Good Governance
Caryn Myers is the Managing Partner at Myers Attorneys. She completed her BA Honours in Political Science at the University of Natal, and an LLB through UNISA. Caryn specializes in commercial law, with a broad range of services within the Commercial, Compliance and Empowerment law space.
She thrives on providing innovative, tailor-made solutions, based on best practice, with a full understanding of the continuously evolving regulatory and business environment she operates in.
For all businesses in South Africa, before investing in any business transaction, whether it is valued at R10,000.00 or R50 million, the credibility of the transaction is always investigated. Ascertaining such credibility could be in the form of the supplier application process or direct due diligence questions. Therefore, whether you are the investor or the investee, it is vital that your organisation aligns itself with ‘Good Corporate Governance’ and has the evidence on-hand to prove that your organisation is in fact a ‘Good Corporate Citizen’.
Running a business has become increasingly complex and challenging for appointed Directors of organisations. Today they have to manage stakeholder relations, deal with the persistent presence of social media and the effects thereof, as well as the escalating dependence on third-party software for the storing, processing and distributing of information. This is, in addition to the day-to-day running of a business in line with good governance expectations. Questions often posed to Directors; “Is your corporate governance in place?” or “Did you act within your fiduciary duty?” Such questions extend beyond the King Code to the expectations of the Amended Codes, both of which obligate organisations to be ‘Good Corporate Citizens’.
What are the different categories Directors fall into?
A Shareholder who owns or holds shares in an organisation has a hand in running a business through meetings with Boards of Directors, where they are briefed on how an organisation is performing. This is, generally outside their daily function. A Director, on the other hand, is typically a member of the Board of an organisation, which manages the day-to-day running of a business.
Section 66 of the Companies Act of 2008 (The Act), states that the business and all affairs of an organisation must be managed by, or be under the direction of, a Board of Directors, whereby they have the authority to exercise all powers and perform functions in the best interests of the organisation. Broadly speaking there are three types of Directors with specific mandates, namely:
> Executive Directors are involved in the day-to-day running of an organisation;
Non-Executive Directors are board members who do not have any day-to-day management role in the business, but may be shareholders. Generally, they attend
board meetings and are paid Director’s fees for their service as a Director on the board; and
> Non-Executive Independent Directors have limited or no financial interest or any other interests that could influence the organisation.
How does The Act prescribe the role of a Director?
Listed below are some sections of The Act that empower Directors to run an organisation largely without interference from outside parties, such as shareholders:
> Section 66(1): To exercise unfettered powers: The Board of Directors has the authority to exercise all of the powers and perform any of the functions in an organisation, except to the extent that The Act or the Memorandum of
Incorporation (MOI) drafted provides otherwise.
> Section 15: To make additional rules except to the extent where an MOI provides otherwise.
> Section 46: To authorise distributions, provided all requirements of The Act have been complied with.
> Section 48: To acquire company or subsidiary shares in terms of The Act.
What are the risks associated with being a Director?
Along with the rights of being a Director comes responsibilities and accountability. The Act sets out circumstances in which a Director can be held personally liable for losses incurred. According to legislation, Directors must run an organisation in line with the standards and obligations set out in The Act, which are wide in terms of transparency, corporate governance and accountability.
What constitutes a Fiduciary Duty?
This is defined as a legal obligation by one party, in this case a Director, to act in the best interests of another, the organisation they represent. It outlines how an obligated party, in this case a Director, is entrusted to take responsibility for finances and/or property. Fiduciary Duties expected from a Director include, however are not limited to:
> Acting in good faith in the best interests of the business;
> Exercising independent judgement in decision making;
> Refraining from using an organisation’s intellectual capital, or any other such opportunity, for personal gain.
> Keeping company and accounting records as set out in The Act; and
> Filing annual returns, as well as provide and maintain proper financial records.
What amounts to Good Corporate Governance?
A Director must have intimate working knowledge of the King Governance principles that are vital to securing good corporate governance. Alongside these principles are compliance and legislative requirements, on which a Director should be fully versed, which include:
> The Companies Act;
> The South African Income Tax Act;
> The Labour Relations Act;
> The Basic Conditions of Employment Act;
> The Employment Equity Act;
> The Occupational Health and Safety Act;
> The Promotion of Access to Information Act;
> The Protection of Personal Information Act (POPI);
> The Consumer Protection Act;
> The National Credit Act; and
> The Broad-Based Black Economic Empowerment Act.
Director liability is a genuine risk for any Director that is appointed to a board, or any such person within the definition. When accepting a board appointment, a person should be fully aware of the risks associated with their position and fully understand the responsibilities and accountability thereof.
The fall of retail holding group Steinhoff late last year serves as a prime example of the impact neglected good governance has. Following the financial scandal in an effort to ascertain how it happened and the accountability thereof, more than 320,000 documents were studied and 4.4 million records gathered.
Although the CEO, Marcus Jooste resigned and took accountability upon the scandal breaking in December 2017, the culpability the Board of Directors and Auditors has been brought into question with no defined outcome to-date. So confident was Jooste that Steinhoff was untouchable, that a week before the scandal broke, he was attempting to persuade investment banks to support a property deal that would have yielded a cash injection of R60 million.
As investigations continue, one thing is evident, Jooste was allowed to act with impunity, secure that he was beyond reproach by having systems in place to ensure that Steinhoff flew under the radar of the Good Governance requirements that guide South African businesses.
It is hard to grasp that a serving board of any organisation can claim that it had no insight into the financial affairs of the organisation. It is, unacceptable that a listed organisation sought Jooste’s judgement only. In effect, the Steinhoff Board was redundant. This lack of insight from the board not only breached Regulations, but lost billions to the economy and investors alike.
Historically, the South African justice system has been soft on white-collar crime. However, due to the magnitude of misconduct and breach of fiduciary duty of the board, the law must run its course.
Christo Wiese, former Chairperson of Steinhoff has appeared on many rich lists over the years. He is an accomplished businessman who was quoted as saying he always based his business on trust. The lesson here is, although trust is a valuable business commodity, the only way to learn if you can trust somebody is to trust them. Therefore, adding Good Governance into the mix as a form of trust collateral would identify red flags.
