Directors: Walking the talk

“Directors need to understand and execute their legal duties effectively – and thus avoid potential liability.”

By Parmi Natesan and Dr Prieur du Plessis

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 courts are now increasingly holding directors to account for breach 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 IV Report on Corporate Governance.

Directors have a fiduciary duty (duty of trust) to perform their functions in good faith, for proper purpose and in the best interest of the organisation.

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 organisation’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 organisation which they are meant to serve.

In practical terms, this means declaring one’s interests to the rest of the board, annually and in specific instances; and then recusing oneself when the matter is discussed and/or decisions about it are taken.

Acting in good faith, for proper purpose and in the best interests of the organisation is a fundamental concept for directors, but more than good intentions are required. The additional duty of due care, skill and diligence requires 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.

Increasingly, the courts are regarding conduct that conforms to governance codes like King IV, as meeting the required standard of care for Directors. This is how King IV finds its way into the common law, despite it being a voluntary code.

When it comes to care and diligence, a key point to note 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.

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 organisation 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, as well as the basis for their decisions.

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		Dr Prieur du Plessis

Parmi Natesan and Dr Prieur du Plessis are respectively CEO and facilitator of the Institute of Directors (IoDSA); email: info@boardgovernance.co.za