Duties and Responsibilities of Directors
On appointment, directors accept the full extent of the duties and responsibilities, not only those imposed by the Companies Act, but also those imposed by Common Law.
They can be individually or collectively held accountable for their actions and decisions, and “I was not aware” is no longer a defence. Familiarising themselves with the Companies Act, King reports and Common Law relating to the management and governance of a company is most important.
Directors often rely heavily on external audit or management, internal audit or board committees in more complex organisations for assurance and reporting. It is the duty of directors to ensure a full understanding of the circumstances and accuracy of those assurances and reports prior to making any decisions.
“More than half of South African business owners and directors do not have a clear understanding of their obligations in terms of management and governance of a company”
SHA Risk Insurers report
Definition of Director
The Companies Act defines a director as not only a board member but also includes:
- persons occupying the position of a director by whatever other designated name;
- ‘shadow’ and alternate directors;
- persons occupying positions on equal footing with board members, e.g. a general manager or head of a significant division within the company;
- any committee or audit committee members;
- persons defined as prescribed officers.
Interestingly, there are circumstances in relation to the duties of directors where related persons, past directors or even individuals connected to an entity which is connected to the company come into play.
Related persons and prescribed officers are also clearly defined in the Companies Act.
Economic Opportunity Rule
Should an economic opportunity be concluded by a director for self-gain, yet it falls into the scope of the company’s existing or prospective business, the law considers it to be company “property” irrespective of whether the opportunity would not or could not have been taken up by it.
This rule also extends to confidential information, including discussions around business opportunities that directors use for self-gain.
This rule does not require an actual conflict to be established. Instead, it requires that a reasonable person would be cognisant of a real sensible possibility of conflict and distance him- or herself from the circumstance. Or if appropriate, declare full disclosure to the company.
Positions of conflict of interest can arise from business and personal undertakings by the directors or as a result of conflict of duty where the director has other roles within the company, e.g. shareholder or employee. In all instances care should be taken to wear the appropriate hat when considering or acting on company matters.
Business Judgement Rule
When required to defend any decision, directors need to be able to demonstrate:
- that reasonable steps were taken to being properly informed;
- a rational basis of belief that the decision at the time was in the best interest of the company;
- that no conflict of interest existed, or adequate disclosure was provided.
Should a director not support a particular decision or course of action, the Companies Act makes it clear that abstaining from voting will not constitute a defence. The director must in these circumstances vote against the decision and make sure their vote is minuted accordingly.
It remains the responsibility of directors to ensure proper written records of all decisions taken, including resolutions and any associated agreements or declarations, are kept by the company.
Directors Indemnity Insurance
A director’s indemnity is voided should they:
- act on behalf of the company without written authority to do so;
- be party to transactions despite knowing such business was being conducted in a reckless manner;
- be party to acts or omissions by the company despite knowing its intention was to defraud a creditor, employee, shareholder, or for any other fraudulent purpose;
- be found guilty of wilful misconduct or wilful breach of trust;
- be convicted of an offence in terms of national legislation.
Article written by Rene Wuis