The Governing Body (GB) is responsible for the governance of an organization. Companies Act (2008, Section 66 (1)) vests the governing body (board of directors) with the legal responsibility and accountability for the management of the organization.
King IV endorses a unitary governing body consisting of executive (employees of the company) and non-executive members (independent external members). In contrast a two-tier system of corporate governance has two boards namely a management board and a supervisory board.
A unitary governing body does recognize the role of an Executive Committee which is responsible under the CEO for executive functions but accounts to the Governing Body through the CEO.
Executive Directors are involved in the day-to-day management of the company or being in the full-time salaried employment of the company (or its subsidiary) or both defines the director as executive. King IV advocates for the independent directors being the majority of the GB. It also provides for at least two executive directors namely the CEO and at least one other executive director. Unlike King III, the current Code does not prescribe who the other executive director should be.
Non Executive Directors (NED) are not involved in the management of the company and are independent of management on all issues including strategy, performance, sustainability, resources, transformation, diversity, employment equity, standards of conduct and evaluation of performance. An individual in the full-time employment of the holding company is also considered a non-executive director of a subsidiary company unless the individual, by conduct or executive authority, is involved in the day-to-day management of the subsidiary.
According to King IV some non executive directors may be considered as independent if there is no interest, position, association or relationship which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making in the best interests of the organisation. Independence should be both in fact and in perception of a reasonably informed outsider.
King III puts it in more detail as follows: An independent director should be independent in character and judgement and there should be no relationship or circumstances which are likely to affect, or could appear to affect this independence. Independence is the absence of undue influence and bias which can be affected by the intensity of the relationship between the director and the company rather than any particular fact such as length of service or age.
The Companies Act (2008) does not use the terms ‘executive’, ‘non-executive’ or ‘independent non-executive’ directors. In fact at law both executive and non-executive directors are treated equally in terms of statutory accountability. It reminds me of a situation where an executive director in an NGO wanted only non executive directors listed in a litigation case against the organizations because of a faulty belief that as an executive he was exempt.
It is critical to understand that at law and in accordance with the fiduciary duties of directors, all directors should exhibit independence of thought and action in the exercise of their duties irrespective of the designation according to Codes of Governance. An executive and/or representative directors should put the interests of the organization above the desires of the shareholders or any other parties. Shareholders and principals often make the mistake of imposing their views on the representative director BUT the director has statutory and personal liability for his/her actions and decisions. S/He cannot cite the instructions or expectations of the principal as a defence at law. A member of the GB must act independently and in the best interests of the organization itself.
From the foregoing, it follows that the board designations we use are often misleading in that they imply some members should be independent while others should not. As we have seen all should demonstrate an independence of mind and action.