Tag Archives: fiduciary duties of directors

REPRESENTATIVE DIRECTORS


The organisation’s directors are normally appointed by shareholders at the recommendation of the Board’s Nominations Committee. However certain directors are appointed by a particular stakeholder.  By way of Memorandum of Incorporation some shareholders with a certain equity holding may be permitted to appoint directors. In some cases providers of capital or debt like banks may through contract appoint directors. In Group Corporate structures, companies may appoint either employees or directors to the subsidiary Boards. In NGOs there may be some stakeholders with the right to appoint directors.  All these directors who are appointed by a particular shareholder are referred to as representative directors since they are appointed ostensibly to represent the interest of that stakeholder.

These representative directors create numerous complexities which need to be managed. The appointing party would want to view the director as representing their interests and so would like to direct them in a way they should vote or decide while on the Board. However this conflicts with the fiduciary role of the director that clearly expects the director to make decisions ONLY in the best interests of the company and to act independently. Representative directors should be cautious as they can suffer personal criminal and civil litigation for their decisions while on the Board. The appointing authority may not suffer the same fate. There are cases where the appointing stakeholder needs to be careful to avoid being considered a “deemed” de facto director and be held criminally liable for the decisions of the director they “control”.

In the Fisheries Development Corporation of SA Ltd case the court found that “A director in that capacity is not the servant or agent of a shareholder who votes for or otherwise procures his appointment to the board ….The director’s duty is to observe the utmost good faith towards the company, and in discharging that duty he is required to exercise independent judgement and to take decisions according to the best interests of the company as his principal. He may in fact be representing the interests of the person who nominated him, and he may even be the servant or agent of that person, but, in carrying out his duties as a director, he is in law obliged to serve the best interests of the company to the exclusion of the interests of any such nominator, employer or principal.” (Fisheries Development Corporation of SA Ltd vs Jorgensen and Another; Fisheries Development Corporation of SA Ltd vs AWJ Investments (Pty) Limited and Others 1980 (4) SA 156 (W) on pages 158 and 164)

An example is that a director appointed to a subsidiary board may be expected to vote for a dividend declaration by the Holding Company BUT this may not be in the best interests of the subsidiary company on whose Board she serves. The law requires that director to vote in the best interests of the Company even if she may suffer sanction from her employer. To avoid this conflict the appointing stakeholder, the director and the company must agree on format of handling this conflict in a was that does not violate the law.

I once served on the Board of a non profit organization where the principal expected directors to make decisions in his interest and not in the interests of the company. It was a painful experience until I chose to resign as the working relationship was no longer tenable. He literally wanted me to serve as a simple proxy while he remained the decision maker. Some NGOs may view representative directors as spokespersons for the principal who makes the decision without carrying the legal liability.

One more time let me emphasize that the legal position is that the representative director once appointed has the company as his principal and not the appointing person.

The Corporate Governance Network gives the following guidance for these representative directors:

• Understand your fiduciary responsibilities as directors

• Ensure that appropriate training is received on governance and directors’ legal duties

• Establish at the outset what the appointing company expects from you in your role as directors and, agree, with each of the parties involved, what may and may not be divulged, also bearing in mind the provisos of the Law. If, at the outset, the appointing company expects you as the director to breach your fiduciary duty, then it is prudent to decline the appointment

• Understand what process you should follow when faced with a dissenting view from the board on which you serve

• Ensuring that you have access to legal advice at the Company’s expense.

DISSENT IN BOARDROOM


The Board is charged with the responsibility of making decisions that guide the company. In the process there will be occasion for disagreement. This is healthy. A board that is always in agreement probably lacks robust debate. The usual result is poor decisions. The Board should aim for consensus after healthy debate.

Some people avoid confrontation on issues. So they simply give in, this is unwise in view of the legal responsibilities that directors carry. Other directors want to please executives to the extent that they would rather acquiesce with whatever is tabled even if outside the Board they would disagree. I remember a matter that came to debate on a Board I served on years ago. The majority of the non executive directors disagreed with management. However when the matter was put to a vote, one non exec abstained from the critical vote. Although he was as opposed to the management position as all the others, he did not want to be viewed as being disloyal especially to the CE. Abstention cannot be viewed as being opposed to a decision.

Disagreement may be minor or significant. The aim of the Board lead by the Chair is to have sufficient debate and inquiry into the matter leading to an agreed position. Sometimes however there is significant ad irreconcilable disagreements of opinion. This leads to dissent.  Dissent does not mean disloyalty but implies that the director takes her fiduciary responsibilities seriously.

I should highlight that dissent should not be based on avoiding business risks as business entails taking risks to achieve its goals. Some directors are so risk averse that they can easily sabotage any attempt to grow the business. This rejection of any initiative is not in the best interests of the organization as it affects the possibility of growth. Businesses always take calculated risk.

Most significant differences occur  in any of the following matters:

  • Disagreement on whether the objectives of certain courses of action are consistent with the strategic vision of the organization
  • Disagreements on whether to declare dividends or not when the organization is not compliant with statutory regulations.
  • Disagreements in implementation of certain projects on the basis of perceived risk. This can be reduced if the organization has clearly defined and agreed risk appetite and risk tolerance levels.
  • Disagreements on ethics and principles within certain transactions
  • Disagreement on fundamental issues such as fraudulent, reckless, grossly negligent or unlawful conduct.

If the matter is important but not fatal and yet the director feels strongly on it, he may insist on his dissension being formally recognized in the minutes. If the director feels that the matter of disagreement is not resolved but Board decides to go against him in a fundamental matter, after due discussion and arguing his case with factual information supported by independent professional advice, he may have to opt to resign.

In one Board the CE agreed to a resolution which he later unilaterally disregarded. When NED met they agreed to take a strong stand against the CE. However in the meeting, the majority softened. The matter was so material in my view that I dissented and ended up resigning from that Board formally in writing having expressed factually and accurately my reason for dissenting. A few months later the highly regulated organization was placed under business rescue by the regulators over the same matter.

Board members should be able to express their views effectively without being disagreeable or hostile. The key principle is always to act rationally in the best interest of the organization as a juristic person in its own right.

LEGAL DUTIES OF CORPORATE DIRECTORS


In common law, corporate directors have a twofold responsibility to the company namely fiduciary duties (duty to act in good faith and in the best interests of the company) and duty of care. This is the bedrock of corporate governance. In South Africa, the Companies Act 71 (2008) has codified the legal duties of directors that would draw legal sanction if not complied with. King IV like any other Code of Corporate Governance advocates for members of governing bodies to acquaint themselves fully and comply with the Law.

This section 76 of the Act that makes discusses the responsibilities of directors, is so critical and clear that I will just post its extract here.

“(2) A director of a company must—

(a) not use the position of director, or any information obtained while acting in the capacity of a director—

(i) to gain an advantage for the director, or for another person other than the company or a wholly-owned subsidiary of the company; or

(ii) to knowingly cause harm to the company or a subsidiary of the company; and

(b) communicate to the board at the earliest practicable opportunity any information that comes to the director’s attention, unless the director—

(i) reasonably believes that the information is—

(aa) immaterial to the company; or

(bb) generally available to the public, or known to the other directors; or

(ii) is bound not to disclose that information by a legal or ethical obligation of

confidentiality.

(3) Subject to subsections (4) and (5), a director of a company, when acting in that capacity, must exercise the powers and perform the functions of director—

(a) in good faith and for a proper purpose;

(b) in the best interests of the company; and

(c) with the degree of care, skill and diligence that may reasonably be expected of a person—

(i) carrying out the same functions in relation to the company as those carried out by that director; and

(ii) having the general knowledge, skill and experience of that director.”

In terms of the Act, a director has a duty to act in the best interests of the company, implying that he/she shall not use their position or information to, for example, gain advantage for anyone other than the company and/or cause harm to the company.

The fiduciary duties impose the following subsidiary duties on the director:  

  • A duty not to exceed his powers
  • A duty the exercise his powers for a proper purpose
  • A duty to maintain an unfettered discretion
  • A duty not to compete with the company
  • A duty to avoid a conflict between a director’s interests and the interests of the company


In terms of the duty of care and skill, the Act requires that he/she acts with care, skill and diligence that may reasonably expected from someone

  • Fulfilling his/her functions and
  • Having his/her knowledge, skill and experience

This imposes a requirement for a member of the governing body to continuously improve herself and keep informed about developments in corporate governance space. The Institute of Directors runs a number of corporate governance courses and seminars to help directors in terms of continuous professional development. It is important for directors to upskill themselves and stay current in terms of skill, knowledge.