Eskom testimony at Zondo Commission points to key issues for directors

Testimony at the Zondo Commission relating to the prepayment of R1.68 billion to Tegeta, a company owned by the Gupta family, provoked strong words from Deputy Chief Justice Raymond Zondo.[1] Dr Simo Lushaba, Facilitator of Director Development Programmes at the Institute of Directors in South Africa (IoDSA), says the whole incident illustrates how seriously directors should approach their duties.

“Justice Zondo suggested that the directors were negligent at best. If we take that line of thought to its logical conclusion, they could be at risk of being sued for damages in their personal capacities,” he says. “Directors need to accept that theirs is a very serious job and that the stakes are high. Their only protection against decisions that are proved to be wrong is that they did discharge their duty of care, and made decisions based on a thorough examination of the facts and in the best interests of the company.”

Dr Lushaba pinpoints the lessons for directors as follows:

Understand your primary duty as a director. When individuals accept a board appointment, they are assuming a duty of care towards the entity, not to whoever appointed them or themselves. Their actions and decisions have to be guided by the interests of the company and its stakeholders.

Apply your mind and ask the right questions. In this case, the trigger phrase was “proposed owners”, which should have prompted directors to question why money for a commodity was not being paid to the existing owners. “In any event, you don’t buy something from the owner of the store, you buy it from the store itself,” he comments. “The most basic question was never asked—who owns the coal and why aren’t we paying them?”

Dr Lushaba emphasises that one of the primary duties of a board member is to ask questions and that there is no such thing as a stupid question. Directors are under an obligation to apply their minds to whatever is before them and to adopt a stance one might call “professional scepticism”.

Be courageous in discharging your duty of care. The fact that no directors dissented when approving this prepayment to “proposed owners” indicates that the board dynamics were out of tune. Directors must have the courage not only to ask tough questions but to dissent when a decision they believe to be wrong is adopted—a good director is an independent thinker.

An important corollary is the importance of diversity. Boards will not generate the necessary quality of questioning if they do not contain individuals with different backgrounds, experience and skills.  

A board is a collection of individuals, not a group and, crucially, directors are held individually responsible for the board’s actions.

Understand the interplay between risk and opportunity. One of the then-directors attempted to portray the board’s action as an effort to secure the supply of a necessary raw material. However, what seemed to be an opportunity hid considerable risk. The same point could be made about risks. “One of a board’s key jobs is to understand the risks the organisation faces and protect it from them,” Dr Lushaba concludes. “Directors cannot just look at opportunities.”
 

[1] News24Wire, “Zondo blasts 'negligent' former Eskom board over R1.68bn prepayment to Gupta entity”, Engineering News (11 February 2021), available at https://www.engineeringnews.co.za/article/zondo-blasts-negligent-former-eskom-board-over-r168bn-prepayment-to-gupta-entity-2021-02-11/rep_id:4136.

ENDS

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