Browsing Tag

King IV Report

board designations

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.

corporate leadership

I am preparing for certification in Corporate Governance with IoDSA. In that process I will be sharing my thoughts on corporate governance based on the King IV Report and the South African Companies Act 2008. While this is primarily as part of my studies, I certainly hope that this will help some of my readers. I have served on numerous Boards over my time and so will use some of my experiences to illustrate concepts.

In the next few posts we start be interrogating the definition of corporate governance. Many definitions have been proferred but I believe that the King IV Report one is quite succinct and user friendly.

“Corporate Governance -is the exercise of ethical and effective leadership by the governing body towards achievement of the following governance outcomes: ethical culture, good performance, effective control and legitimacy.” King IV Report

The corporate governance is really an exercise of leadership by the governing Board (Board of Directors, Trustees etc). This definition clearly places the leadership responsibility of the corporation in the hands of the directors.

Leadership of the organization is not vested in the shareholders or the management. It is vested in the Board.

I remember reading of a business leader and major shareholder who claimed that he employed and paid the Board and so he was not going to be hamstrung by the Board. I have also heard sentiments expressed in non governmental organizations that the Board is simply advisory. This is a major misunderstanding. The Board exercises leadership of the organization.

Leadership means to govern, direct, control within the context of fiduciary duties of the directors/trustees (members of governing body) to the body corporate. Fiduciary duties refer to the duty of acting in good faith towards the organization. Put in another way fiduciary duty means a legal obligation of one party (the governing body) to act in the best interest of another (the company) when entrusted with the care of the corporate’s assets.

The primary responsibility of the governing body is to act in the best interests of the organization AND not necessarily in the best interests of the shareholders.

Remember that the organization is a separate legal person from the shareholders.  

When the interests of shareholders and the organizations diverge, the Governing Body is legally bound to act in the best interests of the organization.

(We will examine this duty in depth later on)

From the foregoing it is clear that the leadership of the organization does not lie in the management or the shareholders. But actually lies in the governing body i.e. the body of directors or trustees. Shareholders entrust the leadership to the directors while directors appoint and are responsible for management to whom they delegate certain leadership responsibilities. Yet many governing bodies do not actually exercise leadership of the organization.

To emphasize the leadership responsibility of the governing body of organizations, notice that at law, the legal liability of the organization is broken down as follows: shareholders’ liability is limited to their shareholding, management’s liability is limited to their levels of authorizations or negligence WHILE the liability of the Board members is unlimited.

In other words the greatest legal liability for a corporate body’s failure lies with the Board members both individually and jointly.

As an aside it is important for Board members not to treat their responsibilities lightly as they can expose their personal wealth at risk for the liability coming from their Board seating.

I once served on the Board of a non governmental organization which had a rental dispute with its landlord and was in arrears. As directors we were sued in our personal capacity while the management (who in effect were responsible for the delinquency) were not included in the litigation. Fortunately we managed to negotiate and get the organization to pay its obligations. If it had failed to do that all the Board members were to be personally liable for the organizations’ rentals.

It is also important to be cautious about the Board seats that you accept. Do proper due diligence. Otherwise you are putting your own wealth at risk if you seat on a Board that does not exercise leadership on the organization

In the next post we will take a closer look at the nature of this leadership.