I am preparing for certification in Corporate Governance with IoDSA. In that process I will be sharing my thoughts on corporate governance based on the King IV Report and the South African Companies Act 2008. While this is primarily as part of my studies, I certainly hope that this will help some of my readers. I have served on numerous Boards over my time and so will use some of my experiences to illustrate concepts.
In the next few posts we start be interrogating the definition of corporate governance. Many definitions have been proferred but I believe that the King IV Report one is quite succinct and user friendly.
“Corporate Governance -is the exercise of ethical and effective leadership by the governing body towards achievement of the following governance outcomes: ethical culture, good performance, effective control and legitimacy.” King IV Report
The corporate governance is really an exercise of leadership by the governing Board (Board of Directors, Trustees etc). This definition clearly places the leadership responsibility of the corporation in the hands of the directors.
Leadership of the organization is not vested in the shareholders or the management. It is vested in the Board.Tweet
I remember reading of a business leader and major shareholder who claimed that he employed and paid the Board and so he was not going to be hamstrung by the Board. I have also heard sentiments expressed in non governmental organizations that the Board is simply advisory. This is a major misunderstanding. The Board exercises leadership of the organization.
Leadership means to govern, direct, control within the context of fiduciary duties of the directors/trustees (members of governing body) to the body corporate. Fiduciary duties refer to the duty of acting in good faith towards the organization. Put in another way fiduciary duty means a legal obligation of one party (the governing body) to act in the best interest of another (the company) when entrusted with the care of the corporate’s assets.
The primary responsibility of the governing body is to act in the best interests of the organization AND not necessarily in the best interests of the shareholders.Tweet
Remember that the organization is a separate legal person from the shareholders.
When the interests of shareholders and the organizations diverge, the Governing Body is legally bound to act in the best interests of the organization.Tweet
(We will examine this duty in depth later on)
From the foregoing it is clear that the leadership of the organization does not lie in the management or the shareholders. But actually lies in the governing body i.e. the body of directors or trustees. Shareholders entrust the leadership to the directors while directors appoint and are responsible for management to whom they delegate certain leadership responsibilities. Yet many governing bodies do not actually exercise leadership of the organization.
To emphasize the leadership responsibility of the governing body of organizations, notice that at law, the legal liability of the organization is broken down as follows: shareholders’ liability is limited to their shareholding, management’s liability is limited to their levels of authorizations or negligence WHILE the liability of the Board members is unlimited.
In other words the greatest legal liability for a corporate body’s failure lies with the Board members both individually and jointly.Tweet
As an aside it is important for Board members not to treat their responsibilities lightly as they can expose their personal wealth at risk for the liability coming from their Board seating.
I once served on the Board of a non governmental organization which had a rental dispute with its landlord and was in arrears. As directors we were sued in our personal capacity while the management (who in effect were responsible for the delinquency) were not included in the litigation. Fortunately we managed to negotiate and get the organization to pay its obligations. If it had failed to do that all the Board members were to be personally liable for the organizations’ rentals.
It is also important to be cautious about the Board seats that you accept. Do proper due diligence. Otherwise you are putting your own wealth at risk if you seat on a Board that does not exercise leadership on the organization
In the next post we will take a closer look at the nature of this leadership.