STATUTORY, COMMON LAW AND OTHER DUTIES …

1 1 statutory , COMMON LAW AND OTHER DUTIES OF DIRECTORS Paper for CIS Corporate Governance Conference on 10 to 11 September 2009 By Walter Geach BA LLB (Cape Town) M Com CA (SA) Professor, Graduate School of Business, University of KwaZulu-Natal Contents Abstract .. 2 Meaning of the word director .. 3 Board composition, independence and directors DUTIES .. 5 DUTIES of directors: where are they found? .. 6 King 3 and the DUTIES of directors vs. DUTIES of managers .. 6 DUTIES of directors: 2008 Companies Act .. 8 DUTIES of directors: section 66 .. 9 DUTIES of directors: section 76 of the 2008 Companies Act.

2 9 The fiduciary duty .. 10 The duty to act with care, skill and diligence (section 76 (3)) .. 12 A statutory defence in terms of the 2008 Companies Act .. 13 Section 214: duty to ensure that financial statements are not misleading .. 14 Directors DUTIES : liquidity and solvency .. 14 Directors DUTIES : indemnification and directors insurance .. 15 Directors DUTIES and the use of committees .. 16 Corporate governance and directors DUTIES : conclusion .. 17 2 ABSTRACT This paper examines the composition of boards, the independence of directors and the DUTIES of directors in depth. The term director has a wider meaning than most people think and challenges the reader to think about who should be a director; what the fiduciary relationship really involves; and what the true meaning of independence is.

3 It goes on to consider the codification of the DUTIES of directors and challenges some of the provisions of the King III code. Key words A system, direction and control and leadership, independence, accountability, stakeholders 3 Meaning of the word director A director is a member of the board of a company, as contemplated in section 66 or an alternate director and includes any person occupying the position of a director or alternate director, by whatever name designated .1 Section 66 recognises different types of King 2 also recognized the existence of 'shadow directors'.

4 These are people who are not officially appointed as directors, they do not complete the consent to act form nor comply with OTHER formalities on appointment, nor do their particulars appear in the register of directors and officers. Despite this, these people may be able to give instructions to the Board, and on whose instructions the Board does indeed act. King 2 discouraged the existence of shadow directors. The 2008 Companies Act recognises the following types of director: Type of director Characteristics (a) An ex officio director3 An ex officio director is a person who holds office as a director of a company solely as a result of that personholding another office or title or status4 Ex officio directors are not appointed by the shareholders An ex officio director of a company has all the powersand functions of any OTHER director, except to the extent that the company s MOI restricts such powers and functions Such director has all of the DUTIES and is subject to theliabilities of any OTHER director (b)

5 A MOI appointeddirector5 Such director does not have to be appointed by the shareholders The MOI can specify how and/or by whom such adirector is appointed (c) An alternate director6 The definition of director 7 specifically includes an 1 Section 1 definition in the Companies Act 71 0f 2008 (hereinafter referred to as the 2008 Companies Act) 2 The word director specifically includes an alternate director of the company. For the types of director recognised by section 66 see discussion below 3 Section 1 and section 66 (4) (a) (ii) 4 See Practical Issue in this paragraph for further explanation 5 Section 66 (4) (a) (i) 4 alternate director of the company An alternate director may be appointed or electeddepending on contents of the MOI An alternate director 8 is defined as a person elected or appointed to serve, as occasion requires, as a memberof the board of a company in substitution for aparticular elected or appointed director of thatcompany.

6 Section 66 (4) (a) (iii) provides that a MOIcan provide for the appointment or election of one or more persons as alternate directors In the case of a profit company at least 50% ofalternate directors must be elected by shareholders (d) An elected director9 In the case of a profit company at least 50% ofdirectors must be elected by shareholders (e) A temporary directorwho is appointed inorder to fill a vacancy10 A MOI can provide for the appointment of a temporary director Unless the MOI provides otherwise, the directors mayappoint a temporary director In Howard v Herrigel 1991 (2) SA 660 (A) the Court held that it is unhelpful and even misleading to classify company directors as 'executive' or 'non-executive' for purposes of ascertaining their DUTIES to the company or when any specific or affirmative action is required of them.

7 No such distinction is to be found in any statute. At COMMON law, once a person accepts an appointment as a director, that person becomes a fiduciary in relation to the company and is obliged to display the utmost good faith towards the company and in his dealings on its behalf. For the purposes of section 76 (section 76 provides for Standards of directors conduct )11 the 2008 Companies Act also includes as a director all of the following: Directors Alternate directors 6 Section 1 and section 66 (4) (a) (iii) 7 See section 1 definition of director 8 Section 1 definition of alternate director 9 Section 66 (4) (b) and section 68 10 Section 68 (3) 11 Section 76 is discussed later 5 A prescribed officer Members of board committees (even if they are not Board members)

8 Members of the audit committee (who all have to be Board members) Therefore, in discussing the DUTIES of directors it must be noted that the word directors must, for the purposes of determining standards of conduct, be applied in a wider sense than is first obvious. Board composition, independence and directors DUTIES As to Board composition, King 3 has a recommendation that there should ideally be a majority of non-executive independent directors (Para. 67) because this reduces the possibility of conflicts of interest. However very little guidance is given as to what is meant by independence.

9 King 3 states (Para. 68) that a lack of available and sufficiently experienced directors should not be a reason for boards not to seek to constitute the majority of the non-executive directors as independent. I personally find this comment quite alarming. Is it suggesting that it is permissible to appoint a buffoon to the Board, and this can be justified because such a person is independent? Take, for example, the Australian bottom-of-the-harbour schemes. Such directors were truly independent, but they hardly added value.

10 In practice the issue of independence may lead to the appointment of directors who are so far removed from the business that they simply do not know what is going on, and this could have unfortunate consequences for the well-being or sustainability of a company. Some commentators take the view that if a director has been a director of a board for a lengthy period of time, length of service in itself can impair that director s independence. I respectfully disagree with that assertion, and would like to suggest that in practice, the continued appointment of a director who is experienced in the matter of a company s business is far more useful and will have far greater positive impact on a company s sustainability than a newcomer who is appointed solely because he or she is independent and new.