Lindie Engelbrecht, chief executive designate of the Institute of Directors in Southern Africa, sheds some light on the appointment and responsibilities of non-executive directors.
The responsibilities of a non-executive director
A non-executive director is a member of the board of directors. Unlike executive directors, who are board members and managers, they are not an employee of the company or affiliated with it in any way, nor are they involved in the day-to-day running of the business.
They have two main responsibilities:
- To challenge and contribute to the development of strategy; and
- To scrutinise the performance of management in meeting agreed goals and objectives, monitor – and where necessary remove – senior management, and plan succession.
Non-executives are the custodians of the governance process in both listed and owner-managed businesses. King II states that boards should comprise a balance of executive and non-executive directors preferably with a majority of non-executive directors.
The responsibilities of non-executive directors in terms of the new Companies Bill
The Companies Bill is expected to be passed into law in 2010. It replaces the current Companies Act, which is more than 34 years old. It promotes transparency and corporate governance and brings South Africa in line with international best practice. It will also form the basis of the King III report.
The objective of the new bill is to recognise the changes that have taken place in the economy since 1973, and to bring existing company law into line with international standards.
One of the bill’s most important innovations is that different rules will apply to companies, based on how they are categorised. This recognises for the first time that smaller private companies do not have the same responsibilities as public companies in corporate governance and financial reporting. The bill makes provision for the development of financial reporting standards suited to the company’s size and nature, for example, making it easier for smaller companies to comply with the provisions of the bill.
Understanding corporate governance issues and principles The new law also deals with matters relating to directors’ dealings, audit committees and risk management, prescribing what is compulsory for directors and it will contain recommendations for directors. This is to ensure that it helps directors to understand corporate governance issues and principles.
Sections 91 and 93 of the bill set out the standards for director’s conduct. The details have yet to be finalised, but directors have “a duty to exercise the degree of care, skill and diligence that would be exercised by a reasonably diligent individual”. They also have a fiduciary duty to act honestly, in good faith and in a manner they believe to be in the best interests and for the benefit of the company. Although it codifies the duties of directors in terms of diligence, it does not define “good faith”, nor can it put a halt to fraud, corruption and dishonesty.
The bill allows a director to rely on others in discharging these duties. It also extends the concept of stakeholders to embrace not just shareholders but employees, creditors, suppliers and society at large. Under the new bill, directors could find decisions deemed to be for the short-term benefit of the company open to challenge by shareholders.
Protection for directors who make decisions in good faith
The business judgement rule, to be outlined in King III, is expected to provide protection for directors who make business judgements in good faith and for a proper purpose. The directors must have acted on an informed basis without material interest and have a rational belief that the decision is in the company’s best interests. If any one of these requirements is not met, the rule will not provide assistance. However, no matter how rash a director’s decision is, if it meets the requirements of the standard, it will be protected under the rule.
The bill ultimately places greater responsibility on directors, with public-interest companies having to appoint audit committees of non-executive directors who act independently. Such directors must not have been involved in the day-to-day management of the company for the previous three years, and they may not be related to someone in that position.
For more information, call +27 11 643 8086, or visit www.iodsa.co.za