Corporate Governance within the South African Banking Sector, with a greater emphasis on the 'Big Four' (ABSA, FNB, Nedbank and Standard Bank)

Abstract

As a developing country, South Africa has an elaborate banking industry and therefore a world-class payment system. In some areas, the industry is on a par with first world countries, if not better. The favourable economic and market conditions allow South Africa banks enjoy better margins than their better-placed peers throughout the developed world and this has made the sector the envy of their foreign counterparts. The four largest banks in South Africa, ABSA, First National Bank (FNB}, Nedbank and Standard Bank, hold 84% of the sector's assets and liabilities. The four banks further hold 80% of the industry's capitalisation. These statistics are a reflection of how dominant these banks are within the industry. The South African banking industry holds assets to the value of RI .627 billion and liabilities of R 1.5 billion. The combined capitalisation of the banking sector amounts to Rl22m. This high ratio of liabilities to capital (leverage) is a worldwide phenomenon within the sector. This is brought about by the fact that deposits held on behalf of clients are classified in the balance sheets of these institutions as liabilities. This great disparity between liabilities and capital results in a need for greater regulatory oversight and good corporate governance within the industry. The industry has in the recent past, however experienced several bankruptcies, which were blamed on corporate governance failures. Banks involved include ABSA(Unifer), Regal Treasury Bank, Nedbank and Saambou Bank. It is from countries and in companies where emphasis is placed on good corporate governance that the major part of investment funds will flow, in the fonn of foreign direct investments (FDI). Evidence of good governance is therefore particularly important in developing economies, which look to developed economies for much needed capital with which to stimulate domestic economic growth. There is also a growing weight of expectation on organisations to operate as good corporate citizens.

The publication of the King Report on Corporate Governance for South Africa 2002 ( the 'King Report 2002') and the Myburgh Report 2003 signifies the importance the South African authorities place on good corporate governance within the business environment. The Mybllrgh Report was a document purely focused on the South African banking sector, with the five major banking groups in South Africa being asked to seek an independent review of certain corporate governance aspects of their businesses. The purpose of the review was to measure the extent to which the South African banking industry complied with international standards and nonns of good corporate governance and best practice, and to ensure that the South African banking industry's credibility as a competitor in the global market was maintained. It sought to establish to what extent an adequate and effective process of corporate governance had been established and maintained, and to what extent the Board of Directors within each group monitors the process. The sector is again receiving international attention, with Barclays Bank wanting to increase its presence in South.Africa. This has been seen as a "vote of confidence" in the country, its economy and the financial sector. This cross-sectional study of four banks seeks to explore how effective the banking sector has been in implementing the principle of good corporate governance as espoused in the King Report 2002, the Banks Act 94 of 1999 (the Act) and the recommendations contained in the Myburgh Report. The research will further seek to determine what impact this has had on the individual banks and/or the industry. The researcher decided to limit this research to the four principal banks in South Africa because they hold such a dominant position in both the South African economic and financial spheres. Other banks are mere followers. The research develops an argument that accepting and implementing principles of good corporate governance coupled with living up to such principles impact positively on an organizations ability to increase shareholder value. This is reflected by increased profitability and/or an increase in share prices. The researcher adopted a positivistic methodology due to the limited time and resources at his disposal (Collis & Hussey,2003:61)

The notion of good corporate governance has been brought to the fore by recent high profile corporate scandals such as those involving Enron and Worldcom. The topic is currently widely and intensely debated in corporate boardrooms and the press. Academics have with continued research added their perspective on what good corporate governance entails and the benefits that can be derived from such governance by a business, its shareholders, the country in which it operates, and the economy. The literature review has been carried out on Corporate Governance, the South African banking / financial sector, the profiles of the four banks in question and globalisation. Globalisation is of particular interest to this research because South Africa has since 1994 become a global player and its financial sector must be foremost in enabling the country to transcend into a developed, first world country. ln total 16 face-to-face interviews were undertaken, with 24 questionnaires completed and assessed. Structured interviews were conducted with company secretaries and three directors of each bank in order to gain greater insight to the topic. One branch manager and one staff member at each bank were randomly selected to complete the questionnaire. No interviews were undertaken with the managers and staff. The branch managers and staff members were included in order to verify whether the corporate governance principles practised at board and executive management levels were in fact filtering down to operation levels within the organisations. The research shows that banks are well on their way in ensuring that the structures required (form) to ensure confonnance with the Code of Corporate Practice and Conduct incorporated in King II are in place. In the institutions researched, these are in one way or the other encoded in rules, regulation or policies .. The research also sets out to detennine whether the industry is not over-regulated and if so, which regulations are viewed as unnecessary, poor or damaging.

The benefits of this research are that it will provide an indication how far the banks have progressed in making good governance an integral part of their culture. In banks, corporate governance needs to be an intrinsic part of each organisation's culture and value system.