Corporate Governance - Durban Chamber - July 2013.pptx

7/28/2019 Corporate Governance - Durban Chamber - July 2013.pptx

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Corporate Governance

The role of the Board and the directors

July 2013

Dr Johan Erasmus


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2013 Deloitte Touche Tohmatsu Limited2

The business and affairs of a company must be managed by or under the direction of itsboard, which has the authority to exercise all of the powers and perform any of thefunctions of the company, except to the extent that this Act or the companys Memorandum

of Incorporation provides otherwise.

Private company or a personal liability company: at least 1 member Public company, state owned companies or a non-profit company: at least 3 members

.. in addition to the minimum number of directors that the company must have tosatisfy any requirement, whether in terms of the Act or the companysMemorandum of Incorporation, to appoint an audit committee (minimum of 3independent non-execs) or an social and ethics committee (at least one non-executive director)

Co Act and

King III

Director/

Prescribed

Officer

Duties

Best interest

of the

company

Role of

support staff


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Quorum

Majority of board members

Resolutions

Passed by majority vote, chair can break a tie

Electronic participation Allowed unless MOI prevents

Round robin

Resolution adopted by written consent of a majority of directors either:

Given in person or

By electronic communicationMinutes and record keeping

Hardie case

Co Act and

King III

Director/

Prescribed

Officer

Duties

Best interest

of the

company

Role of

support staff


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Companies Act codifies the standard of conduct for directors and prescribed officers

Director defined as ...

The Companies Act, 2008 (the Act) defines a director as:

A member of the board of a company ...., or an alternate director of a company and includes any personoccupying the position of director or alternate director, by whatever name designated.

In terms of section 66 of the Companies Act, the business and affairs of a company must be managedby or under the direction of its board, which has the authority to exercise all of the powers and performany of the functions of the company.

Prescribed officer defined as ...

Despite not being a director of a particular company, a person is a prescribed officer ofthe company forall purposes of the Act if that person

exercises general executive control over and management of the whole, or a significant portion,of the business and activities of the company, or

regularly participates to a material degree in the exercise of general executive control over andmanagement of the whole, or a significant portion, of the business and activities of the company.

Co Act and

King III

Director/

Prescribed

Officer

Duties

Best interest

of the

company

Role of

support staff


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2013 Deloitte Touche Tohmatsu Limited

Companies Act codifies standard of directors conduct (Section 76)

A person, acting in the capacity of director, must exercise his powers and perform hisfunctions:

in good faith and for a proper purpose

in the best interest of the company and

with the degree of care, skill and diligence that may reasonably be expected of a

person carrying out the same functions and having the general knowledge, skill

and experience of that director

Personal liability for directors if the standard of conduct is not met, aggrieved party can

claim loss or damages from director personally

Fiduciary duty

Co Act and

King III

Director/

Prescribed

OfficerDuties

Best interest

of the

company

Role of

support staff

Duty of care and skill


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Business judgment rule codified

Defence against claim for not meeting the standard

A director will not be liable if he:

Took reasonable steps to become informed about the matter

Declared any conflict of interest and

Believes that the decision was in the best interests of the company

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Co Act and

King III

Director/

Prescribed

OfficerDuties

Best interest

of the

company

Role of

support staff


7/17 2013 Deloitte Touche Tohmatsu Limited

Liability of directors and prescribed officersDirectors may be jointly and severally liability for loss, damages or cost sustained by the

company

Personal liability - Breach of the directors fiduciary duty or the duty to act with care, skill

and diligence, and also:

acting in the name of the company without the necessary authority

being part of an act or omission while knowing that the intention was to defraudshareholders, employees or creditors

signing financial statements that were false or misleading in a material

respect, or

issuing a prospectus that contained an untrue statement

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Co Act and

King III

Director/

Prescribed

OfficerDuties

Best interest

of the

company

Role of

support staff


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Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty)LtdExecutive vs non-executive directors

... Obviously, a director exercising reasonable care would not accept information and adviseblindly. He would accept it, and he would be entitled to rely on it, but he would give it dueconsideration and exercise his own judgment in the light thereof".

Section 1 of the Act also defines the term knows, knowing and knowingly, when usedwith respect to a person, and in relation to a particular matter, as meaning that theperson either

had actual knowledge of the matter;

was in a position in which the person ought to have

had actual knowledge; investigated the matter to an extent that would have provided the

person with actual knowledge; or taken other measures, which if taken, wouldreasonably be expected to have provided the person with actual knowledge of thematter.

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Co Act and

King III

Director/

Prescribed

OfficerDuties

Best interest

of the

company

Role of

support staff


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Cricket South Africa

Cricket South Africa hosted the IPL tournament, and the CEO received a bonus from

the IPL for a job well done

Why was this an issue?

May directors receive bonuses?

Would it have made a difference if CSA paid the bonus?

9 2012 Deloitte & Touche. All rights reserved.

Co Act and

King III

Director/

Prescribed

OfficerDuties

Best interest

of the

company

Role of

support staff

Fiduciary duty


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Australian Centro case

Australian Federal Court case ofAustralian Securities and Investments Commission v Healey[2011] FCA 717 (the Centro judgment)

So whats this case about?

The non-executive Chairman and six other directors plus the Chief Financial Officer of theCentro Property Group (Centro) faced allegations from the Australian Securities andInvestments Commission (ASIC) that they had contravened sections of the

Corporations Act 2001 arising from their approval of the consolidated financial statementsof Centro, which incorrectly reflected substantial short-term borrowings as non-currentliabilities.

The 2007 annual reports of Centro Properties Group failed to disclose significant matters.The report failed to disclose some $1.5 billion of short-term liabilities by classifying themas non-current liabilities, and failed to disclose guarantees of short-term liabilities of anassociated company of about US$1.75 billion that had been given after the balance sheetdate.


Co Act and

King III

Director/

Prescribed

OfficerDuties

Best interest

of the

company

Role of

support staff

Duty of careand skill


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All directors must carefully read and understand financial statements before they form

an opinion Such a reading and understanding would require the director to considerwhether the financial statements were consistent with his or her own knowledge of thecompanys financial position.

Responsibilities a director include the following:

a director should acquire at least a rudimentary understanding of the business of thecorporation and become familiar with the fundamentals of the business in which thecorporation 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 aregular review and understanding of financial statements

a director, whilst not an auditor, should still have a questioning mind.


Co Act and

King III

Director/

Prescribed

OfficerDuties

Best interest

of the

company

Role of

support staff


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Link between Companies Act and King III

In addition to compliance with legislation, the criteria of good governance, governance codesand guidelines will be relevant to determine what is regarded as an appropriate standardof conduct for directors.

The governance practices embodied in King III are recognised as best practice, If thefiduciary duty requirement is interpreted in view of the stated purpose of the Act toencourage transparency and high standards of corporate governance, the best practiceprinciples enumerated in King III will inevitably be applied to companies and directors.Consequently, any failure to meet a recognised standard of governance, albeit notlegislated, may render a board or individual director liable at law.

Minister of Water Affairs and Forestry vs Stilfontein Gold Mining Company Ltd et al


Co Act and

King III

Director/

Prescribed

OfficerDuties

Best interest

of the

company

Role of

support staff


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How is the best interest of the company determined?

Balance of interests of all key stakeholders (emphasis on shareholder)

Enlightened shareholder value approach

Stakeholder engagement

What might have gone wrong at Lonmin?


Co Act and

King III

Director/

Prescribed

Officer

Duties

Best interest

of the

company

Role of

support staff


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How is the best interest of the company affected where .

The shareholder(s) prescribes to directors what to do SAA

Government pressures the company to behave in a particular manner Amplats

Holding company prescribes to the subsidiary board how to behave/act

JSE prescribes the composition of the Board Cenmag/Coronation

Directors are obliged to always act in the best interest of the company


Co Act and

King III

Director/

Prescribed

Officer

Duties

Best interest

of the

company

Role of

support staff


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Responsibility for preparation of Board reports

Employee Board will reply on documents

Need to be accurate, comprehensive

Accountability: Employment contractDisciplinary procedures

Prescribed officer: Accountability: Employment contract

Disciplinary procedures

but also: Fiduciary duty and duty of care and

skill


Co Act and

King III

Director/

Prescribed

Officer

Duties

Best interest

of the

company

Role of

support

staff


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Board is ultimately responsible for content and quality of the Boardpack


A board CAN control the information it receives. If there was an information overload, it could have been prevented

If there was a huge amount of information, then more time may need to be taken to readand understand it

The complexity and volume of information cannot be an excuse for failing to properly readand understand the financial statements

The failure to notice certain omissions may well be explicable but here the directors clearlylooked solely to management and external advisors.

However, if they had acted as the final filter, taking care to read and understand thefinancial accounts, the errors may have been discovered.


Co Act and

King III

Director/

Prescribed

Officer

Duties

Best interest

of the

company

Role of

support

staff


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Corporate Governance - Durban Chamber - July 2013.pptx