Costs of Corporate Governance Failures: Evidence from South Africa

Abstract

Corporate governance (CG) failures, exemplified by noncompliance with laws, regulations and best practices, have pecuniary costs. Using agency theory, the study aimed to quantify costs of governance failures in South Africa’s FTSE/JSE Top40 listed companies and establish ultimate cost bearer. This differentiates this study from extant literature and makes both methodological and practice contributions by using Value at Risk procedures. Except for Steinhoff, which lost 85% of its value in six weeks, event study method was used to select the other eleven Top40 listed companies included in the study. Data on identified CG failures, published on the Stock Exchange News Service and announced by Regulatory Authorities between 2008 and 2016, was used. At 99.99% confidence level, up to 73.33% of revenue and 62 cents per R1 of market capitalisation were eroded because of governance failures. Due to ascertained losses, the study concluded that CG failures have pecuniary socio-economic costs incurred by principals and government through social expenditure. Theoretical implications suggest agency theory’s extension as agency costs underestimate potential costs by excluding socio-economic costs. The study recommended the use of behavioural theories for insights into agents’ behaviours leading to governance failures and losses. It also recommended that policymakers should strengthen the role of gatekeeping professions to curb the magnitude of ascertained costs.

The Nexus between Executive Compensation and Firm Performance: Does Governance and Inequality Matter?

“…In the USA, Walgreen's executive earned 582 times more than a median employee in 2014 while Discovery Comm's had a ratio of 1 951 (Enderle, 2018). In South Africa, between 2008 and 2016, an executive earned 6 490 times more than an average worker in the industry (Muzata, 2018). These multiples assert that income inequality significantly contribute to national and societal inequality (Enderle, 2018).…”

“…The salary Gini (s-Gini) was calculated using an adaptation from Muzata (2018). Another study that modified the traditional Gini equation is that of Morais et al (2013).…”

“…The difference is relative to the mean Equation 2: Formulation to measure s-Gini adopted from Muzata (2018).…”

“…The two datasets meant two population groups, that is, executives and the least paid in each industry. The modifications to Equation 1 needed the salary differential (      ) and determination of the mean (μ) to provide comparable results with salary multiples considered (Muzata, 2018).…”

“…In calculating the G-index, we aligned our index construction with Muzata (2018) who had 20 equally weighted CG provisions drawn from King III and King IV Codes. The CG provisions were converted to an index by assigning a value of 1 where an entity complied with King III and King IV provisions.…”