We are not doing enough to hold delinquent directors accountable—and that’s having a knock-on impact on the overall state of governance.

Authored by: Vikeshni Vandayar, Executive: Governance and Corporate Services at the IoDSA

The King Codes, the Companies Act and the common law all set high standards for directors because of the huge influence directors have over the oversight and performance of an organisation, be it a private, public or non-profit entity. As the Zondo Commission’s report and a number of high-profile cases have shown, directors who do not do their jobs with due care and skill, or who are willfully dishonest or grossly negligent, can severely damage a company, causing huge negative impacts on all its stakeholders not to mention the negative impact the mala-administration of state-owned companies has on the South African economy.

South African Airways, Eskom, Steinhoff and Tongaat Hulett are just some of the big names scarred by directorial misconduct.

As King IV puts it, directors have to provide leadership that is both ethical and effective—the strong implication is that they are two sides of the same coin—at a recent IoDSA webinar held to discuss a guidance paper on director delinquency, issued by the Institute of Directors in South Africa (IoDSA) in collaboration with Organisation Undoing Tax Abuse (OUTA) and Bowmans, Richard Foster (an IoDSA Governance Specialist) said that accountability was critical to this kind of leadership.

For this to happen, he said, we need to have good governance codes in place, a solid legal framework, effective regulators and an independent, competent judiciary—all of which we are fortunate to have. The main recourse available is to have directors who do not fulfil their fiduciary duties declared delinquent or at least placed on probation. Probation orders last for a maximum of five years, while those for delinquency last for a minimum of seven years and up to the lifetime of the director depending on the severity  —as we saw with the late Dudu Myeni, former chair of SAA.

However, getting a director declared delinquent is a demanding process and can be expensive. As a result, Vanessa Jacklin-Levin a Partner at Bowmans, says many companies take a commercial decision and often come to a settlement with a rogue director to have him or her leave the company versus bringing a director delinquency application. Whilst this may be an effective route for the company to quickly remove such a director, she warns that it still allows that person to continue to hold directorships in other companies and to carry on with misconduct or bad behaviour elsewhere. As such the problem persists.

Advocate Stefanie Fick, the Executive Director of Accountability and Public Governance Division at OUTA (which instituted a delinquent case against the late Dudu Myeni) says that the private and public sectors should step up and take action. “People must know they cannot get away with failing to discharge their fiduciary duty,” she says. This being an imperfect world, though, given the risks and expense of holding a director to account, it seems more likely that NGOs like OUTA will have to lead this particular fight. In that case, the IoDSA’s paper argues, companies must support organisations like OUTA and the Companies and Intellectual Property Commission (CIPC) to undertake that effort should they not be willing to take on this challenge.

An important point is that directors and companies themselves must understand what a director’s responsibilities are, and what their fiduciary duties entail. It’s worth noting that the courts have increasingly seen the King Codes as a yardstick against which directors’ conduct can be measured. Directors of all organisations in South Africa should therefore understand King IV and its recommended practices in depth.

The IoDSA’s drive to professionalise directorship has never seemed more important. Properly qualified and professional directors will at least understand exactly what is expected of them—and the drive to have a licence to operate and to remain relevant will make it easier to remove a director should they lose such licence as a result of their misconduct, making the need to go the legal route less pressing, says IoDSA Executive Director Vikeshni Vandayar.

For South Africa to overcome and break the vicious cycle of corruption and maladministration, it is imperative to hold directors to account and to ensure such individuals found guilty of gross misconduct are not able to serve on any other board. “The overarching principle of a declaration of delinquency is to safeguard companies, investors, and other stakeholders including the South African public, from company maladministration and corruption,” says Vikeshni Vandayar. Taking this stand together with the professionalisation of directorship, she says, promotes effective corporate governance overall and sends a clear message that individuals in positions of trust will be held accountable for their actions and any individual wishing to serve as a director must maintain the highest standards concerning their duties.

ENDS
 
MEDIA CONTACT: Stephné du Toit, [email protected], 084 587 9933, www.atthatpoint.co.za
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The recent SENS announcement by a JSE-listed company that it had appointed an alternate director raises an important issue: while the Companies Act allows for the appointment of alternate directors, is it good governance? Professor Parmi Natesan, CEO of the Institute of Directors in South Africa (IoDSA) says the pros and cons need to be weighed up carefully.

“In certain situations, the appointment of an alternate director may be necessary, but in the end, it should not be a common practice for a number of good reasons,” she says.

In terms of section 1 of the Companies Act (71 of 2008), an alternate director may be elected or appointed to substitute for a particular director of the company. As a director, he or she would have the same responsibilities as the primary director.
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This already points to a potential problem because it will be difficult for an alternate to be kept up to date with the company and its strategy, as well as its markets over extended periods. It’s, therefore, best to see the appointment of alternate directors as a limited measure to be taken in specific circumstances; for example, when a director is not available for a limited period owing to travel or illness, and he or she has special expertise that is considered crucial.

“In such an instance, an alternate with the same special expertise could play a valuable role in ensuring the absence of the primary director does not have a significant adverse effect,” says Natesan. “But the basic principle is that a director should only accept an appointment if he or she is fully committed and available to fulfil his or her responsibilities. Relying on alternate directors too heavily can create issues around accountability and interfere with board dynamics.”

In addition, Natesan adds, frequent use of alternate directors can lead to inconsistent decision-making and a lack of continuity in strategic oversight. Good governance depends on a board that works well together and whose members build up a deep knowledge about the company and its issues. It is not realistic to expect alternate directors to acquire this detailed, in-depth understanding through their sporadic involvement, even if they are on the distribution list for board-related communications, minutes and information.

When a board determines that appointing an alternate director makes sense, Natesan says that best practices should be followed. Clear policies defining the role, responsibility and limits of alternate directors must be drafted so they are properly integrated into the board’s activities. The need for such alternates should be regularly reviewed by the board—if the need becomes lengthy, then it might be time to consider a replacement.

A robust succession plan should be in place to replace any directors who become frequently unavailable with somebody with a similar skills profile who does have the capacity to serve fully.

“While alternate directors can provide a solution in certain situations, relying on them as a standard practice may not align with the principles of good governance. Companies should prioritise appointing directors who are fully committed and available,” concludes Natesan. “If alternate directors are used, policies must be in place and regular reviews should be conducted to determine if a more permanent solution is needed.”

ENDS

MEDIA CONTACT: Stephné du Toit, [email protected], 084 587 9933, www.atthatpoint.co.za
For more information on the IoDSA please visit:
Website:  www.iodsa.co.za
X:  @The_IoDSA
LinkedIn:  Institute of Directors South Africa Company Page 
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President Ramaphosa’s announcement of the multiparty cabinet of the Government of National Unity (GNU) has been broadly welcomed as a move towards a more inclusive government that could make progress in addressing the multiple challenges the country faces. There’s no denying that this is an historic moment, says Professor Parmi Natesan, CEO of the Institute of Directors in South Africa (IoDSA), but the right choices need to be made.
 
“It’s very heartening that the President has committed the GNU to professionalising the public service based on ‘integrity and good governance’, and that they intend appointing people who are ‘committed, capable, hard-working and also have integrity’,” she says.
 
These criteria outlined by the President align well with the qualities of ethical and effective leadership outlined in King IV: integrity, competence, responsibility, accountability, fairness and transparency.
 
“These are noble intentions, but time will tell whether the right people have been appointed and whether the results truly benefit of South Africa Inc and its citizens,” Natesan adds.
 
Principle 1 of King IV says, “The governing body should lead ethically and effectively.” King IV’s linking of ethics and effectiveness is an important connection that is all too often forgotten, she notes. Such an approach is also consistent with s 195 of the South African Constitution, which states, amongst other things, that ‘a high standard of professional ethics must be promoted and maintained’. 
 
It is thus critical to have the right people in leadership positions of our country and of our public sector entities. Principle 7 of King IV spells it out: the governing body must possess the “appropriate balance of knowledge, skills, experience, diversity and independence”, and its practices provide recommendations for how to achieve this.
 
It’s equally important that the executive team is also appointed based on their competence and moral compass; and with the needs of the organisation and its strategic goals in mind.
 
For many years, the IoDSA has been urging the public sector to adopt the principles of good governance as outlined in the King Reports. State-owned enterprises (SOEs) have experienced challenges because appointments to both their boards and executives have been made largely on political grounds rather than merit. By exploiting its position as the single and thus powerful shareholder, and the inadequacies of some of the founding legislation, government has been able to side-step the principles of good governance as outlined in King IV.
 
“Only if the new government commits itself to good governance and professionalising the public service will it be able to deliver on its mandate of, amongst other things, much-needed improvements in service delivery . The IoDSA has long argued that professionalising directorship is a key step in the journey towards better governance and thus better-performing organisations,” Professor Natesan concludes. “I strongly urge the newly appointed ministers, their deputies and the leadership of SOEs and other public-sector entities to reaffirm their commitment to King IV’s principles—they are the key to turning the optimism of the current moment into reality.”

ENDS

MEDIA CONTACT: Stephné du Toit, [email protected], 084 587 9933, www.atthatpoint.co.za
 
For more information on the IoDSA please visit:
Website:  www.iodsa.co.za
X:  @The_IoDSA
LinkedIn:  Institute of Directors South Africa Company Page 
Facebook: Institute of Directors South Africa