Delinquent directors need to be held responsible to break the cycle of maladministration and corruption in South African companies. Picture: Freepik
The King Codes, the Companies Act and the common law all set high standards for directors because of the huge influence they can have on the oversight and performance of private as well as public organisations or non-profit entities.
This is according to Vikeshni Vandayar, Executive: Governance and Corporate Services, Institute of Directors in South Africa (IoDSA).
Vandayar said that the Zondo Commission’s report and a number of high-profile cases has shown that directors who do not do their jobs with due care and skill, or who are wilfully dishonest or grossly negligent, can cause severe damage to a company.
This can have a huge negative impact on all stakeholders not to mention the negative impact of maladministration of state-owned enterprises (SOEs) has on the SA economy.
Vandayar said: “South African Airways, Eskom, Steinhoff and Tongaat Hulett are just some of the big names scarred by directorial misconduct.”
As the King IV puts it, directors have to provide leadership that is both ethical and effective with the implication that these are both two sides of the same coin.
A recent IoDSA webinar was held in collaboration with Organisation Undoing Tax Abuse (OUTA) and Bowmans to discuss a guidance paper on director delinquency.
Speaking at the webinar Richard Foster, Governance Specialist, IoDSA said that accountability was critical to ethical and effective leadership.
According Foster, for this to happen we need 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 for directors who do not fulfil their fiduciary duties is to have them 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.
However, getting a director declared delinquent is a demanding process and can be expensive.
Vanessa Jacklin-Levin, partner, Bowmans, said that companies take a commercial decision and often settle 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, Jacklin-Levin 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.
Advocate Stefanie Fick, Executive Director of Accountability and Public Governance Division, OUTA said that private and public sectors should step up and take action.
“People must know they cannot get away with failing to discharge their fiduciary duty, Jacklin-Levin said.
This being an imperfect world though and 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.
The IoDSA’s paper argues that 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. Therefore directors of SA organisations should understand King IV and its recommended practices in depth.
“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,” Vandayar said.
For South Africa to overcome and break the vicious cycle of corruption and maladministration, it is imperative to hold directors to account and ensure that individuals found guilty of gross misconduct are not able to serve on any other board.
Vandayar said: “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.”
Taking this stand together with the professionalisation of directorship will promote effective corporate governance overall.
It also 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.
IOL Business