Directors’ duties and liability
Tuesday, 12 December 2017
Directors’ duties are largely misunderstood. Recent media coverage of Steinhoff, EOH and Multichoice bring these directly under the spotlight.
Parmi Natesan, Executive: Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA) says that in South Africa, directors’ duties as set out in our common law and in the Companies Act include the fiduciary duty to act in good faith and for a proper purpose in the best interests of the company and also acting with due care, skill and diligence.
Directors could be subject to criminal sanctions like fines, jail time, and even disqualification from serving as a director in future, if they have failed to perform their duties.
However, these duties and related potential liabilities should not prevent directors from taking the necessary bold decisions that are often required to drive growth and success. 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 result in loss.
What is commonly known as the Business Judgment Rule essentially outlines how directors can defend their decisions if they are able to demonstrate that they satisfied the obligations of acting in the best interests of the company and with the required care of skill, in that they; took reasonably diligent steps to be informed about the matter and access the correct information, had a rational basis to believe that their decision was in the best interests of the company at the time, and that they had no personal financial interest in the matter.
In order to be better informed, non-executive directors, who are not involved in the day to day business of the organisation particularly in large and complex organisations such as those referred to earlier, rely heavily on assurances from management, internal audit, and external audit as well as board committees such as the Audit Committee. They must, however, take reasonable steps to ensure the information is accurate and that they understand it prior to making any decisions.
Apart from the law, the governance code in South Africa, King IV, sets out the expected governance best practice. In relation to the allegations at the companies in question , King IV contains specific principles and practices around ethical conduct, good corporate citizenship, compliance with laws, rules, codes and standards, fraud, corruption as well as risk and tax governance. It further outlines oversight and monitoring of implementation and execution by management as one of the four primary governance roles and responsibilities of the board within the dynamic business cycle of the organisation
“Good governance does not exist apart from the law and a corporate governance code that applies on a voluntary basis may also trigger legal consequences,” says Richard Foster, IoDSA facilitator. “A court considers all relevant circumstances in determining the appropriate standard of conduct for those charged with governance duties, including what the generally accepted practices are. Given that the provisions of voluntary codes of governance find their way into jurisprudence and become part of the common law, failure to meet an established corporate governance practice, albeit not legislated may also invoke liability,” says Foster.
Natesan says that King IV is a useful reference point for governance best practice, if it is applied as intended – i.e. meaningful application in a value adding manner to achieve certain outcomes. “An organisation can tick all the boxes, have all the structures, processes, and documents in place, but that does not mean they have good governance.”
In King IV, good governance is defined as ethical and effective leadership that achieves the governance outcomes of ethical leadership, good performance, effective control and legitimacy. In a recent BizNews article, Nic Frangos is quoted as saying, “If you have a CEO with no integrity, King Ten wouldn’t suffice. On the other hand, for someone with the integrity of an Adrian Gore (CEO of Discovery), even King One isn’t required.”
A few of the directors serving on the boards of these companies are members of the IoDSA. However, the institute is a voluntary body that has no statutory power to appoint, remove or take punitive action against directors, says IoDSA CEO Angela Cherrington. This responsibility lies with regulators, the courts and other statutory bodies like the CIPC. “The IoDSA can nevertheless revoke membership from individuals if they are found to be in contravention of our member code of conduct. The same applies to those who carry the IoDSA’s Chartered Director SA or Certified Director professional designations. There are currently no Chartered Director SAs on the boards of Steinhoff, EOH and Multichoice.”