An extract from The Corporate Governance Review, 11th Edition
Corporate leadershipi Board structure and practices
The business and affairs of a company must be managed by or under the direction of the board, which has the authority to exercise all the powers and perform all the functions of the company, except to the extent that the Companies Act or the company's MOI provides otherwise.9 Although shareholders still retain ultimate authority in respect of specific reserved matters10 (including the right to reconstitute the board), the Companies Act vests the board with original statutory authority – without any delegation from shareholders – regarding the conduct of the company's business and affairs. This power may only be exercised collectively by way of majority vote; in the absence of a specific delegation from the board, individual directors do not have the power to bind the company.
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 should comprise a majority of non-executives, most of whom should be independent. The Listings Requirements provide that independence be determined holistically on a 'substance over form' basis, which takes into consideration various interests, positions and relationships listed in the Companies Act and the King Code that might reasonably call the integrity or objectivity of the director into question.
Typically, the board delegates the responsibilities of day-to-day operational management to an executive team, whose members are subject to board oversight and are appointed and dismissed at the behest of the board. The board may appoint any number of committees and may delegate to those committees any of its authority; however, the directors retain ultimate responsibility for the committees' decisions and actions.
The Companies Act requires public companies to constitute an audit committee.11 Public, state-owned and certain significant private companies (i.e., those that have attained a certain 'public interest score' derived from factors such as annual turnover, workforce size, and nature and extent of activities) are required to appoint a social and ethics (S&E) committee.12 Under the Listings Requirements, King-compliant audit, remuneration and S&E committees are mandatory. Risk and nomination committees are only encouraged, although JSE-listed companies constitute these committees in practice.
JSE-listed companies must appoint a chair (or a lead independent director, in the event that the chair is not an independent non-executive) to lead the board, as well as a chief executive officer (CEO) to lead management. As independence is considered essential to the proper fulfilment of the chair's role, the Listings Requirements insist that these positions be held by separate individuals. However, in certain limited instances, a dispensation may be granted by the JSE allowing an executive chair to be appointed temporarily.
Non-executive directors have no automatic right to remuneration. Rather, the Companies Act provides that a company may pay its directors for their service in such capacity only in accordance with a special resolution approved by the shareholders within the previous two years. As such, the Companies Act places the decision of whether to remunerate individual directors squarely in shareholders' hands, with a view to curtailing excessive compensation and encouraging good corporate governance.ii DirectorsAppointment, nomination, removal and term of office
In the case of a profit company other than a state-owned company, at least 50 per cent of the directors (and deputy directors) must be elected by shareholders. For the remainder, the MOI may include a right in favour of a person named in, or determined in terms of, the MOI to appoint a director; certain persons who hold office are also recognised as ex officio directors.
Under the Companies Act, directors are appointed for an indefinite term, unless the MOI provides otherwise. However, owing to the growing awareness surrounding the link between director tenure and independence, the King Code recommends that arrangements for periodic, staggered rotation be put in place. These arrangements should strike a balance between retention of valuable knowledge and experience on the one hand, with the need to infuse fresh ideas and perspectives into board decision-making on the other. As such, companies often provide in their MOIs for staggered retirement by rotation, whereby certain classes of directors (usually non-executives) retire at each annual general meeting (AGM), and then stand for re-election by shareholders. To prevent this process from becoming a mere formality, some companies have adopted policies limiting the duration for which non-executives may hold office. For JSE-listed companies, the annual retirement of at least one-third of non-executive directors is mandatory.13 The board will recommend whether each of those directors is eligible to stand for re-election, taking into account past performance and contributions made.
Shareholders have the right to remove a director for any reason by way of an ordinary resolution (which requires a simple majority threshold) adopted at a shareholders' meeting by those entitled to exercise voting rights in the election of the director. To mitigate against the risk of director entrenchment, the Companies Act states that this shareholder right prevails despite anything to the contrary contained in a company's MOI or rules, or in any other agreement.14
The board is also empowered to remove a director by way of resolution, but only on prescribed grounds pertaining to the director's fitness to hold office, namely if the director has (1) become ineligible or disqualified in terms of the Companies Act (e.g., if the director is labouring under a legal disability, or has been convicted of a dishonesty-related offence), (2) become meaningfully incapacitated or (3) been neglectful or derelict in the performance of his or her functions as a director.15
The Companies Act also permits various constituencies to apply for an order declaring a director delinquent in certain prescribed instances of substantial misconduct by a director. Examples of this misconduct include gross abuse of the position of director, and inflicting harm on the company or a subsidiary wilfully or by gross negligence. In these circumstances, a company, shareholder, director, company secretary, prescribed officer or employee representative may apply to a court for an order declaring a person a delinquent director. If the relevant substantial misconduct can be demonstrated, a court must make an order declaring the relevant person delinquent.16Directors' duties
The fiduciary duties of directors, and the duty of care and skill, have been partially codified in the Companies Act. However, the common law principles are preserved, informing the interpretation of, and filling gaps in, the statutory provisions.
All directors, be they executive or non-executive, owe the same fiduciary duties individually and directly to the company. A 'director' (which encompasses deputy directors, prescribed officers and members of board committees) must exercise his or her powers and functions in good faith and for a proper purpose, and in the best interests of the company.17 At common law, the duty to act in good faith and in the best interests of the company is the paramount and overarching fiduciary duty from which all others flow. These duties are to (1) act within designated powers, (2) maintain and exercise unfettered discretion and independent judgement, and (3) avoid conflicts of interest.
The Companies Act has incorporated, and in some ways expanded on, this latter integral common law fiduciary duty. It prescribes that directors must (1) not use their company position, or any information obtained while acting in that capacity, to gain a personal advantage or knowingly cause harm to the company or a subsidiary thereof,18 and (2) fully disclose any material personal financial interest that they may have in respect of any matter to be considered at a board meeting and, if present at the meeting, recuse themselves so as not to take part in the deliberation of the matter.19
Although South African courts draw no distinction between executive and non-executive directors when applying fiduciary duties, the duty of care and skill provides a court with scope to weigh a director's specific role and function within a company. Section 76 of the Companies Act requires that a director should at all times act with the degree of care, skill and diligence that may reasonably be expected of a person who is (1) carrying out the same functions and (2) with the general knowledge, skill and experience of that director.
To promote innovation and encourage calculated risk-taking by entrepreneurs, the Companies Act has adopted a US-style business judgement rule, which guards against court interference in directors' honest errors of judgement. In essence, the rule provides that a director is deemed to have satisfied his or her duties if that director made an informed, unconflicted decision that he or she genuinely and rationally believed was in the best interests of the company.Liability
Directors, prescribed officers and board committee members may be held jointly and severally liable for any loss, damage or costs sustained by the company as a consequence of having breached any of their duties, or for having breached the Companies Act or the company's MOI.
Section 77 lists specific instances where a director may incur liability, including when a director knowingly (1) acted without authority on behalf of the company, (2) acquiesced in the reckless trading of the company's business, (3) carried out an act calculated to defraud stakeholders, or (4) was party to false or misleading communications to the market.
In limited instances, directors may also be subject to criminal penalties, particularly in instances involving fraud or dishonesty.Requirements and diversity
Directors are not legally required to possess any special qualifications, skills, business acumen or experience in the company's business to hold office. That said, the duty of care and skill is such that directors cannot avoid liability by remaining culpably ignorant of company affairs or blindly deferring to other board members or experts.
The King Code recommends that the board should comprise the appropriate balance of knowledge, skill, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively. In light of these recommendations, as informed by global trends, board diversity is becoming an ever-greater priority for South African companies, particularly in light of the nation's unique history and the prevalent role that Broad-Based Black Economic Empowerment (B-BBEE) plays in the corporate environment.20 The traditional understanding of diversity is also evolving in South Africa: the Listings Requirements have long required the adoption of policies that promote racial and gender diversity at board level, but an amendment introduced in December 2019 expands on these diversity attributes to include culture, age, experience and skill set, in line with the King Code.