This article demonstrates the role of the board of directors in light the King IV Report and the Companies Act 71 of 2008 (“the Act”). The act codifies the common law provisions relating to the role of the board of directors and makes a few essential changes, on the other hand the King IV which builds from King III provides a more structured approach on the responsibilities of boards of directors. Many sources exist in law that discuss the roles of boards of directors, but this paper discusses the provisions set out under section(s), 66, 73, 75 of the Companies Act, South African case law and the King IV report.
Directors act for a company. In terms of the definition in section 1 of the Act, a director is a member of the board of a company as contemplated in section 66 or is an alternate director. And as such the definition includes any person occupying the position of a director or alienate director, more as such, the definition of director therefore not only includes formally appointed directors, but also includes a de facto director
Section 66 of the Act provides that the business and affairs of a company must be managed by or under the direction of its board of directors. Such boards of directors have the authority to exercise all of the powers and perform all of the functions of the company, except to the extent that the Act or the company’s Memorandum of Incorporation (“the MOI”) provides otherwise. This section also recognises different types of directors and specifically provides that a person becomes a director only when that person has given his or her written consent to serve as a director after having been appointed or elected.
Prior to the Act, the role of company directors was governed by the South African common law. According to the common law, directors are required to act in the utmost good faith and in the best interests of their companies. Further, this includes the need to exercise care, skill and diligence to promote company success through independent judgment. The Act now codifies the common law position and makes a few notable additions. In essence, the Act extends the duties of directors and increases the accountability of directors to the shareholders of the company.
The “enlightened shareholder value approach” forms the basis of the Act. Accordingly, this approach obligates directors to promote the success of the company in the collective best interest of shareholders. This includes the company’s need to take account of the legitimate interests of stakeholders including inter alia the community, employees, clients and suppliers. The King Code has de facto become part of the duties and roles of directors in South Africa.
Considering the quorum and voting at a directors’ meeting, section 73(1) of the Act provides that a director who is authorised by the board may call a meeting at any time and that such person must call a meeting if required to do so by at least 25% of the directors in the case of a board that has at least 12 members or two directors in any other case. Furthermore, the Act provides further in section 73(5)(b) that a majority of the directors must be present at a meeting before a vote may be called at the meeting. However, the company’s MOI may set out a different quorum for meetings of the directors of the company. In a similar manner, section 73(5) of the Act provides that unless the company’s MOI provides otherwise, each director has one vote at any meeting of the board and board resolutions are passed by simple majority decisions.
Section 76(4) of the Act states that in respect of any matter arising in the exercise of the powers or the performance of the functions of a director, a director will have satisfied the obligations in section 76(3) of the Act, if the director:
- has taken reasonably diligent steps to become informed about the matter
- has made a decision, or supported the decision of a committee or the board with regard to that matter
- had a rational basis for believing, and did believe, that the decision was in the best interests of the company
Insofar as 'good practice' standards are concerned, the King IV Report which contains a Code on corporate governance (“King Code”), sets out principles and recommended practices that an organisation should apply in order to substantiate a claim that it is practising good governance, reflected in four outcomes: ethical culture, good performance, effective control and legitimacy. The court in Fisheries Development Corporation of SA Ltd v Jorgensen; Fisheries Development Corporation of SA Ltd v AWJ investments (Pty) Ltd, held that the extent of a director’s duty of skill and care largely depends on the nature of the company’s business, that the law does not require of a director to have a special business acumen and that directors may assume that officials will perform their duties honestly.
The traditional structure of a South African board is unitary, with no separation between executives and non-executives. The King Code contains various recommendations on board composition, including that the board comprise a majority of non-executives, most of whom should be independent. In PPWAWU National Provident fund v Chemical, Energy, Paper Printing, Wood and Allied Workers’ Union, the court made it comprehensible that directors must act independently despite the views or decision of those who appointed them. The court further stated that a director is ‘not the servant or agent’ of the shareholder who votes for or otherwise procures his appointment to the board of directors and in carrying out his duties and functions as a director. He is in law obliged to serve the interests of the company to the exclusion of the interests of any nominator, employer or principal.
King IV Report (King Code)- Risk Management
Directors are ultimately responsible for the company's overall approach to risk, as expressed in a board-approved risk policy. The King Code embraces the modern approach to risk governance, which requires directors to appreciate not only the downside of risk, but also the upside, as materialised in potential opportunities and rewards. In this regard, directors should approve both the company's risk appetite, and the limit of the potential loss the company can tolerate. Directors must ensure that systematic, formal risk assessments are performed annually to identify, quantify, evaluate and prioritise risk. The annual report should incorporate a risk management statement that includes details of key risks relevant to the company and the steps taken to mitigate these risks. Directors should allocate the oversight of risk governance to a dedicated committee, which should comprise executive and non-executive directors (with the latter forming the majority).
The Code further promotes proactive shareholder engagement through a number of its recommendations. Among other things, the King Code recommends that directors must encourage shareholders to attend the AGM, at which all directors should be available to respond to shareholders' queries. In line with the 'stakeholder inclusive' approach, it recommends the adoption of comprehensive policies on stakeholder relationship management, and that engagement take place through media platforms designed to facilitate access by a broad range of stakeholders, such as websites, advertising and press releases.
The role of directors is vital in the functioning of the company, and emphasis must always be put on their duty to act in the best interest of the company and that must be done independently. In carrying out their tasks, directors must act with outmost care, skill, and diligence so that the running of the company’s business is not compromised. The company cannot act on its own, therefore it requires that the board of directors be its ears and eyes.
Assistant: Legal and Business Development, Johannesburg