Tag Archives: King IV Code

Two perspectives of a company


Some have asked in bewilderment why the governing body (or Board) of an organization should act primarily in the best interests of the company itself and why they owe the duty of good faith (fiduciary duties) primarily to the company itself. The answer lies in the two schools of thought on what a company is?

One school of thought is that a company is an asset or property owned by the shareholders. Those who hold to this view expect the Board (or governing body) to be accountable to the owners namely the shareholders. This is the view that seems prevalent in State Owned Enterprises where governments generally as shareholders treat the entity as a property of government and so the Corporate Boards are beholden to either the Minister or Permanent Secretary. In effect this official becomes a default Board in and of himself. With this view in mind, the Board would always act with the shareholders’ interests at heart. They seek the best interests of the shareholders and not the best interests of the organization. The example of how SAA was run during the term of a former Chair who has now been reprimanded by the courts is a case in point.

A moderated view is that the company is an asset of the shareholders which the Board stewards on their behalf while taking into consideration the interests of other stakeholders. This is called the enlightened shareholder approach to corporate governance. This view of the organization is not accommodated in King IV. It may be acceptable only if the organization’s equity is owned by one person – although the interests of other stakeholders would still suffer.

The second perspective of a company is that it is a separate juristic entity with its own legal existence and rights independent of the shareholders. In this view the organization owes its existence to numerous stakeholders who provide different forms of capital for it to exist. Contrary to the previous view of only financial capital being the one considered, this view recognizes financial, social, environment, intellectual, human and manufactured capital as necessary for the existence of the organization. The stakeholders become the final licensors of the organization. This is called a stakeholder inclusive approach. Within this view the Board stewards the organization with the knowledge that they are accountable to all the stakeholders and not just the providers of financial capital (shareholders).

The following two quotes from the King IV report encapsulates this concept:

“King IV advocates a stakeholder-inclusive approach, in which the governing body takes account of the legitimate and reasonable needs, interest, and expectations of all material stakeholders in the execution of its duties in the best interest of the organisation over time.”

“Instead of prioritising the interests of providers of financial capital, the governing body gives parity to all sources of value creation.”

I recently read a SCA judgment which underlines this aspect of a company being an entity and not simply a property of the shareholders.  It was the case of Steinhoff minority shareholders who wanted to be compensated for lost value in the company due to alleged negligence of the Board. The Supreme Court of Appeal rejected this as it held that the shareholders had no right to lay this complaint as this was supposed to be done by the aggrieved party who was the company itself. A corollary was that the shareholders would get double compensation if the court ruled in their favor since, if and when the Company sued the directors and recovered the prejudice the shareholders would recover their value. The court on the basis of a rich legal heritage in the matter held that the loss of value in the Company would be a loss to the Company as an entity and not necessarily a loss to the shareholders. The underlying argument was that the company is to be viewed primarily as a legal entity with the right to sue and be sued as a juristic person with a separate existence from the shareholders. It is important to note that this judgement did not absolve the Board and management of Steinhoff of any wrongdoing. They may still have to face their day on court in that matter.

Shareholders normally revert to this argument when it suits them. For example the issue of the indebtedness of the company being separated from the wealth of the shareholder speaks to this concept. Often shareholders have often been heard to say, “I am not my company.” So this argument cuts both ways.

The contemporary view of corporate governance is that the company is a legal entity in and of itself and does not exists simply as an extension of the shareholders. That is why the governing body acts in the best interests of the organization.

COMMON LAW DUTIES OF DIRECTORS


In a previous blog we discussed the legal duties of Corporate Directors. In the next few blogs we dig deeper into Common Law duties of directors. Common law duties are separate from statutory duties as codified by the Law although some common law duties may have been included into the Code. Where some duties in common law have been codified into law, then the law takes precedence. Where there has been no codification of the common law duties, these common law duties are still legally expected to be complied with. It is therefore important for any director to be aware of these duties.

1. A director should act only in the best interests of the company. This means that they should act in a manner that benefits the company as a whole and bona fides towards the company interests. This common law duty normally entails three key aspects namely:

  • must make all decisions and act solely for the benefit of the organization. The primary principal for directors is the company itself. Not the appointing authority or any other party. This duty is owed to the company as a legal persona.
  • may not use or disclose any confidential information for their own personal benefit or for anyone other than the organization
  • must promote the success of the company for the benefit of the members whereby success is viewed as long term increase in value. In doing so a director must consider holistically a multiplicity of factors including the likely long-term consequences of any decision on all stakeholders. This is also captured in the King IV as the stakeholder inclusivity concept. In some jurisdictions e.g. in the UK, the law also specifies the need for protecting the corporate reputation and the need for acting fairly towards all shareholders.

2. A director should not act beyond the limitations of powers and should act for a proper purpose which means a director should always act within the ambit of their authority. This directors’ duty may be distilled into two aspects namely:

  • may not exercise the powers granted to them for any unauthorized and improper purpose and for any ulterior motive. These powers are exercised for the good of the company and not for the benefit of the director himself. This speaks to the intended purposes by both law and the memoranda of incorporation.
  • may not exceed their powers and may only use them for the purposes for which they were granted. This is a way for controlling power of directors. This power is generally granted by law and or by the corporate constitutional documents and agreements. A director has to be familiar with these as they outline and detail any limits to a director’s decision-making powers. Directors must act in accordance with this, and only exercise their powers for the purposes for which they were given. If these powers are exceeded, then decisions may be reversed, transactions may be voided, and may leave the directors liable to pay for any financial losses to the company. In the South African context, the directors powers derive from the Company Act 2008 and not from the company’s Memorandum of Incorporation.

This duty is distinct from the duty of good faith, although they operate cumulatively implying that a director who may have acted in good faith can be found to have not exercised his powers for a proper purpose.

In the next blog post we take a look at the next two common law duties.