Duties of Directors

April 2013
The question of corporate governance as it pertains to directors is a very wide-ranging topic. This
booklet is intended to provide general guidance in this regard only, and does not purport to cover all
possible issues relating to the topic. For specific guidance, we suggest you contact Deloitte & Touche.

Deloitte & Touche cannot accept responsibility for loss occasioned to any person acting or
refraining from action as a result of any material in this publication.

References
Audit committees combined code guidance, Sir Robert Smith, 2003
Banks Act of 1990
Companies Act 71 of 2008
Insurance Act 53 of 1998
JSE Securities Exchange, South Africa Listings Requirements
JSE Securities Exchange, South Africa Insider Trading booklet, 2001
King Report on Corporate Governance for South Africa 2009
Law of South Africa, WA Joubert & JA Faris, Butterworths, 2002
Long-Term Insurance Act 52 of 1998
Review of the role and effectiveness of non-executive directors, Derek Higgs 2003
Financial Markets Act 19 of 2012
Companies and other business structures in South Africa, Davis et al, 2009

2
Contents

Preface
1. What is a Director? 9
1.2 Prescribed officers 10
1.3 The legal status of a director 12
1.4 The different types of directors 12
1.5 Personal characteristics of an effective director 15
2. Appointment of a director 16
2.1 Who qualifies as a director? 17
2.2 The legal mechanics of appointment 17
2.3 What a new director should be told 20
3. Director conduct 22
3.1 The standard of directors conduct 23
3.2 Conflicts of interest 27
3.3 Liability of directors 29
3.4 Apportionment of damages 30
3.5 Insider trading 30
4. The workings of the board of directors 35
4.1 Composition of the full board 35
4.2 The implicit duties of the board 36
4.3 Meetings of directors 40
4.4 Important roles of the board 41
4.6 Relationships within the company 52
4.7 Communication with stakeholders 57
5. The powers of the board of directors 59
5.1 How can a director bind the company? 59
5.2 Reservation of powers 60
5.3 Which powers are restricted? 60
5.4 Effectiveness of company actions and the role of the CIPC 61
6. Remunerating directors 65
6.1 The directors right to remuneration 65
6.2 Remuneration policy 66
6.3 What type of remuneration is appropriate? 66
6.4 Employment contracts, severance and retirement benefits 69
6.5 Disclosure of directors remuneration 69
7. Assessment, removal and resignation 72
7.1 Assessment of performance 72
7.2 Why a director may be removed 73
7.3 Rotation of directors 73
7.4 Vacancies on the board 74
7.5 The legal mechanics of removal 74
7.6 Formalities when a director resigns 75
8. Financial institutions 76
8.1 Directors of banks 76
8.2 Directors of insurance companies 80
9. Contact information 81

Duties of Directors 3
Preface

A key feature of the Companies Act, 2008

(the Act) is that it clearly emphasises the
responsibility and accountability of directors.
Recent international and local jurisprudence also her particular skills, experience and intelligence
underline the demanding standard of conduct appropriately and to the best advantage of the
that is expected of company directors, all of company. In this regard, the Act subscribes to
which South African company directors would the enlightened shareholder value approach
do well to take very thorough notice of. which requires that directors are obliged to
promote the success of the company in the
The Act reduces the companys reliance on collective best interest of shareholders. This
the regulator, the Companies and Intellectual includes, as appropriate, the companys need
Property Commission (CIPC). Although to take account of the legitimate interests of
companies still have to comply with various other stakeholders including among others, the
administrative processes to inform the CIPC community, employees, customers and suppliers.
of its decisions (for example the appointment Also, the social responsibility of the company
of directors, changing of auditors, change of (and the directors) was noted in Minister of
year end, amendment of the Memorandum Water Affairs and Forestry v Stilfontein Gold
of Incorporation, etc.), the validity of these Mining Company Limited and others 2006 (5) SA
decisions are generally not dependent on the 333 (W), emphasising the broader responsibility
approval of the CIPC. In most instances, the of the directors and the company. In this case
companys decision is effective immediately and the court made direct reference to the King
it merely needs to inform the CIPC of decisions Code, which is interpreted by some as evidence
or actions. However, in a few instances the effect that the King Code has de facto become part of
of the decision is delayed until the necessary the duties of directors.
Notices have been filed with the CIPC. Filing
in terms of the new Act simply means that the The Act codifies the standard of directors
Notice had been received by the CIPC (recorded conduct in section 76. The standard sets the bar
in the CIPCs computer system, or the date on very high for directors, with personal liability
which registered or other mail is received by the where the company suffers loss or damage as
CIPC). The CIPC is not required to approve or vet a result of the directors conduct not meeting
any decisions or actions of the company. the prescribed standard. The intention of the
legislature seems to be to confirm the common
The counter balance to the diminished role of law duties and to encourage directors to act
the regulator is greater emphasis on the role of honestly and to bear responsibility for their
the directors of the company. The construction actions - directors should be accountable to
is that by accepting their appointment to the shareholders and other stakeholders for their
position, directors tacitly indicate that they will decisions and their actions on behalf of the
perform their duties to a certain standard, and it inanimate company. With the standard set so
is a reasonable assumption of the shareholders high, the unintended consequence may be
that every individual director will apply his or that directors would not be prepared to take

4
difficult decisions or expose the company to risk. All directors are bound by their fiduciary duty
Since calculated risk taking and risk exposure and the duty of care and skill. The codified
form an integral part of any business, the Act standard of conduct applies equally to all
includes a number of provisions to ensure that the directors of the company. Of course, it is
directors are allowed to act reasonably without trite that not all directors have the same skill
constant fear of personal exposure to liability and experience, and not all directors have a
claims. In this regard, the Act has codified similar understanding of the functioning of the
the business judgement rule, and provides for company. This raises the question as to what is
the indemnification of directors under certain expected of different types of directors when it
circumstances, as well as the possibility to insure comes to their duties. In this regard, the court,
the company and its directors against liability in Fisheries Development Corporation of SA Ltd
claims in certain circumstances. v AWJ Investments (Pty) Ltd 1980 (4) SA 156 (W)
made it clear that the test is applied differently to
The Act makes no specific distinction between different types of directors. The court concluded
the responsibilities of executive, non-executive that the extent of a directors duty of care and
or independent non-executive directors (in order skill depends on the nature of the companys
to understand the distinction between different business, that our law does not require a director
types of directors we turn to the King Report to have special business acumen, and that
of Governance for South Africa, 2009 (King III) directors may assume that officials will perform
for guidance). The codified standard applies their duties honestly.
to all directors. In CyberScene Ltd and others v
iKiosk Internet and Information (Pty) Ltd 2000 (3) The test for the duty of care and skill as
SA 806 (C) the court confirmed that a director contained in the Act provides for a customised
stands in a fiduciary relationship to the company application of the test with respect to each
of which he or she is a director, even if he or she individual director in each instance both the
is a non-executive director. objective part of the test (measured against a
person carrying out the same functions as that
In terms of this standard a director (or other person director), as well as the subjective element of the
to whom section 76 applies), must exercise his or test (measured against a person having the same
her powers and perform his or her functions: knowledge, skill and experience as that director)
in good faith and for a proper purpose; will be applied. Thus, even though all directors
in the best interest of the company; and have the same duties, the measurement against
with the degree of care, skill and diligence the standard of conduct will account for the
that may reasonably be expected of a person personal circumstances of each director.
carrying out the same functions and having the
general knowledge, skill and experience of that As stated above, the Act also codifies the
particular director. business judgment rule. In terms of this rule a
director will not be held liable if he or she took
In essence, the Act combines the common law reasonable diligent steps to become informed
fiduciary duty and the duty of care and skill. This about the subject matter, did not have a personal
codified standard applies in addition to, and not financial interest (or declared such a conflicting
in substitution of the common law duties of a interest) and the director had a rational basis to
director. In fact, the body of case law dealing believe that the decision was in the best interest
with the directors fiduciary duty and the duty of of the company at the time.
care and skill remains applicable.

Duties of Directors 5
 In discharging any board or board committee The relevant detail facts are that the 2007 financial
duty, a director is entitled to rely on one or statements of Centro Properties Group failed to
more employees of the company, legal counsel, disclose, or properly disclose, significant matters.
accountants or other professional persons, or a The statements failed to disclose some AUS$1.5
committee of the board of which the director is billion of short-term liabilities by classifying them
not a member. The director, however, does not as non-current liabilities, and failed to disclose
transfer the liability of the director imposed by this guarantees of short-term liabilities of an associated
act onto such employee, nor can a director blindly company of about US$1.75 billion that had been
rely on the advice of employees or advisors. given after the balance sheet date, but before
approval of the statements.
In a recent Australian judgment, Australian
Securities and Investments Commission v The central question in those proceeding were
Healey [2011] FCA 717, commonly referred to whether directors of substantial publicly listed
as the Centro case, the court re-emphasised entities are required to apply their own minds to,
the responsibility of every director (including and carry out a careful review of, the proposed
non-executive directors) to pay appropriate financial statements and the proposed directors
attention to the business of the company, and to report, to determine that the information
give any advice due consideration and exercise they contain is consistent with the directors
his or her own judgment in the light thereof. knowledge of the companys affairs, and that
This case is relevant to directors of South African they do not omit material matters known to
companies, because the new Act indicates them or material matters that should be known
that a court, when interpreting or applying to them. In short, the question was to what
the provisions of the Act, may consider foreign extent reliance may be placed on the audit
company law. committee and the finance team.

In this case the non-executive Chairman, six

other non-executive directors and the Chief
Financial Officer of the Centro Property Group
(Centro) faced allegations by the Australian
Securities and Investments Commission that they
had contravened sections of the Corporations
Act 2001 arising from their approval of the
consolidated financial statements of Centro,
which incorrectly reflected substantial short-term
borrowings as non-current liabilities. Similar to
our Companies Act, the Australian Corporations
Act also requires the board to approve the
financial statements.

6
In analysing the directors duty of care and skill, Several statements were made in which it
the court commented that: became apparent that every director is expected
all directors must carefully read and to apply his or her own mind to the issues at
understand financial statements before they hand. Even though directors may rely on the
form the opinions which are to be expressed guidance and advice of other board committees,
... Such a reading and understanding would employees and advisors, they nevertheless need
require the director to consider whether the to pay attention and apply an enquiring mind to
financial statements were consistent with his or the responsibilities placed upon him or her.
her own knowledge of the companys financial
position. This accumulated knowledge arises . a director is not relieved of the duty to pay
from a number of responsibilities a director attention to the companys affairs which might
has in carrying out the role and function of a reasonably be expected to attract inquiry, even
director. These include the following: outside the area of the directors expertise.
a director should acquire at least a rudimentary
understanding of the business of the Whether, for instance, a director went
corporation and become familiar with the through the financial statements line by line,
fundamentals of the business in which the he is not thereby taking all reasonable steps,
corporation is engaged; if the director in doing so is not focussed for
a director should keep informed about the himself upon the task and considering for
activities of the corporation; himself the statutory requirements and applying
whilst not required to have a detailed the knowledge he has of the affairs of the
awareness of day-to-day activities, a director company.
should monitor the corporate affairs and
policies; A key statement made by the judge is as follows:
a director should maintain familiarity with Nothing I decide in this case should indicate
the financial status of the corporation by a that directors are required to have infinite
regular review and understanding of financial knowledge or ability. Directors are entitled to
statements; delegate to others the preparation of books and
a director, whilst not an auditor, should still accounts and the carrying on of the day-to-day
have a questioning mind. affairs of the company. What each director
is expected to do is to take a diligent and
intelligent interest in the information available to
him or her, to understand that information, and
apply an enquiring mind to the responsibilities
placed upon him or her.

The court concluded that in the Centro case

each director failed to exercise the degree of
care and diligence required by law in the course
of their review of the financial statements, and
as such can be held liable for the losses suffered
by that company as a result of their failure to
comply with their duties.

Duties of Directors 7
 South African case law echoes the findings of How do these judgments affect the position
the Centro judgment. In Fisheries Development of directors (especially non-executive directors)
Corporation of SA Ltd v AWJ Investments (Pty) where the audit committee considered complex
Ltd 1980 (4) SA 156 (W) the court stated that: financial reports? Are non-executive directors
Nowhere are [the directors] duties and nevertheless expected to review such reports
qualifications listed as being equal to those of an and vote on applicable resolutions? The answer
auditor or accountant. Nor is he required to have seems to be yes. The obligation to approve
special business acumen or expertise, or singular the financial statements of the company rests
ability or intelligence, or even experience in the equally on each director. As such, every director
business of the company... He is nevertheless has to study the relevant reports, and ensure for
expected to exercise the care which can himself that the content of the report confirms
reasonably be expected of a person with his and coincides with his view of the business.
knowledge and experience... a director is not No director is entitled to blindly rely on the
liable for mere errors of judgment. In respect of conclusions of the audit committee, the finance
all duties that may properly be left to some other team or other experts.
official, a director is, in the absence of grounds
for suspicion, justified in trusting that official to These judgements emphasise the fact that the
perform such duties honestly. He is entitled to decision to accept appointment to the board
accept and rely on the judgment, information of a company should not be taken lightly. A
and advice of the management, unless there director cannot uncritically rely on the officials
are proper reasons for querying such. Similarly, of the company, or on the other members of
he is not expected to examine entries in the the board for the decisions of the company,
companys books... Obviously, a director but needs to be confident that he or she is
exercising reasonable care would not accept able to pay adequate personal attention to the
information and advice blindly. He would accept business of the company. Even though directors
it, and he would be entitled to rely on it, but he are entitled to rely of the guidance and advice
would give it due consideration and exercise his from employees, advisors and other board
own judgment in the light thereof. committees, each director is obliged to apply
their own mind (i.e. bring their own skill and
experience to bear) to the facts at hand. They
are not entitled to blindly rely on advice. What
each director is expected to do is to ensure that
they make a concerted effort to understand the
business of the company and the information
placed in front of them, and to apply an
enquiring mind to such information.

8
1. What is a Director?

At common law, once a person accepts appointment as a

director, he becomes a fiduciary in relation to the
company and is obliged to display the utmost good faith
towards the company and in his dealings on its behalf.
Howard v Herrigel 1991 2 SA 660 (A) 678

The term director has been defined in law. The A de facto director is a person who assumes
Companies Act, 2008 (the Act) defines a director as: to act as a director. He is held out as a director
A member of the board of a company..., by the company, and claims and purports
or an alternate director of a company and to be a director, although never actually or
includes any person occupying the position of validly appointed as such. To establish that a
director or alternate director, by whatever name person is a de facto director of a company, it is
designated. necessary to plead and prove that he undertook
the functions in relation to the company which
In terms of section 66 of the Act, the business could properly be discharged only by a director.
and affairs of a company must be managed by
Re Hydrodam (Corby) Ltd [1994] 2 BCLC (Ch);
or under the direction of its board, which has
[1994] BCC 161 at 183
the authority to exercise all of the powers and
perform any of the functions of the company.
The Act requires private companies and
The powers of the board may be limited
personal liability companies to appoint at least
by specific provisions of the Act or by the
one director, whereas public companies, state
companys Memorandum of Incorporation.
owned companies and non-profit companies are
required to appoint at least three directors. This
It is interesting to note that the definition of a
number would be in addition to the number of
director includes not only those individuals that
directors required where an audit committee
are appointed to the board of the company (as
and/or social and ethics committee is required
well as alternate directors), but also any person
(see 2.2 below).
occupying the position of director or alternate
director, by whatever name designated. The
effect of this wide definition is that the provisions
will apply not only to members of the board, but
also to de facto directors.

Duties of Directors 9
It should be noted that this is the minimum 1.2 Prescribed officers
requirement. Given the complexities of running a Prescribed officers include every person, by
corporate, it may be necessary to appoint more whatever title the office is designated, that:
directors. Furthermore, where companies apply exercises general executive control over and
the governance principles set out in the King management of the whole, or a significant
Report on Governance for South Africa (King portion, of the business and activities of the
III), it may be necessary to have more than the company; or
minimum number of directors. regularly participates to a material degree in
the exercise of general executive control over
In general terms, the directors of a company and management of the whole, or a significant
are those individuals empowered by the portion, of the business and activities of the
Memorandum of Incorporation of that company company.
to determine its strategic direction. As a
consequence of the nature of a company, being Most of the provisions in the Act pertaining to
a lifeless corporate entity, human intervention directors apply equally to prescribed officers.
is required to direct its actions and therefore The Act determines that prescribed officers
determine its identity. are required to perform their functions and
exercise their duties to the standard of conduct
The directors are entrusted by the shareholders as it applies to directors. Prescribed officers
of the company with the ultimate responsibility will be subject to the same liability provisions
for the functioning of the company. While as it applies to directors. As is the case with
some of the day-to-day running of the directors, the remuneration paid to prescribed
company is generally delegated to some level officers must be disclosed in the annual financial
of management, the responsibility for the acts statements. The following provisions, inter
committed in the name of the company rests alia applicable to directors, will also apply to
with the directors. prescribed officers:
Section 69 Ineligibility and disqualification of
persons to be directors or prescribed officers;
Section 75 Directors personal financial
interest;
Section 76 Standards of directors conduct;
Section 77 Liability of directors and
prescribed officers;
Section 78 Indemnification and directors
insurance; and
Section 30(4) and 30(5) Disclosure of
remuneration.

A person will be a prescribed officer regardless of

any title or office they are designated.

10
Although it is not a legislative requirement, it is functioning of the company. Where a person is
recommended that the board records the names responsible for implementing specific decisions of
of all those individuals which are regarded as the board, he will in all likelihood not be regarded
prescribed officers. The list of names will be as a prescribed officer, as the exercise of those
necessary, among other requirements, when the functions will not be equated with executive
company has to disclose the remuneration paid management or control. Further, the company will
to or receivable by its prescribed officers in the have to determine, in its particular circumstances
annual financial statements. and in view of the companys structure, which
parts of the company, if any, are regarded as a
Note that regardless of whether a company significant portions of the company.
has officially identified a particular individual
as a prescribed officer or not, that person may Not every division or business unit will necessarily
nevertheless be classified as a prescribed officer to be regarded as a significant portion of the
the extent that the persons role in the company business, and only persons that exercise general
meets the definition. executive control over or management of a
significant portion of the company are regarded as
In order to determine who the prescribed officers prescribed officers.
of the company are, one will have to apply
a certain degree of judgment. Management A person does not have to be employed by a
will have to consider all the relevant provisions particular company to be classified as a prescribed
of the definition, such as general executive officer of the company.
management and control and significant
portion of the business and activities in the
context of their specific company in order to
identify the prescribed officers of the company.

The meaning of general executive control and

management needs to be determined in view of
the organisational and governance structure of
the company. Executive control and management
should be distinguished from ordinary control
and management carried out in the day to day

Duties of Directors 11
 The intention of the legislature seems to be to 1.3 The legal status of a director
classify as prescribed officers those individuals The Act assigns to directors the authority to
that are not appointed to the board of the perform all the functions and exercise all the
company (thus, they are not directors) but powers of the company. It sets out the minimum
nevertheless act with the same authority as standard of conduct, and provides for personal
that of a director (executive management and liability where a director does not perform to
control). In an earlier draft of the Regulations, the said standard. The Act does not specifically
a prescribed officer was defined as anyone that comment on the legal status of a director.
has a significant impact on the management and
administration of the company. This definition Where no express contract has been entered
was much wider and included most of the into between the company and its directors, the
(senior) management of a company. However, provisions contained in the Act and the companys
the definition in the final Regulations limits the Memorandum of Incorporation are generally
scope to only those individuals that exercise viewed as guiding the terms of the relationship
executive management and control this that the director has with the company.
would limit the prescribed officers to only those
individuals that have executive authority in Directors have been alternately viewed as trustees,
the company, and it would exclude ordinary agents, managers and caretakers of the companies
managers, even senior managers (depending of they serve. Whatever the view taken, a director
course on the organisational and governance occupies a position of trust within the company.
structure of the company). Persons may be
classified as prescribed officers under the 1.4 The different types of directors
following circumstances: In law there is no real distinction between
A member of a companys executive the different categories of directors. Thus, for
committee purposes of the Act, all directors are required
The senior financial manager in a company to comply with the relevant provisions, and
that does not have a financial director meet the required standard of conduct when
A chief executive officer performing their functions and duties.
Regional manager (eg Africa manager: Sales)
It is an established practice, however, to classify
A company secretary that performs the role directors according to their different roles on the
contemplated in King III (i.e. advising the board board. King III has provided definitions for each
but not taking decisions on behalf of the board) type of director.
would generally not be classified as a prescribed
officer. Also, persons that perform an important The classification of directors becomes particularly
operational role, but not general executive important when determining the appropriate
management and control functions, would not membership of specialist board committees,
be prescribed officers. and when making disclosures of the directors
remuneration in the companys annual report.

12
Executive director
Involvement in the day-to-day management of Non-executive director
the company or being in the full-time salaried The non-executive director plays an important role
employment of the company (or its subsidiary) or in providing objective judgement independent of
both, defines the director as executive. management on issues facing the company.

An executive director, through his or her privileged Not being involved in the management of the
position, has an intimate knowledge of the company defines the director as non-executive.
workings of the company. There can, therefore, Non-executive directors are independent of
be an imbalance in the amount and quality of management on all issues including strategy,
information regarding the companys affairs performance, sustainability, resources,
possessed by executive and non-executive directors. transformation, diversity, employment equity,
standards of conduct and evaluation of performance.
Executive directors carry an added responsibility.
They are entrusted with ensuring that the The non-executive directors should meet from
information laid before the board by management time to time without the executive directors to
is an accurate reflection of their understanding of consider the performance and actions of executive
the affairs of the company. management.

King III highlights the fact that executive An individual in the full-time employment of the
directors need to strike a balance between their holding company is also considered a non-executive
management of the company, and their fiduciary director of a subsidiary company unless the
duties and concomitant independent state of individual, by conduct or executive authority, is
mind required when serving on the board. The involved in the day-to-day management of the
executive director needs to ask himself Is this subsidiary.
right for the company?, and not Is this right for
King III Report Annex 2.3
the management of the company?

Duties of Directors 13
 Independent director
An independent director is defined in detail in
King III. In essence, an independent director is a
non-executive director who:
is not a representative of a shareholder who has
the ability to control or significantly influence
management or the board
does not have a direct or indirect interest in the
company (including any parent or subsidiary in
a consolidated group with the company) which
exceeds 5% of the groups total number of
shares in issue
does not have a direct or indirect interest in the
company which is less than 5% of the groups
total number of shares in issue, but is material to
his or her personal wealth
has not been employed by the company or
the group of which it currently forms part in
any executive capacity, or appointed as the
designated auditor or partner in the groups
external audit firm, or senior legal adviser for the
preceding three financial years
is not a member of the immediate family of an
individual who is, or has during the preceding
three financial years, been employed by the
company or the group in an executive capacity
is not a professional adviser to the company or
the group, other than as a director
is free from any business or other relationship
(contractual or statutory) which could be seen
by an objective outsider to interfere materially
with the individuals capacity to act in an
independent manner, such as being a director
of a material customer of or supplier to the
company, or
does not receive remuneration contingent upon
the performance of the company.

King III suggests that it may be useful to appoint

a lead independent director who, as a result of his
or her senior status, has the authority to facilitate
any issues that may arise between executive
and non-executive directors of the board. Such
a function is noted as being especially relevant
where the chairperson is an executive director.

14
1.5 Personal characteristics of an effective
director

The role of a director, whether executive or non-

executive, is a particularly challenging one. While all
appointments have their own unique demands, there are
a number of characteristics that can contribute to the
effectiveness of a director.
Some such characteristics may include: In addition to personal characteristics, a number
Strong interpersonal and communications skills of experiential factors may contribute to the
Increasingly, directors are being expected effectiveness of a director. Such factors are
to represent the company at shareholders not mandatory for all directors, but can often
meetings and in discussions with third parties be persuasive in evaluating an individual for
such as analysts and the media. An obvious appointment.
advantage is therefore the ability to clearly and International exposure
definitively present the companys position. South African firms are increasingly competing
Energy on the world stage. This competition brings
Directors typically have a number of competing with it a number of unique challenges.
commitments and priorities. Where critical A director that brings to the board an
decisions are being made on a daily basis, international focus and an exposure to global
directors are constantly challenged to maintain benchmarks and processes is becoming more
their energy levels and enthusiasm. and more valuable.
Of independent mind Industry expertise
A director is expected to apply his or her The board is enriched by any individual that
independent judgment to all issues presented can contribute knowledge of the particular
to the board. Directors are increasingly required industry when evaluating issues and decisions
to take a stand when, in his or her mind, made at the company.
the companys long term future is not being Financial knowledge
prioritised, no matter what the consequences. All businesses are becoming increasingly driven
A strategic thinker by financial and accounting considerations.
The primary duty of the director is to guide the Having the ability to evaluate the financial
company to long-term prosperity. This often implications of an action or decision is
requires the individual to be able to assess the definitely an advantage as a director.
long-term consequences of decisions taken.
Analytical
Directors are often presented with problems
that have a number of potential solutions,
and the ability to sift through data to find an
answer is a valuable personality trait.

Duties of Directors 15
2. Appointment of a director

Shareholders are ultimately responsible for

the composition of the board and it is in
their own interests to ensure that the board
is properly constituted from the viewpoint
of skill and representivity.
King III Principle 2.19 par 80

Certainly one of the most important responsibilities

of shareholders is the appointment of directors.
While the Act and the companys Memorandum
of Incorporation may prescribe the required
qualifications and disqualifications for appointment
as a director, it is vitally important that the existing
directors assess the qualitative characteristics
necessary in an individual to effectively perform
their functions and integrate with the culture and
style of the organisation.

From a legal perspective, it is important to

ensure that the required procedures of the
appointment as set out in the Act and the
companys Memorandum of Incorporation are
carried out correctly. This amy avoid any unwanted
ramifications in the future.

In practice, companies may encounter difficulties

in identifying suitable individuals to approach as
potential directors. The directors of small companies
are often hampered by the fact that they do not
possess the extensive network of contacts that the
directors of larger companies have.

In such instances it is often best to enquire of

the companys auditors or other professional
advisors, or to contact a professional
organisation such as the Institute of Directors to
identify suitable individuals. Further, companies
could make use of executive search agencies to
identify suitable individuals for consideration.

16
2.1 Who qualifies as a director? Register of Directors
With a few specific exceptions, anyone can be The Act requires the Commission to maintain a
appointed as a director of a company. public register of persons who are disqualified
from serving as a director, or who are subject to
Legal qualities required to be a director an order of probation as a director, in terms of an
The Act is the primary determinant of who may order of a court.
or may not be appointed to be a director. A
companys Memorandum of Incorporation may 2.2 The legal mechanics of appointment
provide additional grounds for ineligibility or Directors are either appointed or elected. The Act
disqualification, or minimum qualifications to be provides that the companys Memorandum of
met by directors. Incorporation may provide for:
the direct appointment and removal of directors
Section 69 of the Act in essence provides that any by any person who is named in, or determined
person is ineligible for appointment as director, if in terms of, the Memorandum of Incorporation
that person is a juristic person, an unemancipated (e.g. shareholder representative)
minor (or is under a similar legal disability), or does ex officio directors (e.g. the CEO), and
not satisfy the qualifications as per the companys the appointment of alternate directors.
Memorandum of Incorporation. Also, a person is
disqualified from being a director, if the person: The Act makes it clear that, in the case of a profit
has been prohibited to be a director by the court company other than a state-owned company, the
has been declared by the court to be delinquent Memorandum of Incorporation must provide for
in terms of this Act or the Close Corporations Act the election by shareholders of at least 50% of the
is an unrehabilitated insolvent directors, and 50% of any alternate directors.
is prohibited in terms of any public regulation to
be a director of the company The first directors of the company
has been removed from an office of trust, on the The Act determines that each incorporator of
grounds of misconduct involving dishonesty, or a company will also be a first director of that
has been convicted and imprisoned without company. This directorship will be temporary and
the option of a fine, or fined more than the will continue until a sufficient number of directors
prescribed amount, for theft, fraud, forgery, have been first appointed or first elected in terms
perjury or an offence under the Companies Act, of the requirements of the Act.
the Insolvency Act, the Close Corporations Act,
the Competition Act, the Financial Intelligence The first appointment of directors should be
Centre Act, the Securities Services Act, or done in terms of the provisions of the companys
the Prevention and Combating of Corruption Memorandum of Incorporation (e.g. the
Activities Act. Memorandum of Incorporation may permit the
majority shareholder to appoint a certain number
It is interesting to note that the Act provides the of directors). The first election of directors should
courts with wide discretion to either extend any be done in accordance with the provisions of
disqualification for no longer than a period of five section 68 (see below).
years at a time, or to exempt any person from the
disqualifications as set out above.

The Act determines that the appointment of an

ineligible or disqualified person as director is null
and void.

Duties of Directors 17
The required number of directors may be If a vacancy arises on the board, other than as
determined either in terms of the Act (private a result of an ex officio director ceasing to hold
companies and personal liability companies to that office, it must be filled:
appoint at least one director, whereas public by a new appointment, if the director was
companies, state owned companies and appointed by a person identified in the
non-profit companies are required to appoint Memorandum of Incorporation, or
at least three directors) or the companys by a new election conducted at the next
Memorandum of Incorporation. It should be annual general meeting of the company (in the
noted that the number of directors as prescribed case of a public company and a state owned
by the Act is in addition to the directors that company), or
must be appointed to serve on the audit in any other case, within six months after the
committee or social and ethics committee. vacancy arose at a shareholders meeting called
for the purpose of electing the director. In the
If not enough directors are either first appointed latter instance, the election may be conducted
or first elected to meet the required number of by means of a written poll of the persons
directors as required in terms of the Act or the entitled to exercise voting rights in an election
companys Memorandum of Incorporation, the of the director.
board must call a shareholders meeting within
40 days of incorporation to elect a sufficient King III proposes that a formal and transparent
number of directors. board appointment process be implemented.
The JSE Listings Requirements require listed
Election of directors by the shareholders companies to have a policy detailing the
While it is usually the directors themselves who procedures for appointments to the board of
identify and nominate a new director to be directors. The board, assisted by a nominations
elected to their number, it is the responsibility of committee, should identify potential candidates
the shareholders to evaluate and legally appoint and ensure that all such candidates will be in
each new director. a position to contribute to the combined skill
and experience of the board. The nominations
In terms of section 68 of the Act each director committee (or the board) has to perform
must be voted on by a separate resolution a background check on candidates. When
at a general meeting of the company. Once considering candidates, cognisance should be
elected, the person will become a director only taken of the following:
once written consent to serve as a director the knowledge and experience required to fill
was delivered to the company. The companys the gap on the board
Memorandum of Incorporation may prescribe a the apparent integrity of the individual, and
different process for the election of directors by the skills and capacity of the individual to
the shareholders. However, it should be noted discharge these duties to the board.
that this must still amount to an election.

18
Notwithstanding the consideration and evaluation Where a director retires by rotation and is
of candidates, the onus is on the individual re-appointed, no notice needs to be given to the JSE.
candidate to determine whether or not they have
the time, skill, experience, and capacity to make The minimum number of directors
a meaningful contribution to the company. They The Act requires private companies and
should consent to serve as a director only if they personal liability companies to appoint at least
are of the opinion that they meet the requisite one director, whereas public companies, state
requirements and would be in a position to commit owned companies and non-profit companies
the time necessary to discharge their duties. are required to appoint at least three directors.
This prescribed number of directors is in addition
This is especially true for non-executive to the number of directors appointed to the
directors. Prior to accepting an appointment audit committee and/or the social and ethics
as director, they should consider the time and committee.
dedication required, and they should not accept
an appointment if they would not be able to All public companies and state-owned companies
exercise the necessary care, skill and diligence. need to appoint an audit committee comprising
King III does not prescribe a maximum number at least three directors that meet the prescribed
of directorships for non-executive directors. criteria. All listed public companies and state-
owned companies (as well as those other
The appointment of a non-executive director companies that would have scored at least 500
should be formalised in an agreement between public interest points in any two of the last five
the director and the company. financial years) must appoint a social and ethics
committee comprising at least three directors or
Even though executive directors may accept prescribed officers, of which one director must
non-executive directorships, they should consider be an independent non-executive director. It is,
their responsibilities and only accept such however, permitted for committee members to
appointment in consultation with the CEO and serve on more than one committee. Thus, the
chairman. members of the audit committee may also serve
on the social and ethics committee. As such,
It is important when identifying new directors the minimum prescribed number of directors
to consider the balance of power and authority for a public company is six (i.e. three directors
at board of directors level, to ensure that as required by the Act, plus three committee
no one director has unfettered powers of members). Note: the obligation to appoint an audit
decision-making. committee and/or a social and ethics committee
does not apply where the company in question
The JSE Listings Requirements require that uses the said committee of its holding company.
the company inform the JSE of any new In such an instance, the minimum number will be
appointments of directors (including the change one director for private companies and personal
of important functions on the board, or change liability companies, whereas public companies,
of executive responsibilities of a director) by state owned companies and non-profit companies
the end of the business day following the are required to have at least three directors.
decision, or receipt of notice of the change. This
information must also be disclosed on the JSEs
news service SENS.

Duties of Directors 19
 Any failure by a company at any time to have One of the details required by the Act to be
the minimum number of directors required entered is that of the other companies for
by the Act or the companys Memorandum which the individual also serves as a director. In
of Incorporation, does not limit or negate the practice, these details are often insufficient as
authority of the board, or invalidate anything the company secretary may struggle to obtain
done by the board or the company. the information from the director, and to keep it
current. The information does, however, serve as
Where the company is listed, Schedule 10 to an important record in distinguishing between
the JSE Listings Requirements states that the independent and non-executive directors.
company should have at least four directors.
2.3 What a new director should be told
The Register of Directors King III recommends that when a new director
The Act requires every company to keep a record is appointed to the board, he or she should
of its directors. This record should be in written receive the necessary induction to familiarise
form, or other form as long as the information themselves with the duties and responsibilities
can be converted into written form within a of a director generally (where the individual
reasonable time. The register of directors of a has not performed the role previously), and
company must be open to inspection by any with the issues specific to the company such as
person who holds a beneficial interest in any operations, business environment and general
securities issued by a profit company, or who is a sustainability matters.
member of a non-profit company, as well as any
member of the public. A formal programme should be designed to
increase the awareness and effectiveness of each
A record of its directors should comprise details director appointed (both new and existing director).
of any person who has served as a director of While the responsibility for this process lies with
the company, and include: the chairperson, it is suggested that the company
full name secretary is the best person to actually perform the
identity number or date of birth induction and development programme.
nationality and passport number
occupation Orientation of inexperienced directors
date of their most recent election or The functions and responsibilities of a director
appointment as director of the company are unlike any other management position.
name and registration number of every Therefore, even when an individual has served
other company or foreign company of which for a considerable period of time as a member of
the person is a director, and in the case of senior management, the responsibilities assumed
a foreign company, the nationality of that on the appointment as a director are unique to
company, and that position.
any other information as required by
Regulations.

These records should be kept for a period of seven

years after the person ceases to serve as a director.

20
There are certain critical issues that should be It may be beneficial for an experienced member
communicated to a new, inexperienced director: of the board to introduce the new director to
The time horizon of any decisions made these issues, which may include:
Most individuals, certainly when acting in a Specific risks and the management thereof
managerial capacity, become accustomed to The pertinent risks present in the industry, and
dealing with a short time horizon. This arises those specific to the company, as well as the
due to the numerous deadlines imposed, and ways in which the board manages these risks.
the importance ascribed to accounting results. Key members of senior management
New directors should be introduced to the
The directors role is not to maximise short- various members of management on whom
term returns, but should rather attempt to the directors depend for information.
safeguard the sustainable development of the Pertinent accounting issues
company in the long-run. Decisions should With accounting decisions driving a companys
therefore be taken that are in the long-term share price to a greater extent than ever
interests of the company, and not to boost the before, it is important that all directors are
next earnings statement. aware of the material choices that have been
The independent frame of mind required made, and the extent to which these choices
Managers in the business world are often influence the companys results.
accused of not being team-players when Quality of information and internal controls
they criticise a decision made by their peers or Directors should satisfy themselves of the
superiors. veracity of the information received from
management, and the state of the internal
It should be stressed that the directors role control environment at the company.
is to take a step back and critically assess the The boards relationship with internal and
motivation and consequences of a decision, external audit
and where necessary, to put forward a The directors make certain assertions in the
reasoned view. annual report, including:
Personal liability of directors the accounting results are free from
Directors are often surprised by the high level misstatement, and that the internal controls
of personal risk that they bear through their at the company are operating effectively
position. the company will be a going concern in the
foreseeable future, and
The legal framework in South Africa (which the risk management framework and
extends far beyond the Companies Act) is processes within the company are adequate
increasingly looking to make directors liable to manage the risks inherent in the business.
in their personal capacity for actions of the
company. In order to make such statements, the directors
rely to an extent on assurances provided to them
It is only fair that an individual be given the by the internal and external audit functions. It is
opportunity to weigh up any risks against the therefore important for a director to understand
rewards from serving as a director. the sources and reliability of this assurance.

Each company and industry has its own unique

issues. It is therefore vital for all directors to
understand what these issues are and what their
impact on the company is.

Duties of Directors 21
3. Director conduct

It is unhelpful and even misleading to classify company

directors as executive and non-executive for purposes of
ascertaining their duties to the company or when any or
specific or affirmative action is required of them. No such
distinction is to be found in any statute. At common law,
once a person accepts appointment as a director, he
becomes a fiduciary in relation to the company and is
obliged to display the utmost good faith towards the
company and in his dealings on its behalf. That is the
general rule and its application to any particular
incumbent of the office of director must necessarily depend
on the facts and circumstances if each.
Howard v Herrigel 1991 (2) SA 660 (A)

22
3.1 The standard of directors conduct non-executive or independent non-executive
By accepting their appointment to the position, directors. The standard, and consequent liability
directors imply that they will perform their duties where the standard is not met, applies equally to
to a certain standard, and it is a reasonable all directors.
assumption of the shareholders that every
individual director will apply his or her particular In terms of this standard a director (or other
skills, experience and intelligence to the person to whom section 76 applies), must
advantage of the company. exercise his or her powers and perform his or her
functions:
The Act codifies the standard of directors in good faith and for a proper purpose
conduct in section 76. The standard sets the in the best interest of the company, and
bar very high for directors. The intention of the with the degree of care, skill and diligence that
legislature seems to be to encourage directors may reasonably be expected of a person carrying
to act honestly and to bear responsibility for out the same functions and having the general
their actions - directors should be accountable knowledge, skill and experience of that director.
to shareholders and other stakeholders for
their decisions and their actions. However, The Act prohibits a director from using the
with the standard set so high, the unintended position of director, or any information obtained
consequence may be that directors would not while acting in the capacity of a director to
be prepared to take difficult decisions or expose gain an advantage for himself or herself, or for
the company to risk. Since calculated risk taking any other person (other than the company or
and risk exposure form an integral part of any a wholly-owned subsidiary of the company), or
business, the Act includes a number of provisions to knowingly cause harm to the company or a
to ensure that directors are allowed to act subsidiary of the company.
without constant fear of personal exposure to
liability claims. In this regard, the Act has codified Directors have a fiduciary duty to act in the
the business judgement rule, and provides for best interest of the company as a whole.
the indemnification of directors under certain Directors owe this duty to the company as a
circumstances, as well as the possibility to insure legal entity, and not to any individual, or group
the company and its directors against liability of shareholders not even if the majority
claims in certain circumstances. shareholder appointed the director. Directors are
obliged to act in good faith in the best interest
It should be noted that the duties imposed of the company. They should act within the
under section 76 are in addition to, and not bounds of their powers, and always use these
in substitution for, any duties of the director powers for the benefit of the company. Where
of company under the common law. This a director transgresses his or her powers, the
means that the courts may still have regard company might be bound by his or her action,
to the common law, and past case law when although he or she can be held personally liable
interpreting the provisions of the Act. for any loss suffered as a result.

The codified standard applies to all directors,

prescribed officers or any other person who is
a member of a board committee irrespective of
whether or not that the person is also a member
of the companys board. Also, it should be noted
that no distinction is made between executive,

Duties of Directors 23
 The fiduciary duty of directors includes (but not the extent of a directors duty of care and skill
limited to): depends to a considerable degree on the nature
the duty to individually and collectively exercise of the companys business and on any particular
their powers bona fide in the best interest of obligations assumed by him or assigned to him....
the company In that regard there is a difference between the
the duty not to exceed their powers so-called full-time or executive director, who
the duty not to act illegally dishonestly, or ultra participates in the day to day management of the
vires companys affairs or of a portion thereof, and the
the duty to act with unfettered discretion non-executive director who has not taken on any
the duty not to allow their personal interests to special obligation. The latter is not bound to give
interfere with their duties continuous attention to the affairs of the company.
a director is accountable to the company for His duties are of an intermittent nature to be
secret profits made by virtue of the fiduciary performed at periodical board meetings, and at
position or from the appropriation of a any other meetings that may require his attention.
corporate opportunity
Fisheries Development Corporation of SA Ltd v AWJ
the duty not to compete with the company
Investments (Pty) Ltd 1980 (4) SA 156 (W)
the duty not no misuse confidential
information
In a recent Australian case (Centro case) the duty
of care and skill was considered with respect to
When determining whether a director complied
the duty of directors to approve the financial
with his or her fiduciary duty, the court may consider
statements of the company. In this case that
whether, in the circumstances, a reasonable person
court found that all non-executive directors were
could have believed that the particular act was in the
in breach of their duty of care and skill. The
best interest of the company. This is typically known
failure to notice certain omissions may well be
as an objective test.
explicable but here the directors clearly looked
solely to management and external advisors.
and the directors as occupying a fiduciary
However, if they had acted as the final filter,
position towards the company must exercise
taking care to read and understand the financial
those powers bona fide in the best interest of
accounts, the errors may have been discovered.
the company as a whole, and not for an ulterior
motive

Treasure Trove Diamonds Ltd v Hyman 1928 AD 464 at 479

The codified standard for director conduct

combines care, skill and diligence in one
single test. The test to measure a directors
duty to exercise a degree of care, skill and
diligence provides for an objective assessment
to determine what a reasonable director would
have done in the circumstances. However,
the objective assessment contains subjective
elements in that it takes into consideration the,
skill and experience of that particular director. In
applying the test, a distinction is made between
different types of directors.

24
All directors must carefully read and understand
financial statements before they form the
opinions which are to be expressed Such
a reading and understanding would require
the director to consider whether the financial
statements were consistent with his or her own
knowledge of the companys financial position.
This accumulated knowledge arises from a
number of responsibilities a director has in
carrying out the role and function of a director.

These include the following:

a director should acquire at least a rudimentary
understanding of the business of the
corporation and become familiar with the
fundamentals of the business in which the
corporation is engaged;
a director should keep informed about the
activities of the corporation;
whilst not required to have a detailed
awareness of day-to-day activities, a director
should monitor the corporate affairs and
policies;
a director should maintain familiarity with
the financial status of the corporation by a
regular review and understanding of financial
statements;
a director, whilst not an auditor, should still
have a questioning mind.

. a director is not relieved of the duty to pay

attention to the companys affairs which might
reasonably be expected to attract inquiry, even
outside the area of the directors expertise.

Australian Securities and Investments Commission v Healey

[2011] FCA 717 at 17 and 18

As stated above, the Act also codifies the

business judgment rule. In terms of this rule a
director will not be held liable if he or she took
reasonable diligent steps to become informed
about the subject matter, does not have a
personal financial interest (or declared such
a conflicting interest) and the director had a
rational basis to believe that the decision was in
the best interest of the company.

Duties of Directors 25
In discharging any board or committee duty, Directors of a company may be held jointly and
a director is entitled to rely on one or more severally liable for any loss, damage or costs
employees of the company, legal counsel, sustained by the company as a result of a breach
accountants or other professional persons, or a of the directors fiduciary duty or the duty to act
committee of the board of which the director is with care, skill and diligence. The Act sets out a
not a member. The director, however, does not range of actions for which directors may be held
transfer the liability of the director imposed by liable for any loss, damage or costs sustained by
this act onto such employee. the company. These actions include:
acting in the name of the company without
In respect of all duties that may properly be the necessary authority
left to some other official, a director is, in the being part of an act or omission while knowing
absence of grounds for suspicion, justified in that the intention was to defraud shareholders,
trusting that official to perform such duties employees or creditors
honestly. He is entitled to accept and rely on signing financial statements that was false or
the judgment, information and advice of the misleading in a material respect, or
management, unless there are proper reasons issuing a prospectus that contained an untrue
for querying such. Similarly, he is not expected statement.
to examine entries in the companys books...
Obviously, a director exercising reasonable In certain instances companies are allowed to
care would not accept information and advice indemnify directors in respect of any liability, or
blindly. He would accept it, and he would be companies may purchase insurance to protect
entitled to rely on it, but he would give it due a director against liability (but only for those
consideration and exercise his own judgment in instances for which the company may indemnify
the light thereof. the director), or to protect the company against
expenses or liability for which the company may
Fisheries Development Corporation of SA Ltd v AWJ
indemnify a director. A company may indemnify
Investments (Pty)Ltd 1980 (4) SA 156 (W)
a director in respect of any liability, except for:
any liability arising from situations where the
director:
Nothing I decide in this case should indicate
acted in the name of the company, signed
that directors are required to have infinite
anything on behalf of the company, or
knowledge or ability. Directors are entitled to
purported to bind the company or authorise
delegate to others the preparation of books and
the taking of any action by or on behalf
accounts and the carrying on of the day-to-day
of the company, despite knowing that the
affairs of the company. What each director
director lacked the authority to do so
is expected to do is to take a diligent and
acquiesced in the carrying on of the
intelligent interest in the information available to
companys business despite knowing that it
him or her to understand that information, and
was being conducted in a reckless manner
apply an enquiring mind to the responsibilities
been a party to an act or omission by the
placed upon him or her.
company despite knowing that the intention
Australian Securities and Investments Commission v Healey was calculated to defraud a creditor,
[2011] FCA 717 at 20 employee or shareholder of the company, or
had another fraudulent purpose
any liability arising from wilful misconduct or
wilful breach of trust, or
incurred a fine as a result of a conviction on an
offence in terms of national legislation.
26
Unless the companys Memorandum of It should be noted that section 75 of the Act
Incorporation provides otherwise, a company extends the application of the conflict of interest
may purchase insurance to protect a director provisions to prescribed officers and members of
against any liability or expenses for which the board committees (even if those persons are not
company is permitted to indemnify a director or directors).
to protect the company against any expenses
or liability for which the company is permitted The conflict of interest provisions apply equally
to indemnify a director. The company may, to persons related to the director. Thus, where
however, not directly or indirectly pay a fine a director knows that a related person has a
imposed on the director of the company or of personal financial interest in a matter to be
a related company as a consequence of that considered at a meeting of the board, or knows
director having been convicted of an offence that a related person has acquired a personal
unless the conviction was based on strict liability. financial interest in a matter, after the board has
approved that agreement or matter, the director
3.2 Conflicts of interest should disclose that fact to the board. In this
One of the fundamental duties of a director is regard, it should be noted that for purposes of
to avoid any possible conflict of interests with section 75 the definition of a related person,
the company. It is an accepted principle in when used in reference to a director, not only
South African law that, as a result of the trust has the ordinary meaning as set out in the Act,
placed in the director, he or she is bound to put but also includes a second company of which
the interests of the company before their own the director or a related person is also a director,
personal interests. or a close corporation of which the director or a
related person is a member.
Section 75 of the Act makes clear provision
for dealing with a directors use of company The conflict of interest provisions do not apply
information and conflict of interest. Where to a company or its director, if the company has
a director has a conflicting personal financial only one director, and that director holds all the
interest (where his or her own interests are at beneficial interest in all the issued securities of
odds with the interests of the company), he or the company. However, where that one director
she is prohibited from making, participating in the does not hold all the beneficial interest in the
making, influencing, or attempting to influence any issued securities, he or she may not approve or
decision in relation to that particular matter. This enter into an agreement, or determine any other
provision seems to impose a strict duty on directors matter, in terms of which a person related to him
not to allow their personal financial interest to may have a personal financial interest. In these
impact, in any way, on their dealings with the instances, the director has to obtain shareholder
company. In addition, where a director has a approval by ordinary resolution.
conflicting personal interest in respect of a matter
on the board agenda, he or she has to declare The provision makes it clear that conflict of
that personal interest and immediately leave the interest is taken seriously by the legislature, and
meeting. A director is also prohibited from any one may assume that the Commission and the
action that may influence or attempt to influence Takeover Regulation Panel will enforce these
the discussion or vote by the board, and is provisions strictly.
prohibited from executing any document on behalf
of the company in relation to the matter, unless
specifically requested to do so by the board.

Duties of Directors 27
The provisions will potentially have an impact
on the way in which members of boards are
selected and appointed, as membership of
a number of different boards might lead to
possible conflicts, which in turn means that
those directors will not be able to participate in
or contribute to discussions and decisions related
to such matters.

It is an elementary principle of company law,

that (apart from explicit power in the articles
of association) a director cannot vote for the
adoption of a contract or on a matter in which
he is an interested party.

Gundelfinger v African Textile Manufacturers Ltd

1939 AD 314

Where a director somehow acts in competition

with the company, a fundamental conflict of
interest is inevitable. There are a number of ways
in which such a situation could occur. One is
where a director takes an opportunity that could
have been taken by the company, in his or her
personal capacity. Another is where the director
holds directorships on rival companies.

Where an opportunity arises that could have

It would be a most unusual situation which
been acted upon by the company, the director
allowed directors... of one company to act in
is precluded from acting upon it in his or her
the same or similar capacity for a rival without
individual capacity. The director has a fiduciary
actual or potential conflict situations arising with
duty to pass this opportunity on to the company.
frequent regularity.
The courts have held that even where the
company did not have the resources to pursue Sibex Construction (SA) (Pty) Ltd v Injectaseal CC
the opportunity, the director who came across it 1988 2 SA 54 (T )
was not at liberty to pursue it personally.
Of course, the provisions of the Act relating to
It is debatable whether the holding of conflicts of interest (as discussed above) will
directorships on the boards of rival companies prevent a director from such a position.
in itself constitutes a breach of the directors
fiduciary duties. However, it would be almost
impossible for the director not to prejudice one of
the two or more companies that he or she serves.

28
3.3 Liability of directors Incorporation, to approve a distribution that
The Act makes it clear that a person is not, solely was contrary to the requirements of the Act,
by reason of being an incorporator, shareholder or for the company to acquire any of its own
or director of a company, liable for any liabilities shares, or the shares of its holding company,
or obligations of the company, unless where or make an allotment despite knowing that
the Act or the companys Memorandum of the acquisition or allotment was contrary to
Incorporation provides otherwise. The directors the requirements of the Act.
of a company may only incur liability in specific
instances. In terms of the Act, a director of The Act makes it clear that a director is jointly
a company may be held liable for any loss, and severally liable with any other person who
damages or costs sustained by the company as is or may be held liable for the same act. Also,
a consequence of any breach by the director of any claim for loss, damages or costs for which
a duty contemplated in the standard of directors a person is or may be held liable in terms of the
conduct, failure to disclose a personal financial Act prescribes after three years after the act or
interest in a particular matter, or any breach omission that gave rise to that liability.
by the director of a provision of the Act or the
companys Memorandum of Incorporation. Delinquency and probation of directors
The Act determines that directors may be
In addition, the Act determines that a director declared delinquent or placed on probation as a
of a company is liable for any loss, damages or result of certain conduct. This can be achieved
costs sustained by the company as a direct or by an application to court by the company, a
indirect consequence of the director having - director, a shareholder, the company secretary,
acted in the name of the company, signed a registered trade union or representatives of
anything on behalf of the company, or employees of the company. The grounds for the
purported to bind the company or authorise application for delinquency and probation are
the taking of any action by or on behalf of the set out in the Act, but in general terms, directors
company, despite knowing that the he or she could be:
had no authority to do so declared delinquent if they grossly abused their
persisted and went along with any action or position or if they caused intentional harm to
decision despite knowing that it amounts to the company, and
reckless trading placed on probation if they improperly
been a party to any action or failure to act supported a resolution in contravention of the
despite knowing that the act or omission was solvency and liquidity test or otherwise acted
calculated to defraud a creditor, employee or in a manner which is inconsistent with the
shareholder of the company duties of directors.
signed, consented to, or authorised the
publication of any financial statements that Delinquency usually lasts for 7 years from date of the
were false or misleading, or a prospectus that order or a longer period as determined by the court
contained false or misleading information order. A person who has been declared delinquent
been present at a meeting, or participated in may apply to court after 3 years, for suspension
the making of a decision, and failed to vote of the delinquency order and substitution thereof
against a decision to issue any unauthorised with a probation order. A probation order will lapse
shares or securities, to issue options for automatically after 5 years.
unauthorised shares or securities, to provide
financial assistance to a director or any person
without complying with the requirements
of the Act and the Memorandum of
Duties of Directors 29
 Personal liability company 3.5 Insider trading
The Act allows for the inclusion in the Insider Trading and Closed Periods
Memorandum of Incorporation of a private The Financial Markets Act 19 of 2012 replaces
company the provision that all directors (both the Securities Services Act which has governed
present and past) are jointly and severally liable, the regulation of securities services in South
together with the company, for the past and Africa since 2005. With the purpose of
present debts and liabilities of the company that maintaining the integrity of South African
were incurred during their term of office. Such financial markets, aligning the regulatory
a company is classified as a personal liability framework with relevant local and international
company, and the name of the company will developments and standards and mitigating
end with the expression Incorporated or the the potential impacts of any possible future
abbreviation Inc. financial crisis, the Financial Markets Act refines
its predecessors provisions regulating insider
While all private companies are able to include trading. The revisions further extend the liability
such a provision, it is usually those within certain of directors and their proxies, mainly through the
professions such as companies of attorneys or amendment of allowable defences, in dealing
auditors where personal liability is a necessity with unpublished price-sensitive information
in terms of their professional standards. The within their companies.
advantage of such a corporate structure over a
partnership would be perpetual succession of the Given the Financial Services Board and
legal entity. Legislatures continued focus on market abusive
transactions as well as the criminal and civil
3.4 Apportionment of damages sanctions envisaged by the Financial Markets
The Apportionment of Damages Act makes it Act, this piece of legislation is very relevant
easier for an aggrieved party to sue more than to directors who receive and trade in their
one party at a time. In the case of company companys securities.
failures, it has become common practice for the
aggrieved creditors and shareholders to sue those Inside information
parties with the deepest pockets namely the Inside information is defined by the Financial
auditors, and occasionally the directors (although Markets Act as specific or precise information
most directors of failed companies manage to which has not been made public and which is
alienate their assets prior to being sued). obtained or learned as an insider and, if it were
made public, would be likely to have a material
In such instances, it will become more likely that effect on the price or value of any security listed
the directors, together with any other relevant on a regulated market.
party, will be sued jointly under this Act.

30
Insider The defences
An insider, as defined by the Financial Markets An insider, dealing for his or her own account,
Act, is an individual who has inside information: may no longer utilise the defence that insider
(a) through trading was performed in pursuit of an affected
(i) being a director, employee or shareholder transaction as defined in section 440A of
of an issuer of securities listed on a the Companies Act 1973. The only defence
regulated market to which the inside available to such an insider is where he or she
information relates; or only became an insider after having given the
(ii) having access to such information by instruction to deal to an authorised user (i.e.
virtue of employment, office or possession; licensed security services provider) and the
or her employment, office or possession; or instruction was not changed in any manner after
(b) where such person knows that the direct he or she became an insider. A similar defence
or indirect source of the information was a is given to the authorised user acting on the
person contemplated in paragraph (a) insiders behalf.

The definition, borrowed from the Security Where an insider deals for another persons
Services Act (Act 36 of 2004), stretches a account, the Financial Markets Act has amended
far-reaching net to include not only directors the defence available to the authorised user
as insiders, but also those that have direct or acting on the instruction of the insider and
indirect exposure to inside information. now places the onus on that authorised user
to prove that he or she did not know the client
The offences was an insider at the time that the instruction
Similar to its predecessor, the Financial Markets was given. The defence previously available
Act makes it an offence for an insider to deal to public sector bodies in pursuit of monetary
directly, indirectly or through an agent for his or policy was completely removed in the Financial
her own account or for any other person, in the Markets Act. A new defence has been added,
securities listed on a regulated market to which known as the safe harbour defence, for bona
the inside information relates or which are likely fide commercial transactions amongst insiders
to be affected by it. The disclosure of inside that are not designed to benefit from the price
information to another person, encouragement sensitive information. This defence requires that
of another person in dealing in securities of the all parties to the transaction have possession of
company or discouragement of another person the same inside information and that trading
from dealing in the securities of the company by is limited to these parties. An authorised user
an insider who knows that he or she has inside acting on the instruction of the insider(s) may
information, similarly remains an offence in also utilise this defence.
terms of the Financial Markets Act.
Lastly, disclosure of insider information by an
The Financial Markets Act, however, for the first insider to another person is defensible where
time extends liability to any person dealing for an the insider can prove that such disclosure was
insider who knew that such person is an insider. made pursuant to the proper performance of
Insiders proxies are hereby included within the realm his or her employment, office or profession in
of liability and are treated as insiders themselves if circumstances unrelated to dealing and that
acting for another insider of the company. he or she at the same time disclosed that the
information was inside information.

Duties of Directors 31
The table below summarises the available defences:

The Defence Available to

I only became an insider after having given the An insider dealing for own account.
instruction to deal to an authorised user (i.e. licensed The authorised user dealing on
security services provider) and the instruction was not instruction of the insider
changed in any manner after I became an insider.

I am an authorised user acting on the instruction of the The authorised user dealing on
insider. The onus is on me to prove that I did not know instruction of the insider.
the client was an insider at the time that the instruction
was given.
I entered into a bona fide commercial transaction An insider dealing for another persons
amongst fellow insiders. The transaction was not account.
designed to benefit from the price sensitive information. An authorised user dealing on
All parties to the transaction had possession of the instruction of the insider.
same inside information and the trading was limited to
these parties.
I disclosed insider information to another person. I An insider dealing for own account.
can prove that such disclosure was made pursuant to An insider dealing for another persons
the proper performance of my employment, office or account.
profession in circumstances unrelated to dealing and An authorised user dealing on
that I at the same time disclosed that the information instruction of the insider.
was inside information.

The Penalty Publication

Any director responsible for contravening the The insider trading provisions do not apply to
Financial Markets Acts provisions regulating public information. The Financial Markets Act
insider trading will be liable to pay an has amended the definition of public information
administrative sanction not exceeding the profit to ensure that such information be more widely
on insider trading or loss avoided as a result available before insiders may deal. This was
thereof, an amount of up to R1 million, interest done by removing information obtained by
on any amount payable as well as the costs of persons exercising diligence or observation,
suit, including any investigation costs incurred information only communicated on the payment
by the Enforcement Committeee. In addition, of a fee or information only published outside
the Financial Services Board has wide-ranging South Africa, from the definition of public
powers to investigate allegations of insider information in the Financial Markets Act.
trading, including the search of premises and
examination of any documentation related to
their investigation on authority of a warrant.

32
Closed periods As it is quite possible that unpublished price sensitive
Regulators commonly utilise closed period information might already exist prior to the end of
provisions to curb insider trading practices of a financial period, the closed period could, applying
directors and management. The provisions prohibit the definition above, result in extended periods
trading in company securities by designated during which no trading is allowed. Even during
persons during closed periods which commonly periods of allowed trading, the director or company
coincide with periods during which the persons secretary (excluding his or her associates) require
might be privy to price sensitive information. written authorisation to trade in the securities from
the issuing companys chairman or another director
The JSE Listing Requirements (the JSE) defines a designated for the purpose.
closed period as:
(a) the date from the financial year end up A director is expected to notify his or her
to the date of earliest publication of the immediate family and other associates as well
preliminary report, abridged report or as his or her investment manager of periods
provisional report; during which no trading is allowed and such
(b) the date from the expiration of the first six communication should include the names of
month period of a financial year up to the the issuer(s) of which he or she is a director. The
date of publication of the interim results; investment manager of a director should be
(c) the date from the expiration of the second instructed by the director that no trades should
six month period of a financial year up to be entered into on his or her behalf without prior
the date of publication of the second interim written consent. Similarly, immediate family and
results, in cases where the financial period associates of the director have to inform the
covers more than 12 months; director of their trading activities in the securities
(d) in the case of reporting on a quarterly basis, of the issuer to allow the director to comply with
the date from the end of the quarter up to the disclosure requirements set by the JSE.
the date of the publication of the quarterly
results; and
(e) any period when an issuer is trading under a
cautionary announcement.

The director of a company and company secretary

(of the issuer company or a major subsidiary of
the issuer) as well as associates of the director,
which include immediate family, are prohibited
from trading in the securities of a listed company
during a closed period or any period when there
exists any matter which constitutes unpublished
price sensitive information in relation to the
issuers securities (whether or not the party has
knowledge of such matter).

Duties of Directors 33
 Disclosure
Trading in the securities of a listed company
requires disclosure on Stock Exchange News
Service (SENS) when trading is entered into by or
on behalf of:
(i) a director and company secretary (held
beneficially, whether directly or indirectly) of
the issuer;
(ii) a director and company secretary (held
beneficially whether directly or indirectly) of a
major subsidiary company of the issuer; or
(iii) any associate of the company or a major
subsidiary of the company.

The SENS disclosure shall include all details of the

transaction, including off-market transactions.

In terms of the JSE Listing Requirements, a

company must, without delay, unless the
information is kept confidential for a limited
period of time as allowed by the JSE, release
an announcement providing details of any
development(s) in such companys sphere of
activity that is/are not public knowledge and
which may, by virtue of its/their effect(s), lead
to material movements of the reference price of
such companys listed securities.

Immediately after a listed company acquires

knowledge of any material price sensitive
information and the necessary degree of
confidentiality of such information cannot be
maintained or if the company suspects that
confidentiality has or may have been breached,
the company must publish a cautionary
announcement on SENS in terms of the JSE
Listing Requirements. The company is required
to update the cautionary statement at least
every 30 business days after issuing the initial
cautionary statement.

34
4. The workings of the board
of directors

Directors should be individuals of integrity and courage,

and have the relevant knowledge, skills and experience
to bring judgement to bear on the business of the
company. In situations where directors may lack
experience, detailed induction and formal mentoring and
support programmes should be implemented.
King III Principle 2.18 par 72

4.1 Composition of the full board Factors determining the number of directors to
The three different types of directors each be appointed are:
bring a different area of focus to the board of evolving circumstances, the needs of the
directors. Executive directors have an intimate company and the nature of its business
knowledge of the workings of the company. the need to achieve an appropriate mix of
Non-executive directors may have a better executive and independent non-executive
understanding of the issues facing the group as directors
a whole. Independent directors bring a totally the need to have sufficient directors to
unclouded, objective viewpoint to the board, as structure board committees appropriately
well as experience gained at other enterprises. potential difficulties of raising a quorum with a
small board
The challenge lies in establishing the appropriate regulatory requirements, and
balance. Each company faces different issues, the skills and knowledge needed to make
and will require a unique combination of skills business judgement calls on behalf of the
to meet those challenges. King III suggests that company.
every board should consider whether its size,
King III Report Principle 2.18 Par 70
diversity and demographics make it effective. In
this regard, a number of factors may be taken
into account, including academic qualifications,
technical expertise, relevant industry knowledge,
experience, nationality, age, race and gender.
When determining the number of directors to
serve on the board, the collective knowledge, skills,
experience and resources required for conducting
the business of the board should be considered.

Duties of Directors 35
 King III has re-affirmed the view that the South 4.2 The implicit duties of the board
African business environment lends itself to having The Practice Note on the Board Charter issued
a single (unitary) board of directors that takes with King III advocates that the board has a
ultimate responsibility for the direction of the number of duties, with the following being the
company. Having a single board makes it essential most fundamental:
to achieve the appropriate balance of power
between the different categories of directors. The board has to act as the focal point for, and
In South Africa, best practice dictates that the custodian of, corporate governance and as
majority of directors should be non-executive, such the board should manage its relationship
of which the majority should be independent. with management, the shareholders and other
At least two executive directors (the CEO and stakeholders of the company along sound
the director responsible for the finance function) corporate governance principles.
should be appointed to the board.
As the focal point for, and custodian of,
King III proposes staggered rotation for corporate governance the board should
non-executive directors, while ensuring exercise leadership, integrity, enterprise and
continuity of skills and experience. Rotation also judgment when it directs, governs and controls
allows for the introduction of new directors with the company. The most important function of
different skills and experience from which the the board is to ensure value creation, and in
board may derive benefit. It is proposed that doing so, it should account for the interest of
at least one third of non-executive directors be all stakeholders.
rotated every year. Rotating directors may be
re-appointed, if eligible. The board has to appreciate that strategy, risk,
performance and sustainability are inseparable
The chairman and the board should re-assess and to give effect to this by:
the independence of independent directors informing and approving the strategy
on an annual basis. King III suggests that the satisfying itself that the strategy and business
re-appointment of an independent director plans are not encumbered by risks that
after a term of nine years should be seriously have not been thoroughly assessed by
considered. A statement on the outcome of such management
assessment should be included in the Integrated identifying key performance and risk areas
Report. It is suggested that the directors ensuring that the strategy will result in
independence may be impaired after nine years. sustainable outcomes, and
considering sustainability as a business
opportunity that guides strategy formulation.

The board has to provide effective leadership

that stands on an ethical foundation.

Effective leadership is built on four pillars,

namely responsibility, accountability, fairness
and transparency. This entails doing business
ethically and sustainably by having regard
to the companys economic, social and
environmental impact on the community.

36
 The board must ensure that the company is a consultants after following an agreed process.
responsible corporate citizen. The terms of reference of the audit committee
should be approved by the board.
Responsible corporate citizenship is closely
related to ethical leadership. As a responsible The functions of the audit committee in relation
corporate, the board has to ensure that the to the external auditor include:
company should have regard to not only the nomination of the external auditor for
the financial aspects of the business of the appointment and to verify the independence of
company but also the impact that business the auditor
operations have on the environment and the determining the audit fee and the scope of the
society within which it operates. appointment
ensuring that the appointment complies with
The board should ensure that the companys the requirements of the Act
ethics is managed effectively. determining the nature and extent of
non-audit services, and
The board should set the tone for ethical pre-approving any contract for non-audit
behaviour within a company, and is responsible services.
for creating and sustaining an ethical corporate
culture, both formal and informal. The ethical The board may delegate certain aspects of risk
culture should be reflected in the companys management and sustainability to the audit
vision, mission, strategies, operations, committee. King III introduces the concept of
decisions, conduct and its stakeholder integrated reporting (which combines financial
relationships. Ethical risks and opportunities and sustainability reporting) and allows for the
should be identified and managed. It is board to delegate the review of integrated
advisable to articulate ethical standards in a reporting to the audit committee. In this regard,
code of conduct, which provides guidance and the audit committee should recommend to the
rules to avoid unethical behaviour. The board board the need to engage external assurance
should further ensure that ethics are integrated providers to provide assurance on the accuracy
into all the companys strategies and policies, and completeness of material elements of
and that its ethics performance is assessed, integrated reporting.
monitored, reported and disclosed.

The board must ensure that the company has

an effective and independent audit committee.

Although the Act prescribes the composition

and functions of the audit committee for
state owned and public companies, King III
proposes that all companies should appoint
an audit committee. The audit committee
should comprise at least three members
and all members should be independent
non-executive directors. The committee as
a whole should have sufficient qualifications
and experience to fulfil its duties, and should
be permitted to consult with specialists or

Duties of Directors 37
King III adopts a wide approach to the audit The board should receive combined assurance
committees responsibility for financial risk and regarding the effectiveness of the risk
reporting to include: management process. The board may assign
financial risks and reporting its responsibility for risk management to the
review of internal financial controls, and risk committee. Membership of this committee
fraud risks and IT risks as it relates to financial should include executive and non-executive
reporting. directors. Where the company decides to assign
this function to the audit committee, careful
King III further introduces the combined consideration should be given to the resources
assurance model. In terms of this model, available to the audit committee to adequately
assurance should be done on three levels, i.e. deal with governance of risk in addition to its
management, internal assurance providers audit responsibilities.
and external assurance providers. The audit
committee should ensure that a combined A director is bound to take such precautions
assurance model is applied to provide a and show such diligence in their office as a
coordinated approach to all assurance activities. prudent man of business would exercise in the
management of his own affairs.
The board is responsible for the governance of
Trustees of the Orange River Land & Asbestos Company v
risk.
King (1892) 6 HCG 260 285

King III emphasises the fact that risk

management should be seen as an integral The board is responsible for information
part of the companys strategic and business technology (IT) governance.
processes. The boards responsibility for
governance of risk should be set out in a risk As information and technology systems
management policy and plan. The board should have become such an integral part of doing
consider the risk policy and plan, and should business, King III provides specific guidelines to
monitor the whole risk management process. ensure effective IT governance. It is necessary
for directors to ensure proper IT governance,
While the board remains responsible for the risk the proper alignment of IT with the
management policy and the determination of performance and sustainability objectives of
the companys risk appetite and risk tolerance, the company, and the proper management of
management is responsible for the design, operational IT risk, including security. The risk
implementation and effectiveness of risk committee may be assigned responsibility to
management. oversee the management of IT risk. In addition,
the audit committee should consider IT as it
relates to financial risk and reporting.

38
 The board should ensure that the company The board should appreciate that stakeholders
complies with applicable laws and consider perceptions affect the companys reputation.
adherence to non-binding rules and standards.
King III proposes that companies institute
The board is responsible for overseeing the measures to ensure that they are able to
management of the companys compliance proactively manage the relationships with all
risk. The board should ensure awareness their stakeholders, including shareholders.
of and compliance with laws, rules, codes The board should encourage constructive
and standards throughout the business. In stakeholder engagement, and strive to achieve
turn, management is responsible for the the correct balance between the interests of all
implementation of an effective compliance its various stakeholder groupings and promote
framework and processes, and for the effective mutual respect between the company and its
management of the companys compliance stakeholders.
risk. The board may mandate management to
establish a compliance function to implement The board should ensure the integrity of the
measures and procedures to ensure that the companys integrated report.
boards policy on compliance is implemented.
King III proposes integrated reporting to ensure
The board has to ensure that there is an that all stakeholders are able to assess the
effective risk-based internal audit function. economic value of the company. This entails
the integration of the companys financial
King III advocates a risk based approach to reporting with sustainability reporting and
internal audit. In order for internal audit to disclosure. The board should ensure that the
contribute to the attainment of strategic positive and negative impacts of the companys
goals, the internal audit function should be operations, as well as plans to improve the
positioned at a level within the company to positives and eradicate the negatives, are
understand the strategic direction and goals of conveyed in the integrated report. The board
the company. It should develop a programme should review the integrated reporting and
to test the internal controls vis-a-vis specific disclosure to ensure that it does not contradict
risks. The internal audit function should financial reporting.
provide assurance with reference to the
adequacy of controls to identify risks that The board must act in the best interests of
may impair the realisation of specific goals as the company and in fulfilling this responsibility
well as opportunities that will promote the individual directors:
achievement of the companys strategic goals. must adhere to legal standards of conduct
should be permitted to take independent
As an internal assurance provider internal advice in connection with their duties
audit should form an integral part of the following an agreed procedure
combined assurance model. It should provide must disclose real or perceived conflicts to
a written assessment of internal controls and the board and deal with them accordingly,
risk management to the board, and specifically and
on internal financial controls to the audit deal in securities only in accordance with the
committee. policy adopted by the board.

Duties of Directors 39
 The board must commence business rescue 4.3 Meetings of directors
proceedings as soon as the company is The directors may meet as often as required.
financially distressed. Generally, boards meet quarterly, but more
meetings may be scheduled, depending on
The Act sets out the processes and procedures circumstances.
to be followed when a company is financially
distressed. The board has the responsibility to A director authorised to call a board meeting is
ensure that all stakeholders are consulted in obliged to do so if 2 or more directors (or 25% of
the preparation of the business rescue plan. directors where the board comprises more than
12 members) ask him or her to call a meeting.
The board must elect a chairman of the board
that is an independent non-executive director. In terms of the Act, board meetings may be
conducted by electronic communication so
King III emphasises the fact that the chairman long as the electronic communication facility
should be independent and free of conflicts. employed ordinarily enables all persons
The chair has to set the ethical tone for the participating in that meeting to communicate
board and the company, provide leadership concurrently with each other without an
to the board and the company, and act as link intermediary, and to participate effectively in
between the board and company. the meeting. Directors that participate in the
meeting via electronic communication are
The board must appoint and evaluate the regarded as being present at the meeting both
performance of the chief executive officer. for quorum and voting purposes.

Arguably the most important function of the The majority of directors must be present at a
board is to identify and appoint a suitable chief board meeting before a vote may be called, in
executive officer. The collective responsibility other words, the quorum for the meeting to
of management vests in the chief executive commence is 50% plus one.
officer, and as such the chief executive officer
bears ultimate responsibility for the decisions Decisions taken at the meetings are generally on
and actions of management. a majority vote. In this regard, it should be kept in
mind that a resolution will be passed by a majority
of the directors that participate in the meeting.
Where there is a tie, the Act allows the chairperson
to have the deciding vote (but only if the chair did
not participate in the initial vote). The Act allows
a decision that could be voted on at a meeting
of the board to be adopted by written consent
of a majority of the directors, given in person, or
by electronic communication, provided that each
director has received notice of the matter to be
decided (round-robin). This allows for a handy
alternative to a physical meeting.

40
The information relating to the business to be 4.4 Important roles of the board
conducted at the meeting is generally distributed The board comprises a number of important
ahead of time within a board pack to enable individuals, each with a different role to play.
each director to digest the information prior to The functions of these significant individuals are
the meeting. This is usually the responsibility of discussed below.
the company secretary. Given the strict standard
of director conduct, and the requirement for The Chairperson
directors to take reasonably diligent steps to The Memorandum of Incorporation of a
become informed on any matter on the agenda, company generally allow for the directors to
it is important that the company secretary elect a chairperson to chair the meetings of the
ensures that directors are provided with relevant board. Unless specified in the Memorandum of
and accurate information. Incorporation, the chairperson remains in that
position for as long as he or she is a director, or
Section 73 of the Act requires that the minutes until the board elects otherwise.
of the directors meetings be kept, including
any declaration of a conflict of personal financial The chairperson of the board is the individual
interest, as well as every board resolution charged with providing the board with
adopted by the board. Again, given the strict leadership, and to harness the talents and energy
standard of director conduct, it is important contributed by each of the individual directors.
for all directors to carefully read the minutes,
and ensure that it provides a clear reflection King III recommends that the chairperson should
of the proceedings and decisions taken at that be an independent non-executive director. The
particular meeting. Directors may have to rely chairperson should not also be the CEO. While
on the minutes, should their decisions or actions the chairperson is required to retain an objective
ever be challenged. viewpoint of the affairs of the company, the CEO
is often required to become intimately involved
The chairperson of the meeting (usually also the in developing and executing management plans
chairperson of the board) should sign the minutes for the company.
as evidence that they are correct. Any minutes of
a meeting, or a resolution, signed by the chair of King III emphasises the importance of an
the meeting, or by the chair of the next meeting independent chairperson. The chairperson
of the board, is evidence of the proceedings of of the board should be independent and
that meeting, or adoption of that resolution, as free of conflicts of interest at appointment,
the case may be. If the chairperson of the meeting failing which, the board should appoint a
does not sign the minutes, the chairperson of the lead independent non-executive director (LID)
following meeting should sign them. (another independent director, usually the
deputy chairperson). In situations where the
independence of the chairperson is questionable
or impaired, a LID should be appointed for as
long as the situation exists. The role of the LID
would be to act as the independent conscience
of the chairperson, i.e. to ensure that all
decisions of the chairperson are justifiable from
an independent point of view.

Duties of Directors 41
The most obvious role played by the chairperson According to King III the core functions of
is to govern the workings of the board, including thechairperson include:
directing the meetings of the board and acting setting the ethical tone for the board and the
as a conciliatory element when elements of the company
board differ. In case of a tied vote, the chairperson providing overall leadership to the board
may cast the deciding vote (but only if he did not formulating (with the CEO and company
cast a vote in the initial round of voting). secretary) the yearly work plan for the board
against agreed objectives, and playing an
The chairperson is obliged to use this power active part in setting the agenda for board
appropriately and not to influence the outcome meetings
of the meetings towards a specific agenda. presiding over board meetings and ensuring
that time in meetings is used productively
The Chairperson of a general meeting is managing conflicts of interest
empowered to preserve order, and to take care acting as the link between the board and
that the proceedings are conducted in a proper management and particularly between the
manner, and that the sense of the meeting is board and the CEO
properly ascertained with regard to any question ensuring that complete, timely, relevant,
which is properly before the meeting. accurate, honest and accessible information is
placed before the board to enable directors to
National Dwellings Society v Sykes [1894] 3
reach an informed decision
monitoring how the board works together and
how individual directors perform and interact
at meetings
ensuring that good relations are maintained
with the companys major shareholders and
its strategic stakeholders, and presiding over
shareholders meetings
upholding rigorous standards of preparation
for meetings, and
ensuring that decisions by the board are
executed.

Further responsibilities of the chairperson would

be to identify and participate in selecting board
members (via a nomination committee), and
overseeing a formal succession plan for the board,
CEO and certain senior management appointments
such as the chief financial officer (CFO).

42
The chairperson should ensure that all The board should define its own levels of
directors are appropriately made aware of their materiality, reserving specific powers to it and
responsibilities through a tailored induction delegating other matters to management. Such
programme, and ensuring that a formal delegation by the board should have regard to
programme of continuing professional education directors statutory and fiduciary responsibilities
is adopted at board level. Also, he or she should to the company, while considering strategic and
ensure that directors play a full and constructive operational effectiveness and efficiencies.
role in the affairs of the company and taking a lead
King III principle 2.17 par 50
role in the process for removing non-performing or
unsuitable directors from the board.
Some of the more important functions that King
The Chief Executive Officer III suggests that the CEO perform include:
The chief executive officer (sometimes referred to recommending or appointing the executive
as the managing director) has the responsibility team and ensuring proper succession planning
for determining and maintaining the strategic and performance appraisals
direction of the company. The collective developing the companys strategy for
responsibility of management rests with the CEO, consideration and approval by the board
and as such the CEO bears responsibility for all developing and recommending to the board
management functions and decisions. The CEO annual business plans and budgets that
is usually seen as the figurehead for the company support the companys long-term strategy
in the public eye, and as such should be an monitoring and reporting to the board
individual with the ability to present a positive the performance of the company and its
image of the company. conformance with compliance imperatives
establishing an organisational structure for
Certainly one of the most important functions the company which is necessary to enable
of the board is to appoint a CEO. The CEO execution of its strategic planning
does not necessarily have to be an employee of setting the tone in providing ethical leadership
the company in addition to holding a post as and creating an ethical environment
director. Where the CEO is an employee of the ensuring that the company complies with
company, however, best practice internationally all relevant laws and corporate governance
and in South Africa is that he or she should enter principles, and
into at most a three year employment contract ensuring that the company applies all
with the company. recommended best practices and, if not, that
the failure to do so is justifiably explained.
Where the Memorandum of Incorporation so
provides, the directors may delegate all of their
powers to this one individual, thus conferring
onto him or her an enormous amount of
responsibility. However, it should be made
clear that the board remains accountable to
shareholders and stakeholders. The board
should have regard to the directors fiduciary
and statutory responsibilities when delegating
authority to management. Also, the board
should have clear performance indicators to hold
management accountable.

Duties of Directors 43
 4.5 Board committees The Act requires public companies and
The Act provides the board with the power to state owned companies to appoint an audit
appoint board committees, and to delegate to committee comprising three independent
such committees any of the authority of the non-executive directors. King III proposes that all
board. The authority of the board to appoint other companies provide for the appointment of
board committees is subject to the companys an audit committee (the composition, purpose
Memorandum of Incorporation. and duties to be set out in the companys
Memorandum of Incorporation). In addition,
If the companys Memorandum of Incorporation, King III proposes that the board should appoint
or a board resolution establishing a committee, the audit, risk, remuneration and nomination
does not provide otherwise, the committee committees as standing committees. The board
may include persons who are not directors of may also consider establishing governance, IT
the company. However, it should be noted that steering and sustainability committees.
where non-directors are appointed to a board
committee, such persons are not allowed to vote Smaller companies need not establish formal
on a matter to be decided by the committee). committees to perform these functions,
but should ensure that these functions are
Board committees constitute an important appropriately addressed by the board.
element of the governance process and should
be established with clearly agreed reporting The Act requires listed public companies and
procedures and a written scope of authority. The state owned companies, as well as any other
Act recognises the right of a board to establish company that scored more than 500 Public
board committees but by doing so, the board Interest Score points in any two of the last
is not exonerated of complying with its legal five years, to establish a social and ethics
responsibilities. committee. This committee should comprise
at least three members. The members may be
King III principle 2.23 par 125
directors or prescribed officers, but at least one
must be a director that is not involved in the
day-to-day management of the company, i.e a
King III recommends that the delegation of non-executive director.
powers to a committee be made official, in
order for the members to have formal terms Board committees are allowed to consult with
of reference to determine the scope of their or receive advice from any person, including
powers, and the responsibilities they bear. employees, advisors, or other board committees.

The terms of reference should include detail King III suggests that all board committees, other
pertaining to: than the risk committee, should only comprise
the composition of the committee members of the board and should have a
the objectives, purpose and activities majority of non-executive directors. The majority
the powers that have been delegated of the non-executive directors serving on these
any mandate to make recommendations to the committees should be independent. Committees
board should be chaired by independent non-executive
the lifespan of the committee, and directors, other than the executive committee
how the committee reports to the board. which is ordinarily chaired by the CEO.

44
Advisors, experts and other external parties One of the important considerations for the
may attend committee meetings by invitation. committee is whether there are adequate
Non-directors serving as members on succession plans in place to mitigate the effects
committees of the board are not entitled to of losing key members of the board, specifically
vote, and will be subject to the same standards non-executives as these individuals may be more
of conduct and liability as if they were directors. difficult to replace than executive directors who
Executive directors and senior management have followed a defined career path through the
may be invited to attend committee meetings if management of the company.
the chair of the committee considers their input
and contribution to be of value to the decision- The role of the nominations committee may be
making process. extended to also consider the skill, experience
and succession planning with respect to the
The composition and functions of each of these executive management team.
sub committees are discussed below.
The Remuneration Committee
The Nomination Committee The remuneration of a companys directors is
The role of the nomination committee is to one of the most sensitive and topical issues
review, on a regular basis, the composition facing the board of directors today. It is therefore
of the full board, and where it appears that considered a crucial element of good corporate
the board is lacking in skills or experience in a governance to establish a committee whose
certain area, to identify how best to rectify the sole focus it is to consider and recommend
situation. This may involve identifying skills that the level and form of the directors (and senior
are required, and those individuals best suited to managements) remuneration.
bring these to the board.
King III suggests that the committee should only
King III suggests that the committee should only comprise members of the board. The majority of
comprise members of the board. The majority the members should be non-executive, of which
of the members should be non-executive, of the majority should be independent.
which the majority should be independent. The
ideal situation is for the chairperson of the board The chairman of the committee should be an
to also chair the nomination committee, failing independent, non-executive director. The chair
which an independent non-executive director of the board should not chair the remuneration
should be the chairperson. committee, but may be a member.

The committee is empowered to consider the One of the most important responsibilities of the
size and balance of the full board, and to make members of the committee is to remain up to
recommendations where, in the opinion of its date on appropriate levels, structuring methods
members, improvements could be made. It and types of remuneration in the environment in
remains the responsibility of the full board of which the company operates.
directors to consider the recommendations made
and to vote on any nominated appointments or, The members of the committee are required to
as the case may be, suggested removals. maintain a fine balance between recommending
over-generous remuneration which is not in
the interests of the shareholders, and a level of
remuneration which fails to attract the desired
quality of individual to the board.

Duties of Directors 45
While it is usually within the committees The chairperson of the committee should be a
mandate to deliberate on the remuneration non-executive director. The chairperson of the
of the non-executive directors, it is up to the board should not chair this committee, but may
shareholders to make the final decision on the be a member.
appropriate level.
The role of the committee is to perform an
The Risk Committee oversight function. In doing so, it should consider
Risk management is an often misunderstood the risk policy and plan, determine the companys
discipline within a company. Too often the risk appetite and risk tolerance, ensure that risk
responsibility for ensuring that the significant assessments are performed regularly, monitor
risks are adequately managed is not the whole risk management process, and receive
acknowledged, or is inappropriately delegated assurance from internal and external assurance
to the audit committee. There are two reasons providers regarding the effectiveness of the risk
why the risk management function should not management process. In turn, management is
report to the audit committee, but should be responsible for the design, implementation and
monitored by a separate risk committee. effectiveness of risk management, as well as
continual risk monitoring.
The first is that, as a consequence of the
composition of the committee, the function It is of vital importance that members of the risk
will often have financial focus when risk committee have experience within the industry.
management should correctly extend far beyond This would allow them to identify areas of risk
the finances of a company. and be aware of the appropriate methods of
managing the companys exposure via internal
Secondly, the audit committee should act as an (the control environment) or external (such as
independent oversight body. thorough insurance cover) means.

Having to directly oversee the risk management To operate effectively, it is recommended

function would generally involve a large amount that the committee produces reports that
of detailed review of the processes and workings are reviewed and signed by the full board as
of the company. acknowledgment that their responsibilities in this
regard have been adequately discharged.
This would necessarily have a detrimental effect
on the objectivity of the audit committees
members when considering reports of the risk
management function. The formation of a
separate committee recognises the fact that the
identification and management of risks impacting
the business, and the disclosure of these to the
shareholders is vital to good governance.

King III recommends that the committee should

have at least three members, and may comprise
executive and non-executive directors, and even
non-directors.

46
The Audit Committee The shareholders may appoint anyone they
King III emphasizes the vital role of an audit deem fit and proper.
committee in ensuring the integrity of financial
controls and integrated reporting (both financial Section 94 of the Act determines that the
and sustainability reporting), and identifying audit committee must consist of at least three
and managing financial risk. This sentiment is members. Each member of the committee must
confirmed in the Act. The appointment of an be a director of the company and not:
audit committee is regulated as part of the be involved in the day to day management of
enhanced accountability and transparency the company for the past financial year;
requirements set out in Chapter 3 of the Act. be a prescribed officer or full-time employee of
The Act requires all public companies and all the company for the past 3 financial years;
state owned companies to appoint an audit be a material supplier or customer of
committee. Any other type of company may the company such that a reasonable and
elect to appoint an audit committee (although informed third party would conclude in the
the provisions of the Act pertaining to the audit circumstances that the integrity, impartiality or
committee will only apply to these companies objectivity of that director is compromised by
to the extent provided for in their respective that relationship; and
Memorandums of Incorporation. be related to anybody who falls within the
above criteria.
Notwithstanding the requirements of the Act,
King III proposes that all companies should have The requirements of section 94 are prescriptive.
an audit committee. It appears that if the company appoints an
audit committee with persons other than those
The Act determines that where the appointment prescribed, it would not be an audit committee
of an audit committee is required, the as required by the Act. As a result, any functions
audit committee must be appointed by the undertaken by a non-compliant (that is an
shareholders at every annual general meeting. incorrectly constituted) audit committee
will not have been performed by the audit
This requirement highlights the importance committee as required by the Act.
of the boards nomination committee. As all
audit committee members must be directors
(members of the board), it is important that
the nominations committee identifies suitably
skilled and qualified individuals to nominate for
appointment to the audit committee.

Duties of Directors 47
 The audit committee can consist of as many The statutory duties of the audit committee
members as the company wishes to appoint, but include:
each of them must meet the criteria and each making submissions to the board regarding
of them must be a director of the company. The the companys accounting policies, financial
audit committee would, of course, be entitled to controls, records and reporting
utilise advisors and obtain assistance from other nominating an auditor that the audit
persons inside and outside of the company. The committee regards as independent
audit committee may also invite knowledgeable determining the audit fee
persons to attend its meetings. However, the ensuring that the appointment of the auditor
formally appointed members of the audit complies with the Companies Act and other
committee entitled to vote and fulfil the functions relevant legislation
of the audit committee will have to meet the determining the nature and extent of
criteria (non-executive independent directors) in non-audit services
accordance with the prescribed requirements. pre-approving any proposed agreement with
the auditor for the provision of non-audit
In this regard, cognisance should be taken services
of the position of shareholders as potential preparing a report to be included in the annual
members of the audit committee. The Act makes financial statements describing how the
no reference to shareholders, and the value committee carried out its functions, stating
judgement pertaining to independence relates whether the auditor was independent, and
only to suppliers and customers. The mere fact commenting on the financial statements,
that a person holds shares in the company (or accounting practices and internal financial
meets any of the other factual tests such as control measures of the company
being related to a supplier) would not, on its receiving and dealing with relevant complaints,
own, preclude such a person from serving on and
the audit committee. It is proposed that, in line any other function designated by the board.
with the best practice principles set out in King
III, the appointment of shareholders to the audit Since the Act prescribes the appointment
committee be carefully considered. A judgment process, composition and functions of the
on the effect of the shareholding or other audit committee, it can now be described as
relationship is required in order to establish the a statutory committee. The audit committee
likely factual impact on the independence of a will bear sole responsibility for its decisions
particular person. pertaining to the appointment, fees and terms of
engagement of the auditor. On all other matters
it remains accountable to the board and, as
such, it will function as a board committee.

An interesting development is the fact that the

audit committee is now obliged to also report
to shareholders. The audit committee will report
to shareholders by including in the annual
financial statements the audit committees
report describing how the committee carried out
its functions, stating whether the auditor was
independent, and commenting on the financial
statements, accounting practices and internal
financial control measures of the company.
48
In addition to the legislative duties set out in the internal audit charter for approval by the board
Act, King III proposes a number of additional a description of the working relationship with
functions, including: the chief audit executive
overseeing information about any other responsibilities
financial risks and reporting assigned to the audit committee by the board
internal financial controls a statement on whether the audit committee
fraud and IT risks as they relate to financial complied with its legal, regulatory or other
reporting responsibilities, and
ensuring that a combined assurance model is a statement on whether or not the audit
applied to provide a coordinated approach to committee recommended the integrated report
all assurance activities (in terms of this model, to the board for approval.
assurance should be done on three levels, i.e.
management, internal assurance providers and Ethical leadership and social responsibility is
external assurance providers) highlighted in King III. These same sentiments
overseeing integrated reporting (both financial are echoed in the Act. Although it may be
and sustainability reporting) argued that the provisions of the Act are onerous
satisfying itself with regard to the expertise, and prescriptive, it should be acknowledged
resources and experience of the finance that the intention is for the audit committee to
function play a key role in ensuring accountability and
overseeing the internal audit function transparency. As an independent, objective body,
playing a key role in the risk management it should function as the companys independent
process, and watchdog to ensure the integrity of financial
overseeing the external audit process. controls, combined assurance, effective financial
risk management, and meaningful integrated
In terms of King III, the audit committee is reporting to shareholders and stakeholders alike.
responsible to ensure integrated reporting
(integrating financial and sustainability
reporting). As a minimum, the audit committee
should provide the following information in the
integrated report:
a summary of the role of the audit committee
a statement on whether or not the audit
committee has adopted a formal terms of
reference that has been approved by the board
and if so, whether the committee satisfied its
responsibilities for the year in compliance with
its terms of reference
the names and qualifications of all members of
the audit committee during the period under
review, and the period for which they served
on the committee
the number of audit committee meetings held
during the period under review and members
attendance at these meetings
a statement on whether or not the audit
committee considered and recommended the

Duties of Directors 49
Social and Ethics Committee appointed a social and ethics committee within
During the public hearings on the Companies Bill one year after the Act became effective (i.e. by
conducted by the Portfolio Committee on Trade 30 April 2012):
and Industry in 2007, a proposal was made to every state owned company
include a requirement in the new Act to oblige every listed public company and
certain companies to appoint a member of a any other company that has, in any two of the
trade union as a board member (director). The previous five years, had a public interest score
Portfolio Committee rejected this proposal, but of at least 500 points.
presented a compromise. It was argued that
there is a definite need in the South African The social and ethics committee must comprise
context to encourage large companies (especially not less than three members. These members may
those companies that have a significant be directors or prescribed officers of the company,
impact on the public interest) to not only act however, at least one must be a director who
responsibly, but also to be seen doing so and is not involved in the day-to-day management
to account from the public interest perspective of the companys business, i.e. a non-executive
for their decision making processes and the director, and must not have been so involved
results thereof. In essence, it was argued that during the previous three financial years.
these companies should be obliged to develop
a social conscience, and behave like responsible In terms of Companies Regulation 43 a social
corporate citizens. and ethics committee has to monitor the
companys activities with regard to matters
As such, the Companies Act now provides the relating to:
Minister of Trade and Industry with the authority social and economic development, including
to require certain companies to have a social the companys standing in terms of the goals
and ethics committee, having regard to the and purposes of:
impact such companies have on the public the 10 principles set out in the United
interest. However, regardless of the requirement Nations Global Company Principles;
to appoint a social and ethics committee, the the Organisation for Economic Co-operation
directors and prescribed officers of all companies and Development (OECD) recommendations
are bound to act in accordance with an regarding corruption (refer to the OECD
acceptable standard of conduct. website for further details (www.oecd.org));
the Employment Equity Act, No 55 of 1998;
In terms of this standard, directors and the Broad-Based Black Economic
prescribed officers are obliged to act in the best Empowerment Act, No 53 of 2003;
interest of the company. In this regard, the Act good corporate citizenship, including the
subscribes to the enlightened shareholder value companys:
approach which requires that directors are promotion of equality, prevention of unfair
obliged to promote the success of the company discrimination, and measures to address
in the collective best interest of shareholders, corruption;
which includes, as appropriate, the companys contribution to development of the
need to take account of the legitimate interests communities in which its activities are
of other stakeholders including among predominantly conducted or within which
others, the community, employees, customers its products or services are predominantly
and suppliers. In terms of section 72 of the marketed; and
Companies Act (read with Companies Regulation record of sponsorship, donations and
43), the following companies should have charitable giving;

50
 the environment, health and public safety, obtaining independent external assurance
including the impact of the companys of the companys ethics performance on an
activities and of its products or services; annual basis, and include in the Integrated
consumer relationships, including the Report an assurance statement related to the
companys policies and record relating to ethics performance of the company, and
advertising, public relations and compliance ensuring that management has allocated
with consumer protection laws; and adequate resources to comply with social and
labour and employment matters. ethics policies, codes of best practice and
regulatory requirements.
If one considers the requirements of King III
with respect to ethical leadership and ethical The social and ethics committee must report to
behaviour, it appears advisable to assign to shareholders at the Annual General Meeting. At
the social and ethics committee some of the least one member of the committee must attend
responsibilities in this regard. the Annual General Meeting of the company to
report back to shareholders on the activities of
The additional functions may include: the company. Although there is no legislative
reviewing the adequacy and effectiveness of requirement for the committee to issue a
the companys engagement and interaction written report, it is recommended that a written
with its stakeholders, report be included in the companys Integrated
considering substantive national and Report, Directors Report or its Governance
international regulatory developments, report, whichever is the most appropriate in the
overseeing their operationalisation as well circumstances.
as practice in the fields of social and ethics
management,
reviewing and approving the policy and
strategy pertaining to the companys
programme of corporate social investment,
determining clearly articulated ethical
standards (code of ethics), and ensuring
that the company takes measures to achieve
adherence to these in all aspects of the
business, thus facilitating a sustainable ethical
corporate culture within the company,
monitoring that management develop and
implement programmes, guidelines and
practices congruent with the companys social
and ethics policies,
reviewing the material risks and liabilities
relating to the provisions of the code of ethics,
and ensuring that such risks are managed
as part of the companys risk management
programme,
reviewing the companys performance in
implementing the provisions of the code of
ethics and the assertions made in this regard,

Duties of Directors 51
 4.6 Relationships within the company The boards relationship with the company
The boards relationship with the secretary
shareholders
The board of directors is ultimately accountable The individual directors, and the board
to the owners of the company. The shareholders collectively, should look to the company
therefore need to evaluate the performance of secretary for guidance on their responsibilities
the board to the extent that they are able to. and duties and how such responsibilities and
By exercising their rights to appoint and remove duties should be properly discharged in the best
the directors of the company, the shareholders interests of the company.
effectively control the board.
King III Report principle 2.21 par 101

In most instances, however, the shareholders

would not have access to the detailed decisions The Act requires every public company and
taken by the board, and consequently are not in state owned company to appoint a company
a position to evaluate the success or failure of secretary. The company secretary may be
each decision made by the directors. appointed either by the board or by an ordinary
resolution of the holders of the companys
The board should encourage shareholders to securities. This individual is required to have (in
attend AGMs and other company meetings, the opinion of the directors) sufficient relevant
at which all the directors should be present. experience and knowledge to perform this
The chairmen of each of the board committees function adequately. In addition, the secretary
should be present at the AGM. should be permanently resident in South Africa.

King III Report principle 8.2 par 18 The company secretary is accountable to the
board.
Directors are not required by law to attend
The company secretary should provide a central
general meetings of the shareholders. It is,
source of guidance and advice to the board,
however, general practice for the directors to
and within the company, on matters of good
attend the meetings to maintain a channel of
governance and of changes in legislation.
communication between the shareholders and
the board. Where a company is required to have King III Report principle 2.21 par 102
a social and ethics committee, one member must
attend the AGM to report to shareholders on the The Act allows that the role of the company
activities of the committee. secretary be performed by a juristic person or
partnership.
Usually the chairperson of the board also acts as
the chairperson at a general meeting. However,
depending on the companys Memorandum
of Incorporation, the members may be able to
appoint their own chairperson.

52
The directors have the power to remove the In the past, the role of company secretary
company secretary. The removed individual has was often delegated to individuals who were
the right to place a statement setting out his meticulous in record keeping, but not much
or her objections to the removal in the annual more was usually required from the individual.
financial statements of the company.
The secretary, however, plays an important part
Where there is a casual vacancy of the company in educating and inducting new directors to the
secretarial position, the directors have 60 business board. In recent years the company secretary has
days to find a replacement. The same restrictions become an important and powerful individual
on persons being appointed as directors apply to within the company. This role is enforced by the
the appointment of the company secretary, apart Act and King III.
from the fact that the company secretary does not
have to be a natural person. King III suggests that a further important
function of the secretary is to ensure that the
The Act, in section 88 sets out the duties of the directors receive all relevant information in
company secretary. The company secretary is their board papers. Such information should be
responsible for: complete to allow for an informed decision to
providing the directors of the company be made, concise to ensure that the directors do
collectively and individually with guidance as to not suffer from information overload and timely
their duties, responsibilities and powers to be of any use to the directors.
making the directors aware of any law relevant
to or affecting the company The company secretary should have a direct
reporting to the companys board any channel of communication to the chairman and
failure on the part of the company or a should be available to provide comprehensive
director to comply with the Memorandum of practical support and guidance to directors,
Incorporation or rules of the company or the with particular emphasis on supporting the
provisions of the Act; non-executive directors, the chairman of the
ensuring that minutes of all shareholders board and the chairman of committees and the
meetings, board meetings and the meetings audit committee.
of any committees of the directors, or of the
King III Report principle 2.21 par 103
companys audit committee, are properly
recorded
certifying in the companys annual financial
statements whether the company has filed
required returns and notices in terms of the
Act, and whether all such returns and notices
appear to be true, correct and up to date
ensuring that a copy of the companys annual
financial statements is sent to every person
who is entitled to it, and
ensuring that the companys annual return is
filed in terms of section 33 of the Act.

As can be seen from the above duties, the

company secretary plays a pivotal role in assisting
and supporting the directors of the company.

Duties of Directors 53
The boards relationship with management Prescribed officers include every person, by
The directors have the power to appoint and whatever title the office is designated, that:
remove the management of the company, unless exercises general executive control over and
the manager is also a director of the company, in management of the whole, or a significant
which case the shareholders are responsible for portion, of the business and activities of the
his or her appointment or removal. company; or
regularly participates to a material degree in
In practice however, it is often the board the exercise of general executive control over
that takes decisions on executive director and management of the whole, or a significant
appointments, with shareholder approval being a portion, of the business and activities of the
rubber-stamping exercise. company.

It is managements responsibility to provide the A person will be a prescribed officer regardless of

directors with all relevant information that they any title or office they are designated.
require to make an informed decision as to the
financial and operational affairs of the company. Where executive directors play a dual role, the
individual should ensure that he or she is able to
In exceptional circumstances, managers who are detach him or herself from their role as a manager
not directors may attend directors meetings. of the company when representing the interests
This may be the case where, for some reason, of the shareholders on the board of directors.
the directors require that a key member of
management is required to explain or clarify an
issue for the benefit of the board.

It should be noted that the Act determines

that prescribed officers are required to perform
their functions and exercise their duties to the
standard of conduct as it applies to directors.
Prescribed officers will be subject to the same
liability provisions as it applies to directors.

54
The boards relationship with the external The boards relationship with internal audit
auditors The internal audit function offers the board an
The shareholders are responsible for the objective review of the internal control systems
appointment of the auditor at the annual general within the company. The function should be
meeting. The audit committee has to nominate staffed with appropriate individuals who are well
an independent auditor for appointment. respected within the organisation.
However, nothing precludes the appointment
by the company at its annual general meeting The internal audit function is accountable to the
of an auditor other than one nominated by the board, and operates under the direct oversight
audit committee. However, if such an auditor is of the audit committee.
appointed, the appointment is valid only if the
audit committee is satisfied that the proposed Internal audit should provide a written
auditor is independent of the company. assessment of the effectiveness of the system
of internal controls and risk management to
The board may remove the auditor. A vacancy the board. The assessment regarding internal
created in the appointment of the auditor, financial controls should be reported specifically
either through the removal of the auditor by to the audit committee.
the board or by the resignation of the auditor,
King III Report principle 7.3 par 16
must be filled by the board within 40 business
days. In such an instance, the companys audit
committee must be satisfied that the auditor is
independent of the company.

The audit committee is responsible, to the

exclusion of the rest of the board, for the terms
of engagement, the fees and the appointment of
the external auditor.

The audit committee should be informed when

there is a disagreement on auditing or accounting
matters between the management and the external
auditors. Where an accounting opinion has been
requested from a person other than the external
auditor of the company, the reasoning for the
accounting treatment adopted should be obtained
and should be approved by the audit committee
before the committees recommendation is made
to the board. The audit committee should also be
satisfied with the credentials of the person providing
such an opinion.

King III Report principle 3.4 par 32

Duties of Directors 55
 The charter of the internal audit function should The directors are required to take responsibility
comply with the guidance published by the for the state of the internal controls at the
Institute of Internal Auditors. King III indicates company. In order to discharge this responsibility,
that the key responsibility of internal audit the directors have to take a certain amount of
is to the board, its committees, or both, in reliance from the work performed by the internal
discharging its governance responsibilities and as audit department.
a minimum to perform the following functions:
evaluate the companys governance processes It is vital that each member of the board
including ethics, especially the tone at the top understands the significant risks impacting the
perform an objective assessment of the company, and is therefore able to make an
effectiveness of risk management and the informed decision on the appropriateness of the
internal control framework focus of the internal audit function, as well as
systematically analyse and evaluate business the work performed to draw an opinion on the
processes and associated controls, including IT, functioning of the controls in place to mitigate
and the business, operational and financial risks.
provide a source of information, as
appropriate, regarding instances of fraud, Where the directors feel that there are significant
corruption, unethical behaviour and risks that are not being sufficiently managed,
irregularities. they should be able to look to the internal
audit function to work with management in
Internal audit should pursue a risk based creating and maintaining a comprehensive risk
approach to planning as opposed to a management plan to manage these risks.
compliance approach that is limited to evaluation
of adherence to procedures. A risk-based internal
audit approach has the benefit of assessing
whether the process intended to serve as a
control is an appropriate risk measure. An
internal audit function should be independent
from management who instituted the controls
and should be an objective provider of assurance
with respect to the risks that may threaten the
achievement of the companys strategic goals, as
well as the opportunities that may contribute to
the achievement of such goals.

King III proposes that the internal audit function

should be positioned strategically within the
company to ensure that its objectives are
achieved. The Chief Audit Executive should have
a standing invitation to attend as an invitee any
of the executive committee or other committee
meetings. The Chief Audit Executive should be
apprised formally of the companys strategy
and performance through meetings with the
chairman, the CEO, or both.

56
4.7 Communication with stakeholders developing framework, a greater degree of
The Directors Report pro-activeness than is the case with the more
traditional areas of responsibility where more
All communication to stakeholders should mature and generally accepted frameworks are
use clear and simple language and should in place, is indicated. This requires boards to
set out all relevant facts, both positive and equip themselves properly in this area, and/or
negative. It should be structured to enable its to seek the appropriate assistance to properly
target market to understand the implications discharge their responsibilities.
of the communication. Companies should use
communication channels that are accessible to According to King III, the board should ensure
its stakeholder. the integrity of the Integrated Report, and
the audit committee should oversee the
King III Report principle 8.5 par 33
Integrated Report. Detailed requirements for
audit committees in King III, that directly and
The Act requires that the annual financial indirectly impact on the effective ownership of
statements of a company must include a the Integrated Report include:
directors report. As this report is considered part The responsibility to consider whether an
of the financial statements of the company, it is unbiased picture of the companys position,
subject to review by the auditor. performance or sustainability is being
presented;
The Act requires the directors to discuss in the The responsibility for evaluating the significant
directors report any matter with respect to the judgements and reporting decisions affecting
state of affairs, the business and profit or loss the Integrated Report;
of the company, or of the group of companies, The responsibility to understand how
if the company is part of a group, including materiality for the Integrated Report has been
any matter material for the shareholders to determined; and
appreciate the companys state of affairs. The responsibility to ensure that forward-
looking information provides a proper
Ownership of Integrated Reporting and the appreciation of the key drivers that will enable
Integrated Report the achievement of such goals.
The actual effective ownership by the board
of the Integrated Reporting process, and the
Integrated Report itself, is of significant practical
importance as it is one of the key determinants
for a good Integrated Report.

There is indeed an important difference between

the board actually setting and owning the
agenda in this regard, or effectively acquiescing
to an agenda actually set, and populated by,
executive management or those that report
to them and which is submitted to the board
for approval, very often at a late stage of the
process. Due to the relatively immature stage
of development of Integrated Reporting and
Integrated Reports, and a consequentially still

Duties of Directors 57
 To properly discharge these responsibilities,
as well as those set out in the Companies Act
and contained in Company Law, the board
should pro-actively set and own the Integrated
Reporting agenda. In this regard, the view from
executive management is obviously important
to take into account in setting the agenda
and framework, but once these are finalised
by the board, the primary role of executive
management and those that report to them is
to operationalise and report back to the board
within the framework thus established. If, as
is generally accepted, the Integrated Report
indeed reflects the collective mind of the board

The purpose of an Integrated and the integrated thinking that is essential for
business in the modern world, a more reactive

Report is tell the unique story of approach by the board would not effectively
enable capturing the essential qualities and

the company and the manner in pre-requisites for Integrated Reports.

which it sustains and adds value The purpose of an Integrated Report is tell the
unique story of the company and the manner
in the short, medium and long in which it sustains and adds value in the short,
medium and long term. The board is clearly
term. intended to be ultimately overall accountable
for the company and its journey, and has
been placed in a unique position to practically
discharge this responsibility by a variety of
formal and informal arrangements. In order
to effectively discharge this accountability
responsibility, the board should therefore also
embrace the proactive and effective ownership
of the Integrated Reporting process and the
Integrated Report.

58
5. The powers of the board of
directors

5.1 How can a director bind the company? The business and affairs of a company are
A company is a juristic person, and unless the managed by or under the direction of its board.
companys Memorandum of Incorporation The board of directors has the authority to
provides otherwise it has all of the legal powers exercise all of the powers and perform any of the
and capacity of an individual, except if a juristic functions of the company, except to the extent
person is incapable of exercising any such power, that the Act or the companys Memorandum of
or having any such capacity. Incorporation provides otherwise. It is important
for directors to ensure that they are familiar
A company may limit, restrict or qualify the with the provisions of the Memorandum of
purposes, powers or activities of that company in Incorporation, especially those provisions that
its Memorandum of Incorporation. In addition, limit or restrict the authority of the board and
the Memorandum of Incorporation may limit the directors.
the authority of the directors to perform an act
on behalf of the company. It should be noted It is the board of directors generally that has the
that the Act determines that where a company power to contract on behalf of the company.
or its directors acts in contravention of such a Individual directors or members of management
limitation, qualification or restriction the action do not have such authority, unless the authority
is not regarded as void for this reason only. is expressly delegated to them by the board.
Therefore, the Act provides that any person Often such delegation occurs through the terms
dealing with a company in good faith may of reference of a position within the company,
presume that the company has complied with for example the position of managing director.
all of the formal and procedural requirements
in terms of the Act, its Memorandum of The board often reserves certain powers for
Incorporation and any rules of the company, itself, either because they are strategically
unless the person knew or reasonably ought to important, or in monetary terms they are
have known of any failure by the company to significant. This concept is discussed below.
comply with such requirement.

Where an action by the company or the

directors is inconsistent with any limit, restriction
or qualification as set out in the companys
Memorandum of Incorporation, the shareholders,
by special resolution, may ratify such action.

Duties of Directors 59
 5.2 Reservation of powers 5.3 Which powers are restricted?
As the board of directors bears the ultimate The Act reserves certain decisions for the
responsibility for the actions and performance of shareholders and consequently the directors
the company, it is usually considered appropriate require the approval of the shareholders prior
that certain decisions may only be taken by the to any such decisions being finalised. In some
board itself. instances the shareholders provide the directors
with a general approval for such decisions, which
In many instances, monetary limits are set is usually valid until the next AGM, but some
for each level of responsibility within the decisions need to be voted on individually.
company. For example, when authorising capital
expenditure, limits for authorisation may be set The Act requires approval of the shareholders by
for the divisional manager, the group financial special resolution in the following instances:
director and the managing director. Any projects amendment of the companys Memorandum
exceeding the managing directors limit would of Incorporation
then need to be authorised by the board itself. approval for the voluntary winding-up of the
company
Further examples of when different levels of approval of any proposed fundamental
responsibility may be designated for the various transaction (including the disposal of all
tiers of management (or may be reserved only or greater part of assets or undertaking,
for the board to decide upon, depending on the amalgamation, merger or scheme of
materiality or strategic nature of the decision) are: arrangement)
Decisions regarding the use of auditors, ratification of any action by the company or
consultants and other outside agencies the directors that is inconsistent with a limit,
Strategic marketing decisions affecting restriction or qualification in the Memorandum
the companys brands and stakeholder of Incorporation
communications approval of an issue of shares or securities to
Major tenders to be awarded a director, future director, prescribed officer,
Employee benefits awarded to senior and or any person related or inter-related to the
middle management company, or to a director or prescribed officer
Significant litigation issues of the company
approval of financial assistance for subscription
It is therefore appropriate for the board to of securities (special resolution of the
prescribe the types of decisions that may be shareholders should be adopted within the
delegated, and those that need to be brought preceding two years)
before the board. In some cases, it is appropriate approval of loans or other financial assistance
for the board to require that certain decisions to directors as well as related and inter-
should be pre-approved or alternatively related companies (special resolution of the
subsequently ratified. shareholders should be adopted within the
preceding two years), and
The board should set some level of quantitative approval of the policy or parameters for
materiality for itself to ensure that issues director remuneration(special resolution of the
discussed are significant in terms of the company shareholders should be adopted within the
as a whole. These limits may be more complex preceding two years).
than a single threshold, and may take into
account additional factors such as whether the
decision is for an unbudgeted expense.

60
5.4 Effectiveness of company actions and
the role of the CIPC
The Act specifically reduces the companys reliance
on the regulator, the CIPC. Although companies
still have to comply with an administrative process
to inform the CIPC of its decisions (for example
the appointment of directors, changing of
auditors, change of year end, amendment of the
Memorandum of Incorporation), none of these
decisions are dependent on the approval of the
CIPC. In most instances, the companys decision is
effective immediately and it merely needs to inform
the CIPC of decisions or actions. However, in a few
instances the effect of the decision is delayed until
the necessary notices have been filed with the CIPC.

Companies are often required to file a

notice with the CIPC. Section 1 provides that
file, when used as a verb, means to deliver
a document to the Commission in the manner
and form, if any, prescribed for that document.
If one looks at the Regulations, (Regulation 7
and Annexure 3), it clearly indicates that when
a document is delivered to the CIPC, the date
and time of delivery is determined as follows:

Method of delivery Time of deemed delivery

By entering the required information in an On the date and at the time recorded by the
electronic representation of that form on the Commissions computer system, as verified by
internet website, if any, maintained by the fax reply to the sender of the information.
Commission, if the document is a prescribed
form; or
By transmitting the document as a separate On the date and at the time recorded by the
file attached to an electronic mail message Commissions computer system, unless, within
addressed to the Commission; or 1 business day after that date, the Commission
advises the sender that the file is unreadable.
By sending a computer disk containing the On the date and at the time of delivery of the
document in electronic form, by registered post registered post to the Commission, as recorded
addressed to the Commission; or by the post office, unless, within 1 business day
after that date, the Commission advises the
sender that the disk is unreadable.
By handing the document, or a computer disk On the date and at the time noted in a receipt
containing the document in electronic form, issued by the Commission unless, the document
to the Commission, or a responsible employee is on a computer disk, and, within 1 business
who is apparently in charge of the Commissions day after that date, the Commission advises the
office. sender that the disk is unreadable.

Duties of Directors 61
It should be clear from the table above that file Thus, in terms of the Act the appointment
and deliver is defined so as to simply mean of a director is effective as soon as he/she is
that a document must be submitted to the CIPC. appointed or elected, and has confirmed in
There is no subsequent requirement for the writing that they are prepared to accept the
CIPC to check or approve the particular action. appointment to the board. The CIPC has no role
Of course, the company needs to ensure that to play in the appointment of directors. The
the particular filing complies with the provisions filing of the relevant notice does not affect the
of the Act (relevant form completed correctly, validity or the time of the appointment.
required supporting documents attached, and
the prescribed fee paid). Where the company The question arises as to what would be the
fails to comply with the provisions of the Act, consequence if the CIPC fails to update its register
the company and its directors may be liable. of directors, delays the updating of the register, or
includes incorrect information in the register?
In order to illustrate the above conclusion, the
provisions of the Act with respect to a few Despite the requirement to file a notice of the
company actions will be investigated. To date, appointment or removal of a director to the
the CIPC still adheres to the approach followed CIPC, the company is obliged to keep a record
by its predecessor CIPRO, in that they regard of its directors (section 24(3)(b) and 24(5)). This
it as a core function to check and approve all record may be accessed by any person who
documents filed with them, and then inform holds or has a beneficial interest in any securities
the company as to whether or not the particular issued by a profit company, or who is a member
company action is approved or rejected. This of a non-profit company. Any other person has a
approach is outdated, and not provided for in right to inspect or copy the register of directors
the new Act. On the contrary, section 6(8) and of a company, upon payment of a prescribed
(9) clearly provides for a substance over form amount. As such one may conclude that the
approach, and indicates that even if there is register held by the company should be regarded
a deviation from the design or content of a as the official register of its directors, and it
prescribed form, or in the manner of delivery, it is this register that should be consulted where
does not invalidate the action taken. there is a discrepancy between the companys
register and CIPCs register, or where there is
Appointment of directors confusion or uncertainty as to the identity of the
In terms of section 66(7): companys directors.
A person becomes entitled to serve as a director
of a company when that person
(a) has been appointed or elected in accordance
with this Part, or holds an office, title,
designation or similar status entitling that
person to be an ex officio director of the
company; and
(b) has delivered to the company a written
consent to serve as its director.

In turn, section 70(6) requires every company

to file a notice (CoR39) within 10 business
days after a person becomes or ceases to be a
director of the company.

62
Change of the financial year end Change of auditor
In order to determine the exact date and time on The Act requires certain companies to appoint
which the financial yearend is changed, one needs an auditor (public companies, state owned
to look at the provisions of the Act. Section 27(4) companies, and any other category of
of the Companies Act determines that: company that meets the requirements set out
The board of a company may change its in the Regulations). The Act provides for the
financial year end at any time, by filing a notice appointment of the auditor by shareholders
of that change, but at the annual general meeting, and where a
(a) it may not do so more than once during any vacancy exists, for the directors to fill the vacancy
financial year; within 40 business days. Section 85(3) requires
(b) the newly established financial year end must the company to file a notice (CoR44) within 10
be later than the date on which the notice is business days after making the appointment. In
filed; and addition, the company has to maintain a record
(c) the date as changed may not result in a of its auditors (section 85(1)). Again, the Act
financial year ending more than 15 months does not link the filing of the relevant notice to
after the end of the preceding financial year. the effectiveness of the appointment. However,
where an auditor resigns, the Act expressly states
As pointed out above, filing in terms of the that the resignation of the auditor is effective
new Act simply means that the notice had when the notice is filed (section 91(1)). This
been received by the CIPC (recorded in the implies that a resignation letter submitted to
CIPCs computer system, or the date on which the company by the auditor is not sufficient to
registered or other mail is received by the terminate the appointment of the auditor. In
CIPC). The CIPC is not required to approve or order to complete the action, the company has
vet any decisions or actions of the company. to file the CoR44. The resignation will only be
The changing of the companys financial year effective on the date and time when the notice
end will be complete once the relevant notice was received (and recorded) by the CIPC.
(CoR25)is received by the CIPC.

Duties of Directors 63
 Amendment of the Memorandum of The effect of the corporate law reform is clearly
Incorporation that the regulator now regulates with a much
Where a company amends its Memorandum lighter touch, and that companies and directors
of Incorporation, it has to file a Notice of need to bear responsibility for their actions.
Amendment (CoR15.2) within 10 days after As a consequence, this new regulatory regime
such amendment (section 16(7) read with allows companies to take and implement its
Regulation 15(3)). Where a company amends own decisions much easier and quicker, without
its Memorandum of Incorporation by means of having to wait for approval or a go-ahead by
a special resolution of shareholders (as provided the CIPC. In most instances, mere filing and
for in section 16(1)(c)), the amendment will not delivery will suffice to ensure compliance with
be effective immediately. This constitutes the one the Act. Where documents are rejected by
instance where the Act delays the effectiveness the CIPC, it does not invalidate the particular
of a special resolution of shareholders. Under company action it merely implies that the
other circumstances, a special resolution will take company needs to improve its administrative
effect as soon as the required number of votes processes. Of course the new approach also
is obtained. However, where a special resolution points to the need for directors to carefully
is obtained to amend the Memorandum of consider their decisions and actions, and to take
Incorporation, the amendment to a companys into account the wider context and impact of
Memorandum of Incorporation takes effect on the such decisions. The Act clearly made it easier for
later of the date on, and time at, which the Notice companies to conduct business and has upped
of Amendment is filed, or the date, if any, set out in the ante for directors.
the Notice of Amendment (section 16(9)).

The new approach to enforcement of the Act, as
illustrated by the examples above is in line with
the Governments objectives for reform of our
corporate law. The high-level objectives of the
new Companies Act (as per a DTI presentation to
Cabinet, dated 31 January 2007) were to:
Reduce regulatory burden for small and
medium-sized firms (mostly owner-managed,
privately owned)
Enhance protection of investors through
enhanced governance and accountability
(especially public interest companies), minority
protection and shareholder recourse
Create a more flexible environment, without
comprising regulatory standards and
objectives, to enhance investment.

64
6. Remunerating directors

Remuneration of directors is one of the most

debated topics in the corporate governance
arena, due to the tension between shareholders
demanding to understand their directors
remuneration levels and methods and the directors
desire for the privacy of their financial affairs.

6.1 The directors right to remuneration

Both executive and non-executive directors
provide services to the company for which they
deserve to be remunerated. Executive directors
generally enter into an employment contract
in which their remuneration (which may take a
variety of forms as discussed below) is agreed
upon. In many cases, non-executive directors
have no formal contract with the company but
are paid a standard level of fees for attending
board and committee meetings.

The shareholders at a meeting duly convened

for the purpose, can, if they think proper,
remunerate directors for their trouble or make
presents to them for the services out of assets
properly divisible amongst the shareholders
themselves.

Re George Newman & Co 1895 1 Ch 674 (CA) 686

The Memorandum of Incorporation of

a company generally provides for the
remuneration of the directors, both for the
services they provide and any expenses that
they incur on behalf of the company. Where the
Memorandum of Incorporation do not provide
for this remuneration, the Act determines that
the directors are entitled to payments only if
such remuneration is authorised by a special
resolution approved by the shareholders within
the preceding two years.

Duties of Directors 65
6.2 Remuneration policy
King III suggests that the remuneration
committee be tasked with setting and
administering remuneration policies in the
companys long-term interests. The committee
should consider and recommend remuneration
policies for all levels in the company, but should
be especially concerned with the remuneration
of senior executives, including executive
directors, and should also advise on the
remuneration of non-executive directors.

In proposing the remuneration policy, the

remuneration committee should ensure that the
mix of fixed and variable pay, in cash, shares
and other elements, meets the companys needs
and strategic objectives. Incentives should be
based on targets that are stretching, verifiable
and relevant. The remuneration committee
should satisfy itself as to the accuracy of
recorded performance measures that govern 6.3 What type of remuneration is
vesting of incentives. Risk-based monitoring of appropriate?
bonus pools and long-term incentives should be Remunerating directors can take a number of
exercised to ensure that remuneration policies forms, and there is ongoing debate as to the
do not encourage behaviour contrary to the most appropriate way of both compensating
companys risk management strategy. the director for his or her time, and aligning
their interests with the long term interests of the
King III Report principle 2.25 par 151
company they serve.

King III proposes that the remuneration policy The various types of remuneration are discussed
of the company be approved by shareholders, below. It is unusual for a remuneration policy
and that the board should be responsible for to employ only one type and often a variety of
determining the remuneration of executive different remuneration methods are negotiated.
directors in accordance with the approved
remuneration policy. In setting remuneration policies, the
remuneration committee should ensure that
It is recommended that the remuneration remuneration levels reflect the contribution of
committee set well defined criteria against which senior executives and executive directors and
individual directors should be assessed. Directors should be rigorous in selecting an appropriate
often have a number of directorships within comparative group when comparing
the same group, some executive and some remuneration levels. There should be a balance
non-executive. It is therefore not unusual for between the fixed components and the bonus
an individual to receive emoluments in various component of total remuneration of executives
forms and from various sources. so as to allow for a fully flexible bonus scheme.

King III Report principle 2.25 par 157

66
Cash Often a share incentive trust or other such
While being the most traditional and easy- vehicle is used to house the shares to be issued
to-measure form of remuneration, cash can to directors and employees. The purpose of
sometimes be the most controversial. When such a scheme is to hold these shares in trust
remunerating a director with cash the only on behalf of the beneficiary. The share incentive
corporate governance issue is generally the size trust is not a trading entity.
of the cash payment to the director.
One of the problems with this remuneration
King III recognises the fact that the quantum strategy is that the directors become overly
of a directors remuneration package should interested in maintaining the short-term share
be appropriate in terms of the value that the price, sometimes at the expense of the long-term
director adds to the company, bearing in mind interests of the company itself.
the levels of remuneration that the market pays
individuals of similar calibre in similar industries. In many cases the options issued have relatively
short terms to their maturity dates, thereby
Where the company employs bonuses as part of exacerbating the directors incentive to look for
the remuneration package, the bonuses should short term gains at the expense of the long-term
be related to specific performance indicators. financial health of the company. It is therefore in
Such performance indicators should be the interests of the shareholders to ensure that
consistent with the long-term objectives of the the options have appropriate vesting periods.
company and long term value for shareholders.
Although long- and short-term goals may be A possible solution to this issue is to lock the
utilised in this regard, the company should guard directors into holding the shares for a reasonable
against manipulation of results. period of time before they can dispose of them.
King III suggests that options or other conditional
The companys own equities share awards should be granted for the year in
Where a company is listed, and its shares question and in expectation of service over a
are easily tradable, it is often appropriate to performance measurement period of not less
remunerate the directors by issuing them with than three years. This means that vesting of
the companys shares. The purpose of issuing a rights should be dependent on performance.
director with the companys own shares is that Accordingly, shares and options should not vest
the shareholders and directors interests become or be exercisable within three years from the
more closely aligned. date of grant. In addition, options should not be
exercisable more than 10 years from the date of
King III proposes that the participation in grant. For new schemes it is best practice to restrict
share incentive schemes should be restricted the exercise period to less than seven years.
to employees and executive directors. Such
schemes should have appropriate limits for
individual participation, and such limits should
be disclosed. The chairperson and other
non-executive directors should not receive share
options or other incentives aligned to the share
price or the companys performance, as this may
impair their objectivity and align their interest too
closely with those of the executive directors.

Duties of Directors 67
 To align shareholders and executives interests, In addition, accounting standards require
vesting of share incentive awards should be companies to reflect share-based compensation
conditional on achieving performance conditions. as an expense in the income statement.
Such performance measures and the reasons
for selecting them should be fully disclosed. The issue of shares or securities convertible into
They should be linked to factors enhancing shares, or a grant of options for the subscription
shareholder value, and require strong levels of securities, or a grant of any other rights
of overall corporate performance, measured exercisable for securities is regulated by section
against an appropriately defined peer group or 41 of the Companies Act. In these instances, the
other relevant benchmark where yearly awards Act requires authorisation by a special resolution
are made. If performance conditions for share- of the company. However, no shareholder
based incentive schemes are not met, they approval is required if the issue of shares,
should not be re-tested in subsequent periods. securities or rights is
Where performance measures are based on a under an agreement underwriting the shares,
comparative group of companies, there should be securities or rights
disclosure of the names of the companies chosen. in the exercise of a pre-emptive right to be
offered and to subscribe shares
King III Report principle 2.25 par 174
in proportion to existing holdings, and on
the same terms and conditions as have been
This may, however, prejudice the individual offered to all the shareholders of the company
director from a cash flow perspective, and or to all the shareholders of the class or classes
therefore it is usually preferable to employ of shares being issued
a composite remuneration policy in which pursuant to an employee share scheme, or
performance-related elements of remuneration pursuant to an offer to the public.
constitute a substantial portion of the total
remuneration package of executives. Such
an approach will ensure the alignment of the
directors interests with those of the shareholders.

The price at which shares are issued under a

scheme should not be less than the mid-market
price or volume-weighted average price (or
similar formula) immediately preceding the grant
of the shares under the scheme.

A perceived benefit of issuing both equities and

options is that the shares issued are seen as
free to the company, with no impact on the
earnings of the company. Such a perception,
however, is not entirely accurate as any shares
issued at less than market value dilute the
existing shareholders interests in the assets and
earnings of the company.

68
Loans to directors 6.4 Employment contracts, severance and
The Act regulates financial assistance to directors retirement benefits
(and others) in terms of section 45. In terms of King III recommends that employment contracts
this section, unless the companys Memorandum (also for executive directors) should not commit
of Incorporation provides otherwise, the companies to pay on termination arising from
board may authorise direct or indirect financial the executives failure. Also, with respect
assistance to the following parties: to bonuses, there should be no automatic
a director or prescribed officer of: entitlement to bonuses or share-based payments
the company in the event of early termination. Companies
a related or inter-related company, or should not provide for balloon payments on
a related or inter-related company or termination.
corporation
a member of a related or inter-related Contracts should not compensate executives for
company or corporation, or severance because of change of control.
a person related to any of the above parties.
Where a company pays compensation to a
The requirements for the provision of financial director for loss of office, the Act requires the
assistance in terms of this section are: particulars of such compensation to be disclosed
the provision of financial assistance must be in the annual financial statements.
pursuant to an employee share scheme, or
the shareholders must have approved such 6.5 Disclosure of directors remuneration
financial assistance by special resolution (within Section 30 of the Act regulates the disclosure in
the past 2 years), and the companys annual financial statements of the
the companys board of directors must directors emoluments.
be satisfied that after the transaction, the
company will remain solvent and liquid. Companies should provide full disclosure of each
individual executive and non-executive directors
An important development is that fact that the remuneration, giving details as required in
Act requires the board to inform all shareholders the Act of base pay, bonuses, share-based
and trade unions representing employees payments, granting of options or rights, restraint
whenever it decides to provide financial payments and all other benefits (including
assistance in terms of this section. present values of existing future awards).
Similar information should be provided for the
three most highly-paid employees who are not
directors in the company.

King III Report principle 2.26 par 180

Duties of Directors 69
 The Act requires the annual financial statements Where consolidated financial statements are
of a company to include particulars of the provided, the information disclosed in terms of the
remuneration and benefits received by each Act relates only to the holding companys directors.
director. This should include: In terms of best practice however, it would be
the amount of any pensions paid by the recommended that the company should also
company to directors reflect the remuneration of directors of subsidiary
any amount paid by the company to a pension companies. This would remove any instances
scheme where directors structure their employment
the amount of any compensation paid in contracts through subsidiaries to avoid making
respect of loss of office public disclosure of their remuneration.
the number and class of any securities issued
to a director and the consideration received by Section 30(5) of the Act requires that the
the company for those securities, and disclosure must show the amount of any
details of service contracts of current directors. remuneration or benefits paid to or receivable by
persons in respect of:
For the purpose of disclosure, the Act defines a. services rendered as directors or prescribed
remuneration so as to include: officers of the company, or
fees paid to directors for services rendered by b. services rendered while being directors or
them to or on behalf of the company prescribed officers of the company
salary, bonuses and performance-related i. as directors or prescribed officers of any
payments other company within the same group of
expense allowances companies, or
contributions paid under any pension scheme ii. otherwise in connection with the carrying
the value of any option or right given directly on of the affairs of the company or any
or indirectly to a director other company within the same group of
financial assistance to a director for the companies.
subscription of shares, and
with respect to any loan or other financial The effect of these requirements is that all
assistance by the company to a director, or any remuneration paid to or receivable by a director
loan made by a third party to a director (if the or prescribed officer must be disclosed - thus,
company is a guarantor of that loan), the value not only the remuneration paid to or received
of any interest deferred, waived or forgiven. by the director or prescribed officer for services
to the company, but also all other remuneration
It is encouraging that more and more listed received by the director or prescribed officer
companies are compiling comprehensive for services rendered as a director or prescribed
remuneration reports which go far beyond the officer to any other company with the group.
legislative and regulatory disclosure requirements. One persons remuneration may have to be
disclosed by more than one company in the
These reports are increasingly reflecting not only same group of companies.
the actual remuneration, but the justification for
the levels of remuneration for each individual
director in relation to the performance of the
company for the period. This is in line with
principles as set out in King III.

70
Disclosure is required of all remuneration paid
to or receivable by the directors and prescribed
officers of the company for services as a director
or prescribed officer of any other company
within the same group of companies. In this
regard the definition of a group should be
considered. This means disclosure will have to
account for all other companies in the group,
and not only the subsidiaries of the company
in question, therefore the company will have to
take into account all companies in the group
thus upward, downward and sideways. It
should be noted that the requirement applies
only with respect to all companies within
the group. In terms of the Companies Act a
company is a juristic person incorporated in
terms of the previous or current Companies Act,
i.e. only South African companies. Therefore,
any amounts paid to directors and prescribed
officers for services rendered to a trust or a
foreign subsidiary within the group would not
be included in the disclosure, since a trust or a
foreign subsidiary (company) is not a company
for purposes of the Companies Act.

The Act requires all remuneration paid to or

receivable by directors and prescribed officers
to be disclosed it does not only account for
remuneration paid by the company, or another
company in the group. Rather, it focuses on the
amounts a director or prescribed officer earns for
services as a director or prescribed officer (to the
company or any other company within the group),
or for carrying on the affairs of the company (or
any other company within the group).

Duties of Directors 71
7. Assessment, removal and
resignation

Effective and meaningful evaluation is only King III proposes that an assessment of the
possible once the board has determined its own board, the various board committees, and each
role, functions, duties and performance criteria individual director be done on an annual basis.
as well as those for directors on the board and This would assist the nominations committee to
on board committees. evaluate the levels of skill and experience on the
board and committees with a view to identify
King III Report principle 2.22 par 110
training and skills development needs, as well as
to evaluate the composition of the board and
the respective committees. These evaluations
7.1 Assessment of performance
should be reviewed by the nomination
The assessment of the board of directors
committee to be used in assessing whether the
(collectively and individually) is becoming a critical
board requires additional skills, or that certain
success factor in any effective system of corporate
members of the board are not performing
governance. In capital markets such as the United
according to expectations. Due to the costs and
States, where the level of shareholder activism is
time of initiating a new director, where possible
far greater than in South Africa, it has become
it would be preferable for the existing directors
common practice for directors, and in particular
to acquire any skills that the board lacks, rather
the CEO to be evaluated against the companys
than to have to seek to expand the board. The
results. Where the results have not been
outcome of the evaluation should be used as the
consistent with the shareholders expectations, it
basis for an action plan to ensure that the board
is almost inevitable that the individuals concerned
as a whole has the required skill and experience.
are removed from his or her post.

The annual evaluation of director performance

King III recommends that the company carefully
should be used to determine whether or not
considers whether performance appraisals
a particular director should be nominated for
should be done in-house or by an independent
re-appointment. Re-appointment should not
service provider. Although an in-house process
be an automatic process, but rather be based
may yield proper results, an independent process
on the directors contribution to the board and
may provide a more honest assessment. The
relevant committees.
assessment is usually led by the chairperson
(through the nominations committee) with the
The chairperson should ensure that all directors
assistance of the company secretary, or by an
are aware of the annual evaluation, and that
independent service provider.
they understand the criteria used for evaluation.
A directors role and contribution should be
measured against his or her specific duties.

The chairperson should also be evaluated, and

he or she should not be present when his or her
performance is discussed by the board. Where
an independent service provider is not used,
the Lead Independent Director should lead the
evaluation of the chairperson.

72
7.2 Why a director may be removed Generally, the Memorandum of Incorporation
Directors may be removed for a number of will require that all directors retire at the first
reasons. In some cases, the results of the annual general meeting of the company, and
evaluations discussed above may reveal the fact that one third of the directors retire annually
that an individual does not have the appropriate thereafter. It is usually the directors that have
personality traits or other skills to continue to served the longest that retire, but where the
serve the board. directors have served an equal period of time,
their retirement is selected by lot. The JSE Listings
In other cases the director may become legally Requirements requires such provisions to appear
disqualified from his or her post as director, in in the Memorandum of Incorporation. King III
terms of the Companies Act or other legislation. provides for similar rotation requirements for
In some cases a director is removed not due to non-executive directors.
his or her performance (or lack thereof). When
the nomination committee assesses the skills The Listings Requirements provide for the
and balance of the board, the conclusion may exception where a managing director or other
be that the board is overloaded with certain skill executive director has a contract with the
sets, and unfortunately individual directors with company, he or she does not have to retire so
redundant skills or experience may have to make long as they are employed by the company.
way for others who possess the attributes that They would not be taken into account when
the board requires. determining the number of directors that need
to retire annually.
The Memorandum of Incorporation of a
company may provide that where a director Any appointment (even re-appointment) is only
becomes interested in a contract with the valid once the director has provided written
company, and he or she fails to declare that consent to serve as a director.
interest to the board, that the directors office
must be vacated.

7.3 Rotation of directors

The Memorandum of Incorporation of a
company generally provides that a certain
number or percentage of directors resign every
year and offer themselves for re-appointment.
The intention of such a provision is so that the
shareholders will actively consider whether
the director is performing according to their
expectations, and where he or she is not
performing, they will not be re-appointed.

Duties of Directors 73
7.4 Vacancies on the board 7.5 The legal mechanics of removal
In terms of the Act, a person ceases to be a Section 71 of the Act determines that a director
director, and a vacancy arises on the board of may be removed by an ordinary resolution
a company when the persons term of office as adopted at a shareholders meeting. In any such
director expires (in the case of a company whose case, the director should be given a reasonable
Memorandum of Incorporation provides for fixed opportunity to state his or her case. Also, where
terms). A vacancy may also arise where a director: a company has a board comprising two or more
resigns or dies directors, the board may remove a director
in the case of an ex offcio director, ceases where it is resolved that he or she:
to hold the office, title, designation or similar has become ineligible or disqualified in terms
status that entitled the person to be an ex of the Act
offcio director has become incapacitated to the extent that
becomes incapacitated to the extent that the the director is unable to perform the functions
person is unable to perform the functions of a of a director, or
director has neglected, or been derelict in the
is declared delinquent by a court, or placed on performance of his or her functions.
probation
becomes ineligible or disqualified in terms of The Act provides the director concerned with the
the provisions of the Act, or facility to air his or her grievances regarding the
is removed by resolution of the shareholders or impending removal. The director is allowed the
the board, or by an order of court. opportunity to make representations to those
attending the meeting. Any person who feels
In the case of a vacancy, the directors may have that the representations may prejudice them may
the power to appoint a director to the board. apply to the Court to stop the representations
Such appointment will be temporary, until being communicated to the members.
the director is elected and appointed by the
shareholders in terms of the provisions of the Where the director does have a valid contract
Act. Schedule 10 of the JSE Listings Requirements with the company, compensation may have
requires that any appointment of a director to be paid to the director, as removal would
needs to be confirmed at the next AGM of the in most instances constitute a breach of the
company. In general, the shareholders are not contract (unless of course the removal is due
under any obligation to fill the vacancy left by a to the fact that the director breached the
retiring director, unless the number of directors contract in the first place). Any such payments
has fallen below the minimum required by the should be reflected in the schedule of directors
Companies Act, the companys Memorandum of remuneration in the annual financial statements
Incorporation or the JSE Listings Requirements of the company.
where the company is listed.

The Listings Requirements require that the

companys Memorandum of Incorporation
provide for, where the minimum number
of directors in terms of the Memorandum
of Incorporation has been reached, a
retiring director to be deemed to have been
re-appointed where the shareholders do not fill
the vacancy at the meeting even if they decided
not to re-appoint that particular director.
74
7.6 Formalities when a director resigns
A director generally resigns his or her office
by providing the company with a notice of
this intention (usually in writing in terms of
the Memorandum of Incorporation of the
company). From a practical point of view it
would be preferable to have written record of
the resignation.

(A) director, once having given in the proper

quarter notice of his resignation of his office, is
not entitled to withdraw that notice, but, if it
is withdrawn, it must be by the consent of the
company properly exercised by their managers,
who are the directors of the company. But, of
course, that is always dependent upon any
contract between the parties, and that has to be
ascertained from the articles of association.

Glossop v Glossop 1907 2 Ch 374 & 375

In addition, the relevant form needs to be

sent to the CIPC. In terms of the JSE Listings
Requirements, listed companies must report to
the JSE when a director resigns or is removed
from the board.

The ease with which the director is able to

resign will be a function of the existence of any
contract between the director and the company,
and whether in addition the director acts as an
employee of the company.

Duties of Directors 75
8. Financial institutions

Financial institutions are often viewed as Fiduciary duties of a banks directors

companies with a higher public profile than In addition to the codified standard of director
their counterparts in other industries. These conduct in the Companies Act, the Banks Act
companies therefore often find themselves has codified the specific fiduciary responsibilities
the focus of more regulation than companies of directors of a bank in section 60. This section
operating in other sectors. states that each director, chief executive officer
and executive officer of a bank owes a duty
This fact results in the directors of these towards the bank to:
financial institutions being entrusted with added act bona fide for the benefit of the bank
disclosure and performance responsibilities. avoid any conflict between the banks interests
and the interests of such a director, chief
All financial institutions that are companies are executive officer or executive officer, as the
regulated by the Companies Act and the case case may be
law that interprets it. possess and maintain the knowledge and skill
that may reasonably be expected of a person
Consequently the discussions elsewhere in this holding a similar appointment and carrying
guide are equally of application to directors out similar functions as are carried out by the
of these institutions. Most financial industries, director, chief executive officer or executive
however, have specific legislation that increases officer of that bank, and
the regulatory environment in that sector. The exercise such care in the carrying out of his or
impact of this legislation on certain financial her functions in relation to that bank as may
sectors is discussed in this chapter. reasonably be expected of a diligent person
who holds the same appointment under similar
8.1 Directors of banks circumstances, and who possesses both the
The Companies Act determines that if there is knowledge and skill mentioned above and
an inconsistency between any provision of the any such additional knowledge and skill as the
Companies Act and a provision of any other director, chief executive officer or executive
national legislation, the provisions of both Acts apply officer in question may have.
concurrently. If, in case of a bank, it is impossible
to apply or comply with one of the inconsistent Each director, chief executive officer and
provisions without contravening the Banks Act, the executive officer of a bank owes a fiduciary
provisions of the Banks Act will prevail. duty and a duty of care and skill to the bank of
which such a person is a director, chief executive
Directors applying for registration of a bank officer or executive officer.
The Registrar of Banks is not obliged to approve
Banks Act 94 of 1990 Section 60 (1)
the registration of a new bank unless certain
criteria are met. The Banks Act requires that the
Registrar must be satisfied that the proposed
composition of the board of directors is
appropriate having regard to the nature and
scale of the business it is intended to conduct.
In addition, in terms of section 25(4) of the
Banks Act, the Registrar has the power to apply
to the court to cancel or suspend the registration
of a bank where the directors or executive
officers have committed any offence in terms of
the Banks Act.
76
The Regulations to the Banks Act further expand Audit Committee
on the responsibilities of the directors of a bank. It should be noted that section 94 of the
Companies Act (dealing with the audit
Regulation 39 requires that each director of a committee) applies concurrently with section 64
bank acquire at least a basic knowledge of the of the Banks Act. However, the provisions of the
banks business, and those laws and regulations Companies Act pertaining to the appointment
that govern it. The Regulation further states and requirements for membership of the
that while not every director on a banks board audit committee, do not apply to the audit
necessarily has to have an intimate knowledge committees of banks.
of the workings of a bank, each directors
knowledge thereof must be evaluated, based on The Banks Act in section 64 requires that the
the size and complexity of the bank. board of directors establish an audit committee.
Regulation 64 to the Banks Act further requires
In the case of a director of a controlling that at least three directors be appointed to the
company of a bank, his or her required level of committee. The majority of directors appointed
knowledge becomes a function of the diverse to the committee must, in terms of section 64 (3)
nature of the banks controlled by that company. be independent non-executive directors.

Appointment of directors The chairperson of the board may not serve on

When appointing any new director, the Banks Act the audit committee. Also, the chairperson of the
requires that the particulars of the potential new committee may not be an executive director.
director be forwarded to the Registrar of Banks at The Banks Act in section 64 (4) allows an
least 30 days before the appointment is made. exemption from creating an audit committee in
the circumstances where the bank is part of a
The Banks Act in section 60 (3) mandates the group of companies and the holding company has
appointment of non-executive directors by appointed an audit committee that has assumed
requiring that at most 49% (rounded down to responsibility for all the banks within the group.
the next lowest whole number) of the directors
of the bank may be employees of the bank or Section 64 (2) of the Act provides guidance for
its subsidiaries. Where the bank is controlled the functioning of the committee. The section
by a controlling company, only 49% of that states that the primary responsibilities assumed
companys directors can be employees of that by the members of the committee are to:
company or the bank. assist the board of directors in its evaluation
of the adequacy and efficiency of the internal
In addition, at each directors meeting, the votes control systems, accounting practices,
of the executive directors may only count at information systems and auditing processes
most 49% of the total votes on each resolution applied within that bank in the day-to-day
voted on by the board. management of its business.

Duties of Directors 77
 The members of the committee are therefore In addition to the functions set out in the
required to have a reasonably detailed Banks Act, the audit committee appointed in
understanding of the workings of the bank, terms of section 64 of the Banks Act will also
including the design and operation of the internal be responsible for the functions of the audit
controls, the pertinent accounting issues, the committee as set out in section 94 of the
information technology applied and the scope Companies Act. The legislative duties of the
and function of the internal audit department. audit committee as provided for in section 94 of
the Companies Act include:
facilitate and promote communication, nominating an auditor that the audit
regarding the matters referred to in paragraph committee regards as independent
(a) or any other related matter, between the determining the audit fee
board of directors and the executive officers of, ensuring that the appointment of the auditor
the auditor appointed under section 61 or 62 complies with the Companies Act and other
for, and the employee charged with the internal relevant legislation
auditing of the transactions of, the bank. determining the nature and extent of
non-audit services
As in other companies, the audit committee pre-approving any proposed agreement with
is intended to bridge the gaps between the auditor for the provision of non-audit
management and the external and internal services
audit functions at the bank. Any unresolved preparing a report to be included in the annual
differences that occur within the three parties financial statements describing how the
must be brought before the committee for committee carried out its functions, stating
resolution. whether the auditor was independent, and
commenting on the financial statements,
introduce such measures as in the committees accounting practices and internal financial
opinion may serve to enhance the credibility and control measures of the company
objectivity of financial statements and reports receiving and dealing with relevant complaints
prepared with reference to the affairs of the making submissions to the board regarding
bank. the companys accounting policies, financial
controls, records and reporting, and
It is clear that the audit committee is entrusted any other function designated by the board.
with the responsibility for optimising the
disclosures made by the bank, whether in the Responsibilities of a director
annual report or in the statutory returns made to The Regulations to the Banks Act provide
the Registrar of Banks. guidance for directors in carrying out their
responsibilities.

Regulation 38 states that the board of directors

is responsible for establishing an effective
corporate governance process within the bank.
The scope of this process is intended to be
consistent with the risks, complexity and nature
of the banks operations. Sub-committees may
be established to assist the board in carrying out
these corporate governance processes.

78
The regulation stresses that a banks business Directors duty to establish a compliance
revolves around the effective management of the function
different risks impacting the bank. These risks are As a result of the numerous pieces of legislation
listed in the regulations as: impacting a bank, there is a considerable risk
Solvency that the bank does not comply with all laws and
Liquidity regulations impacting it. In order to manage this
Credit risk, Regulation 47 to the Banks Act requires that the
Currency directors establish an internal compliance function.
Market or position risk
Interest-rate The function should be headed by a compliance
Counterparty officer who has the necessary senior status
Technology within the organisation to effectively address the
Operational banks regulatory risk.
Compliance
To be effective, the Regulation suggests that the
In view of the fact that the primary source of compliance function should:
funds administered and utilised by a bank in be independent of internal audit;
the conduct of its business is deposits loaned to have direct access to, and be supported by the
it by the general public, it shall be the duty of CEO of the bank;
every director and executive officer of a bank to report to the board and the audit committee
ensure that risks that are of necessity taken by on compliance with laws and regulations and
such a bank in the conduct of its business are submit a copy of this to the Registrar; and
managed in a prudent manner. avoid any conflict of interest with other internal
functions.
Regulation 39 (3) to the Banks Act 94 of 1990

The compliance function performs an important

monitoring role within the bank. The Regulation
The board has the responsibility for evaluating reinforces this by requiring the following
the effectiveness of the corporate governance activities to be performed:
processes at the bank (or controlling company) a culture of risk management and compliance
on an ongoing basis. While this task may be should be established
operationally delegated to a sub-committee create a channel of communication to line
of the board, the responsibility for corporate management to monitor compliance with laws
governance at the bank remains with the board. and regulations
instil a compliance focus into line management
At least once a year the corporate governance incorporate regulatory requirements into
assessment is required to be formally operational manuals, and
documented. recommend improvements to ensure greater
compliance with laws and regulations.

Duties of Directors 79
 In terms of reporting, recommendations and In addition, the directors are required annually
findings reported by the compliance officer to report to the Registrar of Banks on the going
should be documented together with the action concern assumption at the bank. Where there is
plan for rectifying problems. In order that issues a potential going concern problem, the details
are resolved promptly, the channel for the thereof should be disclosed.
compliance officer to report problems should
always be available and open. When making supervisory returns to the Registrar of
Banks, both the CEO and Chief Accounting Officer
The compliance function should be staffed are required to certify that the returns are correct.
by capable individuals that receive regular
training to enable them to remain technically 8.2 Directors of insurance companies
up to date with regulatory issues at the bank. A Audit committee
comprehensive compliance manual should be Both the Long Term Insurance Act (in section 23)
developed and kept up to date. and the Short-Term Insurance Act (in section 22)
require that the board of directors establish an
Reporting by directors audit committee unless exempted by the relevant
The board of directors of a bank is required by Registrar on the grounds of impracticality or
Regulation 39 (4) to the Banks Act to report to inappropriateness. The committee must have at
the Registrar of Banks on certain matters within least three members, and at least two of those
120 days of the end of the financial year of the must be directors of that insurance company.
bank, including whether:
the banks internal controls provide reasonable The chairperson, as well as the majority of the
assurance as to the integrity and reliability of members must be non-executive. The Acts state
the financial statements and safeguard, verify that the objectives of the committee are to:
and maintain accountability of the banks assets assist the board of directors in its evaluation
the internal controls are based on established of the adequacy and efficiency of the internal
policies and procedures and are implemented control systems, accounting practices,
by trained, skilled personnel , whose duties information systems and auditing and actuarial
have been segregated appropriately valuation processes applied by the insurer in
adherence to the implemented internal controls the day-to-day management of its business
is continuously monitored by the bank facilitate and promote communication and
all bank employees are required to maintain liaison concerning the matters referred to
high ethical standards, thereby ensuring that above or a related matter, between the board
the [banks] business practices are conducted in of directors and the managing executive,
a manner that is above reproach, and auditor, statutory actuary and internal audit
anything has come to the directors attention to staff of the insurer
indicate that any material malfunction , as defined recommend the introduction of measures
and documented by the board of directors, which which the committee believes may enhance
definition has to be submitted to the Registrar of the credibility and objectivity of financial
Banks, in the functioning of the aforementioned statements and reports concerning the business
controls, procedures and systems has occurred of the insurer, and
during the period under review. advise on a matter referred to the committee
by the board of directors. The audit committee
of an insurance company therefore has a
similar brief to that of a financial institution.

80
9. Contact information

Dr Johan Erasmus Nina le Riche

Tel: 082 573 2536 Tel: 082 331 4840
jerasmus@deloitte.co.za nleriche@deloitte.co.za

Duties of Directors 81
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Duties of Directors 83
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