The accountability deficit

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
 
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