Walking the director talk
Wednesday, 13 September 2017
By Parmi Natesan and Dr Prieur du Plessis
Directors need to have a clear idea of what their duties are in order to fulfil their role – and avoid liability.
The key to performing well as a director, and also to being able to avoid liability, is to discharge one’s duties competently. This is particularly important, as the law is now clearly holding directors to account for non-performance of their duties.
In South Africa, directors’ duties are primarily contained in the common law. Some of these have been codified into the Companies Act and are also covered in the King Reports and Codes, of which the latest is King IV.
The core duties of a director include his or her having a fiduciary duty (duty of trust) to perform his or her functions in good faith, for proper purpose and in the best interest of the company, with a duty of care, skill and diligence.
Good faith is a concept we all instinctively understand, but often find it hard to define. In law, it refers to the general presumption that the parties to a contract will deal with each other fairly and honestly, with sincere motive and no malice.
For directors, good faith and proper purpose complement the concept of putting the company’s interests first. This would mean that directors cannot favour their own personal or other interests, or those of persons related to them, over the interests of the company.
In practical terms, this means declaring one’s personal interests to the rest of the board, annually and in specific instances, and then recusing oneself when the actual matter is discussed and/or decisions about it are taken.
Acting in good faith, for proper purpose and in the best interests of the company is a fundamental concept for directors, but more than good intentions are required. Due care, skill and diligence require a director to exercise powers and perform functions with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions and having the general knowledge, skill and experience of that director.
When it comes to care and diligence, a key point is that directors cannot just blindly rely on board packs or other sources of information; they must take reasonable steps to ensure the information is accurate and they understand it. The Centro case in Australia made it clear that while board members do not necessarily have to be experts (in accounting, in this case), they do have to make sure they understand fully what is presented to them and challenge/interrogate this information.
Skill is a related consideration. Directors’ responsibilities and the standards they are expected to attain are constantly evolving. It is for this reason that the Institute of Directors (IoDSA) is strongly behind the move to professionalise directorship, and why it has launched the Chartered Director (SA) and Certified Director designations, with associated continuous professional development programmes. Directors need to have the right level and quality of skills, and in order to keep those skills current a formal programme is required.
These duties and related potential liabilities should not prevent directors from taking the necessary bold decisions that are often required to drive growth and increase profits. Business is ultimately all about taking risk in order to gain reward. Equally, it is accepted that directors can take decisions that turn out to be wrong or at least result in loss.
What is commonly known as the Business Judgment Rule essentially outlines how directors can defend their decisions. They need to be able to demonstrate that they took reasonable steps to become informed (i.e. access the necessary information), had a rational basis to believe their decision was in the best interests of the company at the time, and had no conflict of interest (or declared such conflict adequately). It is thus very important that directors ensure proper records are kept of the steps they took, what questions they asked, what discussions were had, and so on.
This is even more important when a director does not support a particular decision or course of action. The Companies Act makes it clear that abstaining from voting will not constitute a defence, so if a director does not agree with a decision, he or she must vote against it and make sure this is minuted. Dissenting directors should also take, and record, other actions to change the minds of fellow directors, including private meetings with the chair if deemed necessary.
With the increased activism and call for accountability in South Africa of late, directors are strongly advised to understand the basic principles that determine their duties, and conscientiously fulfil them.
Parmi Natesan and Dr Prieur du Plessis are Executive Director: Centre for Corporate Governance and Chairman of the Institute of Directors (IoDSA) respectively.
Better Directors. Better Boards. Better Business.