The Companies Act 61 of 1973 (the ‘old Act’) distinguished between the rights and duties of executive and non-executive directors.
The relationship between the company and its executive directors was regulated by their employment or service agreements and by prevailing corporate laws.
Under the old Act, executive directors are employees of the company, while non-executive directors are not.
Issues created by the old Act
This distinction created many practical problems.
One issue was that directors who have decision-making powers would be responsible for regulating matters that directly influence employment policies and remuneration.
This is a clear contradiction because the executive directors are also employees of the company.
The conflict could affect the notion of division of power and transparency in company structures.
The other issue was that if an executive director was not formally appointed as a director, then they could not be held accountable for their actions.
The new Act gives directors more power
The new Companies Act 71 of 2008 (the ‘new Act’) makes no distinction between directors, and in the new Act, the concept has been broadened extensively to include executive and non-executive directors, prescribed officers and directors ex officio.
The board of directors also has more power in terms of the new Act.
If this power is not limited by shareholders in the company’s memorandum of incorporation, there is a real risk that power could potentially be abused. This risk exists despite the amendments to company law.
Shareholder limitation — general meetings
Besides the division of power inherent in the company structure, it has always been important to maintain the division between ownership and management to promote corporate accountability and transparency.
The old Act promoted this distinction and the associated institutional transparency.
Under the old Act, decisions that affect ownership were always taken at shareholders’ meetings, and not just by management. The old Act stipulated that a general meeting is convened for the general body of shareholders, regardless of class of shares held.
By contrast, the annual general meeting (AGM) is a compulsory meeting with specifically defined discussion items described by statute.
In other words, the decision-making power does not lie in the hands of the board at a general meeting.
This is also a prime example of where the inherent distinction between ownership and management is historically personified in companies.
Although the provisions relating to the general meeting have remained constant in the new Act, the AGM is only compulsory for public companies (under section 61(7)), and not for all companies.
The memorandum of incorporation and other contracts with directors
The articles and memorandum make provision for certain rights and duties of directors. Under the old Act, these rights were not seen as a contract between the director and the company and were not legally enforceable.
This meant that the articles only guided the rights of directors regarding various aspects such as their rights, terms and conditions of service, termination of service and remuneration.
In reality, the directors’ rights and duties were determined by the existing contracts between the company and the directors, such as the contract of employment or service agreement.
Section 15(6) of the new Act has amended this position. The new Act makes the memorandum of incorporation and the governance rules legally binding between the company, its shareholders and its directors.
This change may make the contents legally enforceable if the service contract with a director is poorly drafted. But issues may arise where the contracts are contradictory.
In such cases, it would be advisable to review service agreements and to align the memorandum of incorporation (previously known as the articles and memorandum of the company) with the new Act.
Dismissal employment contracts
Because executive directors were also employees of the company, their contracts and service agreements and termination of employment conditions should comply with the prevalent labour legislation.
In addition, in terms of the prevailing labour legislation — specifically the Labour Relations Act 66 of 1995 (referred to here as the ‘LRA’), and the Constitution of the Republic of South Africa — every employee has the right to fair labour practices and not to be unfairly dismissed.
In terms of section 192 of the LRA where the company seeks to terminate a director’s contract of employment, it must follow a fair procedure which is in terms of the law.
It is generally accepted that a disciplinary hearing is regarded as a pre-dismissal procedure.
This is further reiterated as a legal right by the common law rule audi alteram partem which translates into to ‘hear the other side’.
Even though LRA does not expressly prescribe form or process for disciplinary hearings, the code of good practice does require that the employee has an opportunity to state his case.
The new Act has not overridden this principle, although there is now no distinction between executive and non-executive directors. Accordingly, the employment relationship is terminated by following the provisions of labour law.
Removal as director
Under the legislation cited above, and also under section 71 of the new Act, it is clear that the termination of the employment relationship is just that. It does not result in the termination the office of director.
This means that both aspects of the relationship must be terminated: the office of director and the employee contract.
In terms of section 220 of the old Act, a company may remove a director from office by ordinary resolution at a general meeting, before the termination of his office.
In addition, section 220(7) explicitly provides that this shall not detract from any power to remove a director which may exist apart from section 220.
The company may elect which procedure to follow. However, if he or she is removed from office, a director may institute action for breach of contract (section 220(7)) or for any losses or damages suffered as consequence.
Section 71 of the new Act replaced the old section 220. Section 71 of the new Act states that the directors may be removed by ordinary resolution.
Both the board and the director involved must be served notice, giving directors sufficient time to prepare a defence against the issues raised, which should be heard at the specified time.
After the director has made representations to the board, the board shall vote on the resolution.
As in the case of a disciplinary hearing for an employment relationship, the audi alteram partem common law rule provides the right to be heard and has now also been included in our Company law.
If he is removed from office, a director may institute action for breach of contract (section 71(9)) or for any losses or damages suffered as a consequence.
It should be noted that — under the transitional provisions of schedule 5 of the new Act — a person has the right to seek a remedy occurring before the effective date of the new Act, unless proceedings have commenced in a court of law.
Many feel this provision implies that the new Act is retrospective. This is purely based on interpretation and there is no precedent to support this contention.
Damages for breach of director’s duties
Where a director’s conduct breaches their fiduciary duties and/or their duty of care and skill and they have been removed as employee and director, in terms of section 77 and 218 of the new Act or common law, it is possible to institute a damages claim against them.
When terminating the relationship with its directors, it is crucially important that companies appoint an attorney to help ensure absolute compliance with the relevant labour legislation and corporate laws.
As a preventative measure, it is important to recruit directors wisely by selecting the right people and regulating their relationship with the company most appropriately from the outset.
Innovative Business Solutions And Compliance
Compliance with certification is a strong way to demonstrate that you are managing your business proactively.
As a business owner, you are probably aware of where your business could improve. Sometimes a business owner would like to improve their business but is not sure how to begin. Therefore, it is of the utmost importance to develop an environment which will foster innovation and create key steps to improve your business while simultaneously trying to comply with all of the necessary legalities.
It is important for an entrepreneur to assess their situation first. Most business owners will ask the question why? Why can’t everyone will follow the same steps to success. Every business is different and unique, therefore, before you start making changes within your business, it is a good idea to make sure you have a full understanding of the factors affecting your business success and whether you are complying with necessary legalities.
Compliance may actually improve performance by giving your business a competitive edge. Legal compliance can assist you with improving your customer relations, enhancing your reputation and most importantly avoiding the cost of legal proceedings.
There’s this saying, ‘What gets measured gets improved’ explains Charles Gaudet, founder and CEO of Predictable Profits, a consulting firm that offers advanced marketing techniques to entrepreneurs who are passionate about expanding their small businesses.
Related: Compliance For Entrepreneurs
Here are a few strategies that you can use to make your business more profitable in the future.
Innovative Marketing solutions
For every business owner, marketing is an important tool to improve their businesses. You may think that you are missing an opportunity if you don’t jump right attracting customers with some type of marketing message.
However, as quoted by John Rampton ‘’one of the best things you can do to achieve growth is to slow down and spend time studying the trends.” What does this mean? While rushing into marketing your product you tend to forget certain details, and once it is out in the public its difficult to forget or to undo. Therefore, its very important to research the market and consumer trends before launching anything.
This becomes very important when you consider the potential risk to your business for the infringement of another product, which is confusingly similar to your product. You also do not wish to be guilty of using a similar brand name, slogan or logo as one of your competitors. Therefore, before you set out your personalised solutions when designing ads and directing messages to consumers ensure you are not infringing on anyone else’s rights as this will likely lead to expensive legal costs for your business.
Compliance Breeds Confidence
It is important to remember that clients are concerned whether suppliers are properly compliant. Compliance with certification is a strong way to demonstrate that you are managing your business proactively and that the money a customer will spend i.t.o. buying your goods or services, is in safe hands. Conversely a failure in compliance can, as well as exposing you to the risk of regulatory sanctions, severely damage your business’ credibility.
For example, in the financial services industry there is an increasing requirement to demonstrate strong security to both external auditors and prospective customers.
With regulation that you feel is of no value, determine how to satisfy the requirements with the minimum effort necessary. Do, however, double check that you are not missing out on a benefit that may be rewarding for your business.
In conclusion, it is important to note when improving your business one always need to act in accordance with the correct laws and procedures. Therefore, if a company is embracing the difficult task of being compliant, I recommend using this as a competitive weapon to improve your business. It just might end up making you and your team better which is usually rewarded with more business.
Policies and Procedures – A Critical Business Support Tool
No longer just an administrative burden, policies and procedures are an essential business support tool in a complex business environment.
In South Africa, SMMEs account for more than 70% of the overall employment rate. It’s critical, therefore, that SMMEs maintain both stability and growth concurrently – our country’s economic development depends on it. However, the tension between stability and growth must be managed, particularly in today’s complex regulatory environment with its ever-increasing compliance requirements.
Smaller organisations often consider policy creation, management and distribution as an administrative burden. Fortunately, growing numbers of small business owners and managers are realising that accessible and clearly-written policies and procedures are essential to business success.
Companies that create, manage and distribute clear policies and procedures reap significant business benefits, some of which are highlighted below.
Consistency and Stability
Clear policies and procedures ensure that staff and management adhere to specific ways of working, minimising time spent on analysis and interpretation, while creating consistency and stability across the organisation.
Policies and procedures allow new hires to onboard quickly, while ensuring they adhere to standard practices and controls.
Health and safety policies not only protect staff, but also visiting clients and stakeholders.
It is important to define boundaries around a position or role. Employees must know and understand their respective responsibilities.
Standardised procedures lead to cost efficiencies from both time and resource perspectives.
Policies and procedures allow organisations working in different areas to develop a uniform approach to business processes which, in turn, supports internal staff transfer when and if required.
Businesses operate in a highly regulated environment. Proof of compliance is not only required in terms of the regulatory environment, but also in terms of risk management and governance. SMMEs do not always appreciate the value demonstrable risk management and governance structures can have, albeit as intangible assets. These structures enhance the oversight role of any business, providing more developed and sustainable business strategies. An additional benefit is the ability to manage liability arising from negligence or malpractice suits. It is no longer enough just to have a policy in place though – distribution and access must be shown.
SMMEs can create and develop a learning culture depending on the availability and distribution of policies and procedures. Tests and assessments linked to specific policies confirm knowledge transfer, formalising both learning and the eligibility to complete tasks.
Given the ever-increasing complexity and competitiveness of business today, policies and procedures provide the parameters and guidelines of business operations, enhancing efficiencies, increasing value and promoting professionalism. Policies and procedures are no longer just an administrative function, they are a critical tool for business success.
4 Vital Differences Between King III And King IV™ On Corporate Governance
Ilana Steyn, unpacks some of the most significant differences between the Institute of Directors in Southern Africa’s (IoDSA) latest report on corporate governance, the King IV Report, and its former version, King III.
April 2018 marks a year since the effective date of the IoDSA’s (Institute of Directors in Southern Africa) latest report, the King IV Report on Corporate Governance ™ (King IV™), on effective and ethical corporate governance.
What is the King Report?
If you’re not familiar with the King Reports: it’s a series of reports that translate international standards and big-time happenings on corporate governance into set of local principles. Each new Report replaces the former.
The aim of the King Report is to set up actionable principles for South African company leadership to act as modern, good corporate citizens.
It also ensures those in leadership positions act in the best interest of the company and all parties influenced by the company. The first Report, King I, published in 1994, and was the first officiated document of its kind in South Africa.
Why is it useful to my business?
The Report also promotes transparency within your company’s leadership to ensure transgressions aren’t hidden that will eventually damage the company. The Report also ensure blunders can be evaluated, found and corrected ASAP. Today, its mandatory for all JSE listed companies to implement the Report into their company policy.
If you’re a smaller business or a non-profit, you can comply with the Report voluntarily; by applying the principles you’re essentially ensuring the long-term sustainability and survival of the business.
It also helps that create a healthy corporate culture and when your business’s foundation is healthy, growth is unthreatened.
If you haven’t applied any of the former Reports in your business, you’re in luck; King IV™ is the simplest, and seemingly the most practical, Report in the family of four reports.
Why was King IV™ needed?
Companies, especially smaller businesses, often struggled to apply the King III due to its long-winded structure.
King IV™ was needed because King III, published in 2009, was out-dated in terms of present-day concerns like technological advances, the increased need for online transparency, long-term resource sustainability and information security.
Here’s the rundown of the most significant differences between King IV™ and King III.
1. King IV’s™ structure is much simpler to apply
While King III did a good job of summarising the extensive scope of effective and ethical governance into 75 principles, the Report still lacked clear guidance on real-world application.
Ensuring the effective incorporation of all 75 vague, ethical principles was too exhaustive for most companies to implement, monitor and account for.
That’s why King IV™ took a different structural approach. King IV™ boiled good corporate governance down to 17 simplified principles, each supplemented with various recommended practices to make it easier for smaller companies to implement the principles within their day-to-day running.
2. King IV™ spotlights practical implementation
King III lists multiple ethical principles and then commands companies to explain how their management and actions honour those principles. Unfortunately this meant companies approached it like a mindless compliance checklist.
King IV™ also states principles, but more importantly, requires organisations to actively report on the implementation of the recommended practices thereof.
Mervyn King, the chair of the King Committee, dubs this the shift from a “apply OR explain” mentality to a “apply AND explain” mentality. The Report also allows organisations to report on alterative-implemented practices – provided they support and advance the principle.
To make the application simpler to grasp, King IV™ clearly differentiates between the long-term Outcomes, the ethical Principles and the recommended Practices. Essentially the new structure and its requirements mean companies have to engage in thoughtful implementation and reporting of those practices.
3. King IV™ is inclusive to more than just large companies
After King III, there was a significant demand for the inclusivity of smaller businesses, and governmental or non-profit organizations in the King Report.
Consequently, King IV™ dedicates an entire supplement chapter to guiding municipalities; non-profit organizations; retirement funds; small and medium enterprises and state-owned entities in the implementation of the Report.
Also, where King III used terms like “companies” and “boards”, King IV™ very purposefully uses more inclusive terms like “governing bodies” and “organizations” throughout the report. It’s clear that King IV™ aims to move the principles on good corporate governance into real-world action – for all organisations.
4. Difference 3: King IV™ pushes for more accountability, transparency and reporting
What King IV™ does quite differently from King III, is recommending the application of its principles within set timelines, reports and committees within it’s recommended practices.
King IV™ strongly propagates transparency, the delegation of responsibility and the implementation of accountability by putting pen to paper in term of officiated aims, bodies responsible for those aims and the provisions of consistent reports.
Take leadership as an example, where King III would just stipulate what being a good leader means, King IV™ advises you to set goals, delegate responsibility and evaluate progress through reports and accountability.
An example would be to set up a committee, consisting of lower management levels, with clearly identifiable responsibilities and then to measure their progress via reports. It comes down to the ignorance no longer being a valid excuse. Directors should be aware of all issues within your company.
Directors should take responsibility for everything that happens within their organisation – you can’t plead innocence on the grounds of not knowing. There should rather be reports in place to identify and uncover any discrepancies early on.
Essentially, where King III lacks in the aim of ensuring the actualization of good corporate citizenship, King IV™ steps up the game.
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