for neglecting one of corporate law’s fundamental principles: the doctrine of separate corporate personality. An excessive focus on shareholder wealth maximization often erodes a company’s autonomy by effectively turning the corporation into a vehicle whose sole objective is wealth maximization, even at the company’s expense. This blurs the distinction between the company and its shareholders, contradicting the Salomon principle. It also undermines the idea that the company possesses a distinct identity with obligations independent of shareholders’ interests.Footnote 52 Further, the shareholder primacy model incorrectly assumes that shareholders have identical wealth maximization interests in a company. In practice, evidence shows that shareholders can have substantially diverse interests, especially in public companies where ownership is dispersed.Footnote 53
Focusing primarily on shareholder wealth often overlooks the interests of other stakeholders, including employees, communities and the environment. This profit-driven approach can worsen income and wealth inequality in various ways, particularly in unequal societies like South Africa. First, directors may prioritize cost-cutting through wage suppression, retrenchments or labour outsourcing to maximize shareholder returns.Footnote 54 The issue of labour outsourcing has been prevalent in both the private and public sectors in South Africa, leading to campaigns that compelled employers to insource outsourced services in a 2015 campaign called “#OutsourcingMustFall”. Second, other stakeholders, particularly employees, are disadvantaged vis-à-vis executive managers whose remuneration is often disproportionately excessive as a reward for maximizing shareholder wealth.Footnote 55 Although recent legal amendments aim to tackle this issue, it is too early to determine if they will change the prevailing practices.Footnote 56 Thirdly, in a bid to minimize costs and increase shareholder wealth, companies externalize social and environmental costs, a phenomenon prevalent in South Africa’s mining sector.Footnote 57
It is clear from the foregoing that shareholder wealth maximization reinforces structural disparities and prioritizes financial gains over societal transformation in the context of inequality. This results in injustice and, to some extent, manifests as instability, evident in community protests, labour strikes and widespread disdain for the so-called “white monopoly capital”.
Societal implications of stakeholder inclusivity
The stakeholder inclusivity model recognizes the interests of broader stakeholder groups (pluralism) in a company and treats shareholders as one constituency among many.Footnote 58 This approach assumes that the existence and success of a company are intertwined with the respect that it accords to stakeholders as a whole, for example, creditors, employees, society and the environment, among others.Footnote 59 In determining the company’s success, directors must balance all the competing interests of the stakeholders.Footnote 60 The stakeholder model is operational in India through section 166(2) of the Indian Companies Act of 2013.Footnote 61 It is considered a “radical experiment with corporate purpose” primarily because of its strong focus on stakeholders. According to section 166(2), directors have a fiduciary duty to both shareholders and stakeholders, thereby treating them as equals. This pluralistic approach does not prioritize one group over the other. However, it has been observed that this aspirational focus on stakeholders remains largely theoretical. Review committees for Indian corporate law and subsequent amendments have revealed that the corporate purpose outlined in the Indian Companies Act is predominantly geared towards safeguarding shareholder interests. Consequently, stakeholder interests often go unaddressed in practice.Footnote 62
The stakeholder model potentially promotes the long-term success of the company. For example, it is assumed that if a company fosters good relationships with stakeholders, including employees, suppliers and creditors, it has the potential to build the trust needed to advance the company’s interests, including shareholders’ interests.Footnote 63 However, focusing on shareholders only can result in short-term benefits.Footnote 64 The stakeholder model is also commended for largely accommodating the values of CSR.Footnote 65 In modern company law, corporate objectives are shifting from purely shareholder wealth maximization to accommodating various stakeholder interests.
However, some criticisms are directed at the stakeholder model, notably that it appears incompatible with the primary objective of entrepreneurship: maximizing profits for shareholders.Footnote 66 Furthermore, the stakeholder model is criticized for supposedly lacking legitimacy because it does not delineate whose interests must be balanced,Footnote 67 which may inadvertently result in directors not being accountable to any stakeholder group.Footnote 68 The stakeholder model fails to allocate clear stakeholder rights and remedies that directors must consider in decision-making.Footnote 69 In the Indian context, it has been argued that “the magnanimity of … [section 166(2) of the Indian Companies Act] verbiage and rhetoric in favour of stakeholders merely pays lip service to them and obscures any real teeth or legal ammunition available to non-shareholder constituencies to assert those rights as a matter of law”.Footnote 70
The key takeaway is that the stakeholder model is somewhat rhetorical, as it leaves stakeholders with unenforceable rights. Aside from shareholders, employees and creditors, the other categories of stakeholders, such as the community and the environment, are vague, making it difficult to regard them as injured parties to assert rights. In the absence of a specific and clearly delineated class, it is improbable that a duty, the breach of which attracts damages, can exist toward the general public.Footnote 71 Therefore, an unequal society would not, in reality, benefit much from a pure stakeholder model.
Societal implications of the enlightened shareholder value model
The ESV model requires directors to consider stakeholders’ interests in furthering the long-term interests of shareholder wealth.Footnote 72 Essentially, the stakeholder model posits that the interests of non-shareholder stakeholders do not hold independent value in the directors’ decision-making process, as they would under the pluralist approach.Footnote 73 The stakeholder model is hierarchical. In situations where various interests conflict, directors are required to prioritize the interests of shareholders, which are paramount.Footnote 74 The language of section 172 of the UK Companies Act 2006 mandates that directors “promote the success of the company for the benefit of its members as a whole”. However, in fulfilling this obligation, they must “have regard to” the interests of other stakeholders. In other words, the company’s ultimate goal is to advance shareholder interests, while consideration of stakeholders’ interests serves merely as a means to an end. For this reason, the stakeholder model is viewed as a shareholder primacy model in disguise, as its ultimate aim is to promote shareholder interests. In contrast, non-shareholding stakeholders’ rights remain unenforceable in their own right.Footnote 75 ESV is also viewed as no more than shareholder wealth maximization in a new “responsible” guise or simply “tokenism”.Footnote 76 Conversely, some argue that ESV leans more towards a pluralistic approach.Footnote 77
To reiterate a point made earlier, the Companies Act, as amended, has made significant inroads towards advancing stakeholder interests in the South African context. However, the lack of clarity, certainty and enforceability of some foundational objectives, such as the notion of companies as agents of socio-economic transformation, creates confusion. Even with the generous interpretation of the Act as embracing ESV, the socio-economic reality, evidenced by irrefutable statistics of the worst inequality in the world, demonstrates that the form of ESV adopted in South Africa is ineffective in empowering all stakeholders and reversing the existing inequality.
Reimagining ESV for an unequal society
In this part, we reimagine an iteration of the ESV model that can meaningfully contribute to reducing inequality and position companies as agents of socio-economic transformation, aligning with the objectives of the Act. This reimagination envisions the deliberate incorporation of the normative values of transformative constitutionalism, Ubuntu and distributive justice into the Act, thereby aligning corporate conduct with the broader constitutional mandate.
Transformative constitutionalism and corporate decision-making
Transformative constitutionalism is a continuous process of interpreting and applying the Constitution to restructure a society’s political, social and economic reality in pursuit of democracy and equality. With South Africa’s unique socio-political context, it seeks to address the effects of historical injustice and inequality.Footnote 78 It offers an essential framework for guiding corporate law reform, ensuring that company law and companies actively support the constitutional vision of a more inclusive, just and equitable society.
Section 39(1) of the Constitution states that when a court, tribunal or forum interprets the Constitution, it must be guided by the democratic principles of human dignity, equality and freedom. Sections 7(a) and 158 of the Act align with this constitutional provision by requiring the promotion of compliance with the Bill of Rights in applying company law.Footnote 79 Based on this, we assert that the Act must fully embrace and infuse the transformative constitutional agenda. We further argue that a company law regime that does not contribute to the emancipation of previously oppressed groups and the creation of an egalitarian society suffers a serious legitimacy crisis.Footnote 80 Inasmuch as the objectives set under section 7 of the Act have some semblance of transformative constitutionalism, we argue that, considering the history and deep-rooted inequality, the said statutory objectives must feature more prominently in the Act, and courts must consciously infuse them in their interpretation of the Act.
Ubuntu-centred corporate decision-making
Ubuntu is an ancient African worldview according to which a person is a person because of other people. In other words, a person exists and thrives because of other people.Footnote 81 It is based on intense humanness, caring, sharing, respect, compassion and the associated values that ensure a happy and high-quality community life in the spirit of family.Footnote 82 Ubuntu is further associated with values such as simunye (we are united / one), reciprocity and hlonipa (respect).Footnote 83 Ubuntu demands a distributive justice system to ensure that the most vulnerable have access to certain primary goods and are afforded social opportunities for a fulfilling life.Footnote 84 In corporate law, infusing Ubuntu into decision-making will likely lead to stakeholder relations based on equity and fairness.Footnote 85 Further, Ubuntu provides guidelines for promoting fair dealing, which is essential, especially in aligning South African company law with constitutional values.
Some criticisms of Ubuntu include the concept not being specific enough. It has also been argued that Ubuntu represents a collectivist orientation, groupthink, uncompromising majoritarianism or extreme sacrifice for society, which is viewed as incompatible with the value of individual freedom.Footnote 86 Despite these criticisms, the concept of Ubuntu remains a critical constitutional value that the judiciary has embraced, although it is not expressly included in the text of the Constitution. The Constitutional Court in S v Makwanyane upheld Ubuntu as a critical value underpinning the fabric of South African society. It held that “it envelops the key values of group solidarity, compassion, respect, human dignity, conformity to basic norms and collective unity, in its fundamental sense it denotes humanity and morality”.Footnote 87 The court further held that the concept emphasizes community and the interdependence of the members of a community.Footnote 88
Ubuntu is also considered to be a vital tool in ensuring the recovery of South Africa from the horrors of apartheid and colonialism.Footnote 89 The fact that the Constitution is informed by the ethos of Ubuntu and the acceptance by the Companies Act that its purposes must be aligned with the Constitution shows that the policymakers acknowledge the influence of Ubuntu in corporate law.Footnote 90 We argue that the influence of Ubuntu in corporate law, particularly regarding directors’ duties, must be considered to ensure that company law serves as an essential tool for addressing inequality. We further argue that incorporating Ubuntu in company law is not misplaced because constitutional supremacy requires the Act to be aligned with the Constitution and constitutional values. Therefore, corporate decisions must be Ubuntu-centred, meaning that a company must consider its existence as possible because of other stakeholders in the broader society. In other words, a company as a legal person exists, operates and thrives because of other people. For that reason, profits must not be prioritized at the expense of society. Decisions made by directors in the best interests of the company should be guided by the principles of humanity, accountability, transparency and collaboration, which characterize the South African society.
Advancing distributive justice through corporations
Distributive justice concerns the equal or fair distribution of resources, public goods, benefits or burdens throughout society. Therefore, it is based on equality, proportionality and fairness.Footnote 91 Notably, distributive justice is concerned with the outcome of distribution rather than the process. Meyersfeld correctly observes that the Bill of Rights, through sections 8(2) and 25 of the Constitution, requires some nuance to achieve a balanced and careful approach to distributive justice to address inequality in South Africa.Footnote 92 When considering that the Act must be aligned with the Constitution, the purposes of the Act cannot escape the influence of the ethos of distributive justice in its application and implementation.Footnote 93
Villiers argues that company law provides a legal basis for formulating a distributive justice approach.Footnote 94 The author states that corporate actors might fulfil their social responsibilities through distributive justice, enabling stakeholders to distribute value according to contributions to the benefits and their adoption of risk.Footnote 95 Company law could adopt various ways to strengthen the implementation of distributive justice, including ensuring that corporate governance is not solely focused on making a profit for shareholders but is influenced by CSR values.
We argue that incorporating the distributive justice ethos is not foreign to South African commercial law. For instance, South African competition law effectively incorporates the policy rationale of distributive justice in the public interest proviso of section 12A(3) of the Competition Act.Footnote 96 The Competition Act regulates anti-competitive conduct that puts employment at risk, compromises small businesses and harms businesses owned by previously disadvantaged individuals. The Competition Act also strives to protect and promote national industries in the international market, thus putting public interest first and ensuring that corporations do not impede economic transformation.Footnote 97
Equitable subordination of stakeholder interests
At this point, we conceptualize a corporate law approach that judiciously balances the policy rationale of promoting investment and ensuring the protection of various stakeholders’ interests on a case-by-case basis. In doing so, we draw insights from the concept of subordination in insolvency law.Footnote 98 Subordination has popularly been applied to shareholder loans vis-à-vis creditors’ loans, where the assumption is that shareholders must accept that their claims be ranked below those of the creditors, should the company, for any reason, become insolvent before repayment.Footnote 99 Since insolvency has dire repercussions for the competing interests of company stakeholders, including shareholders and creditors, the principle of subordination is instrumental in balancing such interests.
Similarly, since corporate decisions could negatively affect company stakeholders, including shareholders, directors, creditors, employees and the community, subordination can effectively be used as a standard or yardstick for balancing the interests of these stakeholders in the decision-making.Footnote 100 For example, the subordination of all shareholder loans ensures that the shareholders adequately participate in their company’s entrepreneurial risks.Footnote 101 Since shareholders enjoy insider status, subordinating their loans could be pivotal to avoid undermining the basic principle of par condictio creditorum [equal treatment of creditors].Footnote 102 For instance, shareholders can either request a repayment of their loans in full or withdraw their loans when they know that the company might be plunged into insolvency, to the detriment of third-party creditors.Footnote 103 Accordingly, this justifies the concept of subordination that imposes certain restrictions on shareholder loans. Simply put, subordination permits shareholders’ interests to be demoted to a position below the supposed lower-rank creditors, but the subordinated claim does not reduce in value.Footnote 104 Confirming this legal position, the Supreme Court of Appeal in Cape Produce Co (PE) (Pty) Ltd v Dal Maso NO and Another Footnote 105 held that subordination could hold subordinated claims in abeyance.
Equitable subordination is a principle primarily rooted in USA bankruptcy law.Footnote 106 Subordination is voluntary and not explicitly codified in South African insolvency law. Its fundamental principles of fairness and transparency are compatible with Ubuntu, distributive justice and transformation. A more viable option that can balance the interests of all stakeholders is mandatory equitable subordination by the company’s directors. Equitable subordination allows for claims of certain creditors to be subordinated in instances of misconduct or inequitable behaviour. The doctrine ensures that creditors cannot exploit their position to the detriment of other stakeholders in insolvency proceedings. We submit that the principle can be adapted so that it is not fault-based and is applied by directors on a case-by-case basis. The process of subordination should place the best interests of the company at the centre while ensuring equity (not equality) among stakeholders.
To mitigate the effects of inequality in corporate decision-making, we submit that the scope and definition of the “best interests of the company” must be reformed and tailored to suit the South African context to accommodate other stakeholder interests. Accordingly, careful consideration is required to incorporate stakeholder interests to promote inclusivity through case-specific subordination.Footnote 107
We suggest that the Act, for example, in the context of fundamental transactions, must promote amalgamations or mergers and also ensure the protection of stakeholder interests through a flexible standard of ranking the pertinent stakeholder interests through the concept of equitable subordination in a case-specific manner and not based on some rigid procedure. In the case of fundamental transactions, stakeholder inclusivity through equitable subordination means that, as a general rule, in the absence of significant adverse effects from a proposed transaction on the stakeholders, the profit maximization goal of the shareholders should be upheld. Conversely, except where the proposed amalgamation or merger negatively affects the other stakeholders, stakeholder inclusivity should be triggered through the principle of equitable subordination. The suggested approach would work as a yardstick to be applied by directors in decision-making, especially in the case of corporate decisions that have the effect of capital reduction and corporate expansion, mainly because these effects have a contentious impact on stakeholders.Footnote 108
Proposed Companies Act Amendments to entrench progressive ESV
We propose three ways to infuse the progressive ESV model. First, in deciding what is in the best interest of the company, directors must have a duty to consider relevant non-shareholder interests, third-party effects and shareholder interests. We consider the view of Robert Austin J, who asserted that “(t)here is a world of difference between legislating to require directors to act in the interests of shareholders having regard to the interests of other stakeholders and legislating to require directors to act in the interests of shareholders and also in the interests of other stakeholders”.Footnote 109 In this context, the South African Companies Act, like the UK Companies Act, must compel directors to consider the interests of designated shareholders meaningfully and genuinely have regard for stakeholder interests in corporate governance decision-making.Footnote 110 An express statutory provision must be inserted into the South African Companies Act to entrench the proposed progressive ESV. In particular, the provision must require directors to act in the best interests of the company by equitable subordination of stakeholder interests informed by the following considerations:Footnote 111
(i) Immediate, medium and long-term consequences of the proposed decision or transaction for the company, its business and its stakeholders;
(ii) The company’s ability to continue as a going concern and to preserve its financial soundness, viability and sustainability;
(iii) Necessity of providing shareholders with a fair and reasonable return on their investment;
(iv) Equitable recognition and treatment of all stakeholder interests, in accordance with their relationship to the company’s success, including the requirement that all stakeholders be treated fairly;
(v) Maintenance and fostering of essential business, credit and employment relationships;
(vi) Compliance with all applicable corporate laws, regulations and codes as a necessary condition for sound corporate governance;
(vii) Integration of stakeholder-sensitive considerations into the company’s ordinary decision-making frameworks, processes and procedures, such as risk management, strategic planning and corporate reporting, particularly in respect of large or publicly listed entities;
(viii) Preservation and enhancement of the company’s reputation for quality, ethical conduct, customer satisfaction, fair pricing and other socially responsible values;
(ix) Mitigation or avoidance of foreseeable adverse impacts of the company’s activities and decisions on local communities, the environment and society at large;
(x) Appropriateness of corporate contributions to societal governance and prosperity, including socio-economic development and environmental protection; and
(xi) Accommodation of the principles and ethos of transformative constitutionalism, Ubuntu and distributive justice in all corporate governance and decision-making.
Section 166(2) of the Indian Companies Act 2013 enshrines a pure stakeholder model, compelling directors to act in good faith to advance the company’s objectives for the benefit of its members as a whole and in the best interests of the company, its employees, shareholders and the wider community. However, this approach gives rise to several practical difficulties. First, directors may be confronted with conflicts between shareholder and stakeholder claims, complicating the prioritization of competing interests. Second, divergent stakeholder constituencies may themselves hold conflicting demands. Third, the interests of shareholders tend to be more tangible and readily quantifiable than those of other stakeholders. Finally, the legal framework, both statutory and judicial, has yet to mature sufficiently to provide effective remedies when directors fail to discharge their duty to consider stakeholder interests.Footnote 112 These difficulties are insurmountable, making the pure stakeholder model unworkable. For this reason, we propose infusing the following proposals into South African company law to bolster the proposed progressive ESV further:Footnote 113
(i) The board must develop, adopt and periodically review a stakeholder-relationship policy, identifying stakeholder engagement as a core corporate policy;
(ii) The board must establish reporting obligations to ensure transparency in the recognition and consideration of stakeholder interests;
(iii) The board, in prescribed circumstances, may require stakeholders to undergo due diligence to verify their interests and claims;
(iv) The board, or an independent committee thereof, shall convene meetings with key stakeholders or their authorized representatives as necessary;
(v) Stakeholder-management matters must be integrated into board deliberations with shareholders, including at annual general meetings; and
(vi) The board must consider the appointment of stakeholder representatives as directors or as non-executive participants in board proceedings.
We further recommend judicial recognition of a broadened director duty, drawing on Delaware’s jurisprudence. Although Delaware corporate law contains no express corporate-constituency statute, its courts have long authorized directors to consider non-shareholder interests in the context of takeovers and other fundamental corporate changes. In Unocal Corp v Mesa Petroleum Co, the Delaware court held that a board may adopt defensive measures against a takeover bid so long as those measures are both reasonable and proportionate to protect the corporation and, by extension, its creditors, customers, employees and the community at large, from foreseeable harm.Footnote 114 This ruling departs from strict shareholder primacy by requiring directors to calibrate profit-sacrificing actions against the rational benefits to investors, the proximity of those actions to the corporation’s business and any long-term, indirect advantages for the market system.Footnote 115 Both proportionality and rationality are subject to objective judicial review.Footnote 116
Delaware reinforced this principle in Paramount Communications v Time Inc, affirming that boards may weigh the impact on constituencies other than shareholders in evaluating a takeover threat.Footnote 117 To safeguard directors who embrace our proposed “progressive ESV” model, South African law should similarly extend the protection of the business-judgment rule to directors’ decisions that duly consider defined non-shareholder interests. Such judicial endorsement would cement the legitimacy of a centre-left corporate governance paradigm that aligns with transformative constitutionalism, Ubuntu and distributive justice while providing clear guidance and certainty to directors.
Concluding remarks
In the South African context, the above discussion illustrates that the current corporate law approaches are inadequate for addressing inequality. While the shareholder model has its merits, considering the history and persistence of inequality in South Africa, it may exacerbate these inequalities. The UK, a largely capitalist-oriented nation with relatively low levels of inequality, has shifted from a purely shareholder-centric model to an ESV model. This shift supports our view that South Africa, the most unequal society, must reconsider the current model. The Indian Companies Act of 2013 has fully embraced the stakeholder model. However, in South Africa, we have hesitated to advocate for a pure stakeholder model due to its impracticality. Instead, we propose reimagining the existing model, suggesting that the values of transformative constitutionalism, Ubuntu and distributive justice should shape it. By incorporating these constitutional values, the current model could evolve from being perceived as a diluted form of the shareholder-centric model to one that is more inclusive of stakeholders. To borrow from political terminology, we view shareholder-centricity as “the right”, the stakeholder model as “the left” and the stakeholder model as “the centre”. Thus, the “progressive ESV model” proposed in this article could be seen as “the centre-left”.
For this proposed model to be practical, directors must be guided by the principle of equitable subordination of stakeholder interests (derived from insolvency law) in their decision-making. We have proposed a move towards what we view as the progressive ESV by amending the Act to insert a provision protecting non-shareholder interests similar to, but also different from, section 172 of the UK Companies Act. The proposed provision should incorporate a distinct and progressive set of factors that directors must consider when equitably balancing and, where appropriate, subordinating stakeholder interests. These factors differ from the more restrained approach adopted in the UK ESV, reflecting South Africa’s unique constitutional and socio-economic context. Furthermore, we call for the courts to endorse and develop jurisprudence supportive of this reimagined progressive ESV model, ensuring that company law meaningfully advances the constitutional imperative of socio-economic transformation.
Competing interests
None
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